Kentuckians at Forefront of Anti-Foreclosure Movement

The mainstream media in Kentucky appears to have overlooked this story, but Susie Madrak at Crooks and Liars caught it:

The entire house of cards constructed by the banks and the mortgage industry is falling down, and it's not going to be pretty. By the time it's all over, this could make 2008's previous banking failures look mild in comparison. This latest lawsuit is a civil suit, not criminal. But that doesn't mean the feds won't get in on the case if it heats up -- and I'm guessing it will:

Citigroup Inc. and Ally Financial Inc. units were sued by homeowners in Kentucky for allegedly conspiring with Mortgage Electronic Registration Systems Inc. to falsely foreclose on loans.

The lawsuit, filed as a civil-racketeering class action on behalf of all Kentucky homeowners facing foreclosure, also names as a defendant Reston, Virginia-based MERS, the company that handles mortgage transfers among member banks. The suit claims that through MERS the banks are foreclosing on homes even when they don’t hold titles to the properties.

“Defendants have filed foreclosures throughout the state of Kentucky and the United States of America knowing that they were not the ‘owners’ or beneficiaries of the loan they filed foreclosure upon,” the homeowners wrote in their complaint filed Sept. 28 in federal court in Louisville, Kentucky.

The homeowners claim the defendants filed or caused to be filed mortgages with forged signatures, filed foreclosure actions months before they acquired any legal interest in the properties and falsely claimed to own notes executed with mortgages.

[...] “RICO comes in because the fraud didn’t just happen piecemeal,” Heather Boone McKeever, a Lexington, Kentucky-based lawyer for the homeowners, said in a phone interview today. “This is organized crime by people in suits, but it is still organized crime. They created a very thorough plan.”

As I've noted previously, some of the biggest title insurance companies are refusing to insure mortgages in foreclosure -- because they can't be sure who actually has title. Because lenders won't underwrite a mortgage without it, this will have the likely effect of driving down home prices even more.

This is as serious as it gets.

The only people happy about this are the lawyers, who will be billing for untangling this whole mess. See, this is why you want a tightly-regulated derivatives market. Now the banks don't even know who owns the mortgages used as collateral. In fact, this can even affect homeowners who are attempting to pay off their mortgages. Who will assign them a clear title?

Watch for the banks for fight any attempt to impose a foreclosure moratorium. This mess is so bad, the administration may have to do what they could have done in the first place: Nationalize the banks. Stay tuned.

Much as we all want to see the greedy banks and mortgage companies and their enablers on Wall Street to lose every dime and suffer for eternity, freezing foreclosures could make the crisis much worse.

Zandar has been covering this like a blanket.