House Afire

OCTOBER 27, 2010


House Afire

The elusive search for villains in the foreclosure crisis. 
By HOLMAN W. JENKINS, JR.

Millions of Americans have stopped paying their mortgages, creating a giant paperwork snafu and legal crisis, and yet . . .


Funny how many media accounts begin with that rarest of creatures, a homeowner fully paid up on his mortgage, or better yet a Florida man who paid cash for his house, and who was foreclosed on anyway thanks to a paperwork error by some confused bank. This poor shmuck then is made to symbolize the larger phenomenon when in fact the larger phenomenon is precisely the opposite.


You can't understand the latest mortgage mess without understanding the powerful appetite to cast borrowers as victims and banks as villains in the housing bubble. This tendency is present in claims that minorities have been especially victimized, that people were sold loans they didn't understand.
The battle of the narratives is reaching its climax in the robo-signer controversy, with lawyers seizing upon technicalities to let people go on living in homes they've stopped paying for.


We hasten to add that technicalities are important; the rule of law is nothing but a profound commitment to honor technicalities. But let's understand that in the absence of the snafu, we'd have a faster, smoother-working foreclosure process, in which more Americans would more quickly be shoved out into the street in perfect compliance with the law.


That's the last thing the state attorneys general want. They're taking the lead in investigating the paperwork crisis, and many are obviously looking to pave their path to higher office with claims they saved homeowners from foreclosure. Listen to Attorney General Lisa Madigan of Illinois: "We are fed up with the mortgage giants and the big banks fraudulently putting people into loans in the first place, and now fraudulently throwing them out of their homes."


A moral perplexity here is how a homeowner whose bank messed up the foreclosure documents is now more deserving than thousands of others whose banks didn't mess up the documents.


A given foreclosure enters this legal hall of mirrors in the first place generally only because a homeowner contests it. Remember "jingle mail," when thousands of homeowners engaged in voluntary foreclosure, dropping their keys in the mail and leaving banks stuck with an untended house? A similar chilly pragmatism is at work in those homeowners now using the courts to remain in a house they defaulted on months or years ago.


The white-hat, black-hat casting couch has become crowded with gray hats. The Obama administration has been trying to keep people in their homes by cutting their mortgages down to a size they could afford, but has succeeded in modifying relatively few, and then mostly for people so hard-up they defaulted anyway.


Why is that? Because any program that reached out to people with the wherewithal actually to benefit from mortgage modification might invite millions of additional Americans to stop paying their mortgages too. Why shouldn't they get a deal? This outcome, known as "strategic default," is something the administration wisely seeks to avoid.


Politicians have been frequent floggers of the bankers-as-villains, borrowers-as-victims story line. Yet the government has moved heaven and earth to prop up the self-same banks.


In the process, the government has taken ownership of many mortgages. Now the New York Fed has joined other mortgage investors to use the legal snafu to demand that Bank of America buy back $47 billion in supposedly tainted mortgages.


Look closely, though, and one of the New York Fed's complaints is that BofA has been costing mortgage investors money by being too lenient with borrowers and too slow to foreclose (ironically, the fruit of an earlier settlement with state AGs).


The ne plus ultra of the government's friendly-fire warfare on itself is the prospect of Fannie and Freddie, which Washington bailed out, now trying to shift their housing losses to the banks, which Washington bailed out.


Every foreclosure is a different story, some painful to hear. But we had a housing bubble, and bubbles by definition occur because the incentives permit them to occur: The Fed kept interest rates low. Regulatory policy favored shoehorning more people into homes. Enormous tax inducements were dangled to encourage housing debt. Not outside the laws of human nature, an industry on the make—the subprime industry— emerged to exploit these conditions.


Ultimately, the government—in the form of Fannie, Freddie and the FDIC—is the party now most bogged down with hundreds of thousands of unsold, decaying and vandalized houses. Getting these houses back into the hands of responsible owners is fundamental to the solvency of the banking system, to the solvency of communities that depend on property taxes, to the solvency of millions of other families whose main asset is their home.


A final irony: TARP has become so toxic that there's serious doubt the political system could respond to another crisis like the one that followed the failure of Lehman Brothers. Let us pray, then, that a breakdown in the ability of mortgage investors to reclaim the collateral behind failed loans doesn't send us back to the Lehman precipice.

Hmmmm.....your thoughts?