Monday, October 25, 2010

The Obama direction: "nothing to see here"on the foreclosure crisis".

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The Obama Administration is entirely predictable. It ever and always sides with large corporate interests, while trying to create the impression that it is actually concerned for the welfare of the average citizen. Admittedly, the occasionally tough talk with little follow through feeds a perverse spectacle of plutocrats sulking, pouting, and claiming that they are really, really badly treated.

Yesterday, the Financial Times reported “Foreclosure crisis tops Obama agenda” and described a closed door meeting scheduled with top officials. This mountain of effort so far seems to be producing a molehill, apparently by design. Team Obama is resorting to another of its well ingrained bad habits, of using PR as the preferred solution for all policy problems.

The only question here is whether the powers that be are so out of touch that they regard the foreclosure crisis version of extend and pretend as a viable strategy, or whether they are simply using it to buy time. And if the latter, is the object to get more breathing room while they do a proper diagnosis or simply to keep things on an even keel through the elections? Presumably, any bank-favoring measures would be radioactive right now, while voters will lack immediate recourse after November 2. Indeed, in a DC version of Br’er Rabbit’s pleas not to be thrown in the briar patch, expected Republican gains could serve as a very useful excuse for the Administration to rescue the banks once again: “Congress made us do it”.

A very good account by Shahien Nasiripour and Arthur Delaney at the Huffington Post lays bare the Administration’s dubious logic. The message starts with the usual suspect promises about doing the right thing for individuals, but then repeats a pet mantra of the Administration, “look ahead, not back”:

U.S. Housing and Urban Development Secretary Shaun Donovan said Wednesday that the Obama administration will attempt to protect homeowners and police the kind of paperwork fraud that led the nation’s largest banks to temporarily halt foreclosures this month, but added that the administration had yet to find anything fundamentally flawed in how large banks securitized home loans or how they foreclosed on them.

“Where any homeowner has been defrauded or denied the basic protections or rights they have under law, we will take actions to make sure the banks make them whole, and their rights will be protected and defended,” Donovan said at a Washington press briefing. “First and foremost, we are committed to accountability, so that everyone in the mortgage process — banks, mortgage servicers and other institutions — is following the law. If they have not followed the law, it’s our responsibility to make sure they’re held accountable.”

He added, however, that the administration is focused on ensuring future compliance, rather than on looking back to make sure homeowners and investors weren’t harmed during the reckless boom years. The administration is “committed to forcing institutions to change the way that they conduct business,” Obama’s top housing official said, “to make sure these problems don’t happen again.”

Yves here. The “we haven’t found anything yet” posture is awfully convenient. I wish I had time to do a Freedom of Information Act request on the calendars of Geithner, Donovan, and their deputies tasked to the foreclosure mess over the last two weeks. I guarantee that their calls and meeting with outsiders on this matter are skewed 4:1, if not heavier in favor of banks or their supporters (industry incumbents, lobbyists, bank lawyers) versus anyone who might have a different point of view.

And another aspect of the DC insider versus outsider dynamic is the blatant bias in favor of people with the right credentials, meaning top schools, past roles at well respected firms or top policy positions. That bias means anyone representing the borrower point of view is going to be discounted because they are not members of the club. The people on the front lines of the foreclosure crisis are consumer lawyers, and a handful of academics, largely from second tier institutions (real estate law has been a backwater until the crisis made it sexy). One of the things that has given the critics’ case real cred is that Adam Levitin, a Georgetown law professor (meaning someone deemed to pass the class test) has supported many of their contentions.

So it isn’t surprising, as the Huffiington Post story intimates, that the preliminary clean bill of health is based on framing the inquiry awfully narrowly:

When it came to the larger issue of what some legal experts describe as a fundamentally-flawed and fraud-ridden mortgage market — fraudulently-underwritten loans that passed through a maze of institutions that failed to properly maintain basic paperwork or follow legal procedures in bundling, securitizing and ultimately selling those mortgages to investors — Donovan said that, thus far, all is well.

