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Project Syndicate / Op-Ed
Published: Saturday 22 October 2011
“Any settlement should also include the banks’ explicit agreement that they will support modifying America’s bankruptcy law to enable inclusion of mortgages in the usual court-run processes.”
Occupy the Mortgage Lenders
Participants in the Occupy Wall Street movement are right to argue that the big banks have never properly been investigated for the mortgage origination, aggregation, and securitization behavior that was central to the financial crisis – and to the loss of more than eight million jobs. But, thanks to the efforts of New York’s attorney general, Eric Schneiderman, and others, serious discussion has started in the United States about an out-of court mortgage settlement between state attorney generals and prominent financial-sector firms.
Talks among state officials, the Obama administration, and the banks are currently focused on reported abuses in servicing mortgages, foreclosing on homes, and evicting their residents. But leading banks are also accused of illegal behavior – inducing people to borrow, for example, by deceiving them about the interest rate that would actually be paid, while misrepresenting the resulting mortgage-backed securities to investors.
If these charges are true, the bank executives involved may fear that civil lawsuits would uncover evidence that could be used in criminal prosecutions. In that case, their interest would naturally lie in seeking – as they now are – to keep that evidence from ever seeing the inside of a courtroom.
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The scale and structure of any out-of-court mortgage settlement should address the damage inflicted by the alleged pattern of behavior. Many Americans now have too much debt. About 10 million mortgages are estimated to be “underwater” (the house is worth less than the loan). And, in key markets around the US, four years into the housing slump, home prices continue to fall.
If these were commercial loans, creditors would consider restructuring them – extending the payment schedule and typically writing down principal. But, in America’s home mortgage market, this is much less common. Banks want neither millions of negotiations nor, most importantly, the need to face the losses implied on their loan portfolio.
As a result, households want to spend less and pay down their debts. To some extent, this is the natural aftermath of any credit boom. And household deleveraging in the US will take a long time.
Policymakers can respond in three ways. First, they could do nothing – apparently the preference of the Republican congressional leadership, which recently wrote to Fed Chairman Ben Bernanke to demand that he not try to stimulate the economy further.
Second, they could continue to rely on conventional monetary and fiscal policy to pull the economy out of the doldrums. This is the approach still preferred by the Obama administration, despite its poor performance.
Third, we could adopt an alternative approach that directly reduces the value of underwater mortgages. At this point, any improvement in consumer balance sheets would directly stimulate the economy and create jobs.
Start with the proposal made by Martin Feldstein, who recommends a trade: the government should reduce the value of mortgages when they are sufficiently underwater, with the government and the banks splitting the losses; in exchange, the borrower must agree that the new loan becomes “full recourse.” That means that lenders could pursue borrowers’ other assets – not just the house – in case of default.
The key to this proposal is that banks must agree; it is a voluntary debt restructuring, compelled by no legal authority. In principle, banks should be attracted to the proposal, because restructured loans are less likely to default. In practice, the banks have consistently dragged their feet on mortgage restructuring – and are laying off staff, rather than hiring people who could help them deal with an initiative of the required scale.
Feldstein calculates that the one-time cost of principal reduction would be around $350 billion. Of course, in our current fiscal environment, it will be hard to find additional resources from the budget.
But $350 billion is roughly what the financial sector as a whole earned in an average quarter during the credit boom – and profit levels in recent quarters have reached or exceeded those levels. So, if the entire write-down cost were covered by banks, most of them would lose the equivalent of no more than one year’s profits – spread over several years.
Those boom-time profits were in any case overstated, because they were not adjusted for risk. And when the downside risks materialized, the losses were largely socialized – the primary reason why US public debt has soared in recent years. Asking shareholders and management to pay a relatively small amount is entirely fair and appropriate under these circumstances.
Some in the financial sector would, of course, threaten dire consequences. In fact, bank stock prices might drop, and it is entirely possible that compensation and bonuses would be curtailed, at least in the short term. On the other hand, a large-scale settlement that legitimately and finally removed the threat of future legal action would lift an enormous cloud that hangs over some of the largest lenders, including Bank of America, and creates significant risks for the rest of the financial system.
If the banks were ever really held accountable for the social costs of their behavior, the bill would far exceed $300-400 billion. Realistically assessed, the full downside legal risks to financial institutions are in excess of $1 trillion – particularly if it can be demonstrated that the “mortgage-backed securities” sold to investors were not backed by mortgages at all, because the proper legal paperwork was never done.
Any settlement should also include the banks’ explicit agreement that they will support modifying America’s bankruptcy law to enable inclusion of mortgages in the usual court-run processes. If the Occupy Wall Street movement tells us anything, it is that the last thing the US economy needs is more households overwhelmed by debt.
