March 15, 2011

This Is What Tyranny Looks Like: The Government’s Foreclosure Mess Shakedown

Filed under: Economy,Taxes & Government — Tom @ 10:43 am

I’ll let the Wall Street Journal’s editorialists explain (tyranny and lawlessness indicators in bold):

The new federal Consumer Financial Protection Bureau’s website proclaims that no financial company “should be able to build, or feel pressure to build, a business model around unfair, deceptive, or abusive practices.” How ironic, then, that the bureau itself is trying to extend its reach by extorting billions of dollars from private mortgage servicers, regulating their business by fiat, and stalling a U.S. housing market recovery.

This brouhaha started last year when mortgage servicers—J.P. Morgan Chase, Wells Fargo and other banks—were accused of mishandling foreclosure documentation. The feds have been investigating, and it turns out that most of the infractions were technical while very few borrowers lost their homes without cause. But state Attorneys General and White House special assistant Elizabeth Warren have spotted a political opening to smack the banks one more time and dole out $20 billion to potential voters in 2012.

They’ve sent a proposed 27-page “settlement” to the banks that would, among other things, force mortgage servicers to submit to the bureau’s permanent regulatory oversight; impose vast new reporting and administrative burdens; mandate the reduction of borrowers’ mortgage principal amounts in certain circumstances; and force servicers to perform “duties to communities,” such as preventing urban blight. We warned during the Dodd-Frank debate that the new consumer bureau would become a political tool for credit allocation, and here we already are.

The legal language is so vague, and the potential liabilities so vast, that no CEO could in good conscience sign the agreement as it stands. The settlement includes, for instance, “unfair and deceptive business practice” clauses that would expose servicers to lawsuits for any “material” violation of the agreement, whatever “material” means. Homeowners and bank shareholders will ultimately pay for the compliance burden and the $20 billion to reward delinquent borrowers, as servicers pass on the costs. Never mind that these banks didn’t originate many of those loans and typically don’t own them now.

(The) real policy goal is to impose by fiat a measure that was roundly rejected in 2009, when a Democratic Congress defeated a “cramdown” measure that would have allowed bankruptcy judges to force servicers to do principal write-downs. That law was rejected because rewarding delinquent borrowers at the expense of responsible borrowers encourages bad behavior.

The principal writedown gambit is also a pre-election attempt to make up for the failure of the many Bush and Obama Administration foreclosure mitigation plans. … more than half of all mortgages modified during this housing depression have redefaulted within a year. A 50% failure rate is bad even for government work. Meanwhile, the foreclosure overhang has kept the housing market from finding a bottom so prices can recover.

the larger story here is the way Ms. Warren is already using the Consumer Financial Protection Bureau to tell banks how and to whom to lend money. She is doing so despite dodging a Senate confirmation that Dodd-Frank says is required for the person who runs the agency. The Warren-Miller diktat will harm the banking system, the housing market and borrowers who pay their bills on time. Quite the achievement.

Dig far enough back, and you’ll find that I once agreed with Lizzie Warren on the need to prevent the passage of bankruptcy “reform” in 2005. That was a very narrow agreement. As I recall it, Warren wanted no changes in current bankruptcy law. She was just fine with the idea that 1.5 million-plus Americans were filing for bankruptcy every year, regardless of whether the economy was in recession or expansion. I thought the “reform” measures were too harsh and arbitrary, and didn’t need to be as draconian as they were to accomplish a worthy policy goal.

Further, the law did nothing to rein in ridiculous lender practices (e.g., abusive, double-dipping overlimit fees; two-cycle interest charges; reckless extensions of “mom and dad will pay if they get in trouble” credit to ignorant college kids with no credit, jobs, or resources). The then-Republican Congress promised to get around to fixing those problems, and didn’t. Largely because of that failure, we have the Card Act of 2009, which industry people tell me is a bureaucratic and compliance nightmare that is restricting credit, sometimes even to the most creditworthy, and, like so many other things the Obama administration and the Pelosi-Reid Congress have done, holding back the economy.

It was apparent even then that Lizzie Warren was far too interested in bending the truth if doing so might help achieve a policy goal. Her claim then that medical bills were the cause of a large percentage of bankruptcies may conceivably have been true. After all, if you charged up your cards to pay such bills, or lived on your cards because of their cash-flow drain, such bankruptcies really were medically-based. But Warren didn’t put up anything resembling enough credible evidence to support her contention. As a result, the contention became a near laughingstock, hurting the cause of stopping the legislation instead of helping it.

That Warren would descend into becoming an authoritarian apparatchik of our Punk President doesn’t surprise me at all. Her “cure” is far worse than any disease she might think she’s curing — assuming she even cares about anything beyond her own power, which is an open question.

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1 Comment

  1. [...] the administration is focused on shaking down home lenders, and appears to have no interest in undoing its interventionist [...]

    Pingback by BizzyBlog — March 16, 2011 @ 9:27 am

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