Another Mortgage Mess
The scandal at the center of our latest mortgage mess is not the “robo signers” who played fast and loose with the affidavits submitted in foreclosure cases. It is that after years of propping up the banks and the alleged reform of the financial system under the Dodd-Frank bill, we still are teetering on the same precipice upon which we found ourselves in the wake of the Lehman Bros. collapse: Enormous amounts of toxic mortgage-backed securities remain on the banks’ books at imaginary valuations while prices for the $1.3 trillion in mortgage-backed securities are crashing, inspiring “too big to fail” institutions to seek special political favors. Fannie and Freddie are poised to insert themselves into the mix for political purposes, and normal financial processes are grinding to a halt as both regulators and the banks themselves put a hold on foreclosures. Meanwhile, thousands of would-be homebuyers have been cast into limbo because it is no longer clear that they can legally take possession of the foreclosed properties they are buying.
Didn’t we just do financial reform?
The United States has a 21st-century system for trading mortgage-backed securities but a 19th-century system for keeping track of actual house titles. That is the product of the shared interests of local governments that treat titling fees as one more cash cow in the golden herd and parochial business interests, such as title-insurance companies, that profit from the inefficiency of our antiquated system. As the turbocharged securitization process crashes into the crude title-recording system, thousands of foreclosure cases are stalled because it is proving difficult or impossible to prove who actually owns the title to a particular house, and who therefore has standing to sue for foreclosure.
One possible result of this mess is that billions of dollars in securitized mortgages, many of them low-quality subprime loans, could end up back on the balance sheets of the banks that sold them, setting the American financial system up for a replay of 2008. The government-sponsored enterprises, Fannie Mae and Freddie Mac, either insure or own most of the mortgages in the country, and the two politically connected firms still enjoy the outrageous privilege of unlimited financial backing from the U.S. government. Once again, taxpayers face the prospect of being on the hook.
The Obama administration was warned months ago that theforeclosure system was in trouble and chose to do nothing in response. But anybody who noted the rise in lawyers invoking the “show me the note” defense in foreclosure cases since 2008 could have predicted this scenario. (A very similar situation is likely to play out among credit-card defaulters: The bill-collector law firms that buy defaulted debt at pennies on the dollar from credit-card issuers are no more ready to show their paperwork than the mortgage servicers in the foreclosures cases.)
The Left already is presenting this as a case of the wicked bankers fraudulently throwing families out of their homes and onto the street. That does not seem to have happened: The vast majority of people who have been foreclosed upon are in fact not making their mortgage payments; in the tiny number of cases in which homeowners have been foreclosed on wrongly, it seems to have been from genuine error rather than malfeasance. (It goes without saying that these homeowners should be made whole and their grossly negligent tormentors punished civilly or criminally, as appropriate.) But the Obama administration has a new Consumer Financial Protection Bureau at its disposal, with left-wing scold Elizabeth Warren waiting in the wings to run it, and some Democrats already are arguing that the administration should use this mess to twist the arms of mortgagelenders until they offer the significant writedowns of principal and interest that the Left has been after since 2008. Their implements of torture: Fannie and Freddie, whose enormous clout could be used to bully the banks. This “solution” would do little or nothing to alleviate the threat of a second financial crisis; it would be merely punitive. In any case, the banks risk taking another beating, either from government strong-arming or from the unraveling of mortgage-backed securities, which will dump a load of bad loans back onto their books.
How bad a beating? Nobody knows. It could be mild, or it could be catastrophic. The critical issue of oversight — gathering intelligence about the financial system rather than attempting to micromanage it — has been comprehensively neglected by the Obama administration, which came into power on a slick of Goldman Sachs money and little appetite for intelligent, market-oriented reform. While the Democrats have been frittering away time and energy on non-issues like executive compensation and risible non-performing initiatives like the Home Affordable Mortgage Program, the deeper problems, as usual, have been ignored or misunderstood by the law professors and career politicos who have installed themselves as regents of the nation’s financial system.
(Story originally appeared on National Review Online.)
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Comments :
May '10
Re: Another Mortgage Mess
The most likely scenario is one in which the administration attempts to prop up and forestall the looming foreclosure crisis for as long as it possibly can, preventing the correction that is needed to allow the economy to begin to work again. Then, just before the 2012 presidential election, the president will propose a massive piece of legislation to erase the mortgages and when Congress rightly fails to pass the bill he will rail about the heartless Republicans that "just don't get it."
