New Regulation of Credit Industry is Now Inevitable. The Only Question is How Much Regulation, and with How Much Bite?

There can no longer be any question whether there will be new regulation of the credit industry in the wake of the housing meltdown and the mortgage crisis.

The only question now is the extent of the regulation and how much teeth it will have.

Treasury Secretary Henry Paulson eliminated any doubt regarding new regulation when he conceded that the Federal Reserve should bolster its supervision of investment banks while they are taking cheap money from the Fed’s new emergency program.

Paulson said that the Bush administration will soon put forth a blueprint for federal oversight in an effort to promote smoother functioning of financial markets.

”This latest episode has highlighted that the world has changed as has the role of other nonbank financial institutions and the interconnectedness among all financial institutions,” Paulson said.  ”These changes require us all to think more broadly about the regulatory and supervisory framework that is consistent with the promotion and maintenance of financial stability.” 

Greater oversight is necessary, according to Paulson, to “enable the Federal Reserve to protect its balance sheet, and ultimately protect U.S. taxpayers.”

Wall Street’s major investment banking firms, including Goldman Sachs, Lehman Brothers and Morgan Stanley, averaged $32.9 billion in daily borrowing over the past week from the new Fed program, compared with $13.4 billion the previous week. On Wednesday alone, their borrowing from the Fed reached $37 billion.

To add to the growing conservative consensus that greater federal regulation of the credit market is necessary, Wall Street Journal columnist Jon Hilsenrath wrote on the front page of the newspaper’s Money and Investing section that “if the government is going to intervene aggressively when bubbles burst, as it’s doing now, then maybe policy makers should do some new thinking about how to prevent bubbles in the first place.”

Democrats, both in Congress and on the presidential campaign trail, have called for more extensive and permanent regulation of both the credit market and the mortgage industry than that proposed by the Bush administration.

The final outcome will depend on who wins in November and what happens in the economy between now and the next Inauguration Day. 

But it is now clear that one consequence of the Bear Stearns bailout and the Fed’s cheap money policy for the major investment banks is to have made some form of new regulation of the credit market and the mortgage industry inevitable.

In the meantime, we’re still waiting for the enormous sums of cheap money that the Fed has pumped into the credit industry to make its way down the pipeline to the rest of us in the economy. 

U.S. Court Rips Subprime Lender as “Ticking Time Bomb” — Faults New Century Executives and Big Four Auditor

The Final Report in the federal bankruptcy proceedings involving subprime mortgage lender New Century Financial Corp. was made public today by the United States Bankruptcy Court for the District of Delaware.

You can read the Final Report here.

Following an investigation that began in June 2007, the 550-page report reviews the accounting and financial reporting practices, loan origination operations, audit committee and internal audit department, and system of internal controls of New Century, once the second-largest originator of subprime home loans in the U.S.

According to the report, the now bankrupt mortgage lender used improper accounting practices while making risky loans, creating “a ticking time bomb” that led to the company’s collapse.

The New York Times has called the report “the most comprehensive and damning document that has been released about the failings of a mortgage business.”

The report states:

“New Century had a brazen obsession with increasing loan originations, without due regard to the risks associated with that business strategy.”

“The increasingly risky nature of New Century’s loan originations created a ticking time bomb that detonated in 2007.”

“Senior management turned a blind eye to the increasing risks of New Century’s loan originations and did not take appropriate steps to manage those risks.”

In one example cited in the report, New Century understated by more than 1000 percent the amount of money it needed to have on reserve to buy back bad loans. As a result, it reported a profit of $63.5 million in the third quarter of 2006, when it should have reported a loss.

New Century also failed to include the interest that it was obligated to pay to investors whenever it was forced to buy back bad loans.

In addition, the report concluded that New Century’s accounting firm, KPMG LLC, one of the Big Four accounting firms, actively enabled New Century’s improper accounting practices. 

Court-appointed examiner Michael J. Missal observed that “As an independent auditor [KPMG is] supposed to look very skeptically at any client, and here they became advocates for the client and in fact even suggested some improper accounting treatment that ultimately started New Century down the road it’s taken.”

The improper accounting also led to higher bonuses for New Century executives.

