Last Updated Mar 3, 2011 2:05 PM EST
The nation's largest mortgage servicer, Bank of America, is already readying what will be among the industry's main arguments: that it is unfair to reward homeowners who are delinquent or underwater but cannot point to specific errors in their case.
"The question is one of fairness, who should receive a modification and who should not," said Jim Mahoney, a spokesman for the bank. Too broad a rescue package, he said, "could forestall the housing market recovery or even create perverse incentives."Come again? Unless the English language has suddenly undergone a drastic overhaul, a loan modification is expressly for borrowers who are delinquent or underwater on their loans -- whether or not they can point to bank errors in their case. When I peruse the "home loan help" section of the company's Web site, I see no reference to homeowners having to prove that they were wrongly refused mortgage relief. And rightly so, since that would be as crazy as having to prove to a doctor that you're sick before he agrees to treat you.
Meanwhile, it is supreme chutzpah for B of A, which blames its own customers for the company's abysmally poor loan modification record, to mention "fairness" after the company was caught red-handed committing foreclosure fraud on a massive scale and illegally kicking people out of their homes. And fairness doesn't quite seem to describe how servicers routinely gouge borrowers with fraudulent fees.
It also takes gall to implicitly blame homeowners pursuing their legal right to seek mortgage relief for threatening the housing market. "Perverse incentives"? Here's one: Loan servicers like B of A have a stronger financial incentive to take borrowers' homes than to help them keep a roof over their head. If the goal is to avoid foreclosure, it doesn't get much more perverse than that.
Menace to society
Banks also unsurprisingly oppose a plan backed by state attorneys general and some government agencies to fine loan servicers and use the money to fund loan modifications. Why? It's bad for society:
"It's like taking money that should be paid to the Treasury and using it for an unappropriated social program," said a lawyer for one of the top servicers, who spoke anonymously because the negotiations were still fluid and the banks had yet to be presented with a proposed settlement. "This is a bad idea, no matter who pays for it."As opposed to appropriated social programs, like TARP. Of course, the Obama administration did allocate federal money to prevent foreclosures under its $75 billion HAMP initiative, under which banks are paid to modify loans. It failed because loan servicers were given enormous discretion over when to alter mortgages and never penalized when they broke HAMP rules. As a result, foreclosures have soared. Call it an unsocial program.
The second part of that quote tells you everything you need to know about where banks stand on the government's proposed settlement. Because if it's a bad idea to cut a borrower's loan balance "no matter who pays for it," including the feds -- hey, why not just tack it on to what homeowners owe? -- then there's nothing to discuss.
Why banks won't cut loan balances
What it comes down is that servicers don't want to go down this road because it would cause them a world of financial hurt. If banks reduce and write down the value of first mortgages, which are securitized, they would almost certainly have to cut second liens, which mostly remain on their balance sheets. Yves Smith notes that would represent a direct hit to their capital.
Michael Barr, who until recently was a Treasury official and who now teaches law at the University of Michigan, claims that there is a fundamental tension to finding a solution for the foreclosure mess:
People want those who are in economic trouble to get a fair shake. But they don't want them bailed out for making their own mistakes, like buying too big a home.Sorry, no. Most distressed borrowers today are in trouble not because of reckless borrowing, but because the housing crash caused home prices to plunge and put millions of people out of work. If there's a tension here, it's between people who need help and banks who refuse to give it to them.
Image from Wikimedia Commons, CC 2.0
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