Ben Bernanke, today at a Federal Reserve and FDIC housing conference: "Before I address the specific topics of this conference, I would like to note that we have been concerned about reported irregularities in foreclosure practices at a number of large financial institutions.... We take violations of proper procedures seriously."Irregularities. Procedural violations. Mistakes. Errors. Government leaders choose their words carefully. The language above is intended to frame the "robo-signing" fiasco as a mere bureaucratic failure or administrative breakdown. This phraseology amounts, in fact, to an alibi. It has the ring of a defense lawyer pleading down on behalf of his client from a felony to a misdemeanor.
President Obama, Oct. 23 in his weekly White House address: "And recently, we've seen problems in foreclosure proceedings â€"- mistakes that have led to disruptions in the housing markets."
Shawn Donovan, Secretary of Housing and Urban Development, in an Oct. 23 story in the L.A. Times: "We will not tolerate business as usual in the mortgage market. Where there have been mistakes made or errors, we will hold those entities, those institutions, accountable to stop those processes, review them and fix them as quickly as possible."
Because the critique against big banks and loan servicers in this affair isn't that they made mistakes -- it's that they deliberately and systematically broke the law to push people out of their homes. Not only did these companies lie about having reviewed millions of foreclosure documents, but they presented fake paperwork in court. They also ignored laws requiring mortgage holders to record transfers in home ownership with local municipalities.
If you want to test the legal force of such excuses in the real world, try handing a cop a phony driver's license the next time you get pulled over for speeding. Then claim it's all a mistake. Sorry, officer, there appears to be an irregularity.
Seen in this light, the government's rhetorical contortions are risible. But they do have a purpose -- to avoid confronting the inescapable reality that financial firms are conducting foreclosures with the same contempt for the rule of law that they demonstrated in issuing and securitizing mortgages. As law and economics prof William Black and economist L. Randall Wray, both of the University of Missouri-Kansas City, write:
No mention of "fraud", "felony," "criminal investigations," or "prosecutions" for the tens of thousands of felonies that representatives of the entities foreclosing on homes have admitted that they committed. Note that Donovan does not even demand that the felons remedy the harm caused by their past fraudulent foreclosures. Donovan wants them to "fix" "processes" -- not repair the harm their frauds caused to their victims.The feds are terrified of speaking frankly about illegal foreclosures for several reasons. First, it's politics, stupid. Obviously, the government is in a race against time to mend the economy. The deadline is Nov. 2 -- not next month, but in 2012. The White House appears to have decided that anything that risks slowing down the recovery, such as temporarily suspending foreclosures and launching a full-blooded investigation into the scandal, threatens Obama's re-election chances.
Second, the Federal Reserve is conflicted. The agency is the world's biggest owner of toxic mortgages, with more than $1 trillion in mortgage-backed securities and some $166 billion in GSE-backed debt on its books. The Fed is also preparing to double down on that bet with another round of quantitative easing. That's likely to involve hoovering up more distressed MBSes in order to keep interest rates down and prop up the fragile residential real estate market.
When it comes to exposure to housing, in other words, the government is in the same vulnerable position as Wall Street. To avoid massive losses, both must pray for home prices to rise. Both must avoid raising questions about who really owns a home in ways that undermine the value of mortgage-related assets. Both must work to kick-start the securitization market, which fuels housing sales. Both need Fannie Mae (FNMA) and Freddie Mac (FMCC) to continue absorbing bank losses, which explains why the government is stalling in coming up with a plan for the GSEs.
By extension, both the feds and the banks want the foreclosure crisis to blow over as quickly as possible. Under these conditions, straight talk is impossible.
Image from Wikimedia Commons, CC 2.0
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