New Century once billed itself as “A New Shade of the Blue Chip.”

Creditors of New Century now say they are owed $35 billion.

The former subprime lending giant’s stock peaked at nearly $65.95 in late 2004 — on Wednesday it was trading at a penny.

You can read New Century’s Chapter 11 Bankruptcy filings here.

New Century is being sued by hundreds of investors and remains the target of a federal criminal investigation.

Mortgage Scam Website Still Online

We blogged yesterday about the federal indictment in “Operation Homewrecker” of Charles Head and 18 others for what the FBI alleges to be a major mortgage scam that defrauded homeowners of their houses, their equity and their credit.

Today we saw that a website of Charles Head’s company is still online.

The website of Head Financial Services (“The Smart Way to Shop for a Lender”) is hosted by the website for Huntington Beach News.

The website promises that you can “Get 3 competing mortgage bids with one easy form” and that “Lenders are standing by now to serve you.” 

 

A representative of the Huntington Beach News told us that the page was a paid advertisement.

He also said that he didn’t know who had paid for the page, but that he needed to take the page down.

The only link on the page is to Charles Head’s email at charleschead@aol.com.

UPDATE:

The Web page we originally linked to has been taken down.  You can see another Head Financial Web page that is still online here.

We’ve also found a reverse mortgage website that lists Operation Home Wrecker scammer Keith Brotemarkle as one of its brokers.  You can read our post here.

“Operation Homewrecker” Nets 19 Indictments for Mortgage Fraud Scheme — With More Charges Soon. Mortgage Brokers Alleged to be Involved.

Federal prosecutors in Sacramento, California, announced today the indictment of 19 people for mortgage fraud-related offenses under what it called “Operation Homewrecker.”

The indictment alleges that the leader of this nationwide scam is Charles Head, 33, of Los Angeles, California, who targeted homeowners in dire financial straits, fraudulently obtaining title to over 100 homes and stole millions of dollars through fraudulently obtained loans and mortgages.

The charges are divided into two separate indictments.

“Head One” involved a “foreclosure rescue” scam, netting approximately $6.7 million in fraudulently obtained funds taken from 47 homeowners, nearly all located in California. The allegations in Head One are that from January 1, 2004 to March 14, 2006, the defendants contacted desperate homeowners, offering two “options” allowing them to avoid foreclosure and obtain thousands of dollars up-front to help pay mounting bills.

If the homeowner could not qualify for the “ first option,” which virtually none could, they would be offered the “second option.” An “investor” would be added to the title of the home, to whom the homeowner would make a “rental” payment of an amount allegedly less than their mortgage payment, thereby allowing the homeowner to repair their credit by having the mortgage payments made in a timely fashion.

All of this was a scam.

The defendants recruited straw buyers as the “investors” who would then replace the homeowners on the titles of the properties without the homeowners’ knowledge. Once the straw buyer had title to the home, the defendants immediately applied for a mortgage to extract the maximum available equity from the home. The defendants would then share the proceeds of the ill-gotten equity and “rent” being paid by the victim homeowner.

When the defendants ultimately would sell the home, stop making the mortgage payment, and/or pursue an eviction proceeding, the victim homeowner was left without their home, equity, or credit.

The following defendants were charged in the February 28, 2008 “Head One” indictment: Charles Head, 33, of La Habra, California; Jeremy Michael Head, 30, of Huntington Beach, California; Elham Assadi, aka Elham Assadi Jouzani, aka Ely Assadi, 30, of Irvine, California; Leonard Bernot, 51, of Laguna Hills, California; Akemi Bottari, 28, of Los Angeles; Joshua Coffman, 29, of North Hollywood; John Corcoran, aka Jack Corcoran, 52, of Anaheim; Sarah Mattson, 27, of Phoenix, Arizona; Domonic McCarns, 33, of Brea, California; Anh Nguyen, 36, of Los Angeles; Omar Sandoval, 32, of Rancho Cucamonga, California; Xochitl Sandoval, 29, of Rancho Cucamonga; Eduardo Vanegas, 28, of Phoenix; Andrew Vu, 39, of Santa Ana; Justin Wiley, 28, of Irvine; and Kou Yang, 32, of Corona, California.

