[A] national moratorium would be very damaging to exactly the kind of people we're trying to protect, because the consequence of that would be in neighborhoods that have been most affected by the foreclosure prices, where you see lots of houses on the block empty, unoccupied, what it means is those communities will be living long we are houses unoccupied, with more pressure on their house prices, people still in their houses. That would be very damaging.Except that a major reason neighborhoods around the country are filled with empty, unoccupied homes is that the federal government has refused to force banks and loan servicers to modify people's mortgages. Meanwhile, isn't the idea of temporarily ceasing foreclosures, a legal process so thoroughly discredited that every state attorney general in the country is looking into it, to help "exactly the kind of people" that most need protection -- homeowners at risk of losing their homes?
Besides, foreclosures didn't gut the housing market; reckless, unregulated lending did. Home prices will continue to fall not because the federal government either suspends or encourages foreclosures, as the Treasury Secretary falsely suggests, but because an epic real estate bubble is deflating.
Given that reality, the Obama administration must be more forceful in responding to the crisis. Because while the intervention of state legal officials is important, it is no substitute for federal leadership in attacking this problem. As Harvard University law professor Katherine Porter told Bloomberg:
This is a problem that cries out for a national regulatory response, these problems are systemic. Throwing these out one-by-one within the court system -- that's not what the court system was designed for. It's not for the mass screw-up.What should the government do? For starters, press loan servicers to present a detailed plan for ensuring that foreclosures are legal and legitimate, Porter added. What that would almost certainly reveal is that banks can't, in fact, verify that they have a sound basis for thousands and thousands of foreclosures. Says Yves Smith:
You don't make up documents if you have the real ones, and if you don't have the real ones, you are really stuck. So the idea that the banks can somehow magically find documentation they clearly DON'T have and get back to life as usual is a complete non-starter.Since that avenue is closed, Treasury can do what it should've been doing all along -- compel banks to write down the principal on mortgages, which experts agree is the strongest measure to help borrowers with negative equity in their homes. After all, the feds have the perfect lever -- Fannie Mae (FNMA) and Freddie Mac (FMCC) -- to get banks to modify loans:
"Fannie and Freddie have a huge amount of leverage over their servicers, and they haven't used it thus far," says Alan White, a law professor at Valparaiso University and expert in mortgage law. "There's an opportunity for the GSEs and Treasury to go to the servicers and particularly the big four banks and say, 'You need to do this job and do it properly. Staff up in a serious way, and start showing us some results.'"Diane Thompson, an attorney with the National Consumer Law Center, has another idea for what the feds can do to help struggling homeowners: Provide them with legal aid.
"In our system, free representation is available for everybody in a criminal proceeding," said Thompson in an interview. "The reason we do that is because the stakes are very high in these proceedings. There's a strong argument that foreclosure cases are similar. The stakes are so high that you have to make sure that people have access to representation. Otherwise, their rights won't be protected."
It's a longstanding problem. One thing to remember here is that robo-signing is nothing new. Thompson, who before joining the NCLA spent more than a decade representing homeowners in foreclosure disputes, said 9 out 10 cases she handled involved erroneous, missing or falsified documents. Ninety percent! The only thing that has changed in recent years is the size of the problem. Foreclosures have surged, overwhelming the capacity of attorneys -- and the courts -- to make sure homeowners get a fair shake.
"Most attorneys who handle foreclosures have a huge volume of cases, while operating on extremely thin margins," she said. "That business model has, unsurprisingly, produced gross violations of standard judicial procedures."
The feds seem intent on sweeping such issues under the carpet. That's not only inexcusable, but also politically short-sighted. The latest foreclosure mess is an opportunity for our national leaders to show leadership by coming up with fresh solutions to a crisis affecting millions of Americans. To miss that chance would be, as Geithner might have it, "very damaging."
Image from U.S. Treasury Department
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- Foreclosures: Did Wall Street Banks Conspire to Rob Homeowners?
- Foreclosures: Help for Homeowners Means Hurt for Banks
- How Ally Financial "Robo-Signed" People's Homes Away
- Ex-Wells Fargo Loan Officer Details Shady Practices