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Why the Federal Foreclosure Probe Is a Sham

Senior U.S. Treasury official Michael Barr says federal authorities have found "inexcusable" problems with bank foreclosure practices. In other news, birds are partial to trees.

Sorry for the snark. But I'd be better disposed to Barr's seemingly no-nonsense acknowledgment that "these problems must be fixed" if the Obama administration had shown a greater desire to, you know, fix them.

From the outset of the robo-signing scandal, however, the White House, Treasury, HUD and other government officials have sought to downplay the crisis. They've also tended to show more concern about the impact of illegal foreclosures on financial firms than on homeowners.

As a result, Barr's statement feels more like a face-saving ex-post admission than the start of an aggressive federal investigation into the foreclosure mess. Neither does the context exactly inspire confidence.

Barr made the comment on Tuesday to the Financial Stability Oversight Council, a new committee of government regulators formed under the Dodd-Frank financial reform law whose mission is to keep the banking system from imploding.

That council may in time prove an invaluable defense against such systemic crises. But as politicians and corporate managers know well, committees are also the place where ideas often go to die, or at least disappear for a while. As often as not -- especially in Washington -- they're a way of creating the illusion of action while ensuring that nothing much gets done.

In this case, it doesn't help that the FSOC is led by Treasury Secretary Tim Geithner. He, too, favors allowing banks to carry on with foreclosures despite mounting evidence of illegal evictions. As a result, says Yves Smith in comparing the federal probe into foreclosuregate into last year's financial "stress test" for banks:

This "review" is clearly a Potemkin exercise, yet another stress test-type charade, in which the facade of a serious investigation is used to sell the message that all is well in the banking industry.
One reason for Smith's suspicion: The government's probe is too small and too rushed. Examining the records and practices of major loan servicers, law firms, MERS and many other participants in foreclosures is a huge undertaking.

Yet Barr says the investigation is expected to take only eight weeks, with federal authorities presenting their findings by year-end. Even assuming that hundreds of investigators are on the case, that's not nearly enough time to get to the bottom of what experts agree is a massive and complex affair.

Calling Barr an "honorable man," Felix Salmon contends that Treasury is serious about the foreclosure investigation. Yet Salmon, too, doubts that it will lead to any major improvements in the mortgage system. What would? He writes:

I suspect that only a radical restructuring of the entire securitization architecture -- and especially the broken relationships between investors and trustees, and between trustees and servicers -- has any chance of actually working. That is clearly not going to happen.
Right. Because that would lead to banks having to recognize the enormous mortgage-related losses lurking within their balance sheets. Companies would fall. The already fragile housing market would draw the shades and bar the door. In Washington, there would be no winners -- only losers, as elected officials and regulators did their usual thing and assumed the crash position.

Only homeowners staring at a foreclosure notice glued to their door might gain. And the political calculus appears to see such people as collateral damage in a campaign to protect financial firms at all costs. That, of course, is inexcusable.

Thumbnail from morgueFile; interior image from Wikimedia Commons, CC 2.0