“Head Two” involved an alleged “equity stripping” scheme, netting approximately $5.9 million in stolen equity from 68 homeowners in states across the nation.

While still targeting distressed homeowners and defrauding mortgage lenders through the use of straw buyers, in this version of the scheme, Charles Head would receive approximately 97 percent of the stolen equity, while his “sales agents” and employees, and the other defendants, would receive either the remaining 3 percent of equity or a salary from the fraudulently-obtained funding.

Instead of recruiting straw buyers, as in Head One, in Head Two the defendants allegedly recruited strangers via the Internet. They also used referrals from mortgage brokers to identify and solicit new victim homeowners. Beyond advertising on the Internet, the defendants also would send “blast faxes” to mortgage brokers throughout the country and generate mass emails to potential victims.

Through misrepresentations and omissions, victim homeowners would be offered what appeared to be their last best chance to save their homes. As in Head One, these victims also were left without their homes, equity, or credit.

Those charged in the Head Two indictment include Charles Head, John Corcoran, Kou Yang, each also charged in Head One, as well as Keith Brotemarkle, 42, of Johnstown, Pennsylvania; Benjamin Budoff, 41, of Colorado Springs, Colorado; Domonic McCarns, 33, of Brea, California; and Lisa Vang, 24, of Westminster, California.

The FBI has seized lavish sports cars, a fleet of high-end Italian motorcycles, thousands of documents and a condominium in Miami.

It remains to be seen how far this scam reached, or how many people and institutions were criminally involved.

Prosecutors made it clear that more charges would be filed. FBI Special Agent Drew Parenti said his agency is now “focusing on the industry professionals, the ‘insiders’ who have manipulated the mortgage loan process for their own financial gain.”

Particularly ominous is the statement by federal prosecutors that the defendants “used referrals from mortgage brokers to identify and solicit new victim homeowners”

Whatever the reach of this investigation, we know it is barely the tip of the iceberg of mortgage-related fraud.

We note too that the defendants’ scheme is alleged to have begun in January 2004 – well before the mortgage crisis grabbed national attention – and that the indictment only covers conduct up until March 2006 – well before the mortgage crisis drove many tens of thousands more people into the kind of desperation that the defendants manipulated.

This is only the beginning.

We’re going to see a lot more mortgage fraud indictments.

And as conditions worsen for more and more people who can not pay their mortgages, we’re going to see even more new mortgage fraud schemes.

UPDATE

We’ve discovered the website of Charles Head’s “Head Financial Services.”  To see the website and read the story, click here.

We’ve also found a reverse mortgage website that lists Operation Home Wrecker scammer Keith Brotemarkle as one of its brokers.  You can read our post here.

California Takes Action (But Not Very Much Action) Against Mortgage Fraud

With great fanfare, California Attorney General Jerry Brown and local prosecutors in San Bernardino and Los Angeles counties announced yesterday that they had shut down subprime mortgage fraud schemes that had victimized thousands of homeowners.

The San Bernardino County district attorney’s office arrested five people and were waiting for two more to surrender to face charges of conspiracy, grand theft and elder abuse, and a related lawsuit was filed in Los Angeles County Superior Court accusing six companies — Lifetime Financial Inc., Nations Mortgage Inc., Greenleaf Lending Inc., Virtual Escrow Inc., Olympic Escrow and Direct Credit Solutions Inc. — of using predatory lending practices to trap homeowners in illegal and expensive loans.

All of the companies participating in the fraud were allegedly operated by one family.

According to prosecutors, the schemes operated by promising borrowers unrealistically low interest rates of less than 6% a year and then having them sign contracts that carried higher rates. The companies are also alleged to have charged hidden loan fees of as much as $20,000 per transaction.

“As the mortgage crisis worsens, a growing number of fly-by-night companies are employing utterly brazen tactics to push homeowners into illegal and unconscionable loans,” California Atty. Gen. Jerry Brown said. “The illegal sales practices of these companies . . . included psychological pressure, forgery and outright lies.”

