Getting to the bottom of the housing crisis is key to economic recovery. So why is the Obama administration trying to block investigation?
Gretchen Morgenson's must-read article, "Attorney General of N.Y. Is Said to Face Pressure on Bank Foreclosure Deal," reveals how the Obama administration is putting pressure on attorneys general, especially New York's Eric T. Schneiderman, who want to bypass an arranged settlement in exchange for an extensive investigation of foreclosure fraud.
Dave Dayen has an important summary of the key issues and Marcy Wheeler brings up two additional items; both are excellent at laying out the field and are highly recommended. If the rush to a settlement is to help consumers, the federal government has many options already available. This is a problem in which the banks are screwing up at the state level and thus the Treasury can't run to the rescue in the same way. Hence, the application of all influence the administration can get.
A few additional thoughts for those joining this issue at this point:
- To put this in perspective, Michael Barr told Felix Salmon in November 2010 that investigations and strong enforcement were on their way. A week ago, I finally read an in-depth investigation that found that in "a staggering 92 percent of the claims brought by creditors asserting the right to foreclose against bankrupt families in New York City and the close-in suburbs, banks and mortgage servicers couldn't prove they had the right to kick the families out on the street... By robosigning documents and pressing foreclosures without the proper paperwork, banks have attempted to steamroll their way over sometimes-outgunned homeowners."
The investigation was done not by the Office of the Comptroller of the Currency (OCC), the Office of Thrift Supervision (OTS), nor by the Federal Deposit Insurance Corporation (FDIC) but by...wait for it...the New York Post. The Post! If the Post is capable of pulling off this investigation and making it public and subject to democratic discussion, why can't the Obama administration? And this is what the New York AG's office has to deal with: signing a deal absolving and protecting the banks when places like the New York Post are out there finding evidence of massive fraud.
- Here's a statement we'll refer to as "A": "During the financial crisis period of 2007-2009, the government took extraordinary actions to stabilize and protect the financial markets and industry, and these were the absolute best actions possible given information at the time and the tools available." You and I have our own thoughts on A, but let's assume it is true for this post.
Given A, it is now almost September 2011. It has been almost two and a half years since the Geithner Public Private Investment Program (PPIP) and the Wall Street stress tests were executed. At what point, is Wall Street comfortable enough that it gets to be held accountable for what is going on? At what point does the administration switch from "protect at all possible costs" mode to "hold just a bit accountable in a place with well-documented abuses that directly impact the economy, recovery and people's well-being"? Do we have to wait until 2013? 2020?
- If you are a general reader of the financial crisis, you probably have a sense of what went wrong with securitization during the bubble. People made sloppy and outright bad loans for huge fees because they could pass them along to people down the line. You may also have a bad sense of what is going on right now in that it involves paperwork and confusion.
I want to emphasize to you that these are the same problem. The same problems on the way up the bubble -- a way of creating, packaging and handling mortgages that was brand new and created agency problems at every stage -- are the same problems on the way down. The documents that hold banks accountable aren't to be found; the special trust laws that allow the infrastructure of these products to work (tax-free) have been made a mockery; and agents have incentives to wealth-strip consumers and dump them even when modifications would be made better from the ultimate creditors' point-of-view.
- We do a lot of navel-gazing arguments about "neoliberalism" here, but a very explicit assumption of deregulating the financial markets was that laws and investigations would be enforced when things went sideways. As John D. Hawke Jr., Comptroller of the Currency, said when he announced that he was going to pre-empt Georgia's anti-predatory lending state laws in 2003: "We believe a far more effective approach [than anti-predatory lending laws] would be to focus on the abusive practitioners, bringing to bear our formidable enforcement powers where we find abusive practices -- after clearly articulating our expectations." The trust and property law violations that are at the heart of this couldn't be clearer. It's a dot-your-I's and cross-your-T's kind of law. This abandonment reflects less a different way of setting up the financial markets than an outright corruption of the whole idea of rule-of-law.
- It's reasonable to think that the banks themselves don't know the extent of the problem either and obviously no single bank has an incentive to figure out what it has done wrong over the past several decades. An investigation coordinates this.
- There's no theory outside "weeping job creators" of what is wrong with the economy that doesn't involve the housing market. Getting to the bottom of this, rather than slowly bleeding out consumers and the more general housing market, is essential for getting us back on track.
- Kudos to Eric T. Schneiderman for fighting for this under intense pressures from a Wall Street/Treasury team-up. I can't even imagine what that squeeze is like and it's awful that the administration is on the wrong side of this.
Mike Konczal is a Research Fellow at the Roosevelt Institute.