Foreclosure Fraud: We Need to Fix the Banks Again

Oct 15, 2010Marshall Auerback

marshall-auerback-100It's time to put the perps of this scandal in jail.

marshall-auerback-100It's time to put the perps of this scandal in jail.

Yves Smith, Bill Black, and Mike Konczal have already done yeoman's work in seeking to explain the lender fraud scandal in the securitized mortgage market and its possible legal ramifications. Here, I'd like to restrict my discussion to the optimal government response.

President Obama recently used a pocket veto on a bill that would allow foreclosure and other documents to be accepted among multiple states (and therefore make it difficult for homeowners to challenge foreclosure documents prepared in other states). But I worried that this action was not sincere. My concern was that, following the midterm elections, the Administration would eventually come up with some grand "compromise" solution, which would in effect give the banks everything they wanted.

In retrospect, it appears that even that was too favorable an assessment. Per the Washington Post:

The Obama administration does not support a nationwide moratorium on foreclosures at this time, Federal Housing Administration Commissioner David Stevens said Sunday in an e-mail response to questions.

"We believe freezing foreclosures for all banks in all states, whether we have reason to believe them to be in error or not, is simply not the prudent step to take in this fragile housing market," he said. (Our emphasis)

Banks 1, rule of law 0. In effect, the President is making the argument, "If we penalize people for not following the laws as they existed at the time, it will have really bad repercussions. So everybody gets a mulligan."

Additionally, the Administration seems to be buying the prevailing spin that the foreclosure problems are merely the product of "sloppy paperwork", rather than recognizing this disaster as a case of rampant, systemic fraud. That deserves punishment: fines and jail time, not additional government support.

Most of the current administration proposals are misguided because they continue to be based on the twin presumptions that big banks only face a liquidity problem, and that if this problem can somehow be resolved, the economy will recover. This is a fundamentally flawed view. Using any honest measure of accounting, the big banks are insolvent. The latest debacle illustrates that big banks cannot and should not be saved. They do not hold the key to recovery; if anything, their rampant criminality demonstrates that they are a barrier to a sustainable recovery. Since they were given their handouts, they have been working assiduously to resurrect the bubble conditions that led to this crisis. (Not to mention paying out huge bonuses in the process -- this year $144 billion, a record high for a second consecutive year, according to a study conducted by The Wall Street Journal.) Your tax dollars at work!

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As Randy Wray and Eric Tymoigne presciently wrote over a year ago:

The best approach is something like a banking holiday for the largest 19 banks and shadow banks in which institutions are closed for a relatively brief period. Supervisors move in to assess problems. It is essential that all big banks be examined during the "holiday" to uncover claims on one another. It is highly likely that supervisors will find that several trillions of dollars of bad assets will turn out to be claims big financial institutions have on one another (that is exactly what was found when AIG was examined -- which is why the government bail-out of AIG led to side payments to the big banks and shadow banks). There probably are not ‘seven degrees of separation' -- by taking over and resolving the biggest 19 banks and netting claims, the collateral damage in the form of losses for other banks and shadow banks will be relatively small. Government lending, guarantees, and purchases of bad assets will be much smaller if we first consolidate the balance sheets of the biggest players, net the assets, and shut down the institutions. This will help to downsize the financial sector and reduce monopoly power. Moving forward, policy should favor small, independent, financial institutions.

In addition, it will be necessary to increase supervision and regulation of the financial sector. This can start with 3 simple measures, which were suggested to me by Bill Black (who was a long-time S&L investigator):

A. Replace every top banking regulator other than Sheila Bair and the head of the SEC. The regulators have to serve as the "sherpas" for any successful effort to prosecute and prevent frauds -- they do the heavy lifting and serve as the essential guides for the FBI. Two of the major banking agencies did zero criminal referrals. None has made putting the crooks in prison even a weak priority. Put new leaders in place who believe in regulating and jailing. End the instructions to regulators to view bankers as their "customers." The only client is the American people.

B. End the FBI's "partnership" with the Mortgage Bankers Association (MBA), the perps' trade association. The MBA has convinced the FBI that the lender was always the victim, never the perpetrator. That's why, along with regulatory failure, we have no top executives convicted, as opposed to over 1000 in the S&L debacle.

C. The Department of Justice needs new leadership. Do what we did in the S&L crisis. Create a "Top 100" priority list to ensure that we go after the elite criminals who caused the greatest wave of white-collar crime in world history -- and the Great Recession.

And we must get back to a fiscal policy that genuinely helps to sustain job growth and rising incomes -- this, in turn, will stabilize the economy. The costs of increased fiscal stimulus are dwarfed by the costs associated with an irrational reliance on monetary policy gimmicks such as "QE2". Fiscal austerity drains aggregate demand and induces reliance on PRIVATE debt. Today, a large number of Americans still suffer from high private debt levels and correspondingly sluggish income growth. Their ongoing reliance on the banks is becoming the 21st century equivalent of indentured servitude. With higher levels of debt comes higher levels of financial fragility and instability and then economic busts. With recessions we don't just experience extended losses of income. The accompanying costs manifest in the criminal justice system (rising crime), the health system (rising mental and physical illness), the family court systems (rising marriage and family breakdown), etc. The sum of these costs dwarf all other economic costs. And we should not forget that human lives are destroyed by prolonged recessions -- dignity is lost, self-esteem disappears and the children who grow up in jobless households inherit their parents' disadvantage.

If borrowers can meet their payments, lenders will receive their funds and will return to profitability; there will be less need for future bailouts. A full employment policy is also a financial stability policy. With a fully-employed population, you have consumers able to purchase goods with rising income. If they decide to expand those purchases or increase investment in a business via debt, they are better able to service it because a fully-employed person or a businessman with booming sales is far more able to service his debts, which means less write-offs for the banks and therefore less need for bailouts.

Amazingly, this is not only sensible economics, but also good politics. Yes, there is no question that some borrowers were overextended and probably took on mortgages they couldn't afford. But to use this as a reason to avoid the issue of fraudulent foreclosures strikes me as a colossal red herring. To be sure, one should not generally support the principle of abrogating loan agreements via strategic defaults, for example. But when the other contracting party is exposed as a rampant predator/fraudster, it changes the moral calculus considerably. If one ignores fraud, or downplays its significance here, it undermines the rule of law, the very basis for modern democracies. What's the "cost" associated with that? The fiscal austerians and defenders of bailout packages such as TARP (yes, I'm talking to you, Tim Geithner) ought to factor this into their calculations the next time they drone on about what a great "success" these programs have been, based on a bogus measure on how "little" it ended up costing the US taxpayer.

Wall Street bankers turned homeownership into an "investment", so owners ought to treat it like one -- walk away from bad investments. Business people do it every day and no one admonishes them about morality. But if we are going to sanction borrowers for strategic defaults, then it seems wildly inconsistent to avoid the issue of fraud, as well as recognizing that eliminating it (or significantly mitigating it) is the only basis on which we can construct a sound financial system going forward.

