Negotiations are currently underway in regards to a national compensation fund for bank foreclosure victims. The negotiations are taking place between all 50 of the state attorney generals, bank regulators, and several of the country’s biggest lenders.  These lenders include J.P. Morgan Chase, Bank of America, Wells Fargo, Citigroup, and Ally Financial (formerly known as GMAC Mortgage).

The fund is supposed to compensate homeowners who may have been illegally foreclosed upon by banks and other lenders.   This solution is also designed to help the lenders to avoid lengthy and costly court cases.  Additionally, it’s supposed to help stabilize the housing industry by removing the current foreclosure freeze.  Moreover, it’s supposed to help clear up the congestion of court cases clogging the judicial system in all 50 states and downscale any future lawsuits involving foreclosure fraud.  The current judicial system isn’t set up to properly adjudicate the massive amount of foreclosures that are occurring nationwide.

Details still need to be worked out

The state officials and mortgage lending industry representatives agree that a financial remedy is essential to preventing further homeowner turmoil.  However, it may take  several months to reach an agreement and work out all the details.  Each side has a different viewpoint as to how the fund should be administered, who should benefit from it, and what proof they’ll need.  The two sides also have differing views as to how much each lender should contribute to the fund and what size the fund should be.   Moreover, they have varying ideas of how much time should be allowed for filing claims and the payment of claims.

Both sides want to end the housing crisis as soon as possible.  Both sides also want to see improvements made to the foreclosure and mortgage servicing processes.   However, this also leads to more unresolved issues.  For instance, reduction of principle for homeowners who are now “under water” is one of the unresolved issues.  Additionally, many officials would like to see bankruptcy judges be permitted to order loan modifications.  Basically, the main differences arise from the state officials wanting the lenders to reform their loan and foreclosure processes to be more fair to homeowners, while the banks want the legal end of the processes to be modified in order to expedite foreclosures.  Expediting the legal process of foreclosure could cover up vast amounts of fraudulent and illegal banking activities, as well as make it even easier for banks to foreclose on property they may not even own a lien to.

Numerous state officials think these types of issues should be addressed by the fund along with several other mortgage fraud issues that have led to the massive amount of foreclosures. Another unresolved issue is how all the foreclosure cases that involve sloppy or fraudulent paperwork should be dealt with on a legal basis.  Yet another unresolved issue is how the loan modification process will work in conjunction with foreclosure processing.   Currently, many lenders initiate both procedures simultaneously, rather than waiting to see if a loan modification will make foreclosing unnecessary.  Moreover, the state officials want lenders to address the issue of servicing fees during the loan modification process.

Why big banks are agreeing to create a compensation fund

One of the major reasons big banks are working to create a compensation fund is that they hope this will deter major lawsuits from homeowners.   Following foreclosure investigations in all 50 states and Washington, D.C., the big banks have determined it would be less costly and much quicker to just create a fund like BP did for the Gulf of Mexico oil spill.   That way, they can eliminate lots of time and court costs, without actually admitting to any guilt of fraudulent crimes.   It has been discovered that many of the foreclosures in the past few years have been conducted in an illegal manner, using fraudulent documentation, robo-signers, and illegal foreclosure procedures.

Due to the Mortgage Electronic Registration Systems (MERS) and mortgage securitization, about 80% of all existing homes may have murky titles, without the homeowners’ knowledge. MERS doesn’t maintain any physical paperwork, which provides the necessary supporting proof of title ownership.   Also, due to the mortgage securitization practices, the loan note is often transferred without the accompanying title, so more than one lien holder can be involved.  One top Bank of America executive acknowledged that it would have to replace at least 102,000 affidavits used to file pending foreclosure cases due to not having the original documentation needed to provide proof of their lien rights.

Banks and bank regulators are also facing major criticism and investigation by the Senate Banking Committee. At the foreclosure crisis hearing, Committee Chairman Christopher Dodd (D-CT), stated the current widespread banking practices were threatening all homeowners.  However, banks have been avidly attempting to downplay the paperwork mess, claiming they have been “materially accurate” even if not properly filed or supported with original paperwork.  The lenders want Americans to think these thousands of illegal foreclosures were just the result of mere clerical errors in routine paperwork rather than intentional criminal acts of fraud.

The lenders have also been working with their investors to cope with having to repurchase the bad loans.  The last thing the banks need is to be fighting lawsuits from homeowners and investors simultaneously.  Many of the bank executives could also be facing criminal charges of fraud.   Moreover, most of the banks and other mortgage lenders could go completely bankrupt if they lost the lawsuits filed by both homeowners and investors, as well as had to repurchase the fraudulent loans.

Will the fund be adequate to soothe American outrage?

Will this new buyoff fund be enough to soothe the American outrage at Wall Street’s flippant attitude towards the average citizen?   Will our politicians and judicial system let big financial institutions get off with just a token payment of atonement and a slap on the hand for outright defrauding and harming the general American public for the past few decades? They probably will, in the hopes of saving the housing industry and stabilizing our country’s economic situation.   These state officials actually think they’re going to force the Wall Street financial giants into changing their harmful, illegal behavior by creating this fund.

However, all the banks representatives have already stated the banks would continue with the 900,000+ foreclosures already filed this year, and would resume initiating more as soon as this mess has been put behind them.  Even after 18 months of the federal government trying to get banks to change their loan modification and foreclosures procedures, the lenders continue to use the same dysfunctional processes.  These lenders knowingly harm and defraud the American public for self-serving purposes, yet have no intention of changing their actions.   Why should they, if they can continue to profit more by harming the American citizens rather than contributing to their well-being?  With the creation of this fund, it would become up to the homeowners to provide proof of whom does or doesn’t own the right to take their home away from them.   The lenders, who can’t prove they own that right, will get out of paying anything for fraudulent foreclosure practices, since the homeowners most likely won’t be able to prove ownership/lien rights either.

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