We’re going to have to endure this line of argument from those savvy business reporters, and Diana Olick is at the head of the pack, so we might as well take on this argument about the foreclosure fraud settlement directly.
Let’s take a step back for a second to remember the fall of 2010, when “robo-signing” came to light. The idea that one low-paid guy sitting in a room was signing his, or perhaps somebody else’s, name to thousands of foreclosure documents was appalling. It is appalling, no question. But let us not forget that the vast, vast majority of those foreclosures being processed were in fact legitimate foreclosures; it was the documentation process that was fraudulent. Banks didn’t foreclose on borrowers for no reason, they foreclosed because borrowers weren’t paying their mortgages.
It continues to amaze me how this “no harm, no foul” argument gets employed, when it would not fly in any other context in jurisprudence. Let’s rewrite that claim slightly, with a different scenario but the same spirit.
The idea that one rogue cop sitting at the police station was fabricating evidence was appalling. It is appalling, no question. But let us not forget that the vast, vast majority of criminal suspects are in fact legitimately guilty of some crime; it was the evidence gathering that was fraudulent. Cops didn’t pick up suspects for no reason, they picked them up because they did something wrong.
This flies in the face of hundreds of years of established law, and the cop, as well as the police department, would be rightly condemned by everyone for allowing a systematic process of evidence fabrication to go on. Practically nobody would make the argument that the suspects were guilty anyway, evidence fabrication be damned. But that’s precisely what Diana Olick is saying with a straight face.
So fast-forward to 2011 when the housing market is still in deep despair. Home prices are still falling, eleven million borrowers owe more on their mortgages than their homes are worth, home construction sees its worst year ever, and government relief programs are doing very little to help. Cries arise that the only way to help housing is to reduce the principal on all those underwater mortgages, give borrowers their equity back! But how does government force the banks to do that? Robo.
On the point that government leveraged the illegal actions of robo-signing and servicer abuse into principal reductions, I don’t totally disagree. Clearly that’s what state and federal regulators wanted over, say, prosecutions, or the dissolution of the Wall Street firms that caused the mess. But those actions did in fact cover up a series of crimes that perpetuated the housing bubble. And the bubble is the main driver of negative equity. So nobody should act like there isn’t a causal relationship here. Borrowers were often duped into purchasing homes, sucked into a mortgage business that consistently fed a monster that artificially drove up prices. By the accident of history, those borrowers bought at a height that deprived them of their home’s value when the bubble popped. And it was all done fraudulently. I’d say principal reductions are quite an appropriate remedy.
Getting the housing market back on track. Restoring stability in the housing market. That’s what [banks] want. They’ve already stopped “robo-signing” long ago. Now what they need is closure. Move the foreclosure process along again, so that the housing market can clear all the distress and move ahead. Let the bank black eye begin to heal. Sure, they will get hit with plenty more lawsuits over mortgage securitizations, but that has little to do with their customers on the street, the average consumers. That has to do with investors, and federal regulators and all kinds of complicated Wall Street products that are lost on average Americans. Robo-signing was more personal; it had to do with real people’s mortgage papers that they signed at their kitchen tables.
How does Diana Olick, exactly, know that the banks stopped robo-signing? I found a Wells Fargo job listing of robo-signers that’s only two weeks old. As recently as last July, Reuters found copious evidence suggesting that robo-signing is ongoing. American Banker found more evidence in September. There’s no reason to believe that robo-signing, and at a larger level mass fabrication of documents, has ended. Diana’s own media outlet, CNBC, reported that Goldman Sachs and Ocwen Financial only agreed to stop robo-signing last September, after an agreement with New York financial services superintendent Benjamin Lawsky. Is five months ago “long ago”? And considering all the other evidence, why should we think that any other bank has put an end to the practice?
Olick states that “Robo-signing was wrong.” Good for her. But she distorts so many of the other issues around this settlement, using the familiar trope that people “bought too much home” and that the ones with negative equity are getting off easy while “the rest of us who didn’t buy more house than we could afford” get nothing. The analysis from the business media on this is almost laughable.