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12 comments on "Occupy the Mortgage Lenders"
October 25, 2011 10:35pm
GUESS WAHT>??? IF IT WAS MENT TO BE RE-SOLVED BY THESE RIP OFF FASCIST BAKNSTER S WHO HAVE TAKE N OVER OUR LIVES AND COUNTRY THSE ASSHOLES WOULD OF DONE SOMETHING BY.. NOW... WELL.......DUH..................THAT HASNT HAPPENED..............HAS IT.............<<>??? DUH
NOW,..GUESS WHAT?>>>>> JAIL THEM.!!...JUST LIKE THEY DO TO US AND THEY ARE GUIILY TIL PROVEN INNOCENT............!!!!!!!!! DUH!!!!!!ITS TIME FOR JAIL AND TO EXECUTE THEM AFTER TRIAL ........OR JUST GET A GILLIOTINE AND SHOW THEM WHOS BOSS!!!!!......... ITS OUR TURN NOW!!!!........ THEIR TURN IS OVER.........KAPUTT!!!!!!
AND THEY CAN GO TO HELL........!!THANK YOU AND PLS VISIT MY YOU TUBE SITE AND B LOGS...!!!!
AND GET UPDATES DAILY!! ON HOW WE TAKE BACK CONTROL OF OUR COUNTRY!! AND GET SHOT OF THESE FASCIST ELITES!! RULING FAMILIES!!http://www.youtube.com/user/LillyofParis?feature=mhee
October 23, 2011 1:11pm
a house like my grandmothers 1st house -- built with a log handled shovel
October 23, 2011 5:26am
If the banksters want to avoid prosecution, they should pay triple damages for all the distress they caused. Just call it an even $3 Trillion. There are no statistics as to how many divorces and suicides are linked to the disruption they caused. The human toll is outrageous, and their paid puppets in government are going to soft pedal on them.
JOIN THE RESISTANCE!
www.mortgageresistanceofamerica.com
www.studentloanresistanceofamerica.com
October 22, 2011 7:41pm
Housing prices have to fall to the level at which an average working person could afford to pay for one. Simple! No mortgage should run more than ten years, and nobody should ever be allowed to sign a mortgage which he or she could not pay off in ten or less years. A thirty or forty year mortgage is a lease, not a purchase. Home ownership does not begin when you sign the loan contract, it begins when you make the final payment. For my whole life, inflation has been the economic evil. Now we are spending billions to prevent deflation. If inflation is bad, and deflation is bad, pray tell, what is good? Inflation is good for the rich; deflation is good for the poor! The distance between the bottom and the top is the true measure of economic health. The greater the distance, the worse the economy. What we need is a plan for controlled deflation. The problem is, those who are riding high on inflation will never allow this.
October 22, 2011 7:35pm
Housing prices have to fall to the level at which an average working person could afford to pay for one. Simple! No mortgage should run more than ten years, and nobody should ever be allowed to sign a mortgage which he or she could not pay off in ten or less years. A thirty or forty year mortgage is a lease, not a purchase. Home ownership does not begin when you sign the loan contract, it begins when you make the final payment. For my whole life, inflation has been the economic evil. Now we are spending billions to prevent deflation. If inflation is bad, and deflation is bad, pray tell, what is good? Inflation is good for the rich; deflation is good for the poor! The distance between the bottom and the top is the true measure of economic health. The greater the distance, the worse the economy. What we need is a plan for controlled deflation. The problem is, those who are riding high on inflation will never allow this.
October 22, 2011 5:14pm
What needs to be created is a Bank Withdrawal Day where everbody that has accounts with Wells Fargo, Bank of America, and Chase Bank, the leaders in the housing market crash, withdraws all their money, closing all accounts. The government and the banks have turned their backs on the people who are the ones making their corrupt system work by keeping our money in their banks, we need to show them who is really in POWER by taking our business and money to another system that works for the people of this country, not greedy self absorbed BANKERS who are not spending their evenings in tents on the streets.I remember Bank of America stated they would pay back the government for the bailout they received as soon as they started showing a profit. Did the banks ever tell the people they call their customers with home mortgages, they could pay back their mortgage loan when they get back on their feet and recover from the greed the banks caused?The only way Occupy Wall Street is going to be effective is to ban together and close your accounts with these large banking institutions. Stop the abuse the banks are afflicting on people with their continued foreclosures and fee hikes.
