The Ground of Existence – 3: The Shift in the Ground

I had written something different for this third part of Ground of Existence. It was about the Supreme Court and the evolution of the thinking of its justices. It followed where Part II had ended.

Then, two things happened. Firstly, several friends commented that the ground of existence was too heavy a topic for a blog. “Being comes into mediation with itself through the negation of itself”. Please, they said!

That was Nasser’s fault, I said. Bad influence.

Then, as if in response to an unuttered prayer, came the banks’ foreclosure practices settlement with the OCC. There was something in the story that could make the point I had in mind, only less abstractly. So I decided to use it. It fits less tightly with the previous parts; there is always a trade-off when you make compromises of this sort. But it made sense to go with it. The story is critically important in its own right. It is something that the readers of this blog must know.

In case you did not know, recently the Comptroller of the Currency settled the case of mortgage foreclosure “wrongdoings” against 14 banks by fining them a total of $8.5 billion. The story was the main business news in all media outlets and received extensive commentary. Let me quote some of what was said. I have underlined the cause of the OCC’s action.

The Financial Times reported the news of the impeding settlement on January 7:

The largest US banks are close to a $10bn settlement with regulators to resolve claims that they broke rules when seizing the homes of customers who defaulted on their mortgage

The “iconoclast” Huffington Post said this:

Under the deal ... the mortgage companies will make $3.3 billion in direct payments to “eligible borrowers” whose foreclosures were handled improperly, and will make $5.2 billion available in other assistance to struggling borrowers, such as loan modifications.

Lost Angeles Times had the story on its front page:

Ten of the nation’s largest mortgage servicers have agreed to an $8.5-billion settlement with federal regulators to end a review of foreclosure abuses.

The settlement … involved some of the biggest names in the financial industry, including Bank of America Corp., Wells Fargo Co., JPMorgan Chase Co. and Citigroup Inc.

The Wall Street Journal called the settlement a “shakedown”, then published the following letter to show that it is man enough to take critical comments.

Having served 9,000 homeowners in distress in California and attempted resolutions with almost all of the 14 major servicers, we disagree with your criticisms of the Office of the Comptroller of the Currency (OCC) and the Federal Reserve regarding...

The 6.5% of affected borrowers that you contend suffered financial harm is an erroneous figure by bank consultants who were paid $1.5 billion by the banking industry. Our estimate is more than 50% that suffered some type of harm.

The Newspaper of the Record wrote the following:

Federal banking regulators are trumpeting an $8.5 billion settlement this week with 10 banks as quick justice for aggrieved homeowners, but the deal is actually a way to quietly paper over a deeply flawed review of foreclosed loans across America, according to current and former regulators and consultants ... As a result, many victims of foreclosure abuses like bungled loan modifications, deficient paperwork, excessive fees and wrongful evictions will most likely get less money.

The article got lots of comments. “James” from Long Island wrote:

Pardon my selfishness, but what do the folks who live within their means and pay their bills get out of all this? Just asking.

Here, “James” is implying that foreclosures hit the “irresponsible” borrowers only. A variation of this theme is the frequently voiced comment that “despite” all irregularities, not one person who paid his mortgage on time was evicted.

That last point is absolutely correct. But James and his fellow selfish nincompoops who pointed to that fact missed the point. The significance of the case arises from something altogether unrelated to responsible social conduct by boorish behavior by banks which caused “some kind of harm” to home owners. In fact, none of the hundreds of reporters and commentators who wrote about it got the source of its significance right – but that is because the ground of existence of law has shifted!

Recall that the trigger of the ongoing crisis that exploded into the open in 2008 was the fall in the value of “mortgage-packed” securities. Nasser dissected the problem in his blog, here, for example. But we do not need the details. Just keep in mind that “mortgage-packed securities” were created by pooling the mortgages. Now, attention:

Q: Who created the securities?

A: The Wall Street firms.

Q: But the Wall Street firms are not mortgage lenders. They do not lend to home buyers. So, where did they get the mortgages?

A: They bought them from the banks.

Q: Meaning that the banks sold their mortgages to Wall Street?

A: Correct.

Q: But if the banks had sold the mortgages, then they – the banks – no longer owned the mortgages. Right?

A: Right, exactly.

Q: Then, how could the banks foreclose? The OCC settlement is with banks. No Wall Street firm was involved. How could the banks foreclose if they were no longer holding the mortgages, meaning that they were no longer the lender of the record?

Aha.

Here, we need a few things about the jurisprudence in the U.S.

In the U.S., if your financial claim against a party is $5000 or less, you go to a small claims court. (In some states, the amount is lower, but $5000 is the ceiling.)

