For Which They Scam

It may come as a surprise to some (it certainly would have surprised myself of a year ago), but I have developed an interest in the financial news recently. Don't get too excited, it's not as though I'm going to become an investor or start wheeling and dealing – at least not any time soon, not with my head for business or lack thereof. It has simply become increasingly clear to me that anyone who really wants to understand what happens in our society has to pay attention to the business news, because that's where most of the real decision-making power actually is.

Now, as a loyal Canadian, I know I'm supposed to get all excited over whether or not Canada gets a seat on the UN Security Council (apparently not). On the other hand, everyone knows that decisions made in Washington, D.C. are at least as likely to affect our lives up here as anything that comes out of Ottawa. The fact is, for sheer spectacle, even in the heavily polarized Harper era our politics can't hold a candle to the bloodsport on the Potomac. Mea culpa.

That said, I can't be alone in seeing the signs coming out of the States as increasingly ominous, even threatening. It looks like the next phase of the financial crisis is upon us, and just like last time, it's in the U.S. mortgage industry. Everyone thought it would be balloon payments in commercial real estate, but no, apparently that's still to come. Instead, it's more fallout from the subprime mortgage bubble that we all know and love. As I understand it, what it boils down to is this. We all know the familiar story of how, during the bubble years, mortgage originating companies would sell mortgages to anyone with a pulse and then flip these mortgages to the banks, pocketing the difference plus their fees and walking away from the loan. The banks would then issue securities to investors, theoretically backed by these mortgages against real estate that was appreciating seemingly without end. Of course, this broke the relationship between lending and actually expecting to get paid back, which is why there are so many bad mortgages out there.

Now that the bubble has burst, lots of American homeowners either can't make their payments, or don't want to because they owe more than the house is worth (they have negative equity). Something has to happen to all those mortgages: either the homeowner manages to renegotiate, or the mortgage gets foreclosed on. And here's the rub: The foreclosure process is massively, jaw-droppingly corrupt and fraudulent. To be specific, there are two parts to a mortgage: the note, which is the IOU that legally establishes to whom the borrower actually owes the money; and the lien, which attaches the property that backstops the note in the event of non-payment. In 45 out of 50 U.S. states, only the note matters; the lien is, so to speak, just paperclipped to it. It seems that in the rush to sell as many mortgages as possible and fob them off to the Greater Fools at the banks, a lot of those mortgage originators – many of which don't even exist anymore – didn't bother to pass along the paperwork, namely the note. Untold numbers of mortgages are not clearly or correctly documented, meaning that not only is title to the houses unclear (a fact which may be causing grief for unsuspecting homeowners for decades to come), but many, many, many foreclosures are being performed on behalf of parties whose right to foreclose is not legally established, supported by fraudulent documentation. Check out this video where U.S. congressman Alan Grayson picks up the story.

To sum up, it appears that the U.S. mortgage system, which has increasingly become the underpinning for their entire economy, is an unholy Mongolian Charlie Foxtrot of unspeakable, world-historical proportions. There is an appreciable chance that their financial system, which the federal government has already committed trillions to propping up, will seize up for the second time in as many years. And if you're a homeowner who's unlucky enough to get foreclosed on (even by mistake, as in the case of at least one guy who, for God's sake, paid CASH ON THE BARRELHEAD for his house – he didn't even have a mortgage!), the courts can simply steamroll over you, so it's bye-bye to the rule of law.

This brings me back to why I've been so focused on the financial news lately. Everyone knows about the global financial crisis, and everyone knows that, in theory, the recession of the past couple of years is over and we're in a recovery. But the fact is, the 'recovery' is anemic at best, a large part of the workforce may be out of work more or less permanently, and the financial crisis hasn't run more than a quarter of its course. What's more, if you believe some of the commentators I've been reading, the whole story of economic growth that began with the invention of modern banking four centuries ago has reached and passed its peak, and all that's left to us and our descendants is the downside and a future of ever-diminishing expectations. That part of the story is a bit too big and lofty even for the high-minded likes of me. But more and more, the story of our times looks like the story of democratic institutions being captured by big money interests, who don't care if they run our entire civilization into the ground, as long as they get paid. Exhibit A: Our friendly neighbour to the south, the banana republic, for which they scam.