The foreclosure fiasco

I'm not exactly sure about what to think about Matt Taisbi's latest article "Courts Helping Banks Screw Over Homeowners". Matt makes the argument that many of these homeowners are making their mortgages and they are being foreclosed on anyway. This seems unlikely, and Matt bring a lot of statistics,or even many (any?) homeowners who feel they are being unjustly foreclosed upon. However, he does bring lots of evidence that there is ridiculously sloppy paperwork, and rather than punishing the banks for the poor paperwork, the judge in question is accommodating the banks and allowing them to "fix" (forge?) the paperwork.

One of Taibbi's main argument seems to be that banks have been suggesting that homeowners stop paying so that their loans can be modified, and then when the homeowners stop paying they are foreclosed upon. Of course, the fact that these people need a modification suggests that they are going to default anyway.

Thanks to Seeking Alpha and Ellen Browns' "Homeowners’ Rebellion: Could 62 Million Homes Be Foreclosure-Proof?", I had heard about this issue in August, a couple months earlier than when it hit mainstream media in full force.

Google Trends "foreclosure" in 2010

foreclosure

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When I initially heard about the whole foreclosure issue, I figured that ultimately these foreclosures should go through because these people are not paying their mortgages. But after reading Matt's article I'm not so sure. I've been working as a regulator of a financial services industry for a state government for the past couple years. Sloppy paperwork doesn't surprise me. I see sloppy paperwork all the time, and I'm not just talking about companies not complying with arcane regulations that only I would really know - I'm talking about basic statistical work that the companies should know a lot better than I do, or carefully worded legal contract language that is entirely ambiguous. And while we manage to avoid pandering to the industry's whims, my impression is that we are perhaps more the exception than the rule. We have a statute which prohibits companies from knowingly providing misleading or false documents, but we generally don't bring it up. Like the judges in the case, we bend over backwards to let companies fix their mistakes, but in our case the mistakes just waste our time. In this case the mistakes cost people their homes.

I think the perpatrators of this sloppiness should be punished severely. However, one wonders whether the banks should be punished. Many of these banks have ownership which turns over all the time. The investors should not necessarily be punished, either, as they are fraud victims. Rather, one should punish the managers of the banks. I'm talking about the executives who have collected hundreds of billions of dollars in stock options with little downside risk, many of whom owned little in stock at the time of the crash. These people should be going to prison in some cases. Of course we know that's not going to happen.

Summary of the Equity Bailout; Money Going to Bailouts?

Here is a nice summary of at least one of the bailout plans, the $250 billion preferred stock recapitalization plan, ie the TARP (Troubled Assets Relief Program) Capital Purchase Program. In other news, someone says that a State Street (NYS:STT) banker is getting a nice bonus check this year, courtesy of the US taxpayers.

I'm still not sure how this program is structured exactly, but I hope that this $250 billion comes from the $700 billion. The Wall Street Journal seems to say that ("TARP will also be used by Treasury when it puts new equity into banks").

Long-term tax rates

It's hard for me to see the value added in some of financial innovations and institutions. Credit card companies often simply allow people to indebt themselves more. Insurance companies must have had crazy margins before Geico started this price war. Did this rate swap add value to the situation?

What if we had a tax structure that encouraged real long-term investing? We already have long-term taxes rates for 1+ year of owning a stock; how about additional tax breaks for 5 or 10-year ownership? Or how about higher short-term rates and a more gradual long-term rate?

The short-term craziness of financial markets today is a real distraction from what matters. People don't think for the long-term. That's why we had these dumb loans: the people in charge of these companies were only thinking a few years into the future.