Foreclosure Fraud For Dummies, 5: The Necessity of Government Action and Ways Out of The Crisis

(This is a series giving a basic explanation of the current foreclosure fraud crisis from Mike Konczal; This is Part Five; you should also see Part One, Part Two, Part Three and Part Four)

Here’s a guess:  In one month, the large banks will conclude that there are no problems with its foreclosure processes.  The massive fraud that was committed on the courts was the result of a few bad apples, but those are now gone and it’s back to business as normal.

At this point, either as a citizen or as a financial market participant, would there be any reason to believe them?   Is there any reason to believe that the servicer and foreclosure mill fraud is over?  That securitizations actually have the proper legal documentation necessary?   That borrowers and lenders are actually getting a chance to come to mutually beneficials situations?    Is there any reason to believe they aren’t lying?

Because servicers aren’t currently regulated.  They have a patchwork of state regulators and the OCC may regulate their parent company if it is a bank or thrift, but there’s no current government agent to provide any accountability here.   So without action, there’s going to be no one to confirm or deny that anything has actually changed in the housing market.

In some ways this narrative already reminds me of the BP oil spill in the gulf.  The Obama administration largely left it to BP to tell the government and the public what was wrong, hire the contractors and then also to tell everyone what the environmental damages were.  It will surprise no one that the information BP sent out was wrong (see, for example, Kate Sheppard,“Not an Incidental Public Relations Problem”), but for better or worse, the Obama administration is now linked to whatever course and information BP chooses to pursue.

Why not choose a different course for this one?   One that emphasizes social justice through powerful banks having to follow the rule of law, corporate responsibility to not commit fraud, provides a space where those who are weak and poor get a fair say instead of being bulldozed over by the rich and strong, and actually starts to dig out of the mortgage crisis that we are in. Check out Mike Lux’s Exploding foreclosure fraud issue: An opportunity for Democrats to turn the tide. Not only is it relevant, but it demonstrates that there’s a good chance this is going to get worse before it gets better. Why not get in front of it, and change course from the disastrous path we’ve been taking?

What Just Went Wrong in the Government Response?

Because what we’ve done to this point hasn’t worked.  Shahien Nasiripour and Arthur Delaney wrote the definitive account of the failure of the HAMP program, Extend AND Pretend: The Obama Administration’s Failed Foreclosure Program. Instead of continuing HAMP, it’s time for a fresh response.

Pat Garofalo of the Center for American Progress has The Fix Is Over: Mortgage Foreclosure Scandal Offers New Hope for Homeowners which has a lot on what a new foreclosure relief program could look like:

allowing housing counselors and other public entities to approve mortgage modifications directly, and if the borrower’s servicer doesn’t challenge the modification in 90 days, it automatically becomes permanent. Such a step would go a long way toward streamlining the program and getting borrowers who qualify through the maze of bureaucracy in a timely, clear fashion without leaving them in limbo for months on end.

Mortgage mediation programs—in which a bank must meet with a borrower, in the presence of a judge and housing counselors, before finalizing a foreclosure—should also be expanded..

Another new favorite policy option everyone should start considering:  ”REMICs bestow enormous tax breaks to investors; these breaks should be revoked for any residential home mortgage loan holding entity that forecloses on more than a specified percentage of all of its mortgages.”

We have to remember what went wrong with HAMP: the servicers were in the driver’s seat. We need a process that is involuntary, government-run and is standardizable on both the modification and on the foreclosure end.  Between this and a clearing out of the current crisis to confirm change has actually happened we can start on a way out of this crisis.

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This is the first of a 5 part series from Mike Konczal, a former financial engineer, is a fellow with the Roosevelt Institute, who also blogs at New Deal 2.0, and is working on financial reform, the 21st century economy, structural unemployment, inequality, risk sharing, consumer access to financial services and more generally what it means to have a social contract in a financialized, post-industrial economy.