Monday, January 18, 2010

Bankruptcy and Bankers

This is old, but it still ought to make you sick:

Predictably, the legislation failed, leading Sen. Durbin to admit back in April:
"And the banks -- hard to believe in a time when we're facing a banking crisis that many of the banks created -- are still the most powerful lobby on Capitol Hill. And they frankly own the place." 
Bankruptcy reform would have allowed judges to modify mortgages in order to allow people to afford to stay in their homes. In other words, it would have helped to avoid foreclosures.

Foreclosures are the worst possible result when home values go south. They depress the prices of surrounding homes, resulting in a feedback loop in which home prices drop and foreclosures escalate. The bank often ends up with a property which has been abandoned, gutted and worth very little. The homeowners find themselves on the street. In many cases, having a judge adjust the loan principal downwards would have very beneficial long-term results for both parties. So why are banks opposing these changes?

The short answer is that they are simply trying to push this problem as far off into the future as possible. Many of the banks holding the loans, or securitized bundles of them, are practically insolvent. As long as they can avoid addressing the issue, the can continue to pretend that that $300,000 mortgage is worth $300,000, even if they have no chance of every collecting that. They just kick the can farther down the road.

Now this practice may, in the long run, result in far worse problems for banks. And in fact, industry predictions are that more banks will fail this year than last. But in the short run, the guys running these banks are getting bonuses, and when the shit really hits the fan (and it will), they'll have already cashed those checks.

See how this works?

In the meantime, these bankers are running around telling homeowners that they have a moral obligation to pay their mortgage, even when it makes no sense to do so. They say this even though they know that there is no moral obligation clause in a mortgage, and that mortgage contracts spell out what happens if the homeowner decides not to pay anymore: the mortgage holder gets to have the house back. As Roger Lowenstein put it:

John Courson, president and C.E.O. of the Mortgage Bankers Association, recently told The Wall Street Journal that homeowners who default on their mortgages should think about the “message” they will send to “their family and their kids and their friends.” Courson was implying that homeowners — record numbers of whom continue to default — have a responsibility to make good. He wasn’t referring to the people who have no choice, who can’t afford their payments. He was speaking about the rising number of folks who arevoluntarily choosing not to pay.
Such voluntary defaults are a new phenomenon. Time was, Americans would do anything to pay their mortgage — forgo a new car or a vacation, even put a younger family member to work. But the housing collapse left 10.7 million families owing more than their homes are worth. So some of them are making a calculated decision to hang onto their money and let their homes go. Is this irresponsible?
Businesses — in particular Wall Street banks — make such calculations routinely. Morgan Stanley recently decided to stop making payments on five San Francisco office buildings. A Morgan Stanley fund purchased the buildings at the height of the boom, and their value has plunged. Nobody has said Morgan Stanley is immoral — perhaps because no one assumed it was moral to begin with. But the average American, as if sprung from some Franklinesque mythology, is supposed to honor his debts, or so says the mortgage industry as well as government officials. FormerTreasury Secretary Henry M. Paulson Jr. declared that “any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property is simply a speculator — and one who is not honoring his obligation.” (Paulson presumably was not so censorious of speculation during his 32-year career at Goldman Sachs.)
I suppose if there is one thing to take away from all of this, it's that there are important things to consider before walking away from a mortgage you could afford to pay. But a moral obligation sure ain't one of 'em.


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