Lenders are still getting away with highway robbery, according to Nobel Prize winning economist and New York Times Op/Ed columnist, Paul Krugman.
Krugman eviscerates the banking industry and the wealthy class with a powerful reminder that although an economic recovery is under way, there has yet to be a final reckoning. More than a moralistic call for lender atonement, Krugman adroitly identifies the phenomenal role reversal that has taken place between the accused and their accusers. He reveals how the banking industry has managed to demonize those who seek to prosecute them for their abuses. In the past it was real estate brokers and appraisers; now it is others.
Rather than cheering-on the attorneys general (AGs) as they pursue lenders for restitution via a recently proposed settlement, congressmen, the press and of course lenders themselves, are branding the settlement as “extortion,” and a “shakedown” that will threaten the economic recovery. Such rhetoric is brazenly employed against the AGs who have repeatedly exposed the gross improprieties of lenders.
Big Banks have been accused by the AGs of luring distressed homeowners into their loan modification programs under false pretenses. Loan modification programs, known as extend-and-pretend modifications, were designed to squeeze as many mortgage payments as possible out of distressed homeowners, as well as extend the amount of time lenders had before reporting losses to their investors and government regulators. The delay essentially allows lenders to drag their collective feet while simultaneously bilking homeowners. As is now common knowledge, thousands of homeowners were foreclosed on while awaiting a loan modification — modification lenders knew would never come. [For more information on extend-and-pretend mortgage modification programs, see the April 2010 first tuesday article, Surge in loan modification defaults.]
Lenders have been asked to offer loan modifications that are beneficial to both homeowners as well as the lenders themselves. Although a principal reduction is a necessary aspect of the equation, the reduction will still provide a greater net present value (NPV) than foreclosure for the lender. That is, should the lender offer the modification, the asset will retain a greater value as an occupied home with a reduced principal than it would if the lender chose to foreclose.
Is it possible that these modest cramdowns, which are logically and fiscally beneficial to lenders, would result in widespread lender insolvency and cause another financial crisis? Absolutely not, says Krugman. Even if such cramdowns were offered, the financial status of lenders is not the cause of this lengthy plateau recovery.
Rather, it is the immense household debt consumers have built-up with lenders over the past 20 years due to a lack of savings, coupled with the persistent stagnancy of the real estate market that threatens the economic recovery. If lenders would either foreclose or cram down the massive amounts of mortgage debt consumers are currently collapsing under, the economic recovery will begin to grow legs. [For first tuesday’s proposal on how lenders should go about cleaning up mortgage debts, see the January 2010 first tuesday article, Cramdowns, cramdowns, cramdowns.]
However, as is evident from lenders’ reception of the settlement proposed by the United States AGs, the political machinery operated by the bankers is too powerful to be vanquished by even the top law enforcement officers in the land. While politicians and pundits squawk about banks that are too big to fail and condemn homeowners for being financially irresponsible, lenders continue to defraud homeowners without any fear of consequence — and California’s real estate market is left to smother in stagnation on all fronts.
first tuesday take: We could not say it any better ourselves.
Re: “Another inside job” from the New York Times