The small claims courts exist in many countries under such names as the elders’ councils or justice councils. Their role is to mediate the minor claims that arise from the social and commercial interactions at the local level. That relieves the higher courts from having to deal with petty disputes and minor sums.

Small claims courts exist in their own judicial world. Their ruling does not become a precedent. And because of the personal nature of the disputes, both the plaintiff and the defendant are allowed to tell stories about their loss. So if you are suing your cat sitter because she let your cat run away, you can sobbingly describe how dear the cat was to you. That is what you see in “Judge Judy” and her small claims court.

When the money in dispute is more than $5000, you have to file the claim in the civil court. No exceptions.

In the civil court, the “Anglo-Saxon” jurisprudence reigns. The rules of evidence kick in.

No personal stories are allowed in the civil court. The focus is on the violation of the law only. Taking the example of the cat, you have to show which law was violated by the cat sitter’s negligence. If there is no statute and no case law applicable, the cat sitter walks free not matter how severe your emotional distress. The centrality of law is the point of Oliver Wendell Holmes’ famous utterance: “This is a court of law, young man, not a court of justice.”

Because the language of the law is the frame of reference in deciding the cases, the technical law is all that matters: which evidence is admissible; which evidence must be presented for establishing a claim, etc. Hence, the role of lawyers who are trained in the law’s technicality. A defendant could be guilty as a matter of fact, but if the evidence against him is inadmissible – because it was obtained through illegal search or by threat or torture – the court will set him free. That is the meaning of a case being dismissed “on a technicality”, an expression familiar to all Americans of a certain age through real life cases or the court-room dramas on TV and in Hollywood movies.

Returning to our main topic, imagine you are a bank. A while back, you lent $200,000 to a homebuyer on which he defaulted. Now, to foreclose so you could claim the house, you have gone to court. There, the absolute first thing you need to do is to establish the evidence of indebtedness; you have to show that the party you are suing owes you money.

But as a participant in the great wave of securitization you have sold the mortgage note, remember?

Now how are you going to establish your claim? You are in a court where stories are not allowed. “Your honor, this is the copy of an advice that shows we deposited $200,000 a few years back to the defendant’s account” will not work. The defendant can claim that he returned the money next day in small bills in a laundry bag. He will demand that you produce the evidence of indebtedness.

With the evidence of indebtedness gone – or lost, or destroyed of misplaced in the mortgage frenzy – the only way to satisfy that demand is to create the evidence. That is forgery. Knowingly testifying to the authenticity of a forged document is perjury. Both are serious offenses punishable by jail time. That is what the closely related but now expunged-from-the-record “robo signing” scandal was all about.

In “robo signing”, a neutered phrase meaning “robot signing”, letters signed by fictional bank staff were presented as the evidence of indebtedness of homeowners who were late in their payments. Those were then used to start the foreclosure and eviction proceedings. Google “robo signing” and read some of the articles. They should make sense now. See also how the central crime of the case is consistently concealed as a matter of good journalism.

Yet, no one served a day in jail. And the settlement with the OCC will see to it that no one will. That is the critical point of the settlement – it is not the fine which works out to a few thousand dollars per “injured” party, but rather, shutting the door to legal action. The offending banks can no longer be sued. The case is closed.

But let us not focus on the OCC. The agency could not and would not settle the case if the rot had already not set in.

The rot is a legal one. It changes the law from a shield protecting the people to a sword attacking them. The headlines of a New York headlines a few months ago about the tactics of collection agencies put that succinctly:

In Prosecutors, Debt Collectors Find a Partner

Here is the opening paragraph:

The letters are sent by the thousands to people across the country who have written bad checks, threatening them with jail if they do not pay up.

They bear the seal and signature of the local district attorney’s office. But there is a catch: the letters are from debt-collection companies, which the prosecutors allow to use their letterhead. In return, the companies try to collect not only the unpaid check, but also high fees from debtors … some of which goes back to the district attorneys’ offices.

In the mortgage scandal, a few home owners did try to fight in court. They got nowhere. The fix – long in the making – was in. From the New York Times of November 29, 2010, reporting about the “high speed” court in Florida which was set up to handle the foreclosure cases:

Lawyers such as Mr Parker allege that these courts show leniency towards the sloppy bookkeeping of the banks, but crack down on homeowners who are ill-prepared.

In a testimony ... one executive from Countrywide Financial said it was routine not to pass along the original notes and related documents as part of the securitization process of the loans…

“After this, the judges in foreclosure cases are going to have to start ignoring massive systemic violations of law in order to grant foreclosures … Do we save the financial markets and sacrifice the rule of law? You can’t save both, you’ve got the sacrifice one for the other.

This “transformation” of the law is the shift in the ground of existence.