A Society of Laws? Or a Sea of Flimflammery?

I don’t understand the intricacies of the mortgage mess in America, and I bet you don’t either. But I am sure of one thing:  there’s flimflammery involved.

Consider the current foreclosure scandal. Banks are backing off on foreclosures because they do not have the right paperwork. And that threatens to bring the sputtering housing market revival to a grinding halt.

Here’s how Nobel prizewinning economist Paul Krugman sums up the debacle:

The story so far: An epic housing bust and sustained high unemployment have led to an epidemic of default, with millions of homeowners falling behind on mortgage payments. So servicers — the companies that collect payments on behalf of mortgage owners — have been foreclosing on many mortgages, seizing many homes.

But do they actually have the right to seize these homes? Horror stories have been proliferating, like the case of the Florida man whose home was taken even though he had no mortgage. More significantly, certain players have been ignoring the law. Courts have been approving foreclosures without requiring that mortgage servicers produce appropriate documentation; instead, they have relied on affidavits asserting that the papers are in order. And these affidavits were often produced by “robo-signers,” or low-level employees who had no idea whether their assertions were true.

Now an awful truth is becoming apparent: In many cases, the documentation doesn’t exist. In the frenzy of the bubble, much home lending was undertaken by fly-by-night companies trying to generate as much volume as possible. These loans were sold off to mortgage “trusts,” which, in turn, sliced and diced them into mortgage-backed securities. The trusts were legally required to obtain and hold the mortgage notes that specified the borrowers’ obligations. But it’s now apparent that such niceties were frequently neglected. And this means that many of the foreclosures now taking place are, in fact, illegal.

Why don’t the banks have the right paperwork?

There’s no simple answer. But when it’s all sorted out, I bet some people are going to prison.

And I’m in good company.

Florida Congressman Alan Grayson has formally requested an emergency task force on foreclosure fraud. He says there has been “widespread fabrication of documents.”

I think the root of the problem is that the industry is so bewilderingly complex. Flimflammers thrive in that kind of environment.

The government must accept some of the blame, of course.

Why is nothing that comes out of Washington simple and clear-cut? I wonder if one reason is that lobbyists get to every piece of proposed legislation and trick it up with convoluted conditions, making it as difficult as possible to implement?

And it’s not just the government. Left to itself, private industry can become bewilderingly convoluted.

In the case of the mortgage scam, for instance, the complex arrangements between mortgage sellers, banks and “trusts” provided cover for con artists – probably including organized crime.

On her website “Web of Debt,”  (www.webofdebt.com/articles/breakup_banks.php), financial author Ellen Hodgson Brown cites a class action lawsuit against the mortgage lenders under the Racketeer Influenced and Corrupt Organizations Act. Brown’s article quotes the lawyer in the suit, Heather Boone McKeever of Lexington, Ky., as saying that:

The fraud didn’t just happen piecemeal. This is organized crime by people in suits, but it is still organized crime. They created a very thorough plan.

Krugman says the mortgage mess “is making nonsense of claims that we have effective contract enforcement — in fact, the question is whether our economy is governed by any kind of rule of law.” And he warns that conservative commentators, “like those at The Wall Street Journal’s editorial page,” are exploiting the situation to promote an even more Wild West economy. He writes:

They’re saying that if a bank says it owns your house, we should just take its word. To me, this evokes the days when noblemen felt free to take whatever they wanted, knowing that peasants had no standing in the courts. But then, I suspect that some people regard those as the good old days.

The way I see it, the answer to the morass of government red tape is not to get rid of government but to replace the red tape with simple regulations that even I can understand. The fine print that flourishes in an unregulated economy can be a lot more dangerous than the voluminous gobbledygook that politicians produce.