Housing and Urban Development Secretary Shaun Donovan is out today with a more measured, slightly more progressive-friendly, but still ultimately unsatisfying take on the foreclosure fraud mess. He does say that the faulty documentation of foreclosure documents from the same banks and servicers that caused the housing crisis is “shameful” – the strongest word I’ve seen from an Administration official so far. And he asserts that nobody should lose their home from a bank mistake, which is nice. But while he lists all the ways in which the Administration is reviewing the practices of the servicers, and forcing them to undergo reviews of their own, he eventually toes the White House line against a national foreclosure moratorium. Here’s his argument:

Some have suggested, however, that all foreclosures in every state, under every servicer, should be stopped. But a national, blanket moratorium on all foreclosure sales would do far more harm than good — hurting homeowners and home-buyers alike at a time when foreclosed homes make up 25 percent of home sales.

For instance, in Cleveland, where there are over 18,000 vacant homes, lives Millie Davis who recently earned her Master’s Degree in Urban Planning from Cleveland State University and just bought her first home – one that had fallen into foreclosure and sat abandoned for years. Had a blanket moratorium been in place, that sale would have fallen through — not only deferring her dream of homeownership but leaving neighbors on the block to stand by and watch as their property values continue to plummet. Right now, families who have watched their home values decline over the last few years want nothing more than homebuyers like Millie to buy the vacant homes in their neighborhoods. These homeowners are at risk, too – and the best hope they have is for the “Foreclosed” signs in front of the vacant, abandoned properties on their block to come down, so that the value of their homes can start rising again.

Now, Donovan goes on to say that the focus should be on helping homeowners before they get deep into delinquency and into foreclosure – and when he can name a workable modification program from the government, I’ll climb aboard. But it’s really interesting that he picks out the Cleveland area as his example of how we can’t stop what’s working in the housing market. I have my own anecdotes from Cleveland.

Michael and Pamella Negrea have never been late on a mortgage payment in the 15 years they’ve owned their home in Eastlake. But they’ve been foreclosed on three times.

Martin and Kirsten Davis, meanwhile, lost their home in Cleveland to foreclosure two years ago. The reason: a mess that started when they accidentally paid 14 cents too little on their monthly payment.

And Michael Rendes of Berea had his mortgage sold last year to Bank of America. The bank foreclosed on him in November, after insisting for months that it didn’t hold his loan and wouldn’t accept his payments.

Tales like these portray the ugly side of the world of mortgage finance, a world embroiled in controversy amid claims of fraudulently signed foreclosure documents.

Now, why would Shaun Donovan want to bring new homeowners into this unstable mess of a housing market right now until these problems have been figured out? You have servicers, like in Mr. Davis’ case, who tack on $2,200 in fees when the borrower forgets to add 14 cents to his mortgage payment. Or the Rendes family, who had their mortgage sold three times, eventually landing with Bank of America. They weren’t notified of the sale, sent their mortgage payments to the previous servicer, who cashed them and didn’t forward them to BofA. BofA put them in default, and the couple tried to use savings to catch up but BofA wouldn’t take their payments. They foreclosed last November. One attorney at the Legal Aid Society says this behavior from the servicers has been going on for over a decade.

Donovan’s stance only makes sense if this crisis concerns mere technical paperwork problems. That’s just clearly not the case, no matter how much Bill McBride at Calculated Risk wants it to be. The servicers messed up at every single step of this process, and now they’re getting everything they deserve. They have sapped the confidence from the other major players in the market, the investors of MBS and the title insurance companies, that the properties they buy and sell are pristine and free of legal questions. This guest-post at Naked Capitalism gets it right – the servicers caused a legal breakdown in the housing market. And if you scratch the surface as to why, they clearly wanted to process foreclosures as quickly as possible and had no problem cutting corners doing it, for two reasons. One, they wanted to collect fees. Two, they wanted to paper over the host of other legal problems with mortgage origination and the underlying notes. It’s fraud to mask other fraud.

What Donovan is asking is that people like Millie Davis march into the thicket of weeds that is the housing market at this point, before the very obvious legal problems with the entire market are solved. He wants her, for the good of the economy, to buy a home which may or may not have a clear title, from a servicer who may or may not follow the law. He essentially wants her to be a human shield, without protection if she falls 14 cents short on a payment, or has her mortgage sold without her knowledge, or finds the previous owner at her doorstep with a judge’s order saying she has a legal claim to return to the home.

And Millie Davis is really just a pawn in this game. The real fight is playing out between the megabanks and the investors, and neither of them really care how the homeowners deal with the fallout.

The Federal Home Loan Bank of Chicago has sued several of the nation’s largest banks, including its biggest shareholder, Bank of America Corp., alleging that their failure to disclose lax mortgage underwriting standards led the Home Loan Bank to suffer losses after purchasing poor-quality mortgage-backed securities from them.

The Home Loan Bank’s lawsuit, filed in Cook County Circuit Court, asks the court to void the sales of the securities and direct the banks to reimburse the Home Loan Bank plus 10% annual interest, according to Bloomberg News […]

As of June 30, the Federal Home Loan Bank of Chicago reported having $3.4 billion in mortgage-backed securities purchased from private banks and has recognized $800 million in losses on that portfolio.

“The defendants did not tell the bank the truth about the loans that comprised the mortgage pools,” the lawsuit said, according to Bloomberg. While the Federal Home Loan Bank believed the securities were “safe,” “in fact the bank purchased a toxic stew of doomed mortgage loans,” Bloomberg quoted the complaint as saying.

This is complete chaos in the housing market right now. Cheerleading for it without fixing the errors that plague it puts every homeowner at risk.

David Dayen

David Dayen