By James Kwak
I’ve been largely sitting out the foreclosure scandal/crisis. Partly I’ve just been too busy, and partly the coverage on other blogs has been great. Mike Konczal in particular has been providing the “beginners” posts–here’s part one of five–that were my niche during the earlier part of the financial crisis, basically putting me out of a job, and Yves Smith has also been all over the issue.
I want to ask one question, but for those who are not economics blogs junkies, let me get you up to speed. It first turned out that in their haste to foreclose on houses, the law firms filing for the foreclosures (in many states, you have to get a judgment from a court in order to foreclose) were cutting corners and sometimes filing fake documents. Then it turned out that sometimes they were filing fake documents because the real ones didn’t exist. In particular, it is possible that many of the trusts that issue mortgage-backed securities never had properly-endorsed copies of the notes that underlay those mortgages. (See this Yves Smith post. Highlight quote, from the CEO of a mortgage originator: “We never transferred the paper. No one in the industry transferred the paper.”)
The question is this: Why, just weeks from an election in which Democrats are probably going to get clobbered, is the Obama administration sitting on its hands, writing this off as a bunch of technicalities, and opposing a foreclosure moratorium?
Not only would it be good politics for an administration that has a hard time establishing credibility with ordinary people, but you would think a halt to foreclosures is actually what the Treasury Department wants. Over the summer, Steve Randy Waldman pointed out that Treasury essentially confirmed what many had suspected all along–the main point of HAMP (the mortgage modification program) was not to help homeowners, but to spread out the foreclosure wave over time in order to prop up housing prices and therefore protect the economy. A foreclosure moratorium, by temporarily halting the flood of foreclosed houses onto the market, would be even better.
The scary possibility is that what they’re really afraid of is systemic risk: the possibility that, as Konczal and others have pointed out, the mortgage securitization trusts (the entities that bought mortgages and issued mortgage-backed securities) could sue the investment banks, forcing them to buy back the underlying mortgages at the original cost. Since those mortgages are now worth far less than before, this would impose huge losses on the Big Six banks.
Big banks losing money isn’t what’s scary. What’s scary is that the administration may be pooh-poohing the foreclosure fraud crisis because it wants to protect the big banks once again. In other words, it’s minimizing the problem because it’s hoping that the banks will finish “reviewing their procedures,” say that everything has been fixed, and go on with their business; in that situation, it would be awkward for the administration to have come out strongly on the side of homeowners. This would basically be the operational equivalent of “it’s just a liquidity problem.”
But why? If this really could damage the big banks, why not let them take the hit and clean up afterward–especially if “orderly liquidation authority” is really the bazooka they claim it is? Why protect them now after being stabbed in the back repeatedly during the financial reform debate and in the current campaign finance cycle? Why not take this opportunity, if there really is one, to undo the mistakes of 2009?
Let’s hope there’s a better explanation than “we have created [our biggest banks], and we’re sort of past that point, and I think that in some sense, the genie’s out of the bottle.”