Roy Oppenheim on Strategic Foreclosure: Shay’s Rebellion 2.0

A silent rebellion has begun. This time there will be no drums or shots fired. In fact, no one will hear anything. Not even footsteps.

Homeowners have reached a tipping point of sorts: 7 million homeowners are currently underwater. They are defaulting on their mortgages. One by one they are part of Shay’s Rebellion 2.0, a rebellion being fought on the frontlines of foreclosure through strategic default.

This time however, it’s not just western Massachusetts, but a silent battalion of millions of underwater homeowners across every state that have declared a consumer rebellion. These new warriors are no longer worried about a bad credit score; instead they are concerned with their family’s economic future. They no longer trust a Congress they believe has been hijacked by a few large financial institutions. They also instinctively know their collective actions can quickly have devastating consequences to these oligarchic financial institutions.

This time, the Rebellion is a boycott caused by the banks’ own audacity, by thinking that they could take over the polity of this nation by growing too large for any President, Federal Reserve, or Congress.

Most experts suggest families are making a rational economic decision in walking away. Businesses decide to walk away from investments all the time. Oppenheim Law recognizes that families have an obligation to themselves and may feel compelled to break contracts just like any commercial real estate owner.

In fact, Time Equities, the owner of Tudor City in Manhattan, did exactly that when they walked away from billions in the largest strategic default in the history of the United States. Did we hear anyone say such conduct by these owners was immoral or unethical?

I find it fascinating that things are now coming to a head in the form of this strategic foreclosure rebellion. 60 Minutes just did a piece on strategic foreclosure, and J.P Morgan Chase just reported that strategic defaults could have devastating consequences to its bottom line.

David Stevens, Commissioner of the Federal Housing Administration, is chiding homeowners for walking away. Fannie Mae is also pleading with homeowners to stay in their homes if they can afford to pay. Even the President of the Mortgage Banker’s Association, who arranged for a short-sale of the organization’s headquarters, is warning of the dire consequences to the banking industry and the economy if strategic foreclosures continue.

However, it should come as no surprise that the Banks’ own conduct is now simply coming home to roost. The banks and investment banks, along with auto makers and even foreign countries, sought billions or as much as a trillion in extortionary taxpayer bailouts based on the rubric that because of their size, their failure would take down the economy, and the American people with it.

So Congress, conceding to the threat along with the Federal Reserve, blinked. They opened the cash spigot, convincing the public and maybe themselves the funds would be used to help bailout the millions of folks underwater. That, as we now know, never happened.

Instead, funds given to the banks were used to shore up balance sheets, pay multi-million dollar bonuses, acquire regional banks and lobby Congress against further regulation. In addition, banks were free to continue lending practices that under ordinary circumstances would be deemed usurious. Banks are still permitted to charge consumers on average 29.5% per year and sometimes as much as 70% per year on outstanding credit card charges when most banks pay account holders less than 1% a year.

In addition, unbeknownst to most, the banks lobbied Congress to prevent legislation that would have given homeowners in bankruptcy the same rights as businesses to renegotiate their underwater principal on a loan.

The Banks convinced Congress there is an illusory distinction; that homeowners had a greater moral obligation than banks and businesses to keep their word.

Of course the news during the past two weeks that Goldman Sachs as well as other banks actually created toxic financial instruments, orchestrated by placing home loans deemed to fail into vast portfolios, might also have been the last straw for revolt. In most cases, these homebuyers were duped into borrowing money from banks that knew those loans would go into default. The banks, in fact, were betting big the loans would fail.

Sixteen months ago, I warned this rebellion could happen if the banks did not start to participate in meaningful negotiations with homeowners when it came to mortgage modifications and short sales. Instead, they have given most homeowners mere lip service.

The banks routinely lose modification papers submitted by homeowners, keep the homeowners on hold whenever they call, place the homeowners in “trial modifications,” and then proceed to foreclose. Banks tell homeowners not to worry about foreclosure proceedings while the bank attempts to modify the loans. Yet without the homeowner’s knowledge the foreclosure continues.

Thomas Jefferson once stated:

“I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered…”

While Shay’s Rebellion may be a footnote to most in American History, Shay may well have left an enduring mark on history. His legacy could be far from over.

Congress and the President must act and use the powers of anti-trust to break up these oligarchs so the public will once again place its confidence in our banking institutions. The American people must be convinced they will not be held hostage by any financial institution. No one institution will subordinate or subjugate the will of the American people.

Banks should dust off their history books if they think otherwise.

From the trenches,

Roy Oppenheim