The predatory practices that were alleged included:

“Offering thousands of dollars in cash back without disclosing that the money would be used to cover high fees;

Falsely promising to reimburse prepayment penalties from the victim’s current lender;

Pressuring victims to sign inaccurate loan documents by promising to correct excessive fees;

Failing to provide copies of signed documents;

Forging victims names and signatures on loan documents;

Falsifying income information on loan applications and creating fake references;

Refusing to honor written demands to cancel loans.

If a consumer tries to back out of the transaction, the companies promise to waive thousands of dollars in various processing, application, origination and underwriting fees. If the consumers agree, sales representatives provide a new statement but then resubmit the original forms, ultimately charging the same excessive fees.”

Brown’s office is seeking civil penalties of $2,500 for each violation of law and full restitution as well as a permanent injunction against operation these businesses. Penalties and restitution are estimated by prosecutors to exceed $20 million.

Although the announcement of the prosecutions was staged for maximum political effect, the response from the local media and consumer groups probably hasn’t been what Jerry Brown expected.

Rather than congratulating Brown on his prosecution of mortgage fraud, the commentary has criticised Brown for taking so long to do so little.

Paul Leonard, director of the California office of the Center for Responsible Lending, said that while the prosecution would help “to rid the marketplace of the most egregious illegal practices,” the real problems in the subprime market are caused by practices that are still legal.  “The illegal practices are only the tip of the iceberg,” Leonard said. “The vast proportion of the problems in the sub-prime market were caused by perfectly legal but systematic failures.”

Los Angeles Times real estate blogger Peter Viles was even more skeptical.  Viles noted that “The companies accused in the crackdown are not exactly household names and were operated by a single family in Tarzana.”

More caustic still was John Gittelsohn at the Orange County Register.

Gittelsohn observed that this appears to be Brown’s first attempt to prosecute mortgage fraud since he took office. 

“Since early 2007,” Gittelsohn wrote, “federal authorities have initiated civil and criminal probes of lenders such as New Century Financial Corp., a bankrupt subprime lender in Irvine. Attorneys general in New York, Ohio and other states have announced investigations into mortgage writing, financing and other industry players.”

“Brown’s predecessor, Bill Lockyer, in cooperation with other prosecutors won multi-million dollar settlements in predatory lending cases against Orange-based Ameriquest Mortgage Co., Illinois-based Household Finance Corp. and Irvine-based First Alliance Mortgage Corp. among other companies.”

“As the birthplace of America’s subprime lending boom and bust, you’d expect California’s Attorney General to be a national leader in policing the mortgage industry.”

Gittelsohn then asked: “So what’s taken Brown so long?” 

Brown says that he intends to bring additional legal actions, both civil and criminal, against other mortgage lenders and foreclosure consultants who are taking advantage of homeowners in California.

We hope he does. 

But we also agree with Paul Leonard that illegal practices are only the tip of the iceberg in the current mortgage crisis, and that the vast proportion of the problems in the sub-prime market are the result of perfectly legal but systematic failures in the mortage industry and credit market.

Go Ahead, Foreclose Me, I’ve Already Bought a New House!

Here’s a new twist on surviving the foreclosure crisis. 

We’ve already heard about thousands of homeowners facing foreclosure who simply walk away from their properties and their mortgages, letting the lenders deal with the financial fallout.

Since they owe more than their houses are worth, their decisions to abandon their homes and their mortgages often make financial sense, especially if they are not too concerned about the hit to their credit scores.

Now some homeowners are combining that strategy with a new one. 

They are buying new homes before their old homes go into foreclosure, and then walking away from the old homes and the old mortgages.

What these homeowners hope to achieve is getting out of their current untenable mortgage situations with a new home and a new mortgage. 

And it appears that so long as the homeowners don’t mind seeing their credit scores tumble, this strategy will work.

The homeowners will need to come up with a  new lender and sizable down payment for the new home, but once they’re in, there is nothing that the old lender can do.

Since the new home, with the new mortgage, has no connection to the old home and the old lender, the old lender can not come after the new home to collect any debt owed on the old home.

What is also a sign of the times is that there are now realtors who specialize in helping homeowners pursue this strategy and lenders who also specialize in these situations.

Real estate is getting stranger and stranger. . .

