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Wednesday, December 22, 2010

False Foreclosures and the Free Market

Are banks market institutions?

One thing heard ad nauseum is that the housing bubble was the result of free markets. To the critics the financial markets ran over the cliff because that is what naturally happens when markets are free. For that matter, when government fails to regulate producers, they overproduce, which every good Keynesian knows is why we have recessions.

Not only have free markets created a mortgage mess, according to Keynesians like Paul Krugman, but now thousands of people are caught up in a web of bank foreclosures — even when they have made timely payments – and even when that particular bank had nothing to do with the mortgage in the first place. The horror stories are becoming endless. According to a recent Associated Press article:

Tom Williams was in his kitchen thumbing through the mail when he opened a letter from GMAC. It informed him that the bank would confiscate his house unless he immediately paid off his mortgage balance of $276,000. But Williams had never missed a mortgage payment. And his loan wasn’t due to mature until 2032.

Warren Nyerges opened his front door in Naples, Fla., to find a scraggly-haired summons server standing on his stoop. He plopped a foreclosure notice from Bank of America in Nyerges’ hands. But Nyerges had paid for his house in cash. And he’d never had a checking account, much less a mortgage, with Bank of America.

It is hard to know how many people have been caught in this trap, but I only imagine it would be a nightmare second only to being falsely accused of a crime. Furthermore, even if one is in a situation like the unfortunate Warren Nyerges, it takes time and legal help – often expensive legal help – to be able to beat back a bank attempt to wrongfully take one’s home.

To make matters worse, it is clear that many banks are operating on the premise that they are correct and that it is up to the person whose house is being taken to prove otherwise. Banks have even broken into homes, taken the furniture, and changed the locks after a wrongful foreclosure. (See this.) In some situations it is clear that banks are committing outright fraud:

Former employees at banks and foreclosure law firms have testified that they also knowingly pushed through foreclosures on the wrong people.

Tammie Lou Kapusta is a former paralegal with the law offices of David J. Stern, a Florida firm that works for all the major banks and handles up to 70,000 foreclosure cases a year. Kapusta testified in September that she received as many as 50 calls a day from homeowners who said they were the victims of mistakes. But she was told, she testified, to ignore the callers and push through the foreclosures anyway.

As one who works regularly with people who have been wrongfully accused of crimes, I find the material in this article fascinating if only because I see the same bullheadedness in the criminal “justice” system. Even when it becomes clear that prosecutors and judges have made grievous errors and sent innocent people to prison, it is almost impossible to get them to rectify the wrong, which means that innocent people remain wrongfully incarcerated.

We can understand how governments will do these things, even if that understanding is based on a very dark view of government, but we have to remember that financial institutions in this country basically have become yet another arm of the State. Along with the billions in bailout money came new regulations and more government “oversight” that in effect has turned the banks and financial houses into de facto government bureaucracies.

In other words, banks became even more like the State that effectively nationalized them. Thus, in my view, we really should not be surprised when employees of these institutions start acting like bureaucrats at the Internal Revenue Service.

Once the government effectively nationalized these institutions allegedly to make them solvent, any notion of real customer service disappeared. They work for the government, and — surprise, surprise —  they also act like the government. Welcome to the Brave New World of finance.

  • Dr. William Anderson is Professor of Economics at Frostburg State University. He holds a Ph.D in Economics from Auburn University. He is a member of the FEE Faculty Network.