Georgetown U.’s Adam Levitin has become something of a rock star during the foreclosure fraud crisis. He had some of the best and most biting commentary in the Senate Banking Committee hearings on the issue, and he also appeared today at the House Financial Services Committee hearings. And under questioning from Rep. Brad Miller (D-NC), he let loose, and said what everyone has been thinking about the foreclosure crisis.
First off, he lamented the fact that we have been holding hearings like this since 2007. “Every year we have another set of hearings, and you can add 2 million foreclosures” to the bottom line. Nothing gets fixed, despite all kinds of documented evidence that the banks and servicers have committed fraud. Levitin’s position is that the servicers should be banned from the loan modification business entirely, because they don’t have any interest in it except as a profit-maximization scheme, and they have massive conflicts of interest that cut against doing right by the borrowers (and even the investors for whom they work).
But this was the key moment. Levitin said that we don’t have the full data sets from the servicers, or any comprehensive data to see whether there is a full-on crisis of unclear title and improper mortgage assignment. In other words, we don’t quite know the full extent of the problem. Levitin said, essentially, “The federal regulators don’t want to get info from servicers, because then they’d have to do something about it.” They don’t want to recognize the scope of the problem because it would require them to act.
And Levitin in particular singled out the Treasury Department. “The prime directive coming out of Treasury is ‘protect the banks’ and don’t force them to recognize their losses.” That says it in a nutshell, and it was said in open testimony in Congress.
I’ll have video of this sometime today. It was a remarkable moment. I don’t see how you can argue with Levitin’s assessment. It’s why most experts are looking to the 50-state Attorneys General investigation to perhaps get to the bottom of the level of fraud. The New York Times downplayed the risk of a quite resolution to that investigation today, as I expected.
The banks, who have been subjected to bad publicity, have played down the investigation and want to see it end as quickly as possible. The state attorneys general, however, say that there is an opportunity to fundamentally change the way banks deal with defaulting borrowers so that more people can stay in their homes by modifying their mortgages, and that they will take the time needed.
“The large banks say they are doing everything they can to avoid foreclosure, but that is not the reality on the ground,” said Patrick Madigan, an assistant attorney general in Iowa who is a lead figure in the investigation. “The question is, Why?”
Mr. Madigan mentioned some theories, saying any or all could be true: “Is it the fact that the current servicing system was not designed to do large numbers of loan modifications, is it being understaffed, incompetence or the servicers having the wrong financial incentives?”
However, the banks may want to simply buy their way out of the problem with the AGs by setting up a compensation fund. That would be the wrong move. The investigation must dig into every single nook and cranny to expose the fraud, and then radically change the way the modification process works. Criminal and civil penalties should not be out of the question, as well.
The banks simply aren’t going to change unless forced to, as Levitin says in this article. And the federal regulators have no interest in doing that at the moment, as Levitin said today in Congress. Maybe we should be asking about their incentives.
…just as an aside, take a look at the numbers in this Congressional Research Service survey:
A far greater threat to the broader financial system is the possibility that investors will force financial institutions to buy back hundreds of billions of dollars in soured mortgages, according to a Congressional Research Service report prepared for Thursday’s hearing and obtained by The New York Times.
Loan buybacks could shift $425 billion in losses on mortgage-backed securities from the investors that owned them to the banks that helped originate or assemble the securities, according to the report, far more than most estimates floated on Wall Street.
This is why the banks are fighting tooth and nail. It may be the reason for Treasury as well.
UPDATE: If you want to check out Julia Gordon’s testimony today before the committee, which was also excellent, here it is. Lots of great stuff in there.