Marshall Auerback is a Senior Fellow at the Roosevelt Institute, and a market analyst and commentator.

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The Foreign Exchange Mystery

Oct 13, 2010Wallace Turbeville

money-question-150Why would such a large swaps market be a possible exemption from FinReg?

money-question-150Why would such a large swaps market be a possible exemption from FinReg?

The traded foreign exchange market is the big enchilada. It is the largest financial market in the world. The Bank for International Settlements estimates that the daily turnover in this market, including swaps, futures and spot purchases, is $4 trillion as of April 2010. This turnover increased more than 20% in the last 3 years. Trading is concentrated in London, accounting for 36.7%, while the New York share of the market is around 18%.

Since FX swaps and forwards are based on currency values, it is very easy to embed other financial transactions in a dealtransaction that involves exchange rates on its face. For instance, a loan can be the primary purpose for a swap of currency values. The danger in such obfuscation is illustrated by the foreign exchange transactions between the Greek government and Goldman Sachs, which disguised the debt burden of Greece and triggered a crisis.

In the Dodd-Frank Act, clearing (if available) is mandated for most derivatives, with "end user" hedging transactions carved out. But a second carve out, for FX swaps and forwards, is permitted if the Treasury orders it. There is significant concern among progressives monitoring the implementation of Dodd-Frank that the Secretary will soon exempt FX instruments from the clearing mandate. (See Mary Bottari, "Is Geithner Planning a Stealth Attack on the Wall Street Reform Bill" and David Wigan, "Traders Angered by Swaps Legislation.") Why did the Act envision this enormous exception? Why would Treasury implement the exemption? Why would it act now? These and other questions are shrouded in mystery, and that fact alone is of great concern.

Several knowledgeable individuals who were involved in the discussions of this provision during the drafting of Dodd-Frank report that Treasury never articulated a coherent rationale. It was clear that the New York Federal Reserve sought the exemption, but their motive was obscure. There was no structural impediment to mandating the clearing FX instruments: the Chicago Mercantile Exchange has a thriving FX futures business. It follows that Congress did not have the information to assess the proposed exemption, and the decision was delayed and delegated to Treasury.

According to Dodd-Frank, the Treasury Secretary must consider the following in deciding whether to grant the exemption:

1) "whether the required trading and clearing of foreign exchange swaps and foreign exchange forwards would create systemic risk, lower transparency, or threaten the financial stability of the United States;

2) whether foreign exchange swaps and foreign exchange forwards are already subject to a regulatory scheme that is materially comparable to that established by this Act for other classes of swaps;

3) the extent to which bank regulators of participants in the foreign exchange market provide adequate supervision, including capital and margin requirements;

4) the extent of adequate payment and settlement systems; and

5) the use of a potential exemption of foreign exchange swaps and foreign exchange forwards to evade otherwise applicable regulatory requirements."

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If the Secretary decides to grant the exemption, he is required to submit specific information to the relevant congressional committees, including:

1) "an explanation regarding why foreign exchange swaps and foreign exchange forwards are qualitatively different from other classes of swaps in a way that would make the foreign exchange swaps and foreign exchange forwards ill-suited for regulation as swaps; and

2) an identification of the objective differences of foreign exchange swaps and foreign exchange forwards with respect to standard swaps that warrant an exempted status."

It is hard to imagine that, in the months of discussion that preceded the enactment of Dodd-Frank, these issues were not thoroughly analyzed by the Treasury and the Fed. Certainly there is nothing that has emerged since enactment that is relevant to these issues. Granting the exemption now doesn't make sense with the flow of events. Congress could have been presented with all relevant facts and arguments so it could have decided instead of delegating the decision to Treasury.

The process suggests that this delay and the procedure were designed to appease opponents to the exemption and those who were concerned that the rationale was insufficiently presented. If this is true, the result is probably inevitable, at least in the minds of those in charge of the Treasury and the Fed. It is really maddening that the administration and the Fed were unwilling or unable to lay out the necessary factors to allow Congress to decide on such an important segment of the market.

We are left to guess at the reasons the FX market is to be treated so differently from other derivatives markets. There are several distinctions:

• As stated above, it is large. Worldwide, it is the largest of the financial markets.

• There is no meaningful distinction between a forward purchase and sale and a swap. Buying euros for future delivery at a fixed dollar price is not materially different from a euro/US dollar swap. In contrast, if someone sells a bushel of corn, he or she must deliver it.

• There has been much debate about the proportion of hedging and speculation in the FX market. However, it is clear that, compared with other markets, the amount of speculation is quite large.

• Relative currency values are directly related to central bank activities.

• The London market, being twice the size of the US market, plays a central role.

• The market presence of US financial institutions is significant, but the larger participants are European banks.

None of these distinctions compels a decision to exclude FX transactions from mandatory clearing, a process in which trade data is reported and a standard system for margining is imposed. Until the Treasury and Fed fill the public in on their thinking, it is pointless to speculate (unless you are a bank speculating on foreign exchange rates). It is ironic that, in implementing legislation designed to bring transparency to the financial markets, the Treasury and the Fed are so unconcerned about their own lack of transparency.

Wallace C. Turbeville is the former CEO of VMAC LLC and a former Vice President of Goldman, Sachs & Co. He is Visiting Scholar at the Roosevelt Institute.

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Foreclosure Fraud For Dummies, Part 3: What's the Worst and Slightly Better Case Scenario?

Oct 12, 2010Mike Konczal

mike-konczal-2-100The foreclosure crisis is heating up. Will it all come crashing down, or can we find a way out of the mess? **This is Part 3 in a series giving a basic explanation of the current foreclosure fraud crisis.

mike-konczal-2-100The foreclosure crisis is heating up. Will it all come crashing down, or can we find a way out of the mess? **This is Part 3 in a series giving a basic explanation of the current foreclosure fraud crisis. You can find Part 1 here and Part 2 here.

Right now the foreclosure system has shut down as a result of the banks' own voluntary actions. There is currently a debate over whether or not the current foreclosure fraud crisis could explode into a systemic risk problem that imperils the larger financial sector and economy, and if so what that would look like.

No matter what happens, the uncertainty about notes and what is currently going on with the foreclosure crisis is terrible for the economy. Getting to the heart of this problem so that negotiations can be worked out is important for getting the economy going again. There is little reason to trust whatever the servicers and the banks conclude at the end of the month, and the market will know that. Only the government can credibly clear the air as to what the legal situation is with the notes and the securitizations.

But I want to get some unlikely but dangerous scenarios on the table in which this blows up. Bangs, not whimpers.  The kind where Congress is pressured to act over a weekend.  I had a discussion with Adam Levitin about how this could explode into a systemic problem.