When the House Buyers Come Back to Capistrano…

We live in Southern California, not too far from the Mission San Juan Capistrano.

According to tradition, the swallows that live in the area leave the mission every year on October 23 and return on March 19 to the ringing of the church bells on St. Joseph’s Day.

This is the week that the swallows are supposed to return. 

There is a beautiful old song written by Leon René based on the swallows legend — When the Swallows Come Back to Capistrano:

All the mission bells will ring
The chapel choir will sing
The happiness you’ll bring
Will live in my memory
When the swallows come back to Capistrano
That’s the day I pray that you’ll come back to me

Like the lover in the song, many of us in real estate are feeling a sense of longing for happier days.

This weekend, it looked like those days could come back again.

It seemed that the both swallows and the house buyers had returned to Southern California.

For the past several months, the “Open House” signs in our area looked as forlorn as Joshua trees standing alone in the Mojave Desert, surrounded by miles of desolation.  And few sights were as dismal as watching the dejected realtors taking down their signs at sunset after hosting open houses that had attracted no one.

But this weekend, suddenly, inexplicably, everything changed. 

People were packing the open houses.  Outside the houses, cars were double parked.  Realtors looked perky, annimated, and happy.

Illusion?

Wishful thinking?

Or can we really hear the mission bells ringing in the distance? 

Have the house buyers come back to Capistrano?

The Battle Lines Have Formed in the Politics of the Credit and Mortgage Crisis

The battle lines have formed in the political fight over the federal government’s response to the credit and mortgage crisis.

There are now two clear, and clearly different, strategies being put forward as the federal government attempts to deal with the credit and mortgage crisis — or is it the real estate crisis, the housing crisis, the foreclosure crisis, the liquidity crisis, the international banking crisis, the securities crisis, or all of the above?

One strategy relies on persuasion (and the credit industry’s recognition of group self-interest) and the other on force (and the belief that without the threat of force, individual self-interest will trump group self-interest every time).

The persuasion strategy belongs to the Bush administration, including the President’s Working Group on Financial Markets, and a majority of the Republicans in the House and Senate.

Their basic approach is to use their bully pulpit, as well as some incentives, to attempt to persuade the banks, lenders, mortgage brokers, and others in the credit industry to regulate and reform themselves.

As Treasury Secretary Henry Paulson put it, the Bush administration and the President’s Working Group on Financial Markets (which includes, in addition to the Treasury Secretary, the heads of the Federal Reserve Board, the Federal Reserve Bank of New York, the Securities and Exchange Commission and the Commodity Futures Trading Commission) want “to not create a burden” on the players in the credit industry.

They’re hoping that the industry will see that their own self-interest requires them to take the actions that the administration suggests in order to restore confidence and stability in the credit market.

For the most part, the Working Group’s recommendations would not require legislation, but would be implemented by the credit industry itself.

As the New York Times testily observed, the administration’s program, announced with such fanfare today by Treasury Secretary Paulson, “amounted to little more than demands that investors and financial institutions take greater care in analyzing and managing their risks.”

On the other side of the aisle, and from a different ideological perspective, the Democrats are pushing an agenda that relies far more on the force of government imposed regulations and the concomitant threat of legal sanctions.

The Democrats’ thinking is premised on the belief that even with the credit market in crisis, and even with the general recognition within the credit industry that new rules are necessary for the good of the game, the individual players will adhere to these rules only when they are forced to do so by federal regulators with the threat of punishment.

The Democrats are probably also thinking that a “tough” approach to the banks and the brokers will play well with the voters.

What will happen — will the persuaders or the punishers win out in the end?

Our view is that in the short run — that is, until after the November elections — the persuaders will stand their ground, even in the face of election year attacks from the Democrats, and resist the increasingly insistent calls for unleashing an armed federal force against the credit industry.

If the financial crisis worsens significantly, we would then expect that the Republican persuaders will have to make more concessions regarding legislation and federal sanctions, although we would still expect that these will be minimal.

On the other hand, if the Democrats win in November, persuasion will be dead and war will be declared.  Force would be used against the financial markets and credit industry on a major scale.

