Monday, November 7, 2011

Bankers' Moral Hazard

By Matt Stoller at naked capitalism, this essay considers how it is that banks are pressing for a national settlemrnt for their mortgage fraud even as they continue along that path.

Gretchen Morgenson is ringing alarm bells that a 50 state settlement on the foreclosure fraud issue is on deck, and is spelling out some of the details. There would be some principal write-downs, random cash payouts for those who were foreclosed, and money to buy off nonprofits in the states that work on housing issues (a classic Fannie/Freddie Dem friendly tactic Morgenson and Rosner exposed nicely in their book Reckless Endangerment). The settlement looks vague and stupid, and will probably be executed with the care and competence of HAMP. But let’s put that aside.

What makes these discussions so utterly absurd, so ridiculous, and farcical, is that robo-signing, an abuse the banks have admitted to and clam they’ve ceased, is still going on. The AP reported this in July; mortgage servicers in Nevada have stopped foreclosing because of a law explicitly criminalizing robo-signing. Yes, the banks are asking for a release of claims on acts, or perhaps crimes, that are ongoing. And these abuses are extensive: lying to investors about the quality of the mortgages; violating their own contracts by failing to convey mortgages properly to securitization trusts; charging fees that are impermissible under Federal law and the contracts; making a mess of property records and engaging in deceptive consumer practices through the use of MERS; and engaging in document forgeries and fabrications in foreclosures. All these people trying to give the banks “a settlement” are in fact immunizing banks against acts they are committing and will commit going forward. Only in the future, when a voter complains to his or her state AG, that official will have to explain to that voter that his/her rights have been given away.

We’re talking about an ongoing case of criminal theft of private property by mortgage servicers charging illegal fees and then using fraudulent documents to foreclose. Now, a settlement implies that this practice is over, and that the banks are remediating past wrongs. It isn’t over, but the AGs and Federal regulators are treating it as if it is. Think about this incentive – why should a bank change its mortgage servicing once it has immunity for robo-signing, origination, pyramiding of fees, etc? The last consent decrees weren’t enforced, why would this one be enforced?

This speaks to the basic issue at hand, which is that there has been no serious investigation of the problem, on a Federal or state level. We don’t know how widespread the problem is, or how to fix it. My guess is that even the banks have no idea how to fix it, even if they wanted to. They have systematically under-invested in their mortgage servicing operations, and they don’t intend to do it right next time. Why should they? The fine is cheaper, especially when you layer on second lien exposure (the big mortgage servicers own a lot of second lien debt while they only service first lien debt, leading to a massive conflict of interest). Hell, this might even make them money, if they can write off first lien debt which would elevate the value of their second lien holdings.

The larger problem is that banks mistreat homeowners and abuse property rights, and this is going to continue and worsen until the housing market just dies. During the mortgage servicing process, homeowners complain of poor service, lost records, inconsistent treatment of modifications, and fraud. During the foreclosure process, it’s clear that banks have been falsifying documents and records to foreclose, which allows them to get around fraud in the original securitization process. Without a thorough investigation of the documentation issues at hand, an investigation this settlement precludes, there will be no way to bring back certainty to the mortgage market, ever. The rule of law matters when it comes to property rights. Allowing banks to just take property from homeowners will ultimately cause the death of homeownership. But you don’t believe me. Just look at the housing market.

My guess is that what will happen is that this “settlement” will go through, the banks will do some PR about helping some homeowners, but the robosigning and other abuses will continue. And this time they’ll have immunity from the state AG.

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