Beware of banks screaming about morality
By MITCHELL SOMMERS
Be suspicious — be very, very suspicious — when banks and politicians start throwing around phrases like “moral hazard.” Because what it really means is there’s a war going on, and those banks and politicians mean to win it.
Some background: Last year, as it came to light that mortgage foreclosure complaints were being filed by “robosigners” (people signing foreclosure complaints without even having looked at the documents), a number of state attorneys general, led by Iowa’s Attorney General Tom Miller, as well as Federal regulators and officials from the Department of Justice, began discussions with the largest banks and mortgage servicers. The thought process was that settlement discussions might be appropriate in order to reform the way those banks and servicers handled foreclosures and processed loan modifications and short sales, or sales where the house is sold for less than the loan.
In early March, the AG’s presented a 27 page document to the lenders that represented the starting point of negotiations. The document set forth a number of proposals. Among them was a proposal to change the loan modification process. The change would allow principal on the mortgage to be reduced for homes with more owed on the home than the loan was worth. Modification wouldn’t be automatic, but if the borrower was able to pay the reduced mortgage balance, part of the principal would be written down over a three-year period.
That doesn’t sound too awful, right? Remember, we’re talking about loans where the house is under water, where the loan balance has, in effect, already been written down by the market itself. If the lender foreclosed, they wouldn’t get what they were owed anyway. And anyway, this is just the opening bid of the AG’s.
Unfortunately, at least some of the Attorneys General — all Republicans — want to negotiate against themselves.
First up was Virginia Attorney General Ken Cuccinelli. He, along with three other AG’s, wrote a letter to Tom Miller complaining that the thought of writing down mortgages to conform to the fact that the homes are not worth what is owed represents “an unintended ‘moral hazard’ that rewards those who simply choose not to pay their mortgage.” And lockstep behind that, the chairman of J.P. Morgan Chase has said that writing down mortgage balances is “off the table.”
So, what you have is a bunch of banks aided and abetted by a bunch of AG’s who are supposed to be trying to negotiate with those banks, lecturing not the banks, but homeowners, on morality.
I just threw up a little in my mouth typing those words.
Some points to keep in mind when trying to unpack the chutzpah of that statement: First, does anyone really think that the housing market crash occurred in spite of the highly moral behavior of lenders?
Didn’t think so.
Second, does anyone think that lenders and servicers have behaved morally in their actions since the housing market crash began, dealing fairly and honorably with homeowners, working with them to resolve problems without being prodded to by Treasury regulators? Nope, nobody home there, either.
Third, does anyone think that these big financial institutions have gone out of their way to lend money to stimulate the economy, including all that money they were given through TARP? Hmmm… I’m guessing the answer to that is a big, fat, no way.
To be fair, there is a concept out there called “Strategic Default.” The idea is that even if you can sorta, kinda afford to stay in your house, if it makes more sense to walk away because the payments are high and the house is under water, equity-wise, you should do so, and let the bank foreclose. It is this concept that Ken Cuccinelli is whining about — the idea that a homeowner who makes a decision to walk away from a bad bargain (or who gets a balance write down so as not to walk away from a bad bargain) is doing something immoral.
This is so massively wrong I don’t know where to begin. The big banks and their Attorney General enablers want to block a settlement by suggesting that homeowners should not act in their financial self-interest while the banks act in a manner entirely consistent with their own self-interest. Apparently morality is yet another one of those things that only the shrinking middle class need concern themselves with.
Expect more of this slimy behavior as these talks continue.