We could then see a comprehensive and sweeping legislative overall of the entire credit and banking industry even more extenstive than the Securities and Exchange Act.

Are “Deadbeat” Home Owners Beating the Banks Through “Judicial Nullification”?

Are “Deadbeat” Home Owners Beating the Banks?

One of the strangest consequences of the current crisis involving mortgage backed securities is that it is often impossible to prove who owns the property that backs the mortgage.

As a result, judges in several states are refusing to allow lenders to foreclose on homeowners who are in default, since the lenders cannot produce proof that they own the mortgage.

Bloomberg News recently ran a story on this subject that is worth reading:

“Banks Lose to Deadbeat Homeowners as Loans Sold in Bonds Vanish”

“Joe Lents hasn’t made a payment on his $1.5 million mortgage since 2002. That’s when Washington Mutual Inc. first tried to foreclose on his home in Boca Raton, Florida. The Seattle-based lender failed to prove that it owned Lents’s mortgage note and dropped attempts to take his house. Subsequent efforts to foreclose have stalled because no one has produced the paperwork. “If you’re going to take my house away from me, you better own the note,” said Lents, 63, the former chief executive officer of a now-defunct voice recognition software company.

Judges in at least five states have stopped foreclosure proceedings because the banks that pool mortgages into securities and the companies that collect monthly payments haven’t been able to prove they own the mortgages. The confusion is another headache for U.S. Treasury Secretary Henry Paulson as he revises rules for packaging mortgages into securities. “I think it’s going to become pretty hairy,” said Josh Rosner, managing director at the New York-based investment research firm Graham Fisher & Co. “Regulators appear to have ignored this, given the size and scope of the problem.”

More than $2.1 trillion, or 19 percent, of outstanding mortgages have been bundled into securities by private banks, according to Inside Mortgage Finance, a Bethesda, Maryland-based industry newsletter. Those loans may be sold several times before they land in a security.

Mortgage servicers, who collect monthly payments and distribute them to securities investors, can buy and sell the home loans many times.

Each time the mortgages change hands, the sellers are required to sign over the mortgage notes to the buyers. In the rush to originate more loans during the U.S. mortgage boom, from 2003 to 2006, that assignment of ownership wasn’t always properly completed, said Alan White, assistant professor at Valparaiso University School of Law in Valparaiso, Indiana. “Loans were mass produced and short cuts were taken,” White said. “A lot of the paperwork is done in the name of the original lender and a lot of the original lenders aren’t around anymore.”

More than 100 mortgage companies stopped making loans, closed or were sold last year, according to Bloomberg data. The foreclosure rate, at 1.69 percent of all U.S. homeowners, is the highest since the Mortgage Bankers Association began tracking it in 1993. The foreclosure rate for subprime borrowers, who have bad or incomplete credit and whose mortgages typically are securitized by private banks rather than government-sponsored entities Fannie Mae and Freddie Mac, is at a four-year high, according to the mortgage bankers.

More than 1.5 million homeowners will enter the foreclosure process this year, said Rick Sharga, executive vice president for marketing at RealtyTrac Inc., the Irvine, California-based seller of foreclosure information. About half of them, 750,000, will have their homes repossessed, Sharga said.

Borrower advocates, including Ohio Attorney General Marc Dann, have seized upon the issue of missing mortgage notes as a way to stem foreclosures. “The best thing to do is to keep people in their homes and for everybody to take steps necessary to make that happen,” said Chris Geidner, an attorney in Dann’s office. “These trusts are purchasing these notes, and before they even get the paperwork, they foreclose on people. They become foreclosure machines.”

When the mortgage servicers and securitizing banks that act as trustees of the securities fail to present proof that they own a mortgage, they sometimes file what’s called a lost-note affidavit, said April Charney, a lawyer at Jacksonville Area Legal Aid in Florida.

Nobody knows how widespread the use of lost-note affidavits are, Charney said. She’s had foreclosure proceedings for 300 clients dismissed or postponed in the past year, with about 80 percent of them involving lost-note affidavits, she said. “They raise the issue of whether the trusts own the loans at all,” Charney said. “Lost-note affidavits are pattern and practice in the industry. They are not exceptions. They are the rule.”

