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Hullabaloo


Wednesday, August 24, 2011

 
Confidence Fairies and Attorneys General
by David Atkins ("thereisnospoon")

Attempting to follow the mortgage fraud foreclosure story is like going down Alice's rabbit hole: the farther you go in, the weirder and more convoluted everything starts to become, the more confusing the details get, and the less you know what or whom to trust in terms of sources.

That is why context is so important. The essential details are basically that lenders transferred the deeds of ownership from one servicer to the next in order to create the mortgage-backed security bundles that crashed the entire economy. In so doing, they had shoddy or nonexistent documentation of the transfer of ownership of the mortgages. As any student of property rights knows, you can't foreclose on a property for which you cannot prove ownership. We already know that courts have been papering over the problem in allowing banks to illegally foreclose on properties. But homeowners are fighting back, causing a massive legal and financial liability for the banking industry both in terms of properties they cannot legally foreclose on, and lawsuits for improper handling of documentation and illegal evictions.

So the Administration and state Attorneys General have been working for months on a multi-state compact that would allow the major banks to make a slap-on-the-wrist settlement in exchange for immunity for their various criminal and criminally negligent behaviors. But why do that? Why not let the banks assume the responsibility for the mess of their own creation? Tim Geithner explained the Administration's thinking back in March:

A comprehensive settlement between U.S. authorities and banks over alleged mortgage servicing abuses needs to be reached quickly to help the housing market heal, Treasury Secretary Timothy Geithner said on Tuesday.

Geithner said such a settlement will help dispel legal uncertainty that has been plaguing mortgage lenders and clogging the foreclosure process.

"It is very important that we try to bring this to bed as quickly as we can," Geithner told the Senate Banking Committee. "I think all parties, not just the servicers, but the state AGs and the federal agencies have a strong stake in doing that."

A group of 50 state attorneys general and 12 federal agencies are probing bank mortgage practices that burst into public view last year, including the use of "robo-signers" to sign hundreds of unread foreclosure documents a day.

The negotiators are struggling to reach a single agreement on financial penalties and higher standards for banks handling troubled home loans.

The Administration's argument is that the economy cannot rebound unless the housing market rebounds, and the housing market can't rebound unless the foreclosures are processed, and the foreclosures can't be processed until this inconvenient ugliness is out of the way. This argument assumes that the only path to economic prosperity is through higher home prices.

The only problem with that is that, as the Wall Street Journal points out, housing prices are still overvalued:

The analysis underscores a broader point: While the nation's housing markets largely fell and rose together during the housing boom and bust, they aren't likely to hit bottom and begin recovery at the same time or pace. The Zillow analysis shows that many markets still appear to be overvalued.

For the U.S. as a whole, home prices were around 2.9 times incomes from 1985 to 2000. But during the housing boom, values increased at a much faster rate than incomes. The price-to-income ratio peaked at around 5.1 in 2005. Home prices have since fallen so that on average, nationally, prices are around 3.3 times incomes, or about 14% above the historical trend.

In short, the Administration's argument boils down to the idea that Americans need to re-inflate a still overinflated housing asset bubble to reinvigorate the economy, because the idea of making gains through wage increases, jobs programs and burden-lightening social programs are off the table. In fact, not only are those things off the table, but it's actually time for austerity measures that will contract wages and employment.

That's why the Administration is dead set on hoping we get lucky by boosting the confidence fairy, because they have no other plan for boosting the economy. None. And if that means papering over massive criminal activity on the part of the financial industry to make the confidence fairy perk up her little wings, then so be it.

That, then, is the context for New York Attorney General Eric Schneiderman's removal from the group of nationwide Attorneys General seeking a settlement with the banks. Schneiderman isn't keen on the deal being sought to grant immunity and a slap on the wrist for these institutions, and wants significantly more accountability to protect both investors and homeowners. Particularly since no one yet knows the full extent of the criminal negligence involved:

And so, the moral of the story is, the robo-signing/chain of title/overall mortgage securitization liability issue is a bear of a problem. It isn’t going away. So here’s a tip to journalists writing about the housing market. Don’t trust what Bank of America, Iowa Attorney General Tom Miller, various Federal regulators, Obama officials, and probably other bank-associated parties tell you.

Don’t trust the bank-friendly conventional wisdom, because it will end up making otherwise good stories inaccurate (this goes for headline writers as well). The banks don’t know their legal liability and the regulators don’t know how to fix this problem. And everyone’s suing everyone.

There is no reason for anyone to be hurrying to a settlement on this. Questions of moral hazard and basic justice aside, indemnifying the banks won't automatically clear out the foreclosure backlog. The housing market is still overvalued, and attempting to re-inflate it is simply bad economic policy. Geither's plan, in addition to being flagrantly immoral, is also doomed to fail from a purely economic perspective.

What needs to happen is for the long-planned indemnification deal to die a well-deserved death, and for each state to make a full investigation of the criminal negligence involved. Efforts should be made to work out deals between homeowners and banks to move to negotiated settlements, including own-to-rent scenarios. And the Administration needs to start focusing on ways to jump-start the economy that don't involve pumping up asset bubbles and providing more giveaways to an already overfed and bloated financial sector.

Democratic Attorneys General in states across the nation should abandon the multi-state compact, and join with Schneiderman to demand real investigations and full accountability for the financial sector in its handling of the mortgage mess. Once they have assessed the extent of the damage, then the nation can work out solutions that are based on wage and jobs growth, rather than asset bubbles and confidence fairies.


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