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BofA, Citi Claim That Everything’s Fine Now

Bank of America, which suspended its foreclosure operations in all 50 states, has now started to prepare new affidavits for 102,000 pending cases, to comply with all relevant state laws.

By Oct. 25, a spokesman said, the Charlotte, N.C., bank expects the new affidavits to be resubmitted to the courts and foreclosure sales will resume in those states starting in November.

The bank is trying to take this issue off the table. It hopes the announcement Monday and more detail expected Tuesday as it releases earnings will help restore confidence in the foreclosure process.

“This is an important first step in debunking speculation that the mortgage market is severely flawed,” a Bank of America spokesman said.

It’s certainly a step. But all the bank appears to be doing is going back and verifying the documents without using robo-signers. This falls in line with the industry line (as well as the Administration line, basically) that this is a technical matter, that the documents simply have to be prepared properly and then everything will be fine.

Two things on this. One, it neglects the clear risk to the rule of law that banks like BofA submitted phony documents to a court. Whether they take them back now or not has no bearing on this attempt to commit fraud.

Two, it localizes the issue to the signing of the affidavits and not the impropriety of the documents themselves – the forgeries, the backdating, the failure to inform borrowers of foreclosure actions, all of the horror stories we’ve heard over the past month. BofA can claim that they’ve found “no cases” of improper foreclosures, just as Citigroup said earlier in the day. But look: somebody’s responsible for the home that received a foreclosure notice even though the owner paid cash. Somebody’s responsible for breaking into a house and changing the locks when it’s occupied. Somebody screwed up when two banks try to foreclose on the same house. Nobody invented these stories; as much as finance writers want to huff and puff and look down their noses at “bloggers” (an epithet worse than “peasants”), these things happened, the result of a complete breakdown in the rule of law and multiple instances of fraud across the entire mortgage process. BofA certainly isn’t grappling with that, and Citi claims there’s nothing to see here. But publicly available lawsuits tell a far different story.

Finally, the fact that such actions had to be taken to catch up to a record amount of foreclosures itself suggests a serious breakdown in the mortgage market.

Because the first rule of mortgage lending is you don’t foreclose. And the second rule of mortgage lending is you don’t foreclose. For all the talk about how principal modifications will harm other economic parties, it’s the other way around. Imagine a house is worth $200,000, but the mortgage is worth $300,000 and the person can’t make the payments at $300K but could at $250K. If the person’s principal isn’t written down, the bank seizes the house and sells it at….$200K. And that assumes they don’t lose 30+% as is common for a foreclosure sale. This loss that will raise the cost of capital for everyone else. Why is this breaking down this way?

One is that there isn’t anyone standing in the center acting as the fiduciary. We only have to look at the structure of the servicers to see this. Designed to do automated, scalable and streamlined work, they are being asked to do work that is time and energy intensive. Then comes the incentive structure where it’s less profitable for loans to be current and functioning, and built into the business model is that loans that are delinquent will balance out the lack of profit from fewer mortgages being started (what they called a counter-cyclical diversification strategy). This is what people like Amar Bhide are pointing out about local knowledge; issuing loans can harness economies of scale. Servicing loans can harness economies of scale. Managing loans that are delinquent and in need of modification is time and knowledge intensive.

The major servicers, concentrated in the big banks, tried to mechanize the lending industry which should simply not be mechanized, in a way that is violently abusive to borrowers and bad for the housing market and the bottom lines of the banks, not to mention the overall economy. Changing that permanently would require a policy response, which some would say is already at hand; and so unwinding the mess that the banks have made of the market can be done right now, or it can be allowed to proceed, at great cost to individuals.

UPDATE: Just to clarify, the 102,000 filings are only in the 23 judicial foreclosure states. BofA still has their operations at a halt in the other 27 non-judicial foreclosure states while they review their processes.

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David Dayen

David Dayen