October 22, 2011 5:08pm
sorry about the spelling "original"
October 22, 2011 5:06pm
To the best of my knowledge, foreclosure can only happen if the origonal mortgage can be produced. The banks can't foreclose, and it would seem to me that if they can't produce the origonal docs, they have no claim whatsoever,period.
THAT is why they want this settlement!!!!
October 22, 2011 4:27pm
Mortgage lenders...we'll be coming after you too.
Let’s wake up America!
The 1% of Piratical Capitalists are strangling the other 99% of Americans and the rest of the world to death!
I’m sick and tired of the Democrats, the Republicans, the tea party, and the news media!
I’m sick and tired of listening to incessant political nonsense while we the people, are losing everything!
Are we supposed to remain passive while we lose our jobs, our homes, our families, our health, our savings, our future, and our lives!? Are we…really!?!?! Do you people out there want to let this happen!?
Are we just supposed to lie down and die?! Sure, greedy corporations and the elite rich would love that wouldn’t they? If we’re dead, then we can’t cause any trouble. If we’re dead, then we can’t come after them!
We’ve been blind and passive way too long. We keep dancing around the real solution here, while the rich pay off our politicians and the courts to stay free and so they can repeatedly rape us!
No-way, it’s time we put a stop to this! They need a lesson here. Unfortunately, the American Revolution, the French Revolution, and the Russian Revolution were necessary because the royals and elite rich just never did get it. They didn’t care that millions of people were being hurt or dying because of them.
We have that same exact international situation right here…right now. We’re not dead yet, and there are millions and millions of us around the world. And that, is OUR POWER!
People, we are in the midst of a Global Revolution! It’s happening now and it’s time we pulled these arrogant royals off of their thrones. Yes people, IT’S TIME IT GOT UGLY!
This is why.
THE NEW AMERICAN PIRATES, ARE KILLING AMERICANS.
This is not about glamorized or fictional piracy. This is, “real piracy.”
Hundreds of our wealthiest leaders and most powerful corporations know that in the next few years, they will be able to siphon, skim, and steal, so much “NEW CASH,” that they and their progeny will be ultra-rich for generations to come.
Welcome to the modern “Piratical Capitalism” movement. And, welcome to WAR!
No, this is not funny, or fiction, or a conspiracy, it is just simple greed and simple theft.
The new pirates of America have launched an all-out siege on us…the 99%, in order to capture, amass, and hold many trillions of dollars for themselves.
All of the recent political power grabs and nonsensical debating is purely a slight-of-hand deflection. President Obama, Democrats, Republicans, the International Press, and even the Tea Party, are watching the tiny pea in the shell game…while the rich and powerful “Piratical Right” is stealing America right out from under us.
Consider that their combined total plunder from corporate flipping, downsizing, offshore labor, speculation, price fixing of oil and energy plus, corruption in defense, health care, banking, student loans, foreclosures, etc., etc., is a trillion dollar treasure for these pirates.
Go ahead, put your own calculator to it.
Are they smarter than we are? Yes, and they are laughing at us. I, we, you, and all of us, have not been able see the big picture of what is happening to our own country and to our own people. The rape and theft of America, has been cleverly packaged, promoted, and sold under the guise of “cost-cutting,” “deregulation,” and “free enterprise.”
The “Piratical Right” is directly responsible for millions of people dying, getting sick, losing their jobs and homes, losing their ability to fight, their spirit, and even losing their will to live. The sick smell of this carnage now permeates the air across America.
To us, this is all unimaginable, because we look for some sense or the morality of things. These modern-day American pirates however, have no moral compass. They are devoid of any conscience, humanity or soul, and are feeding on the flesh of the American people.
Don’t look to the President, the Senate, Congress, the press, or any political party to help. Sadly, they just don’t see it, don’t care, or are part of it. “We the people” are on our own. Start asking questions. Demand answers. If we don’t fight back America…who will!?
History has taught us how to stop piracy!
October 22, 2011 2:14pm
Once again, government is angling to let the criminals off easy. This is so disgusting. They should be disgorged of their illegal profits and prosecuted.
JOIN THE RESISTANCE!
www.mortgageresistanceofamerica.com
October 22, 2011 8:23am
David Icke offers essential knowledge for a wall street protester:
youtu.be/lW4J1e2WW68
Unless you understand the concept of PROBLEM-REACTION-SOLUTION, the solution you are fighting for may very well exacerbate the very problem you're reacting to. Don't replace "Wall Street Banks" with a national or international bank. Demand for the right to use competing currencies: gold, silver, cannabis, cans of beans, "work hours", whatever...
Sing-a-long:
doctorsparkles.com/audio/DOCTOR_SPARKLES-Scary_Countr.mp3