Title Insurance Market Breaks Down

The first scenario involves title insurance, specifically a situation wherein title insurers decide to take a month off from writing title insurance even on performing and current loans to investigate what is going on with note transfers.

If that happened, there would be no mortgage sales (except for those involving cash) in the country. The system would simply stop. Everyone with an interest, from realtors to Wall Street to construction to huge sections of the economy, would face a major crisis from this short-term pinch. There would be a call for Congress to step in immediately.

You can tell that the title insurance market, which is largely concentrated and also holding very little capital to deal with a nationwide crisis, is investigating the current problems.  They are holding off on certain types of foreclosed properties;  if they decide to hold off altogether, things could get seriously bad.

Lawsuits a Go-Go

The second would be a wave of lawsuits. As we discussed in Part Two, many of the servicing agreements allowed for the trustees to force the depositors and sponsors to purchase mortgages without notes. That would be 100 cents on the dollar for mortgages worth pennies. If the trustees don't take action, the investors could sue them. And the tranche warfare on this issue is intense, as foreclosures versus a few more payments radically change the balance between junior and senior tranche holders (See Tracy Alloway on tranche warfare here).

Here's what this could look like. Read left side up for what the lawsuit screaming looks like and the right side down for the response:

Much of the activity would center around the four largest participants in these areas, the Too Big To Fail institutions of Wells Fargo, Bank of America, Citi and JP Morgan.

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And many of these mortgage-backed securities are cheap. So in an interesting scenario, you could see hedge funds buying them for pennies just for the option to sue firms that are likely backstopped by the government.

If title insurance froze, or if the financial markets had a panic over fears of waves of lawsuits, there would be pressure for Congress to do something. Much of the law is New York trust law, so it isn't clear Congress can act.  But there will be pressure.

Because if this bad-case scenario happens, and there is a small but reasonable chance it could, progressives need to have a clear sense of what they want in exchange for negotiations when the financial industry comes flying in over the cliff -- a list of demands and questions to replace the in-large-part steamrolling of TARP over anyone's interests but the banks.  Even if that doesn't happen, and the slow bleed of the current dysfunctional mortgage market continues, progressive wonk policy initiatives that fix this crisis and get the mortgage market going again should be at the front of the debate.

What's likely to happen

Here's a guess:  In one month, the large banks will conclude that there are no problems with its foreclosure processes.  They'll say that the massive fraud that was committed on the courts was the result of a few bad apples, but those are now gone and it's back to business as normal.

At this point, either as a citizen or as a financial market participant, would there be any reason to believe them?   Is there any reason to believe that the servicer and foreclosure mill fraud is over?  That securitizations actually have the proper legal documentation necessary?  That borrowers and lenders are actually getting a chance to come to mutually beneficial situations?  Is there any reason to believe they aren't lying?

Because servicers aren't currently regulated.  They have a patchwork of state regulators and the OCC may regulate their parent company if it is a bank or thrift, but there's no government agent to provide any accountability here.  So without action, there's going to be no one to confirm or deny that anything has actually changed in the housing market.

In some ways this narrative already reminds me of the BP oil spill in the Gulf.  The Obama administration largely left it to BP to tell the government and the public what was wrong, hire the contractors and then also to tell everyone what the environmental damages were. It will surprise no one that the information BP sent out was wrong (see, for example, Kate Sheppard, "Not an Incidental Public Relations Problem"), but for better or worse, the Obama administration is now linked to whatever course and information BP chooses to pursue.

Why not choose a different course for this case?  One that emphasizes social justice by requiring powerful banks to follow the rule of law, demands corporate responsibility not to commit fraud, provides a space where those who are weak and poor get a fair say instead of being bulldozed by the rich and strong, and actually starts to dig out of the mortgage crisis that we are in? Check out Mike Lux's Exploding foreclosure fraud issue: An opportunity for Democrats to turn the tide. Not only is it relevant, but it demonstrates that there's a good chance this is going to get worse before it gets better. Why not get in front of it and change course from the disastrous path we've been taking?

What Just Went Wrong in the Government Response?

Because what we've done to this point hasn't worked.  Shahien Nasiripour and Arthur Delaney wrote the definitive account of the failure of the HAMP program, Extend AND Pretend: The Obama Administration's Failed Foreclosure Program. Instead of continuing HAMP, it's time for a fresh response.

Pat Garofalo of the Center for American Progress has The Fix Is Over: Mortgage Foreclosure Scandal Offers New Hope for Homeowners, which has a lot on what a new foreclosure relief program could look like:

...allowing housing counselors and other public entities to approve mortgage modifications directly, and if the borrower’s servicer doesn’t challenge the modification in 90 days, it automatically becomes permanent. Such a step would go a long way toward streamlining the program and getting borrowers who qualify through the maze of bureaucracy in a timely, clear fashion without leaving them in limbo for months on end.

Mortgage mediation programs—in which a bank must meet with a borrower, in the presence of a judge and housing counselors, before finalizing a foreclosure—should also be expanded.

And here's another new favorite policy option everyone should start considering, from the same piece:  "REMICs bestow enormous tax breaks to investors; these breaks should be revoked for any residential home mortgage loan holding entity that forecloses on more than a specified percentage of all of its mortgages."

We have to remember what went wrong with HAMP: the servicers were in the driver's seat. We need a process that is involuntary, government-run and is standardizable on both the modification and on the foreclosure end.  After this is instated the current crisis is cleared out in a way that confirms change has actually happened, we can start on a way out of this crisis.

Mike Konczal is a Fellow at the Roosevelt Institute.

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Foreclosure Fraud For Dummies, Part 2: What's a Note, Who's a Servicer, and Why They Matter

Oct 12, 2010Mike Konczal

mike-konczal-2-100Mike Konczal defines the key players in the foreclosure fraud mess. **This is Part 2 in a series giving a basic explanation of the current foreclosure fraud crisis.

mike-konczal-2-100Mike Konczal defines the key players in the foreclosure fraud mess. **This is Part 2 in a series giving a basic explanation of the current foreclosure fraud crisis. You can find Part 1 here.

What is the note?

The SEIU has a campaign: Where's the Note? Demand to see your mortgage note. It's worth checking out. But first, what is this note? And why would its existence be important to struggling homeowners, homeowners in foreclosure, and investors in mortgage backed securities?

There's going to be a campaign to convince you that having the note correctly filed and produced isn't that important (see, to start, this WSJ editorial from the weekend). It will argue that this is some sort of useless cover sheet for a TPS form that someone forgot to fill out. That is profoundly incorrect.

Independent of the fraud that was committed on our courts, the current crisis is important because the note is a crucial document for every party to a mortgage. But first, let's define what a mortgage is. A mortgage consists of two documents, a note and a lien:

The note is the IOU; it's the borrower's promise to pay. The mortgage, or the lien, is just the enforcement right to take the property if the note goes unpaid. The note is crucial.

