The next book I’m going to be reading is Amar Bhide’s A Call for Judgment: Sensible Finance for a Dynamic Economy, a book that has been well reviewed by both Reihan Salam and Yves Smith. From Bhide’s big idea post:
In recent times, though, a new form of centralized control has taken root—one that is the work not of old-fashioned autocrats, committees, or rule books but of statistical models and algorithms. These mechanistic decision-making technologies have value under certain circumstances, but when misused or overused they can be every bit as dysfunctional as a Muscovite politburo. Consider what has just happened in the financial sector: A host of lending officers used to make boots-on-the-ground, case-by-case examinations of borrowers’ creditworthiness. Unfortunately, those individuals were replaced by a small number of very similar statistical models created by financial wizards and disseminated by Wall Street firms, rating agencies, and government-sponsored mortgage lenders. This centralization and robotization of credit flourished as banks were freed from many regulatory limits on their activities and regulators embraced top-down, mechanistic capital requirements. The result was an epic financial crisis and the near-collapse of the global economy. Finance suffered from a judgment deficit, and all of us are paying the price.
Here the financialization of our economy is actually a cover for the centralization of the mechanisms in which value is transfered from one part of the economy to another. Whatever economics of scale that are gained through centralizing are hampered by the inability for the financial sector to see things outside of automated, statistical projections of aggregate data. The real local knowledge that can facilitate a more robust and venturesome economy is lost, and at the end all you end up with is a handful of firms rent-seeking over crucial conduits for how our economy functions. Though quite skilled at pumping hot money into bubbles on the way up, the financial system is too thin to be able to manage the following collapse.
I thought about this “Muscovite politburo” centralization while reading this post by Tom Cox, Two Cords of Wood: An Intimate Look at Unnecessary Foreclosure, which I’ve mentioned in passing before. Read this as not a financial system getting somethings wrong, but instead as a nightmare of central planning worthy of the politburo (my bold):
Back in September, I was asked to give some unusual advice to a client. This woman, a resident of rural Northwestern Maine, wanted to know if she should buy the two cords of wood that she needed to heat her $48,000 home for the winter. I had previously told her that my bag of legal tricks was empty, and that I could not stop KeyBank from completing a foreclosure of its $28,000 second mortgage on her home. She was having trouble accepting the fact that it would really evict her, since she owed $50,000 on her first mortgage to a local bank, a loan on which she was current in her payments, which meant that KeyBank could recover nothing by foreclosing on its second mortgage. She told me again how, even though she had lost her job in the local paper mill, she had found other, but much lower, employment income and that she was able and willing to make reduced payments on the second mortgage. But KeyBank refused to accept reduced payments…
After spending over $4,000 on foreclosure costs and legal fees, it purchased my client’s interest in the property at its foreclosure sale (there were no other bidders for this worthless second interest) and it did evict this woman from her home at the beginning of October. She is now living in the basement of her daughter’s house. Since the interest in this home that it purchased was still subject to the outstanding first mortgage, it then paid $50,000 to the first mortgage holder so that it could own full title to the property as it made plans to re-sell it. Thus, at this point it had over $54,000 invested in gaining full title to this property. Last week, KeyBank listed this property for sale for $44,000. It will surely net no more than $40,000, if it can sell it at all. This will leave the bank with a real cash loss of over $14,000, a woman living in her daughter’s basement who was willing to pay at least some level on her second mortgage, her community with an empty and devalued property in its midst, and a very sour taste for all of us who try to help these people.
Looking only at this loan and the personal situation of its borrower, KeyBank’s actions make no sense at all. However, along with all of the other major lenders and loan servicers in this foreclosure crisis, it does not look at these loans from a personal perspective. Everything is driven by “the numbers.” Those numbers tell financial institutions like KeyBank that it makes economic sense to avoid the costs of evaluating these loans on an individual basis. The numbers tell them not spend the money to pay employees to make individual decisions on whether a situation such as the one described here makes sense or whether ways can be found to work with the homeowner…
I used to represent KeyBank back in my bank lawyer days. It grew out of purchases of two venerable old-line Maine banks with roots going back into the mid-1800s. Even as late as the 1990s, when I was representing KeyBank of Maine, it was still a “local bank.” There were bank officers assigned to dealing with loans such as this one who would make real human decisions on appropriate courses of action. Since these banks have gone national, they no longer care about how they hurt their individual customers, and they no longer care about the communities where those customers live. They are entirely willing to sacrifice a certain (and substantial) percentage of those customers on the altar of corporate profits. They can get away with this because they can lend money more cheaply then our local banks can — Federal monetary policies allow them to borrow money at a cheaper rate. Is this what we want from our Federal government?