I only hope that when that happens we have a presidential candidate able to explain to the American people why we need to get through the correction sooner rather than later. And how fun it would be if this divisive debate took place between the president and his Democratic primary challenger...
Sep '10
Re: Another Mortgage Mess
“Enormous amounts of toxic mortgage-back securities remain on the banks’ books at imaginary prices” - “We have a 21st-century system for trading mortgage back securities.” Does not sound like a great system to me.
Aug '10
Re: Another Mortgage Mess
National Review:
As the turbocharged securitization process crashes into the crude title-recording system, thousands of foreclosure cases are stalled because it is proving difficult or impossible to prove who actually owns the title to a particular house, and who therefore has standing to sue for foreclosure.
Didn't Claire recently write about how one of Turkey's problems (and Greece's, too, I think) is not being able to figure out who holds the title to real property?
If we've got to imitate these countries (which are fine countries with a long and illustrious history) in some way, couldn't we pick the food instead?
(EDIT: Found what I was referring to: "The property deed system is similarly opaque. An acquaintance of mine—an American who works in commercial real estate—rolled his eyes when describing the pointlessness of looking for a deed at Tapu Dairesi, the property records bureau. If you’re lucky enough to find it at all, he said, you have no guarantee that it bears any relationship to reality." From
Edited on Oct 14, 2010 at 4:16pmhttp://www.berlinski.com/node/106)
Sep '10
Re: Another Mortgage Mess
The Obama administration was warned months ago that theforeclosure system was in trouble and chose to do nothing in response.
Correction: They crafted an imaginary response.
Jul '10
Re: Another Mortgage Mess
Ugh. I can read National Review at NRO.
If I want to read Ponnuru and Nordlinger drivel, I'll surf over there.
May '10
Re: Another Mortgage Mess
One more step toward a bribe-based legal system.
Aug '10
Re: Another Mortgage Mess
Michael Tee:
If I want to read Ponnuru and Nordlinger drivel, I'll surf over there. · Oct 14 at 5:19pm
Heyyy... I rather enjoy Nordlinger's Impromptus. They're sweet and whimsical... And I enjoy being called "my dears" or "my darlings" or whatever it is he calls his readers.
Nordlinger's a good egg, though I get how his paratactic style isn't for all tastes.
Maybe it's a girl thing.
Sep '10
Re: Another Mortgage Mess
Robert Rubin and the big government GOP fostered the creation of this “turbocharged mortgage securitization process,” to benefit a privileged class and sold it as financial reform in the late 90’s. The 50 state foreclosure processes were not designed to handle the implosion of a housing bubble that was fostered by big government politicians. The idea of now federalizing the foreclosure process is the typical more big government solution.
Sep '10
Re: Another Mortgage Mess
I now I'm going to come off sounding like a populist crank, but, I really have a hard time ginning up any sympathy for the banks and similar industries consumed by the mortgage meltdown. In hindsight, it seems clear to me that the whole securitization and bundling mess was just a big game of hot potato where everyone involved just kept combining piles of trash, handing them off to someone else and then hoping they weren't the ones holding it when the collapse came. Here we are, at least two years later, and it still seems that the only actor being asked to take a hit is the homeowner. Part of this whole mess should be some of these too big to fail entities FAILING. Maybe then we can avoid going through this idiocy again. If they have a bunch of bad paper in hand and can't verify who owns it, tough nuggies. Time for them to join some of the unemployed out here rather than tsk, tsk'ing their way to the bank to deposit their latest bonus check.
Aug '10
Re: Another Mortgage Mess
You are exactly right. But that is one of the problems of the Leviathan State: its intrusions create such a huge incentive for Big Business to broker special deals with it that regulatory capture is practically inevitable.
So many people believe that Big Government can somehow vanquish Big Business. But the reality is quite the opposite: Big Government and Big Business are natural allies, not because they choose to be friends -- heck, they can even choose to be enemies, it doesn't matter -- but because of the process. They can't help it.
Big Government and Big Business: even when they hate each other, they still end up in bed together.