Why does this matter? Three reasons, reasons that even the Wall Street Journal op-ed page needs to take into account. The first is that the note is the evidence of the debt. If it isn't properly in the trust, then there isn't clear evidence of the debt existing.

And it can't be a matter of "let's go find it now!" REMIC law, which governs the securitization, is really specific here.  The securitization can't get new assets after 90 days without a tax penalty, and it can't get defaulted assets at all without a major tax penalty. Most of these notes are way past 90 days and will be in a defaulted state.

This is because these parts of the mortgage-backed security were supposed to be passive entities. They are supposed to take in money through mortgage payments on one end and pay it out to bondholders on the other end -- hence their exemption from lots of taxes. The tradeoff is that they can't be de facto managers of assets, and that's what going to find the notes would require.

For Distressed Homeowners

The second is that it also matters a great deal for homeowners who are distressed. The note lays out the terms of late fees and other penalties. As we will discuss in the section on mortgage servicers, the process of trying to get people who are behind on their payments current instead of driving them into bankruptcy has broken down. But for now, it's clear that mortgage servicers don't have great incentives to get distressed homeowners' records correct.

There's well-documented evidence that extra fees are tacked on to mortgages that have fallen behind, fees that aren't following the terms of the note. This is usually only found out in bankruptcy where there is a lawyer (and multiple parties), not in foreclosure cases. But the terms of the note are necessary for the court if homeowners wants to challenge the servicers' claim of the final due amount.

This will matter a great deal for many homeowners. Small, marginal differences in the total owed could allow for a short sale. It could determine if the homeowner has any equity in their home. And this can only be determined by producing the note.

For Investors, Who Took This Seriously at the Beginning

Last reason: you can tell it's important because all the smartest finance guys in the room thought it was important. Let's look at a Pooling and Service Agreement form from 2006 (PSA) between "GS MORTGAGE SECURITIES CORP., Depositor, and DEUTSCHE BANK NATIONAL TRUST COMPANY, Trustee." (h/t Adam Levitin for this example.) Let's reproduce the chart from part 1 to see the chain between depositors and trustees who oversee the trust:

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So what agreement did they come to when it comes to the proper handling of notes in securitization? Did they think this was no big deal, or that it is something serious? From the PSA (my bold):

(b) In connection with the transfer and assignment of each Mortgage Loan, the Depositor has delivered or caused to be delivered to the Trustee for the benefit of the Certificateholders the following documents or instruments with respect to each Mortgage Loan so assigned:

(i) the original Mortgage Note (except for up to 0.01% of the Mortgage Notes for which there is a lost note affidavit and the copy of the Mortgage Note) bearing all intervening endorsements showing a complete chain of endorsement from the originator to the last endorsee, endorsed "Pay to the order of _____________, without recourse" and signed in the name of the last endorsee...

The Depositor shall use reasonable efforts to cause the Sponsor and the Responsible Party to deliver to the Trustee the applicable recorded document promptly upon receipt from the respective recording office but in no event later than 180 days from the Closing Date....

In the event, with respect to any Mortgage Loan, that such original or copy of any document submitted for recordation to the appropriate public recording office is not so delivered to the Trustee within 180 days of the applicable Original Purchase Date as specified in the Purchase Agreement, the Trustee shall notify the Depositor and the Depositor shall take or cause to be taken such remedial actions under the Purchase Agreement as may be permitted to be taken thereunder, including without limitation, if applicable, the repurchase by the Responsible Party of such Mortgage Loan.

Read that again through to the end and use the chart to follow the chain. If more than 0.01% (!) of mortgage notes weren't properly transferred, the trust can force the sponsor (in this case, Goldman Sachs) to repurchase the bad mortgages.   And this is just one contract for one part of the ~$2.6 trillion dollar mortgage backed securities market.  How's that for systemic risk?  Especially if this is found to be widespread...

Looking at the documents, you see that the smart guys who created these mortgage-backed securities put large poison pills into them to try and prevent the kind of note fraud we are currently experiencing.  They took the policing and legal recourse (and legal ability to cover themselves) very seriously on this issue. So seriously they can force repurchases of this bad debt.

So don't believe anyone who says these are just technicalities; the people who wrote the contract didn't believe they were.

Who is a servicer?

Whenever I hear someone say there wouldn't be a problem with foreclosures if people just paid their mortgages on time, I'm reminded of Alan Grayson's paraphrase of the Republican Health Care Plan: "Don't Get Sick. If You Get Sick, Die Quickly." Yes, the world would be an easier place if people never got sick, or credit risk didn't exist, and people made payments perfectly all the time. But they don't, and we need a system of rules and a process for collecting and presenting evidence in order to kick a family out of their home. And we need a system where this process sets the ground rules that in turn allow for lenders and borrowers coming together and negotiating a situation that is best for both of them.

Because the first rule of mortgage lending is that you don't foreclose.  And the second rule of mortgage lending is that you don't foreclose.  I'll let Lewis Ranieri, who created the mortgage-backed security in the 1980s, tell you: "The cardinal principle in the mortgage crisis is a very old one. You are almost always better off restructuring a loan in a crisis with a borrower than going to a foreclosure. In the past that was never at issue because the loan was always in the hands of someone acting as a fudiciary. The bank, or someone like a bank owned them, and they always exercised their best judgement and their interest. The problem now with the size of securitization and so many loans are not in the hands of a portfolio lender but in a security where structurally nobody is acting as the fiduciary."

In the past you had Jimmy Stewart banks. The mortgages were kept on the bank's books. You had someone who you could go to in order to renegotiate your mortgage. With mortgage-backed securities, the handling of payments and working-out of troubles moved to servicers.  If you are learning about this crisis for the first time, understanding what is broken here is very important.

This is Not a New Problem With Servicing

Let's get some quotes from bankruptcy judges in here:

“Fairbanks, in a shocking display of corporate irresponsibility, repeatedly fabricated the amount of the Debtor’s obligation to it out of thin air.” 53 Maxwell v. Fairbanks Capital Corp. (In re Maxwell), 281 B.R. 101, 114 (Bankr. D. Mass. 2002).

“[T]he poor quality of papers filed by Fleet to support its claim is a sad commentary on the record keeping of a large financial institution. Unfortunately, it is typical of record-keeping products generated by lenders and loan servicers in court proceedings.” In re Wines, 239 B.R. 703, 709 (Bankr. D.N.J. 1999).

“Is it too much to ask a consumer mortgage lender to provide the debtor with a clear and unambiguous statement of the debtor’s default prior to foreclosing on the debtor’s house?” In re Thompson, 350 B.R. 842, 844–45 (Bankr. E.D. Wis. 2006).

(Source.) Notice that consumer rights groups were flagging this as a major problem back in 1999 and 2002 because judges were noticing it was a major problem in their bankruptcy courts. If the late 1990s to 2006 period is a Renaissance period of servicer fraud, then we can contrast it with the period we live in now, the Baroque period of servicer fraud.  Whatever unity there used to be between the forms and functions of the sloppy documentation and outright fraud in the art of servicing have become detached.

