The Continuing Mortgage Mess

After the drubbing that the Democrats took last November, you would think that it might occur to the White House that it makes sense to be more clearly aligned with the interests of consumers. But that is still contested terrain.
This post was published on the now-closed HuffPost Contributor platform. Contributors control their own work and posted freely to our site. If you need to flag this entry as abusive, send us an email.

One of the most startling exit-poll results to emerge from the 2010 midterm elections was the finding that the 35 percent of voters who (correctly) blamed the economic collapse on Wall Street actually voted Republican by a margin of 56-42 percent. As Ruy Teixeira and John Halpin wrote in a sifting of the exit polls, "The Obama administration's association with bailing out Wall Street bankers, who are heavily blamed for the bad economy, apparently had a negative effect on Democratic performance in this election."

To put it mildly.

But since the election, Republicans keep on demonstrating that they are even better friends of the banks than the ambivalent Democrats. Tea Party populism at the grass roots coexists with close alliance with the financial industry where it counts. Under the guise of reducing the budget deficit, the Republican House and Senate budget would dramatically reduce funding for the agencies that regulate Wall Street.

Richard Shelby, the ranking Republican on the Senate Banking Committee, keeps inserting himself into a law-enforcement proceeding, trying to block the proposed legal settlement of abuses in mortgage foreclosures and documentation that has been put forward by the 50 state attorneys general.

Shelby last week called the plan:

"Nothing less than a regulatory shakedown by the new Bureau for Consumer Financial Protection, the FDIC, the Fed, certain Attorneys General, and the Administration, led by Elizabeth Warren. This proposed settlement appears to be an attempt to advance the Administration's political agenda, rather than an effort to help homeowners who were harmed by a servicer's actual conduct."

It's worth reviewing the back story. State attorneys general, led by Iowa's Tom Miller, but with the vigorous support of Republican as well as Democrat AGs, have documented a wide range of illegal abuses by mortgage companies and banks dealing with homeowners who were victimized by corrupt lenders.

So called "robo-signers" falsely signed affidavits that the bank or other mortgage service company had the right to foreclose when in fact it had no such legal right.

Timely payments that were sent in to pay principal and interest were improperly applied to late fees and other penalties, causing homeowners to fall behind in their payments and then fall into technical default, leaving them vulnerable to foreclosure.

While many homeowners who were working in good faith with the lender to secure refinancing or loan modifications, the loan servicer was proceeding on a separate track to foreclose and take away their house.

Cases are legion of frantic homeowners not getting phone calls returned and being unable to get a straight story of how much money they owe, and to whom.

Some military families lost their homes while a breadwinner was serving in Iraq, in flat violation of law.

The proposed agreement with the five largest banks that control 59 percent of the mortgage market, drafted by the state AGs, would prohibit such abusive practices, define permissible procedures, and collect a one-time penalty fee from the banks in the range of $20 billion as an alternative to the criminal prosecution that the mortgage industry so thoroughly deserves.

As the tireless Bill Black, a former senior financial regulator, keeps pointing out, in the savings and loan scandals of the 1980s, there were more than a thousand felony convictions. S&L executives went to jail. There was an interagency task force coordinating criminal prosecution, and this under the Reagan administration. And unlike the subprime disaster and its continuing fallout, the S&L collapse was largely contained to that industry, did not end up punishing homeowners, and caused little damage to the wider economy.

Instead of using their political influence to resist the proposed global settlement of mortgage abuses, banking executives should consider themselves lucky. The proposed settlement would be a two-fer. It would prohibit illegal and deceptive practices, define proper ones, and would produce some of the money needed for the principal reductions to keep some ten million Americans from losing their homes.

The Administration's Home Affordable Modification Program (HAMP) is a widely acknowledged failure. About 600,000 loans -- fewer than one at-risk mortgage in ten -- have gotten relief. The program, which includes a modest incentive payment to banks, is entirely voluntary to bankers.

The administration's reluctance to push for stronger medicine is rooted in the banking industry's reluctance to book losses on their balance sheets. By pretending that under-water mortgages are worth 100 cents on the dollar (until they are foreclosed) banks can pump up the stated value of their assets. But it would be far better for all concerned if banks reduced the principal amount of at-risk mortgages to roughly the actual market value of the home. That would compel honest accounting, and allow millions of homeowners to keep their homes.

The present policy, by contrast, continues the epidemic of foreclosures and the resulting drag on housing prices. The downdraft in the real estate sector, in turn, functions as a deadweight drag on the economy.

Leaks and counter-leaks suggest that the Obama administration is split on whether to strongly push for the AG's proposed global settlement. The Treasury Department, both Secretary Tim Geithner, and the Office of Comptroller of the Currency, basically are siding with the banks. Elizabeth Warren, assistant to the president and acting director of the Consumer Financial Protection Bureau, favors the plan, as does the FDIC, and the Department of Housing and Urban Development.

The banks and their Republican allies are, not surprisingly, dead set against it. But it is one thing for Republican politicians like Shelby to weigh in against policies they oppose. It is utterly shameful for them to try to block law-enforcement proceedings. Republicans like Shelby are all for states rights when it's convenient, but not when state AGs go after their banker pals.

As more and more abuses come to light, and more homeowners are fighting back against illegal foreclosures, the average foreclosure proceeding now drags on for almost two years. Just this month, the banking giant, HSBC had to suspend foreclosure actions because of questions about documentation and dubious practices.

With Republicans so explicitly in bed with bankers, and after the drubbing that the Democrats took last November, you would think that it might occur to the White House that it makes good political as well as economic sense to be more clearly aligned with the interests of consumers. But that is still contested terrain.

If the proposed global settlement does fail, bankers will face a continued legal morass, and some may yet face criminal proceedings for abuses. It would be tempting to wish that fate on an industry that is responsible for so much wider suffering. But it would be far better to get the mortgage mess behind us and get on with the economic recovery. Rather than political brickbats, the state AGs and Professor Warren deserve Shelby's thanks and Obama's strong support.

Robert Kuttner is co-editor of The American Prospect and a Senior Fellow at Demos. His latest book is A Presidency in Peril.

Go To Homepage

Before You Go

Popular in the Community