The story so far: An epic housing bust and sustained high unemployment have led to an epidemic of default, with millions of homeowners falling behind on mortgage payments. So servicers — the companies that collect payments on behalf of mortgage owners — have been foreclosing on many mortgages, seizing many homes.But, of course, the Obama administration is more interested in continuing to coddle the same financial institutions that got us into this mess, and the one before, and the one before: "True to form, the Obama administration's response has been to oppose any action that might upset the banks, like a temporary moratorium on foreclosures while some of the issues are resolved. Instead, it is asking the banks, very nicely, to behave better and clean up their act. I mean, that's worked so well in the past, right?"
But do they actually have the right to seize these homes? Horror stories have been proliferating, like the case of the Florida man whose home was taken even though he had no mortgage. More significantly, certain players have been ignoring the law. Courts have been approving foreclosures without requiring that mortgage servicers produce appropriate documentation; instead, they have relied on affidavits asserting that the papers are in order. And these affidavits were often produced by "robo-signers," or low-level employees who had no idea whether their assertions were true.
Now an awful truth is becoming apparent: In many cases, the documentation doesn't exist. In the frenzy of the bubble, much home lending was undertaken by fly-by-night companies trying to generate as much volume as possible. These loans were sold off to mortgage "trusts," which, in turn, sliced and diced them into mortgage-backed securities. The trusts were legally required to obtain and hold the mortgage notes that specified the borrowers' obligations. But it's now apparent that such niceties were frequently neglected. And this means that many of the foreclosures now taking place are, in fact, illegal.
This is very, very bad. For one thing, it's a near certainty that significant numbers of borrowers are being defrauded — charged fees they don't actually owe, declared in default when, by the terms of their loan agreements, they aren't.
Beyond that, if trusts can't produce proof that they actually own the mortgages against which they have been selling claims, the sponsors of these trusts will face lawsuits from investors who bought these claims — claims that are now, in many cases, worth only a small fraction of their face value.
And who are these sponsors? Major financial institutions — the same institutions supposedly rescued by government programs last year. So the mortgage mess threatens to produce another financial crisis.
...The excesses of the bubble years have created a legal morass, in which property rights are ill defined because nobody has proper documentation. And where no clear property rights exist, it's the government's job to create them.
I do understand the concept behind the "too big to fail" mantra, but letting the institutions that are allegedly "too big to fail" to continue to operate in ways that maximize profits but also the risk of failure is incomprehensibly stupid. I mean, we know what happens when you keep bailing out an irresponsible failure over and over.
[Image Description: George W. Bush, who was repeatedly bailed out of bad business deals by his daddy's business associates, before becoming President of the United States.]
That's only half a joke. The truth is, the US government treats the big financial institutions the same way that families like the Bushes treat their very privileged sons: They're too important to fail. And it's the same lack of discipline, unchecked entitlement, and voracious avarice that creates fortunate sons and the financial institutions that make them rich beyond the comprehension of the average US mortgage-holder.
Whose struggles are not worthy of bail-out, but merely admonishments about bootstraps from the people who own the bootstrap factory.
Which was recently relocated to China, because US workers were demanding a livable wage, and the shareholders didn't like the way that was cutting into profits.
[Image Description: A fake newspaper reading: "Invisible hand gives ironic finger to local workforce: After massive layoffs at the local bootstrap factory, workers facing foreclosure are failing to appreciate the irony of their circumstances..."]
We need a fundamental shift in priorities here. The seemingly intractable (hope! change!) insistence on saving the very institutions that are now routinely threatening the economy with their malfeasance, no less saving them without severe restrictions on their ability to continue to do business in such a wildly irresponsible (though highly profitable!) manner, is utterly ludicrous and equally unjustifiable.
Something's gotta give.
And the first thing that can go is the idea that any institution is "too big to fail." No institution is too big to fail: THEY'RE FAILING. If they necessitate bail-out—and, make no mistake, even refusing to take action on behalf of homeowners because the banks might pout and complain is a bail-out as sure as a fat government check—it's not because they're too big to fail; it's because they're too big to not rescue. (No financial institution should be allowed to be that big in the first place, but that's a whole other post.)
"Too big to not rescue" vs. "too big to fail" might seem like it's only a semantic difference, and maybe it is, but it's an important one. "Too big to not rescue," unlike "too big to fail," does not mask the despicable double-standard to which we're holding financial institutions and the people they serve (don't serve)—banks have a social safety net; individual people are on their own.
Well, maybe we can all get together and weave ourselves a safety net out of our fucking bootstraps.
Yet the narratives of irresponsibility are about individual people, rather than the systemic failures that bring us, again and again, to the brink. Which is, of course, precisely backwards—but just the way the emergent corporatocracy wants it.
A change in priorities, a change in narrative, a change in accountability and oversight, and political leadership willing to actually make these changes. That's what we need.
But it ain't what we got.
Bloomberg: Securitization Flaws May Lead Investors to Fight Mortgage Deals.
WaPo: Lack of proper mortgage paper trail could leave big banks reeling again.
Digby: "Everybody needs to stop worrying about the moral hazard of letting average people off the hook for their mortgages and worry a little bit more about the moral hazard of continually allowing these huge financial institutions to get away with murder."