“The primary issue that’s been the focus of the moratoria is, is the foreclosure process being followed correctly? Are affidavits being filed correctly, and are notarizations and other things being done correctly? That is one set of issues,” he said. “A second set of issues — and we think this is very important — that we look more broadly at, ‘Are servicers taking steps to help keep people in their homes?’”

The lesser, third issue that has been raised, Donovan said, is whether the process underlying the securitization of mortgages is “in question.”

“So that’s the point that I’m trying to make, is that the issues that we are finding … that we’re focused on are, ‘Are there particular servicers that are not following these processes?’”

Donovan added that “we have not found any evidence at this point of systemic issues in the underlying legal or other documents that have been reviewed.”

That review, however, is fairly new. Experts in mortgage processes, housing law and bankruptcy say the practices employed by the big mortgage originators, securitizers and servicers is largely flawed, and that in some cases the basic process of how a loan came to be securitized and sold can be legitimately questioned. It’s unclear how hard the administration looked into the matter prior to Donovan’s diagnosis.

Even though Donovan steered clear of specifically endorsing bank assertions that the fuss over affidavits was unwarranted and the underlying information is fine, the “we see nothing wrong so far” amounts to the same thing. Others in positions of authority are less credulous. Per Bloomberg:

Ohio Attorney General Richard Cordray on Oct. 19 expressed deep skepticism that Bank of America had managed to complete its internal review in just 2 1/2 weeks, saying, “I would caution that they still have significant financial exposure in many, many cases.”

The officialdom’s attempts to diminish the severity of the mortgage securitization mess isn’t that hard to discern if you are paying attention. But it isn’t the only version of three card Monte at work. EmptyWheel points to a more complicated, less obvious version. Fidelity, the biggest title insurer in the US, is demanding that lenders warrant all foreclosure sales. That has the effect of moving liability for defective title off the title insurers and back onto the sellers, who just happen to be TBTF banks, meaning the taxpayer is now in the title insurance business. As bad as that is, EmptyWheel points out another advantage if you believe in protection a bad system at all costs, that it sweeps a lot of the concerns about title under the rug:
Note, too, that Fidelity National instituted this policy (as distinct from the agreement it signed with Bank of

America on the day BoA halted foreclosures) in consultation with Fannie and Freddie. That is, in consultation with government owned entities holding a majority of the mortgages out there.

So the government and Fidelity National have gotten together and said, “rather than actually check for fraud we’ve got abundant evidence exists not just in foreclosures being processed now, but in foreclosures already sold and–significantly–in performing loans that were securitized at the height of the boom, let’s just have the banks sign off on any foreclosures going forward.” As a particularly nice touch, they’re describing this fraud not as fraud, but “incompetent or erroneous affidavit testimony or documentation.”

From the standpoint of an industry and a government hoping to prevent people from learning about the extent to which our property system has been tainted by the banksters, that might be shrewd. After all, the most common time for real people to challenge bank conduct here is when they are foreclosed on or when they buy a house–when they are involved in a legal transaction. We only came to understand the true extent of foreclosure fraud after foreclosure and bankruptcy lawyers had dealt with such volume of cases that they came to learn the tricks of the servicers and even reviewed enough documents to have solid evidence of notary and robosigner fraud. By getting indemnity from the banks, Fidelity National (and our government acting through Fannie and Freddie) will ensure that one entity at least will continue to offer lenders title insurance, helping them unload those properties that may or may not have fraudulent title, but will never look closely at the documentation to see if there has been fraud. (boldface original)

So the effect of the official “don’t rattle the markets” posture is a refusal to dig too deeply, and the end result is to sanction fraud. Rewarding criminal behavior has never been the foundation of a well functioning capitalist society; indeed, Singapore was able to become an economic success against considerable odds by having a clean government and tough enforcement. But the powers that be seem determined to try this experiment, since they’d rather not rattle the power structure, no matter how rotten it might turn out to be.

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