TWO: Breaking the Chain

All right, let's make this simple.

Missouri is a non-judicial foreclosure state.

What that means is that when you borrow money to buy property, you most likely sign papers that give the lender the chance to get the property back if you don't pay for it, or make it smell too much like cat pee so the neighbors rat on you, or whatever.  You can breach the agreement in a number of ways.  Not pay taxes, not keep insurance, or give your interest to someone else without okaying it with the lender first.

In a non-foreclosure state, when you sign your paperwork, you actually deed it to a trustee.  Note in that word "trustee" the word "trust."  That means in latin or something "dude or female dude you can trust." And the trustee holds it until you pay for the property, and then he or she deeds it back to you.  If you don't pay for it, then you have already okayed the fact that the trustee can sell it without having to go to court, like would have to be done in a state where foreclosures (known as "judicial foreclosures") would have to be taken to court and run before a judge.

In many cases, this works great.  Has for many years.  It keeps cases out of court that don't need to be there. But something changed that made the system go haywire.

For most of recorded history, when someone borrows money on a house, here's what happened:

• Person borrows money from Bank.
• Bank holds mortgage to Person's house.
• Bank records the deed, so the whole world (or at least anyone who cares) could go down to the courthouse and find out who owns it.
• Bank takes payments, makes the interest rate agreed upon.

This is not sexy.  It will never be the subject of a made-for-TV movie starring Valerie Bertinelli.  But it WORKS.  It STILL works.  But as we moved into the past two decades, it wasn't enough.

For many years, not everyone could get a loan.  The reason was sometimes their past credit, sometimes their work record, sometimes their income or assets, sometimes the value of the property they wanted to borrow against.  This meant the banks could loan at lower rates, because they felt good they knew how often they were going to get burned.

But there were so many people that WANTED to own homes.  And it seemed like such a waste for them not to have them.  The lenders who tapped into this market in the 1990s spoke about it in very patriotic terms:  They said were doing everyone a favor by lending money to people who really couldn't afford it.  They talked a lot about the value of home ownership.  People like Angelo Mozilo, who started the toxic waste dump of a company known as Countrywide, was just one of those people.

But they couldn't take these loans to regular banks.  Those banks had their patterns of lending, and the people and the properties in question were clearly not in them.  So they created an entirely new system, of "mortgage-backed securities."

Mortgage-backed securities was a process of taking a large number of loans and pooling them all together.  The idea was that based on the background and credit history of those borrowing the money, you could divide the loans into different groups, and charge different rates for them.

If you were getting people like Jane Juicebox, with great credit scores and properties with great appraisals, you got paid a lower interest rate.  If you took Freddie Forty-Ounce who just lost his job at the pawn shop, you got a lot higher interest rate, because you were taking a bigger risk.

Problem was, Freddie really couldn't afford that house and that rate.  And to top it off, Freddie got sold the loan by an unscrupulous mortgage broker who:

• Got a shady appraiser to inflate the value of the home;
• Lied about how much Freddie really made; and
• Didn't tell Freddie that his rate would start changing in six months, and would no longer be that low rate that he was initially promised.

So banks and school districts and pension plans bought tiny slivers of Freddie's loan.  Freddie was out smoking a joint and hitting on teenagers again, and he forgot that he had a loan payment due.  Freddie had some choice words for the debt collectors, and then when he saw that the interest rate -- and his payment! -- was going up, he said screw it, invited his friends over for a big party, painted a few pentangles on the wall, then threw deuces up on his way out the door.

And the investors, who had forgotten that the sweet return they were getting was due in large part to the fact that Freddie had never paid a loan in his life, were now screwed.

Problem was, the mortgage broker who sold Freddie the loan was gone.  So was the lender that made the original deal.  And the people who broke these mortgages into a million pieces were not really real estate people, and so they didn't know how to handle a mortgage.

It would have been easy for them to do.  After Freddie signed his paperwork, the bank held the interest in his property.  When the bank transferred that interest to one of the loan pools, they should have made a deed and recorded it at the courthouse, just like the first one was done, and told the world, "Hot Mess Loan Pool Number 69 now owns your loan.  We're no longer involved."  Then if Hot Mess sold it off, they would record a deed and say, "Suckers Unlimited now owns your loan, Freddie and anyone else who cares. Peace Out."

But they didn't do that.  They just trusted that by saying that someone else "serviced" the loan (kinda sounds massage parlor, doesn't it?), that was all they needed to do.  They took all of the loans, worth tens and hundreds of thousands of dollars, and did nothing to follow up on them.

But then all those loans went bad.  Lindsey Lohan at Happy Hour bad.  Freddie moved to East St. Louis and started work as a director at a strip club. And now someone had to try to foreclose on the house.

So they hired a "foreclosure mill," who did things similar to what Unnamed did in this case, and overlooked the fact that there was no paperwork and no authority for the "servicer" to call for a foreclosure.  They went ahead and sold the house at the courthouse steps back to the bank, who could now put it back on its books as an "asset."

In this entry, I've obviously exaggerated Freddie to make a point about the way the loans were processed.  But most of the loans were given to people who in good faith thought they could make this work.  Then the interest rates went up, or somebody lost a job.  And they found themselves in the position of being foreclosed on by a bank and a trustee who they naturally assumed were telling them the truth.

They were wrong to assume this.