Sadly, my advice to my client was correct. It was good that she did not waste her limited resources on the two cords of wood, as she no longer has a house to heat for the winter.
A bank went ahead and foreclosed on a second lien, forcing it to purchase out the first lien for more than the property was worth. It immediately put the house on the market for a loss, which it is likely to not even get. An immediate loss of $14,000, with additional liabilities on taxes, upkeep, etc.
I’ve enjoyed talking with Tom Cox about these issues lately. He’s very much someone who saw, at a local level, how banking used to be done. It’s not perfect, and I think we are wrong to romanticize it. But it wasn’t broken in this nightmare of central planning way, where irrationally economic (and inhumane) things are done to check boxes on a spreadsheet or because an algorithm at the central computer told someone to do that. Where instead of transactions and contracts, we get bumbling ass-covering and forged signatures.
Cox also recently wrote a response to a judge attacking those fighting foreclosures. I found it very convincing:
…During that [1980s SnL] banking crisis, much of my legal work was devoted to representing banks and the FDIC in the same Federal Court system in which you worked, using the same Federal Rules of Procedure that you used. For the past two and a half years, I have been engaged as a full-time volunteer to represent homeowners in foreclosure cases in these same courts. The rules relating to the handling of summary judgment motions in foreclosure cases have not changed in any substantial way since you were on the bench…
Today, I have yet to see a single affidavit from a loan servicer witness that adequately meets this personal knowledge requirement. As a consequence, I estimate that I, and the lawyers with whom I consult, win about 75% of the time by opposing these summary judgment motions based upon false affidavits. Yet the lawyers presenting these dishonest affidavits show no sense of shame when they lose, because in the 90% of the cases where they are unopposed, they win by default, collect their fees and go home happy. This failure to present honest and competent evidence arises not out of an inability to meet the requirements, but out of their stubborn refusal to devote the necessary resources to honestly comply with the rule.
So much do these institutions try to hide this dishonesty that GMAC Mortgage, LLC attacked me personally for exposing the abusive affidavit signing practices of its Limited Signing Officer, Jeffery Stephan….GMAC Mortgage wanted to keep Stephan’s testimony under wraps so badly that it tried to obtain a court order to stop me from sharing it with other foreclosure defense lawyers, and it asked the court to fine me personally for what it called my “malicious dissemination” of the transcript. I was outraged by these efforts to intimidate and gag me, having never experienced such offensive conduct in my forty years as a lawyer. I fear that many younger or less experienced lawyers might have been cowed into silence by any similar efforts. Our judge did not hesitate to deny the GMAC Mortgage motion to gag and fine me and in one case imposed lawyers’ fees sanctions of over $27,000 against it for its bad faith filing of the affidavit from Stephan.
Finally, I must answer the implication in your article that there is a widespread practice among foreclosure defense lawyers of denying the existence of loan defaults when they are found. While you have been retired for many years, I have been working with many lawyers in actual foreclosure defense for almost three years. In addition, I am in constant communication with foreclosure defense lawyers all over the country. I have seen no evidence at all to support your assertion. While there will always be exceptions, I do not believe that there are widespread denials of defaults where they actually exist. What you seem to overlook is the fact that, even when defaults do exist, it is not only appropriate, but a matter of professional responsibility for a homeowner’s lawyer to challenge the standing of any party asserting that default when that party clearly lacks standing to seek a foreclosure, when it is unable to prove that it owns the loan that it is trying to foreclose upon, or when it is unable to prove that it has provided the homeowner with the contractually created right to a proper notice of default and the right to cure it.
Do read the whole thing. What amazes me is how viciously the banks have come after the foreclosure lawyers, both legally and professionally. I can’t even imagine the intimidation tactics they use on vunerable homeowners if they’ll go this hard after a veteran like Cox, someone who was involved with housing, foreclosures and consumer banking back when the system actually was worth a damn.