Foreclosure Funny Business

Virtually everyone has had the experience of being forced to pay a
late fee or a bank penalty because of some fine-print provision that we
overlooked. Sometimes, begging by good customers can win forbearance,
but usually we are held to the written terms of the contract, no matter
how buried or convoluted the clause in question may be.

That
is the way it works for the rest of us, but apparently this is not the
way the banks do business, at least when those at the other end of the
contract are ordinary homeowners. As a number of news reports
have shown in recent weeks, banks have been carrying through
foreclosures at a breakneck pace and freely ignoring the legal niceties
required under the law, such as demonstrating clear ownership to the
property being foreclosed.

The problem is that when
mortgages got sliced and diced into various mortgage-backed securities,
it became difficult to follow who actually held the title to the home.
Often the bank that was servicing the mortgage did not actually have the
title and may not even know where the title is. As a result, if a
homeowner stopped paying their mortgage, the servicer may not be able to
prove they actually have a claim to the property.

If the
servicer followed the law on carrying through foreclosures then it would
have to go through a costly and time-consuming process of getting its
paperwork in order and ensuring that it actually did have possession of
the title before going to a judge and getting a judgment that would
allow them to take possession of the property. Instead, banks got in the
habit of skirting the proper procedures and filling in forms
inaccurately and improperly in order to take possession of properties.

GMAC,
the former financing arm of General Motors and now called Ally
Financial, has become the poster-child for these sorts of practices. Jeffrey Stephan,
a leader of one of its foreclosure units, acknowledged that he had
signed thousands of affidavits claiming that he had reviewed documents
he had never seen.

In addition to being a major subprime lender
during the heyday of the housing bubble, Ally Financial also has the
notoriety of being primarily owned by the federal government
following its collapse last year. This fact may ensure greater
accountability at Ally, but there is no reason to believe that its
practices are qualitatively different than those of other servicers
carrying through foreclosures. The basic point is that the banks
foreclosing on homes don't feel that they should be held to the letter
of the law like ordinary people.

As we approach the two-year anniversary of Tarp,
it is certainly understandable the big banks think the laws that apply
to others don't apply to them. After all, the lesson of Tarp was that
when the banks got themselves into trouble with their reckless lending,
the taxpayers would come to the rescue with whatever loans and
guarantees were needed to keep them in business.

In fact,
many of the bankers who were begging Congress for below-market loans two
years ago are now bragging about having paid back the money with
interest. This should prompt ridicule. Instead, all the reporters and
columnists who were too thick to see an $8tn housing bubble are
repeating the banks' lines and telling us how happy we should be about
the bailouts.

In the financial crisis of two years ago,
these banks would have been forced to pay enormous interest rates to
borrow money in private markets. This would have pushed most of them
into bankruptcy.

Instead, the Treasury and the Fed gave
them money at near zero cost. This was an enormous subsidy that allowed
them to stay in business. It's nice that the banks tossed us a few
nickels in interest, but the taxpayers preserved trillions of dollars in
wealth for their shareholders, top executives and creditors. We would
have a very different economy, with a very different wealth
distribution, if we had allowed the magic of the market to do its work
on the financial industry.

But, that's history. The current
issue is whether we will again grant special treatment to the financial
industry by allowing them to skirt the legal procedures required for
foreclosures. In the land of endless affirmative action for the rich,
the smart money is on the banks. After all, huge multinational banks
can't be expected to read all the fine-print that binds the rest of us.