The forms of fraud have gone high art: serving documents on people who could never have been served, signing 10,000 affidavits a month, etc. They are all well-covered, and we'll list more later perhaps. Here are some of my favorites from last year, the reading list in Part One has even more. But what I want to focus on is the function of servicer fraud.

What Do Servicers Do?  A Case Study in Bad Design and Worse Incentives

Servicers in a mortgage-backed security have two businesses. The first is transaction processing. This means taking in your mortgage money on one end and walking it over to the crazy tranches and payment waterfalls on the other end. This is clean, efficient, largely automated, requires little discretion and works very well, and implicit in it is that it is most profitable when you can harness economies of scale.

In fact, it's considered a "passive entity", so there are no taxes applied in this passthrough mechanism. If servicers went "active", say by looking for mortgage notes not in the trust 90 days after the fact or mortgage notes that are not in the trust that have defaulted (which is what they'd likely have to do to get out of this foreclosure fraud crisis), they'd face very severe tax penalties.

Their other business is to handle default situations.  In addition to the fixed fee they get for servicing each individual mortgage, they get paid by default fees like late charges. They get to retain most, if not all, of these fees.

So right away they have a disincentive to negotiate to get a mortgage in a good state. They also have a strong incentive to keep a steady stream of fees and charges going to their books, rather than to investors.  So anything that puts servicers in charge of negotiating mortgages, say the Obama's administration's HAMP program, is designed to fail.

Because even without bad incentives, doing good work on modification is costly, time consuming, requires individual expertise and experience and doesn't benefit from automation or economies of scale.  Which is to say it has the opposite structure of their normal business.

And there are additional worries. Many of the servicers work for the largest four banks -- Wells Fargo, Bank of America, Citi, and JP Morgan -- and these four banks have large exposures to junior liens. These are second or third mortgages or home equity lines of credit that would have to be wiped out before the first mortgage can be modified. The four banks have almost half a trillion dollars worth of these exposures and, from the stress test, are valuing them at something like 85 cents on the dollar. Keeping a homeowner struggling to pay the second lien would be more worthwhile to these middlemen banks than getting him or her into a solid first lien to the benefit of the bond investor.

So keep these in mind as you read about the servicers here. There have been worries that they, as a designed institution, were simply not qualified for this job going back a decade. They have massive conflicts with the investors they are supposed to be working for. They profit when homeowners collapse and lose money when they are brought up to a normal payment schedule (made current). And if the instruments don't have the notes necessary to bring standing to carry out the foreclosures, they have to take a massive tax hit in order to take the note into the trust. And there is no regulation in place to handle this.

No Regulator

Because for all the talks of regulatory burden, there is no current federal government agency that regulates the servicers. Not the Federal Reserve. Not the Treasury. This is what happens when the financial industry writes the deregulation. Instead, you have a patchwork of state regulators and attorney generals.  Notice how President Obama has nobody to turn to and tell the press that "So and So is on the case." In theory, the OCC regulates servicers if they are part of a bank or a thrift. This regulation must fall to the new regulatory counsel and the Consumer Financial Protection Bureau to investigate, where it will properly belong.

(The Fair Debt Collections Act, which applies to debt collectors, doesn't apply to servicers. Here's a fun idea for an enterprising staffer: if there is no producible note, are servicers still legally servicers and thus exempt from the Fair Debt Collections Act? Just a thought...)

Is it any wonder that servicers are rushing these foreclosures and making a mockery of the courts and producing systemic risk in the process? There needs to be an investigation of what is being done and why, because this problem is not taking care of itself.

(Special thanks to Katie Porter and Adam Levitin, who you can read at credit slips, as well as Tom Adams and Yves Smith, who you can read at naked capitalism, for in-depth discussions on this material.)

Mike Konczal is a Fellow at the Roosevelt Institute.

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Josh Rosner Goes After the Children Who Ran the Banks

Oct 12, 2010

Sunlight is the best disinfectant, and there is a lot of rot to uncover in the mess that lead to the financial crisis. ND20 contributor Josh Rosner appeared on the new CNN show Parker Spitzer to discuss documents that prove a solid 28% of mortgages in securities didn't even meet investment banks' own underwriting standards. The banks ignored the warnings, ratings agencies turned a blind eye, and the securities got sold to investors, Rosner explains:

Sunlight is the best disinfectant, and there is a lot of rot to uncover in the mess that lead to the financial crisis. ND20 contributor Josh Rosner appeared on the new CNN show Parker Spitzer to discuss documents that prove a solid 28% of mortgages in securities didn't even meet investment banks' own underwriting standards. The banks ignored the warnings, ratings agencies turned a blind eye, and the securities got sold to investors, Rosner explains:

"There's a real problem here and these documents do seem to highlight that the investment banks did have reason to know that these loans didn't even meet their own standards," Rosner explains. Ratings agencies claim they have no obligation to verify information, so "it seems they intentionally avoided collecting this information," he adds. "This is what happens when the children are in charge. We saw the risk management culture of the investment banks disappear, the trading desks really took over this business," he says. Things would have been fine if housing prices kept rising -- but we all know the end to that story.

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So is this fraud? Rosner claims, "I'm not a lawyer. I don't play one on TV." But Eliot Spitzer is -- and he proposes someone should "drop a subpoena on every investment bank saying I want to track this information... see where in the company [the documents] went, who saw them, who knew about them, who had a conversation about them, and what did they do." And if someone saw the documents and pushed these securities anyway? "Boom, charge them right there." Time will tell if anyone else takes the hard line against this behavior.

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How Much Will Currency Policies Really Affect Our Economy?

Oct 6, 2010J. W. Mason

downarrow-money-150Does the math really add up on these potential solutions to our economic problems?

downarrow-money-150Does the math really add up on these potential solutions to our economic problems?

A number of economists of the liberal Keynesian persuasion have been arguing recently that dollar devaluation is an important step in moving us back toward full employment. In principle, of course, a cheaper dollar should raise US exports and lower US imports. But what's missing from many of these arguments is a concrete, quantitative analysis of how much a lower dollar would raise demand for American goods.

In the interest of starting a discussion, here is a very rough first cut. There are four parameters to worry about, two each for imports and exports: how much a given change in the dollar moves prices in the destination country (the passthrough rate), and how much demand for traded goods responds to a change in price (the price elasticity). We can't observe these relationships directly, of course, so we have to estimate them based on historical data on trade flows and exchange rates. But once we assign values to them, it's straightforward how to calculate the effect of a given exchange rate change. And the values reported in published studies suggest that the level of the dollar is a relatively minor factor in US unemployment.