State laws generally make it difficult to foreclose because they favor the homeowner, said Stuart Saft, a real estate lawyer and partner at the New York firm Dewey & LeBoeuf LLP. “All these loan documents are being sent to the inside of a mountain in the middle of America and not being checked very carefully,” Saft said. “The lenders can’t find the paper. We’re dealing with a lot of paper produced in a mortgage closing.”

Requiring banks to produce the paperwork at a foreclosure hearing is a nuisance, said Jeffrey Naimon, a partner in the Washington office of Buckley Kolar LLP. “It’s a gigantic waste of time,” Naimon said. “The mortgage may have transferred five, six, eight times. It’s possible that you don’t have all the pieces of paper, but it was enough to convince the next guy in the chain. There’s no true controversy over whether the owner owns the loan.”

Judges are becoming increasingly impatient with plaintiffs who produce no more proof of ownership than a lost-note affidavit or a copy of the note, said Michael Doan, an attorney at Doan Law Firm LLP in Carlsbad, California. “Things are heating up,” Doan said.

In Ohio, where RealtyTrac reported an 88 percent jump in foreclosures last year, Dann, the attorney general, is now arguing 40 foreclosure cases that challenge ownership of mortgage notes, according to his office.

U.S. District Judge David D. Dowd Jr. in Ohio’s northern district chastised Deutsche Bank National Trust Co. and Argent Mortgage Securities Inc. in October for what he called their “cavalier approach” and “take my word for it” attitude toward proving ownership of the mortgage note in a foreclosure case. John Gallagher, a spokesman for Frankfurt-based Deutsche Bank AG, said the bank had no comment.

Federal District Judge Christopher Boyko dismissed 14 foreclosure cases in Cleveland in November due to the inability of the trustee and the servicer to prove ownership of the mortgages.

Similar cases were dismissed during the past year by judges in California, Massachusetts, Kansas and New York. “Judges are human beings,” said Kenneth M. Lapine, a partner at the Cleveland law firm Roetzel & Andress LPA. “They no doubt feel the little guy needs all the help he can get against the impersonal, out of town, mega-investment banking company.”

U.S. Bankruptcy Judge Samuel L. Bufford in Los Angeles issued a notice last month warning plaintiffs in foreclosure cases to bring the mortgage notes to court and not submit copies. “This requirement will apply because developments in the secondary market for mortgages and other security interests cause the court to lack confidence that presenting a copy of a promissory note is sufficient to show that movant has a right to enforce the note or that it qualifies as a real party in interest,” the notice said.

Quick foreclosures benefit communities because properties in default lose value and homeowners in financial distress don’t maintain their houses or pay real estate taxes, said Saft of Dewey & Leboeuf.

“When banks originally made the loans they used people’s money from pension funds and savings accounts and they should be allowed to foreclose the loan as quickly as possible before the property depreciates in value any more,” Saft said.

“The mortgage industry has been painted as the enemy when all they did was make loans to enable people to buy homes. Now there’s less money available for new borrowers to buy homes and that’s what’s causing the value of homes to go down.”

Lents is former CEO of Investco Inc., a Boca Raton, Florida-based developer of voice recognition software. In 2002, the U.S. Securities and Exchange Commission sanctioned Lents and others for stock manipulation, according to the SEC Web site. He lost his job, was fined and his assets were frozen. That’s the reason he couldn’t pay his mortgage, he said. “If the homeowner doesn’t object to the lost-note affidavit, the judge rubber-stamps it,” Lents said. “Is it oversight, or are they trying to get around the law?” Washington Mutual spokeswoman Geri Ann Baptista said the bank had no comment.

“I can’t believe the handling of notes is worse than it was five years ago,” said Guy Cecala, publisher of Inside Mortgage Finance. “What we didn’t have back then were armies of attorneys out there looking for loopholes. People are challenging foreclosures and courts are paying a lot more attention to foreclosures than they ever did before.”

American Home Mortgage Investment Corp., the Melville, New York-based lender that filed for bankruptcy last August, said it was paying $45,000 a month to store loan paperwork and petitioned U.S. Bankruptcy Judge Christopher Sontchi in Wilmington, Delaware, for the right to toss it all. Sontchi ruled last week that American Home Mortgage could charge banks from $3 to $13 a file to retrieve documents.

