Posted on Tuesday, October 19, 2010
How long will President Barack Obama and Congress be able to avoid wading into the foreclosure mess?
“I think the [federal government] is going to need to act pretty soon,” said John Taylor, president of the National Community Reinvestment Coalition, who predicts Democrats will introduce bills to enact a nationwide moratorium on foreclosures – which he favors - during a planned lame duck session of Congress. So far, Obama has resisted demands for a moratorium, warning that it could shake confidence in home prices and cause a new housing crisis.
Although the revelation that most of the biggest banks have admitted skirting foreclosure rules in 23 states has thrown into doubt millions of pending and completed foreclosures, Obama administration officials believe that relatively few homeowners have been improperly foreclosed upon. Supporting that view, the nation’s largest bank, Bank of America, on Monday said it has not found any examples of a foreclosure proceeding in error, and announced it would resume foreclosures.
Still, administration officials are wary of a backlash from liberal Democrats and progressive groups unhappy that the government hasn’t been more successful convincing banks to renegotiate mortgages for homeowners who can’t keep up with their payments. House Speaker Nancy Pelosi has called on the president to halt all foreclosures and wants the Justice Department to open a criminal investigation of the banks.
Republican leaders have said little about the foreclosure problems, except for House GOP Whip Eric Cantor, who warned that a moratorium threatened to destabilize the housing recovery.
Behind the scenes, Republicans are consulting with the banks, which are hoping to reach a quick settlement with attorneys general from all 50 states who have announced a joint investigation into home foreclosures. The settlement would involve a sizable fine and some basic reforms to the foreclosure process.
These efforts represent the opening salvos in what is likely to be a fierce battle over who is to blame for the foreclosure mess – the banks that have tried to streamline foreclosures, or the Obama administration because of its failure to foresee that antiquated legal procedures would make it impossible for many states to handle the flood of foreclosures resulting from the financial crisis.
The immediate problem that prompted some banks to halt foreclosures – the use of “robo-signer” employees to speed along hundreds of foreclosures – has exposed more fundamental questions about how the bundling together of mortgages for resale has made the ownership of the underlying loans murky.
“It is a can of worms,” said one bank lobbyist. “I think at least some of the attorneys general are not going to want to let this go so easily,”
Some banks have shown interest in obtaining new federal guidelines on mortgage procedures that don’t pre-empt the states but might be enough to deter lawsuits planned by the attorneys The only action now scheduled in Congress on foreclosures is a Nov. 16 hearing to be convened by Sen. Christopher Dodd, D-Conn., chairman of the Senate, Banking, Housing and Urban Affairs Committee. Dodd has come out against a moratorium, but said little else. He is retiring at the end of the year, and is expected to be succeeded by Sen. Tim Johnson, D-S.D.
In Taylor’s view, there is plenty of blame to go around for the current problem. Congress did a bad job of holding banks accountable in the financial reform legislation it recently passed, and the Obama administration hasn’t done enough to help prevent homeowners from losing their homes. Yet he concedes that those who oppose a national moratorium have some valid concerns about how an indefinite halt to foreclosures could affect the overall housing market. Treasury Secretary Timothy Geithner has warned that a widespread halt to foreclosures could create doubt about all home values and drive a vicious circle of declining prices.
“I think this incident shows that we’ve failed to get our hands around a lot of the problems created by the housing crisis,” said Taylor.
Banks, meanwhile, are increasingly concerned that the uncertainty over foreclosures will spread beyond the 23 states where foreclosures have already been halted, destabilizing the values of housing securities generally, according to two representatives of bank interests in Washington who spoke on condition of anonymity.
One bank lobbyist said the biggest danger for his industry is that the foreclosure problem leads to broader lawsuits and investigations into the securitization or mortgages, whereby large numbers of mortgages are bundled together and resold as tradable securities.
Taylor said the broader threat posed by securitized mortgages was the elephant in the room. “We could have a whole unraveling of the chain of ownership,” he said.
In addition to the banks, Uncle Sam has got a lot to lose from a new crisis pushing down values of mortgage-backed securities. Home lenders Fannie Mae and Freddie Mac, which were seized by the government, are directly or indirectly involved in millions of foreclosures, and a foreclosure halt or new plunge in home values could raise the cost of the bailout, which is already estimated at $400 million.
The Federal Reserve, which bought up $1.25 trillion worth of mortgage-backed securities to prop up the bond market, could see the value of that investment sink.
If Geithner is right and a nationwide moratorium would shut down home sales and drive down prices, then that result is now likely anyway in the 23 states where major banks and some smaller lenders have already halted foreclosures voluntarily. Those states, which cover about one third of the U.S. population, have close to half of recent foreclosure filings.
More importantly, they include some big states that are crucial to Obama’s re-election in 2012 -- Pennsylvania, Ohio and Florida. If the uncertainty over foreclosures in those states, even without a nationwide moratorium, sets off a steeper drop in housing there, “I don’t think that’s going to be a good way to start off your re-election campaign,” said one of the bank lobbyists. politico.com JOHN MAGGS