For passthrough, estimates are quite consistent that dollar changes are passed through more or less one for one to US export prices, but considerably less to US import prices. (In other words, US exporters set prices based solely on domestic costs, but exporters to the US "price to market".) The OECD's global macro model uses a value of 0.33 for import passthrough at a two-year horizon; a simple OLS regression of changes in import prices on the trade-weighted exchange rate yields basically the same value. Estimates of import price elasticity are almost always less than unity. Here are a few: Kwack et al (2007), -0.93; Crane, Crowley and Quayyum (2007), -0.47 to -0.63; Mann and Plück (2005), -0.28; Marquez (1990), -0.63 to -0.92. (Studies that use the real exchange rate rather than import prices generally find import elasticities between -0.1 and -0.25, which is consistent with a passthrough rate of about one-third.) So a reasonable assumption for import price elasticity would be about -0.75; there is no support for a value beyond -1. Estimated export elasticities vary more widely, but most fall between -0.5 and -1.

So let's use values near the midpoint of the published estimates. Let's assume import passthrough of 0.33, import price elasticity of -0.75, export passthrough of 1 and price elasticity of -1. And let's assume initial trade flows at their average levels of the 2000s -- imports of 15 percent of GDP and exports at 10.5 percent of GDP. Given those assumptions, what happens if the dollar falls by 20 percent? The answer is, the US trade deficit shrinks by 1.9 percent of GDP.

That might sound like a lot. But keep in mind, these are long-run elasticities -- in general, it takes as much as two years for price movements to have their full effect on trade. And the fall in the dollar also can't happen overnight, at least not without severe disruptions to financial markets. So we are talking about an annual boost to demand of somewhere between 0.5 and 1.0 percent of GDP for two to three years. And then, of course, the stimulus ends unless the dollar keeps falling. This is less than half the size of the stimulus passed last January. (Although to be fair, increased demand for tradables should have a higher multiplier than the mix of direct spending, transfers and tax cuts that made up the Obama stimulus.) The employment effect would probably be of the same magnitude -- a reduction of the unemployment rate by between 0.5 and 1.0 points.

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So it's not a trivial effect, but it's also not the main thing we should be worried about if we want to get back to broadly-shared prosperity. We should remember, too, that a policy of boosting US demand by increasing net exports has costs that a policy of boosting domestic demand does not.

And what about China? At least as often as we hear calls for a lower dollar, we hear calls for China to allow its currency to rise. How much could that help?

Unfortunately, there aren't as many good recent studies of bilateral trade elasticities between the US and China. And the BEA's published series for Chinese import prices only goes back to 2003, which isn't enough for reliable estimates. But common sense can get us quite a ways here. In recent years, US imports from China have run around 2 percent of GDP, and US exports to China a bit under 0.5 percent. So even if we assume that (1) a change in the nominal exchange rate is reflected one for one in the real exchange rate, i.e. that it doesn't affect Chinese prices or wages at all; (2) a change in the real exchange rate is passed one for one into prices of Chinese imports in the US; (3) Chinese goods compete only with American-made goods, and not with those of other exporters; and (4) the price elasticity of US imports from China is an implausibly high 1.5; then a 20 percent appreciation of the Chinese currency only provides a boost to US demand of less than one half of one percent of GDP in total, spread out over several years.

And of course, those are all wildly optimistic assumptions. A recent Deutsche Bank report uses an estimate of -0.6 for the exchange rate elasticity of Chinese exports. They don't give any estimates for US-China flows specifically, but given the well-established empirical fact that US imports are unusually exchange-rate inelastic, we have to assume that the number for Chinese exports to the US is substantially smaller than for Chinese exports overall. Consistent with that, my own simple error-correction model, using 1993-2010 data and the relative CPI-deflated bilateral exchange rate, gives an exchange rate elasticity of US imports from China of -0.17. If the real figure is in that range, then a Chinese appreciation of 20 percent will reduce our imports from China by just 0.03 percent of GDP -- and of course much of even that tiny demand shift will be to goods from other low-wage exporters. This last point makes a focus on the Chinese peg particularly problematic as an explanation of US unemployment. If you are talking about reducing the value of the dollar against our trading partners as a whole, any resulting shift away from imports has to be to domestic goods. But presumably the closest substitutes for Chinese imports are usually other imports, not stuff made in the USA.

These are rough calculations and only intended to start a conversation. But it's a conversation we very much need to have. Before we launch a trade war with China for the sake of American workers, we need more concrete answers on the size of the potential gains.

Historically-minded critics of China and other surplus countries often quote Keynes' writings from the 1930s and '40s, with their emphasis on the importance of "creditor adjustment". The implication is that it's China's responsibility to reduce its net exports. But this is a misleading reading of Keynes. In fact, his concern was only ever to ensure that no country was prevented from pursuing full employment by the need to earn foreign exchange. The US, as the supplier of the world reserve currency, cannot face a balance of payments constraint; if we fail to pursue full employment, we have no one to blame but ourselves. If Keynes were alive today, I suspect he would be telling American policymakers to forget about China and focus all their efforts on boosting US demand -- by public investment in infrastructure, by unconventional monetary stimulus, by paying people to dig holes and fill them up again if need be. Because he knew that the only reason to worry about the trade balance was to gain the freedom to pursue "a policy of an autonomous rate of interest, unimpeded by international preoccupations, and of a national investment program directed to the optimum level of domestic employment, which is twice blessed in the sense that it helps ourselves and our neighbors at the same time."

J. W. Mason is a graduate student in economics at the University of Massachusetts, Amherst. A version of this post previously appeared at The Slack Wire.

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Main Street is Dying a Death by a Thousand Spending Cuts

Oct 5, 2010Marshall Auerback

marshall-auerback-100The evidence is everywhere that fiscal austerity only prolongs our misery.

marshall-auerback-100The evidence is everywhere that fiscal austerity only prolongs our misery.

According to the in an article entitled "Savers told to stop moaning and start spending," Charles Bean, deputy governor of the Bank of England, said, "Savers shouldn't necessarily expect to be able to live just off their income in times when interest rates are low. It may make sense for them to eat into their capital a bit." Mr. Bean also said savers "might be suffering" from the low bank rate, but they had done well from higher rates in the past and would do so again. Encouraging Britons to spend was one reason why the Bank had cut interest rates, he added.

Spend what exactly, Mr. Bean? Why is it that central bankers find it easy to recall the following equation: C (consumption) + I (investment) + G (gov't spending) = GDP (gross domestic product), but they can't seem to learn this one: HU (high unemployment) + HD (high debt levels) + 0 (no interest income) = AZS (almost zero spending).

I know why: because the latter depends on fiscal policy, and central bankers consistently agitate against fiscal policy. This continues despite the fact that expansionary government spending by accounting identity helps to sustain the private sector desire to save. Unfortunately, Charles Bean of the Bank of England fails to understand that today's predisposition to save is a natural reaction to the credit binge that preceded the crisis. Had the increased private sector saving that occurred over the past few years not been accommodated by rising deficits, then the negative income adjustments would have been more severe and the private sector's plans to return some safety margin to their balance sheet positions would have been thwarted. But he and his fellow central bankers appear incapable of acknowledging this fact.

