Banks Created the Foreclosure Crisis – They Should Have to Live with It
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On Tuesday Prairie Weather linked to this episode of the Diane Rehm show on the foreclosure crisis. Representing the mortgage industry was Tom Deutsch of the American Securitization Forum, and his oily insincerity positively oozed out of my speakers. Along with Greg Ip of The Economist (who seemed very sympathetic) they nicely summarized the industry’s position.
It goes something like this: There were a few rogue operators who rushed through some bureaucratic formalities during foreclosure. Nevertheless the homeowners in question are in default. Therefore, the proceedings are all proper; we just need to correct the paperwork and roust the deadbeats.
One theme that runs through such commentary is the remarkably cavalier attitude towards the consequences of foreclosure. Consider these astoundingly inapt analogies used to compare to a family losing its home.
Deutsch: "You know, if you go to the grocery store, and you’re buying your groceries. And they accidentally overcharge you 50 cents for your milk, you don’t just say, well, you know what, let’s just stop everything and figure out whether these scanners nationwide are working or not."
Ip: "I used to cover the stock market, Diane, and I — it was basically a rule of stock market that if I sold — you know, stock trades get fumbled all the time. You said 16. No, you said 60. And the basic rules that nobody contested unless they actually ended up losing money on the trade, and that’s exactly what we’re dealing with here."
Then Rehm quotes a Wall Street Journal editorial: "One left-wing financial blog has compiled news accounts that as many as seven people have unfairly suffered a foreclosure, despite making all payments. That’s right, seven in a nation of more than 310 million."
The clear implication is that seven fraudulent seizures nationwide is acceptable. The foreclosure machine is cranked up and we’ll just have to accept that a few eggs need to be broken to make our modern, streamlined 21st century free market omelet. This appears to be irreconcilably opposed to the perspective of those for whom a house is not a commodity but a residence. For them, the maximum number of acceptable fraudulent home seizures is zero. It should never, ever happen under any circumstances.
As large corporations have taken on lending functions traditionally performed by local banks, the tenor of the interaction with the community has become distant and transactional. It used to be that a troubled homeowner would sit down with a loan officer and figure something out. Mortgagees did not want to default and lenders did not want to seem predatory, so both sides had an incentive to negotiate.
The story line being peddled by the banks is that there are two types of foreclosures: The tiny (acceptable) number of illegal ones and the much larger percentage that are legitimate. But there is at least one more category, and it can be read in the stories told by Rehm’s callers. Once the mortgage papers are signed it gets shipped around and made difficult for the homeowner to keep track of. The same servicer might give multiple names and phone numbers, and the homeowner might get contradictory messages. They might assign a mortgage to a modification program, then make it unclear which loan to pay. They might be told not to pay anything, then find out after several months they are being foreclosed for nonpayment.
In other words, in some cases the banks appear to have acted with the intention of tricking homeowners into missing a payment or two, then seizing on that to initiate foreclosure proceedings. There is a world of difference between that and the way it is being characterized ("they bought more house than they could afford"). These days, negotiation is out. Big banks have taken a much more clinical – and ruthless – approach.
They treated housing like a shell game in pursuit of the most profitable outcome: Taking ownership of the property. But piddly little things like affidavits, notarizations and formal record transfers are there for a reason. They exist not simply as remnants of some era just up from clay tablets, but because homes are not like bottles of milk or stock certificates – for most people they are the places where they live out their lives. That means they are precious, and the procedures for establishing and transferring ownership of them ought to be bulletproof.
If those in charge of processing mortgages have taken homes illegally they should be jailed – everyone involved, up to the CEO. If they used deception to snatch homes on technicalities and legalistic grounds then there needs to be a time out to sort through it. If it is too muddled to sort they should take a full loss on all of it. This is people’s lives they are playing with.