worth reading even by those who think the NY Times is a leading
conservative paper - ( wait till Murdock's 'Wall St. Journal' out
lasts the Times!)
New York Times Editorial ( & below PAUL KRUGMAN 'The Mortgage
Morass') October 14, 2010 The Foreclosure Crises
Attorneys general in all 50 states have pledged a coordinated
investigation into chaotic foreclosure practices by some of the
nation's largest banks. The Department of Justice is also looking
into what happened, while some lawmakers are now calling for a
nationwide moratorium on all foreclosures until the legal questions
are settled. The Obama administration is insisting such a broad
delay would hurt the economy.
There is plenty to worry about. But amid all this roiling, neither
Congress nor the administration has found a way to address an even
more fundamental problem: What government and banks need to do to
finally stanch the flood of foreclosures wreaking havoc on the lives
of millions of Americans and threatening the recovery.
According to the latest figures, 4.2 million loans are now in or
near foreclosure. An estimated 3.5 million homes will be lost by
the end of 2012, on top of 6.2 million already lost. Yet the
administration's main antiforeclosure effort has modified fewer
than 500,000 loans in about 18 months.
Judges and investigators need to be unflinching in their inquiries
into the paperwork debacle and must hold the banks fully accountable.
What we've already learned is chilling - and suggests that bankers
have learned little since the 2008 implosion and taxpayer bailout.
Major banks - including Bank of America, JPMorgan Chase and Ally
Bank, which is owned by GMAC - have suspended foreclosures after
admitting they had submitted tens of thousands of affidavits to the
courts, attesting to facts about the defaulted loans that had not
been verified by the bank employees signing the documents.
The Times's Eric Dash and Nelson D. Schwartz reported in Thursday's
paper that in their rush to process foreclosures, banks hired
inexperienced workers ("Burger King kids" as one former banker
derided them) who barely knew what a mortgage was.
The problems may go far deeper. The banks' procedures for keeping
track of mortgages may also be seriously flawed. If there are
problems in establishing a chain of title, it could - again - call
into question the value of mortgage-backed securities. That would
mean litigation, which would harm bank profits, and in a worst case,
risk another economywide disruption.
As important, and dismaying, as all this is, it must not obscure
the underlying problem: potentially millions of foreclosures that
could and should be avoided.
A mandated, national moratorium may be unavoidable if banks resume
a rush to foreclosure before all the legal issues are resolved. So
far, there is no sign of that. A moratorium won't address the
fundamental problem that banks have not competently and aggressively
pursued ways to keep more financially viable Americans in their
homes.
The White House may well be right that a moratorium would further
rattle investors. But the economy is not going to rebound until the
housing mess is resolved. What is needed, urgently, are laws and
policies to give homeowners a better shot at reworking their loans
so they can keep making payments and avoid foreclosure.
Throughout this crisis, the Obama administration has been far more
worried about protecting the banks than protecting homeowners. The
big weaknesses in the administration's main antiforeclosure policy
is that participation by lenders is voluntary and homeowners have
little leverage to get better terms - especially reductions in loan
principal when the mortgage balance is greater than the value of
the home.
One way to change that would be for Congress to reform the bankruptcy
law so troubled borrowers could turn to the courts for a loan
modification if banks were uncooperative. Homeowners also need a
simple process to challenge a bank if it uses incorrect information
to deny a modification and justify a foreclosure, or if it refuses
to divulge the facts and figures it used.
The administration also needs to alter refinancing guidelines so
that many borrowers who are current in their payments are eligible
to refinance to lower rates, even if their houses have declined in
value. It needs to provide more legal aid to homeowners, using money
authorized by Congress.
This latest foreclosure crisis should settle one issue once and for
all. The banks that got us into this mess can't be trusted to get
us out of it. The administration and Congress need to act.
October 14, 2010 The Mortgage Morass By PAUL KRUGMAN
American officials used to lecture other countries about their
economic failings and tell them that they needed to emulate the
U.S. model. The Asian financial crisis of the late 1990s, in
particular, led to a lot of self-satisfied moralizing. Thus, in
2000, Lawrence Summers, then the Treasury secretary, declared that
the keys to avoiding financial crisis were "well-capitalized and
supervised banks, effective corporate governance and bankruptcy
codes, and credible means of contract enforcement." By implication,
these were things the Asians lacked but we had.
We didn't.
The accounting scandals at Enron and WorldCom dispelled the myth
of effective corporate governance. These days, the idea that our
banks were well capitalized and supervised sounds like a sick joke.
And now the mortgage mess is making nonsense of claims that we have
effective contract enforcement - in fact, the question is whether
our economy is governed by any kind of rule of law.
The story so far: An epic housing bust and sustained high unemployment
have led to an epidemic of default, with millions of homeowners
falling behind on mortgage payments. So servicers - the companies
that collect payments on behalf of mortgage owners - have been
foreclosing on many mortgages, seizing many homes.
But do they actually have the right to seize these homes? Horror
stories have been proliferating, like the case of the Florida man
whose home was taken even though he had no mortgage. More significantly,
certain players have been ignoring the law. Courts have been approving
foreclosures without requiring that mortgage servicers produce
appropriate documentation; instead, they have relied on affidavits
asserting that the papers are in order. And these affidavits were
often produced by "robo-signers," or low-level employees who had
no idea whether their assertions were true.
Now an awful truth is becoming apparent: In many cases, the
documentation doesn't exist. In the frenzy of the bubble, much home
lending was undertaken by fly-by-night companies trying to generate
as much volume as possible. These loans were sold off to mortgage
"trusts," which, in turn, sliced and diced them into mortgage-backed
securities. The trusts were legally required to obtain and hold the
mortgage notes that specified the borrowers' obligations.
But it's now apparent that such niceties were frequently neglected.
And this means that many of the foreclosures now taking place are,
in fact, illegal.
This is very, very bad. For one thing, it's a near certainty that
significant numbers of borrowers are being defrauded - charged fees
they don't actually owe, declared in default when, by the terms of
their loan agreements, they aren't.
Beyond that, if trusts can't produce proof that they actually own
the mortgages against which they have been selling claims, the
sponsors of these trusts will face lawsuits from investors who
bought these claims - claims that are now, in many cases, worth
only a small fraction of their face value.
And who are these sponsors? Major financial institutions - the same
institutions supposedly rescued by government programs last year.
So the mortgage mess threatens to produce another financial crisis.
What can be done?
True to form, the Obama administration's response has been to oppose
any action that might upset the banks, like a temporary moratorium
on foreclosures while some of the issues are resolved. Instead, it
is asking the banks, very nicely, to behave better and clean up
their act. I mean, that's worked so well in the past, right?
The response from the right is, however, even worse. Republicans
in Congress are lying low, but conservative commentators like those
at The Wall Street Journal's editorial page have come out dismissing
the lack of proper documents as a triviality. In effect, they're
saying that if a bank says it owns your house, we should just take
its word. To me, this evokes the days when noblemen felt free to
take whatever they wanted, knowing that peasants had no standing
in the courts. But then, I suspect that some people regard those
as the good old days.
What should be happening? The excesses of the bubble years have
created a legal morass, in which property rights are ill defined
because nobody has proper documentation. And where no clear property
rights exist, it's the government's job to create them.
That won't be easy, but there are good ideas out there. For example,
the Center for American Progress has proposed giving mortgage
counselors and other public entities the power to modify troubled
loans directly, with their judgment standing unless appealed by the
mortgage servicer. This would do a lot to clarify matters and help
extract us from the morass.
One thing is for sure: What we're doing now isn't working. And
pretending that things are O.K. won't convince anyone.
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