Each week new evidence emerges that categorically demonstrates that the fiscal austerity proponents are clueless about the functioning of real economies and monetary systems. So today in Britain we have a new government committed to significant budget cuts, despite mounting evidence that cuts already undertaken are drastically curtailing their economic activity. The recently released Markit/CIPS UK Manufacturing Purchasing Managers' Indices, which is calculated from data on new orders, output, employment, supplier performance and stocks of purchases, fell to a ten-month low of 53.4 in September, down from a revised figure of 53.7 in August. Similarly, Ireland finds itself in the midst of a major banking crisis -- Anglo-Irish Bank was recently nationalized, for example -- despite the fact that the Irish government has steadfastly continued to apply the fiscal austerian measures urged on it by the ECB. In reality, this is because of the austerity measures it is taking. The budget deficit, as a percentage of GDP, now stands at 32 percent! Those are wartime-type levels of expenditures.

Yet the conditions attached to the European Central Bank's ongoing financial support of Ireland and the rest of the euro zone is continued fiscal austerity. The so-called PIIGS nations remained trapped between Scylla and Charybdis as a consequence of this Faustian bargain with the European Central Bank. If the ECB stops buying national government debt on the secondary markets, those governments are likely to default, and the big French and German banks it is protecting will be in crisis. Alternatively, every day governments like Ireland or Portugal continue with this policy, the more their economies continue to implode. Ultimately there will be mayhem. The euro itself could once again be threatened.

Don't get us wrong: we think such deficits ultimately put a floor on demand and will help the economy recover. But policy makers need to let these economies breathe for a time, rather than crushing them with additional threats of fiscal austerity. Isn't it interesting that the very policy prescriptions designed to eliminate the so-called "scourge of public debt" are actually increasing it? Shouldn't that make our policy makers pause in their enthusiastic embrace of fiscal austerity? Even the high priests of austerianism, the International Monetary Fund, are now conceding in their latest report that these current policies will condemn Southern Europe to death by slow suffocation, as well as leaving northern Europe, the UK, and the US in a slump for a long time to come.

Policy makers here in the US continue to hint at accounting tricks such as quantitative easing on the premise that central banks swapping one financial asset for another will help incite more speculation. That seems to be doing the trick for the stock market. But this does nothing to boost underlying aggregate demand. How about a solution for Main Street?

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Even as the markets continue to make new post-2008 recovery highs, governments continue to construct policies around bailing out fundamentally insolvent financial institutions. These policies ensure that the bankers and others can continue to get their exorbitant and totally unjustifiable bonuses, thereby sustaining the very practices that created the crisis in the first place. Lloyd Blankfein of Goldman Sachs warned that the bank could shift its operations around the world if regulatory crackdown becomes too tough in certain jurisdictions. To which any politician with an ounce of backbone ought to say, "Good! Take your socially polluting activities elsewhere and leave our populations alone."

Of course, they don't do that. The more likely supine response (as we've already seen in Basel III and Dodd-Frank) is a further undermining of any kind of serious regulation. We tinker around the edges but make no fundamental, structural reforms. It's a national scandal that our most elite businessmen and professionals, who have destroyed the global economy through an unprecedented orgy of mortgage and accounting fraud, have to date gotten away with it scot-free and continue to have a major hand in policy making. Equally incredibly, our governments continue to trumpet the "success" of abominations such as TARP along with their enablers in the media.

As the risk of being called a whiner by Vice President Biden, it has to be pointed out that these very same governments hand out little in spending to underpin the real economy, even as unemployment remains in double digits around the globe. Government support for the real economy via fiscal policy is minimal compared to the trillions thrown at the financial sector. But before we see any kinds of real reductions in unemployment, the cries of "socialism" and "intergenerational theft" rise. The fiscal austerians launch counter-attacks to mobilize against further fiscal expenditures that support employment growth. The expansion of fiscal policy is stopped dead in its tracks.

Curiously, progressives have come to be seen as the enemy because they dare to point out the incoherence and incongruity in current government policy.

For all of the recent hoopla in the stock market recently, much of the latest economic data is consistent with a slow to stagnant economic environment. In the US, inventories are rising. ISM new orders are now just barely hovering above 50, which usually marks the onset of falling levels. The same thing can be said of the leading indicator (which has been falling since the second quarter), and the coincident to lagging indicator ratio. Weekly chains store sales continue to slip toward the April/May lows, while mortgage applications for refinancing are also tipping over, despite the recent drop in mortgage rates. Second quarter revisions of GDP were mild, although this probably marks peak profit margins

Overseas, Japan appears to be reverting back into a recession. Additionally, very few people are looking at the direct impact of China's trade policies and how Beijing's mercantilism is beginning to hollow out other countries' manufacturing bases -- not just in the US but also in other parts of Asia (which are also experiencing decelerations in their exports and purchasing manufacturing indices).

Consumer expectations are tipping over, and we are concerned with a relapse back to a low level of confidence, which never improved from the recession lows. Euro zone company and macro data flow are starting to reflect more fiscal retrenchment , and with the euro higher, exporters may find more competition in the quarters ahead.

Message to today's policy makers: the public debt ratio will fall again when growth resumes. Growth will not resume very strongly unless it is continued to be supported by discretionary fiscal stimulus. There is no magical alternative. Hacking away the last vestiges of fiscal support will simply ensure much more misery, unemployment and social turmoil in the years ahead.

Marshall Auerback is a Senior Fellow at the Roosevelt Institute, and a market analyst and commentator.

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What Choices Should America Make to Strengthen the Economy?

Oct 5, 2010

Should we listen to deficit hysteria? What should the Federal budget look like? How do we revive our comatose economy? An event today put on by Demos, the Center on Budget and Policy Priorities, The Century Foundation, and the Economic Policy Institute will tackle these questions with speakers including Paul Krugman, Martin Feldstein, Jan Hatzius, Robert Reischauer, and David Walker. Not in DC?

Should we listen to deficit hysteria? What should the Federal budget look like? How do we revive our comatose economy? An event today put on by Demos, the Center on Budget and Policy Priorities, The Century Foundation, and the Economic Policy Institute will tackle these questions with speakers including Paul Krugman, Martin Feldstein, Jan Hatzius, Robert Reischauer, and David Walker. Not in DC? You're in luck -- you can watch livestreaming video from the event here.

