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.