Wednesday, March 30, 2011
Mass Foreclosures as Fallout from Regulatory Capture: Banks in a Conflict of Interest at Treasury
Posted by Find Insurance Online at 11:34 AMDuring the summer of 2010, the Obama administration unveiled a $1 billion program to offer loans to help the jobless pay their mortgages until they could find work again. Even as it was to take effect before the end of that year, by April of the next year the program had yet to accept one application. The New York Times avers that this “could be an epitaph for the administration’s broader foreclosure prevention effort, as tens of billions of dollars remain unspent and hundreds of thousands of homeowners have been rejected.” By April of 2011, the existence of the main program, the Home Assistance Modification Program, had become a target of the Republican-controlled U.S. House. On March 29th, the House voted to end the foreclosure relief program. Even though the Democratic-controlled U.S. Senate vowed to pursue a rescue, even the Democrats there considered the program to be badly flawed. To be sure, the administration had failed to stem the wave of foreclosures.
There were 225,000 foreclosure filings in February of 2011, according to RealtyTrac. About 145,000 homeowners were in trial modifications under the Obama program. The New York Times adds that “an examination of federal documents and lawsuits, and interviews with legislators, state attorneys general, housing counselors, homeowners and regulators, reveal a federal mortgage modification program crippled by weak oversight, conflicts of interest, mind-numbing complexity and poor performance by many participating banks.” Lest we be consigned to accept the thesis that the executive branch is simply incompetent, we might take a look below the radar to the forces that had been actively working to enervate the administration’s attempt to deal with the foreclosures. “The banking industry fought us tooth and nail, and we ended up with a program that is failing homeowners,” said Representative Zoe Lofgren, a Democrat from California. In other words, the combination of “mind-numbing complexity and poor performance” by many of the banks and “weak oversight” of the government’s program may not be a coincidence.
Specifically, the paper reports that “(t)he companies that service mortgages, typically large banks, continually lose homeowner paperwork and incorrectly tell homeowners that they must be delinquent to qualify. Treasury officials have not fined any servicers, and the government-controlled company hired by the Treasury to oversee the program has expressed reluctance to crack down on banks.” The behavior of the banks attests that the bankers do not want to help their borrowers facing foreclosure. I suspect the bankers, ignoring their own role in approving sub-prime mortgages, have been projecting the responsibility exclusively on to the less-knowledgeable mortgage holder. That Treasury officials had not fined any of these bankers for their foot-dragging points to possible influence of the banking lobby in the executive branch. Treasury officials bowing to the banks, perhaps on the presumption that the bankers have superior information or maybe that ignoring their wishes could obstruct future job offers, evinces a conflict of interest because the banks are the regulated in this case.
That Treasury didn’t take more strident action at the expense of the banks when they were down suggests just how much influence the banks have in Washington. “The banks were so despised, and TARP was so front and center, you could have actually done something,” said Katherine M. Porter, a visiting law professor at Harvard. “In the midst of real boldness in bailing out the banks, we get this timid, soft, voluntary conditional program.” The New York Times adds that “Treasury officials argue that the mortgage program has kept more than half a million American homeowners out of foreclosure and has pressured banks to offer in-house modifications. These private modifications, however, typically offer terms significantly less favorable to homeowners than what the government program offers. . . . Michael S. Barr, who was a top Treasury official involved with the program, says . . . ‘We tried to bring some order out of the chaos . . . Taxpayer money was only used for successful modifications. I think that was directionally the right thing to do.’” Directionality? Better said, taxpayer money was only used when banks signed off on the modifications. This ignores the very real possibility that taxpayer money should go to homeowners even though their bankers are not willing to agree to a modification.
The justification for the expanded use the program is that bankers were indeed guilty of at least contributory negligence when they signed off on the bad mortgages. Treasury should therefore not make taxpayer funding contingent on what the bankers are willing to accept in terms of modification. The government, rather than the bankers themselves, should be in charge of the modifications precisely because the bankers are one of the parties in the disputes and had been negligent in too many instances (the sub-primes).
That the Treasury department had not been willing to stand up to the banks results in this case in people losing their homes. There is perhaps nothing more personal than this, yet that government officials have apparently felt that limiting taxpayer money to modifications already agreed to by the banks is satisfactory nonetheless indicates just how sordid greed and the lust for more power can be. Moreover, the fact that there have been so many foreclosures in the wake of the financial crisis of 2008 even as Wall Street banks received hundreds of billions in TARP and Federal Reserve funds while Treasury officials have restricted the use of taxpayer money for distressed homeowner is perhaps the clearest picture of the operative values among the elite in American society. Huge banks whose very existences connote being too big to fail (i.e., systemic risk) were saved so the financial system itself would not collapse. Meanwhile, millions of Americans lost their homes.
The impact of the greed and its callous disregard for the basic human rights of the downtrodden was for society itself to be blind to the alternative of saving two birds with one infusion. That is, had the TARP and Fed Reserve funds have gone to homeowners in trouble, the mortgage-based securities would not have been toxic because the mortgage payments would have been made (also, the ARM feature of the subprime mortgages could have been reduced to decrease the payment increases to what is fair). With the securities no longer toxic, the banks’ balance sheets would not have been toxic. Hence those banks would not have needed TARP to avoid the risk of going bankrupt. That we as a society overlooked this better solution without even debating it testifies to the clutching nature of greed among the elites. In short, the powerful took care of their contributors while not even considering that saving the little guy would also have sustained the political donors. In other words, our societal values are not optimal even from the standpoint of the best interest of Wall Street and Washington. The picture of Wall Street bankers getting near-record bonuses in 2010 as millions of homeowners faced foreclosure while their banks refused to modify in spite of having been part of the problem and the Treasury department stood back at the behest of the culpits should be a wake-up call to all of us.
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Source: http://www.nytimes.com/2011/03/30/business/30foreclose.html?hp
Source: http://www.nytimes.com/2011/03/30/business/30foreclose.html?hp
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