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Eliot Spitzer: The Crisis of Accountability

Oct 4, 2010Lynn Parramore

eliot_spitzer-100This is the third installment of "The Influencers," a six-part interview series that Lynn Parramore, the editor of New Deal 2.0 and a media fellow at the Roosevelt Institute, is conducting in partnership with

eliot_spitzer-100This is the third installment of "The Influencers," a six-part interview series that Lynn Parramore, the editor of New Deal 2.0 and a media fellow at the Roosevelt Institute, is conducting in partnership with Salon. She recently caught up with former New York Gov. and ND20 contributor Eliot Spitzer, whose new TV show, "ParkerSpitzer," will launch TONIGHT on CNN, and they talked about the crisis of accountability in American institutions. According to Spitzer, the failures of Wall Street are the symptom of an epidemic that his new show will explore.

Lynn Parramore: As attorney general, you brought a series of high-profile prosecutions to Wall Street. How do you compare their range and results to those following the financial crisis?

Eliot Spitzer: The paramount difference is that we tried to bring prosecutions that led to structural reforms. That was the idea behind the suit against AIG for using deception and fraud to elevate stock price, or the case against Merrill Lynch, where we charged analysts of offering investment advice influenced by gross conflicts of interest. It was important to challenge the whole structure of the banking and financial-services industry and argue for greater accountability. After the economic collapse, what I've seen so far are one-off prosecutions where you catch somebody for insider trading, for example. Given the systemic nature of the problems on Wall Street, the effort should be less on how to address violations in a particular case, but rather the ongoing structural issues.

You've noted that accountability is still a problem on Wall Street. Does the problem extend to other American institutions?

Absolutely. Disaffection of the public has passed from Wall Street to governance and beyond. There is a tremendous sense of failure in accountability in everything from nonprofits to for-profit entities to the whole spectrum of American institutions.

The scholar Viktor Frankl once suggested that the Statue of Liberty should be supplemented by a Statue of Responsibility. Are we striking the right balance between freedom and responsibility?

There is a second half of the equation that we tend sometimes to forget. And when that happens, there's a problem. There's the issue of communitarianism -- we need a sense of community and responsibility to each other that rises in parallel with a sense of the freedom of the individual.

How does accountability impact the legitimacy of our institutions?

This is hugely important. If accountability suffers, then institutions become highly suspect. This happens everywhere from Wall Street to Congress. When people feel no accountability, they are more hesitant to presume that the system is functioning. This affects the entire structure of our democracy.

Do you see anything on the horizon that makes you more optimistic about government's role in regulation that will impact the accountability crisis?

We're at a moment where the regulatory bodies are appreciating what they need to do. Elizabeth Warren, for example, will set a high bar in that regard. On the other side of the equation, you have the public's complete fury at government intervention in any way and the prospect that Republican takeover of Congress will eliminate whatever impetus there may have been.

How do you assess the role journalism has played in demanding accountability?

Journalism cuts both ways. Journalists have certainly shined light on major problems. But you also find examples of journalism that are less noble, that tend to diminish pubic understanding. Journalism really mirrors the rest of society. Its failures and triumphs come in waves.

Is this something you hope to address on your new show on CNN?

We're hoping to put a lot of energy in looking closely at institutions. Whether it is Wall Street or government entities, we want to ask the right questions so we can understand who is doing what. We also want to have guests who can help us understand what is happening to the middle class. And we want to understand the response of the middle class to real frustrations and the ongoing economic crisis. A lot of people say that given what the history is, the response of the Tea Party should not hold -- that they are learning the wrong lessons. The idea is that they shouldn't be blaming government, for example, when many would say that a failure of regulation is what caused the collapse. People wonder, Why haven't we learned the lesson that the enforcement of accountability in the private sector is a positive and critical role that government can play?

What are you most looking forward to in your new role as television host?

I'm looking forward to creating something that hopefully a couple of people will watch that is interesting, fun and informative. I've got a very long reading list to prepare for it -- more intense than anything I've had in my recent stint of teaching!

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Why We Should be Mad as Hell About Florida's Foreclosures

Sep 29, 2010Mike Konczal

mike-konczal-2-100We could be giving underwater homeowners a chance. Instead, we're kicking people out of their homes without due process.

mike-konczal-2-100We could be giving underwater homeowners a chance. Instead, we're kicking people out of their homes without due process.

Given that the IMF and others believe a large part of the "structural unemployment" in our country is related to the struggling housing market and underwater/barely-hanging on homeowners, what is to be done? One choice is to allow for options like lien-stripping in bankruptcy courts, resetting mortgages by zip code, etc. Another option is for courts to accelerate foreclosures by ignoring due process, proper documentation and legal process in order to kick people out of their homes and preserve the value of senior tranches of RMBS while giving mortgage servicers a nice kickback.

What option do you think our country is taking?

We should all be very concerned about the foreclosure situation in Florida. If you are a homeowner or potential homeowner, you should find it offensive that people's property rights are being violated in such a flagrant way. If you are an investor, either as "bond vigilante" or someone with a generic 401(k), you should be worried that servicers have gone rogue and the incentive structure to maximize value instead of fees associated with foreclosures has broken down.

And if you care about basic Western liberalism -- the classical kind, with a Lockean understanding of freedom to own property along with freedoms of speech and religion -- you should be pissed off. This is a clear-cut instance of the rich and powerful decimating other people's property rights, rights that are supposed to protect the weak from the strong, in order to preserve their wealth and autonomy. Unless you think property rights are mere placeholders for whatever the financial sector demands, this should be resisted. This should be viewed as a problem an order of magnitude larger than Kelo v. City of New London.

The short problem is that banks are foreclosing without showing clear ownership of the property. In addition, "foreclosure mills" are processing 100,000s of foreclosures a month without doing any of the actual due diligence or legal legwork required for the state to justify the taking of property and putting people on the street. Even worse, many are faking documentation and committing other fraud in the process. The government is allowing this to happen both by not having courts block it from going forward, but also through purchasing the services of these mills. As Barney Frank noted: "Why is Fannie Mae using lawyers that are accused of regularly engaging in fraud to kick people out of their homes?"

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And the worst part is the lack of conversation about this. Thanks to Yves Smith at naked capitalism for following this story from the get-go; her blog has become the place for anyone interested in this topic (that link is a catch-up post). The rest of the media is starting to catch up to where she was weeks ago.  Here's the Washington Post with the story of an individual caught in one of these nets and ProPublica on GMAC's "robo-signers" who sign off on foreclosures without knowing anything about them.

Also Dean Baker just wrote a good summary of the situation for the Guardian:

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.

And the situation in Florida is worse than most assume. The specially-created courts see it as their purpose to clear out the foreclosures, as Yves Smith covers here (must read). The most obvious takeaway is that homeowners aren't being given the chance to have their documents properly viewed, have the challenges and proper legal hurdles to putting someone on the street vetted by the courts, and instead are being bribed with an additional month of house time if they don't ask too many questions.

And the biggest fear is that the fraud uncovered at GMAC is the tip of the iceberg for what is going on nationwide.   Keep your eye on this situation.

Mike Konczal is a Fellow at the Roosevelt Institute.

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