The home-loan industry has had a central electronic database since 1997 to track mortgages as they are bought and sold. It’s run by Mortgage Electronic Registration System, or MERS, a subsidiary of Vienna, Virginia-based MERSCORP Inc., which is owned by mortgage companies.

MERS has 3,246 member companies and about half of outstanding mortgages are registered with the company, including loans purchased by government-sponsored entities Fannie Mae, Freddie Mac and Ginnie Mae, said R.K. Arnold, the company’s CEO.

For about half of U.S. mortgages, there is no tracking mechanism. MERS rules don’t allow members to submit lost-note affidavits in place of mortgage notes, Arnold said. “A lot of companies say the note is lost when it’s highly unlikely the note is lost,” Arnold said. “Saying a note is lost when it’s not really lost is wrong.”

Lents’s attorney, Jane Raskin of Raskin & Raskin in Miami, said she has no idea who owns Lents’s mortgage note. “Something is wrong if you start from what I think is the reasonable assumption that these banks are not losing all of these notes,” Raskin said. “As an officer of the court, I find it troubling that they’ve been going in and saying we lost the note, and because nobody is challenging it, the foreclosures are pushed through the system.”

We think that what is going on here could be called “judicial nullification.”

We also think that lenders, banks, and the credit industry should be very worried about it.

In the law, when juries refuse to follow the law or the instructions of judges, and instead render a verdict based on their sympathies, it is called “jury nulllification.”

The most famous (or infamous) examples of jury nullification in the United States are John Peter Zenger’s sedition trial in New York in 1734 for publishing criticism of the British governor, the refusal of some Northern juries to convict in fugative slave cases, and the refusal of some Southern juries to convict in civil rights cases in the 1960s.

The problem is not only that judges believe that the delinquent homeowners (nice middle-class people like themselves) are victims and that the lenders are fundamentally at fault.

More importantly, the judges do not see the government or the credit industry actively moving toward a solution that would prevent what the judges believe to be serious injustices.

I recall that when I worked as a law clerk for an extremely liberal judge on the United States Court of Appeals, he often disagreed with the outcome that the law mandated, and yet still voted to uphold the law.

He did so, he said, because he believed fundamentally in the rule of law. But I think he also did so because he believed that Congress had considered the issues fairly and thoroughly. He was to some extent what people now call an “activist judge,” but he also believed in the American system of government and the Constitution’s separation of powers.

We think that more judges will engage in “judicial nullification” of mortgages unless Congress and the Executive Branch exercise their responsibilities and turn their attention to the mortgage and credit crisis in a far more comprehensive and meaningful way than they have so far.

UPDATE:

See Judicial Nullification of Foreclosures Spreads to Bankruptcy Court.

The Government Offers Kind Words and Bandages

When we reported on Thursday on the continuing rise in foreclosures and the downward slide in homeowner equity, we concluded that “The political pressure on the States and the federal government to take sweeping and even desparate actions will also continue to mount, especially because this is a presidential election year.”

On Friday, The New York Times echoed our assessment, saying that “The [recent foreclosure] figures are expected to increase pressure on policy makers and the mortgage industry to move faster to contain losses and help homeowners. In recent days, regulators and lawmakers have begun suggesting that the federal government might need to take a bigger role in the mortgage business.”

While Federal Reserve Chairman Bernanke repeated his call for lenders to voluntarily reduce the principal on delinquent loans to adjust them for the drop in home prices, far more more forceful action was propsed by the Chairman of the House Financial Services Committee, Rep. Barney Frank (D-Mass.), who will introduce legislation that would require the refinancing of hundreds of thousands of mortgages, with the F.H.A. providing new loan insurance.

Our opinion is that the most signifiant cause of the mortgage and foreclosure crisis is the underlying disarry in the credit markets. Unless and until the credit markets are better regulated and rationalized (and not necessarily by the government), all that can be hoped for is first aid, not a cure.

Of course, if you’re bleeding badly, you’re grateful even for a kind word and a bandage.