the audit

Audit Notes: Lex Dreck, Recourse, Extend and Pretend

January 28, 2010

This is a bad sentiment for a journalist to have:

Postmortems are revealing. But too much poking is damaging.

That’s the Financial Times‘s Lex column this morning telling the media and Congress to back off on the AIG backdoor bailout. Yeah, they really did say that.

Elsewhere, this autopsy has descended into minutiae – such as whether purchases required disclosure on a security-by-security basis, information for which there is a negligible public interest argument. The big picture is that in a crisis questionable decisions are made under pressure without malicious intent. Bury this corpse now.

Bury this column before any impressionable journalists get the wrong idea.

— Bloomberg has an eye-opening report finding that the banks (or the collectors) are coming after borrowers even after they’ve foreclosed on the loans.

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King is among a rising number of borrowers who are learning that they can be on the hook for years after losing their homes. Amid a crisis that stripped $6.4 trillion, or 28 percent, from the value of U.S. residential real estate since the 2006 peak, lenders are exercising their rights to pursue unpaid mortgage balances. To get their money, they can seize wages, tap bank accounts and put liens on other assets held by debtors.

“The big dogs get a bailout, and the little man gets no mercy,” said King, 39, referring to the U.S. government’s rescue of banks and other financial institutions.

In Florida, lenders have recourse on foreclosed loans but they don’t in California or Arizona (in some cases, Bloomberg says, home-equity loans can be gone after).

It’s not just foreclosures that can trigger debt collections. Short sales also may lead to deficiency judgments years after former homeowners have moved on, according to Hillard, the attorney in Largo. In a short sale, lenders agree to let borrowers sell a home for less than the mortgage balance.

The press ought to take a close look at this. Meanwhile, Calculated Risk has some good advice: “All sellers should obtain the advice of a lawyer and make sure the lender waives their rights for a deficiency judgment if possible.”

— Which brings us to the failure of Obama’s mortgage-modification policies. Mike Konczal points out that 70 percent of the ones that have been actually modified had their principal increased. He points out that banks don’t want to modify principal because they’d have to write down what they’re valuing those assets at on their books—”extend and pretend.”

Here’s Felix Salmon:

Why are the banks behaving like this? I think the obvious answer is the right one: they’re holding these loans on their books at much more than they’re really worth, and they can’t afford to take the write-downs which would accompany principal reductions of roughly the same magnitude as the decline in housing prices. This kind of head-in-the-sand behavior can only possibly work if housing prices suddenly rebound in the next couple of years, and that ain’t gonna happen.

This is bad for homeowners, bad for the economy, bad for the banks—bad for everybody. How are banks valuing these assets on their books?

And Konczal asks if the mortgage-mod system sets is predatory. That’s also a very good question for the press to examine.

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR’s business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.