According to variations of this spin, the scandal is a “paperwork” (WSJ) problem involving “clerical errors” (ex-Goldman dude) but at base it’s still about “deadbeat” (John Carney) borrowers hoping to get a “house as a freebie” (Megan McArdle).
First, forgery is pretty much by its nature a “paperwork problem.” Funny how the Journal glosses over the bedrock functions of the property system when its convenient for Wall Street. As Barry Ritholtz said the other day in knocking down this line:
It is a legal impossibility for someone without a mortgage to be foreclosed upon. It is a legal impossibility for the wrong house to be foreclosed upon, It is a legal impossibility for the wrong bank to sue for foreclosure.
And yet, all of those things have occurred. The only way these errors could have occurred is if several people involved in the process committed criminal fraud. This is not a case of “Well, something slipped through the cracks.” In order for the process to fail, many people along the chain must commit fraud.
That it is being done for expediency and to save a few dollars on the process is why the full criminal prosecution must occur.
Second, nobody is “lionizing deadbeats,” and it’s unfortunate that the millions of folks who’ve lost their jobs or whatever and are down and out have a CNBC journalist call them what they’ve already been called a hundred times by two-bit bill collectors. Carney:
The vast majority of people (say, 88 percent) behind on their mortgages aren’t strategic defaulters and would pay if they could.
Further, most, I’d bet, would be able to keep paying these mortgages if the banks worked to modify them like they’ve said they would. But how can you modify the mortgage when you don’t even know if you own it? And why would you restructure it if you have no incentive to do so?
… we need a system of rules and a process for collecting and presenting evidence in order to kick a family out of their home. And we need a system where this process sets the ground rules that in turn allow for lenders and borrowers coming together and negotiating a situation that is best for both of them.
Because the first rule of mortgage lending is that you don’t foreclose. And the second rule of mortgage lending is that you don’t foreclose. I’ll let Lewis Ranieri, who created the mortgage-backed security in the 1980s, tell you: “The cardinal principle in the mortgage crisis is a very old one. You are almost always better off restructuring a loan in a crisis with a borrower than going to a foreclosure. In the past that was never at issue because the loan was always in the hands of someone acting as a fudiciary. The bank, or someone like a bank owned them, and they always exercised their best judgement and their interest. The problem now with the size of securitization and so many loans are not in the hands of a portfolio lender but in a security where structurally nobody is acting as the fiduciary.”
Get it? The same Wall Street-created system that’s responsible for the paperwork foreclosure mess is the one that’s responsible for the families-on-the-curb Foreclosure Mess (not to mention the creation of the bubble in the first place and the key role predatory lending played in it). It’s feeding on itself. You don’t have one without the other. And it may be worse than that. Konczal again:
Many of the servicers work for the largest four banks - Wells Fargo, Bank of America, Citi, and JP Morgan - and these four banks have large exposures to junior liens. These are second or third mortgages or home equity lines of credit that would have to be wiped out before the first mortgage can be modified. The four banks have almost half a trillion dollars worth of these exposures and, from the stress test, are valuing them at something like 85 cents on the dollar. Keeping a homeowner struggling to pay the second lien would be more worthwhile to these middlemen banks than getting him or her into a solid first lien to the benefit of the bond investor.