Posted on Monday, October 18, 2010
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.