Over the past few months, it has become more common to speak of the housing and financial crises in the past tense. The National Bureau of Economic Research recently announced that the recession ended in June 2009. While 2010 has hardly been a banner year, the pace of job losses has slowed and home prices have begun to stabilize. It's a tepid economy, yes, but on the road from perdition.
Or maybe not. In the past few weeks, the banking industry has been roiled by revelations of widespread flaws in the way it forecloses on homeowners who have stopped making their mortgage paymentsa lot of people. The foreclosures were being processed by "robo-signers," a neologism that has quickly become part of the lexicon of housing-market infamy. In the face of legal constraints and investigations by state and federal officials, lendersled by behemoths Bank of America and JPMorgan Chase and othersannounced a temporary moratorium, which they then lifted. Years of litigation loom.
With a wave of foreclosures that could top 1 million homes with $1 trillion in mortgages this year, banks have hired staff to process the tsunami of paperwork. But a fair number of these hires had no experience or knowledge of the industry and may not have reviewed the documentshence the term robo-signers. One employee of GMAC testified that he signed as many as 10,000 foreclosure affidavits a monthnearly 500 per business day. Unless he was a robo-reader, he could not have read what he was signing.
This practice alone may be illegal. Then there is the additional issue of how the massive amount of securitization of these loansselling them off to investors in the form of bondsmay affect litigation and regulation. Only the holder of a loan can legally foreclose, but with securitization, these loans were sliced, diced and repackaged. The banks say they possess adequate documentation of titles and ownership, but the suspension signaled serious concerns.
In the past few weeks, Wall Street analysts have attempted to quantify the cost of the emerging foreclosure scandal. Their guesses range from tens of billions (which seems like a lot but is actually minimal relative to the balance sheet of the big banks) to hundreds of billions (a real problem).
The numbers remain uncertain; the consequences are quite clear. Regardless of the balance-sheet harm, the foreclosure debacle guarantees that any lasting recovery in either the consumer-credit or the housing market is nowhere near imminent. While the economy may have emerged from recession, the system of putting capital in motion for housing, business and consumption remains seriously challenged.
Banks have a very basic model: they earn money by taking in deposits and then lending money out at a higher rate than they pay on those depositsbut with some capital set aside to offset bad loans. Banks have urgently been trying to free themselves of the toxic remnants of the housing bubble, but with so many bad loans still on the books, that process is impaired.
That isn't a call for sympathy for the bankers. It is, however, a reminder that credit is essential to our economy. Good credit, that is, and not the promiscuous, no-doc credit of the mid-2000s. Banks aren't the only impediments. People became so used to easy credit that they now find demands for documentation onerous, even insulting. For lending to resume, that attitude has to change.
Predictions are always dicey, especially about the future. For now it seems this imbroglio, combined with the angry insurgency of an electorate that believes the government has spent too much money for not enough recovery, ensures that the U.S. will not enjoy a surge in activity, a revival of hiring or a resumption of anything but sluggish growth in the coming year. This chapter won't plunge the country back into recession, but it will lengthen the tortuous road to a new economy, especially with Washington gridlocked and the mood bleak.
Yet even with the foreclosure crisis, nearly 90% of those who have a mortgage remain current, and more than a third of all homes are owned outright. Those numbers dwarf the number of mortgages in distress. The fact that most Americans remain in decent shape may be incidental for a banking system that rested on high-risk loans, but it ought to shape our sense of what is possible. The U.S. is still, on balance, affluent beyond the wildest dreams of most humans who have ever walked the earth. That should be a recipe for moving forward and creating a vibrant society. Rather than being hobbled by robo-signers, we should be collectively focused on the next generation of robotics. We are not, and that says more about our culture than a thousand stories about the housing morass ever will.This article originally appeared in the November 1, 2010 issue of TIME.