You can tell that the landscape is changing. Third Way has just released a memo titled Fixing “Foreclosure-gate” which details out a policy solution to the current foreclosure fraud crisis. That the post-Ibenez landscape is so drastically different that groups are mobilizing in a policy way should tell us that things may move in Congress, and we need to be ready.
There’s been some fantastic writing on the memo that I’ll point you to – Yves Smith, David Dayen, and Marcy Wheeler should all be read on this. Marcy’s quick summary is great: “The more I think about this paper, the more it seems like Third Way is saying, ‘Congress, we’ve had a major setback in the courts. Can you please make sure to 1) limit access to the courts and 2) preventing any more of these judgments that will reveal just how deep the shitpile really is?'”
The big difference between the original and the new, improved version of the bailout model is that the payouts to the banks were at least in part visible the first time around. This is an effort yet again to spare the banks any pain, not only at the cost of the rule of law but also of investor rights….
Note that these provisions would also presumably have the effect of sheltering servicers and trustees from litigation, when the trustees made multiple certifications that they had all the loans and everything was in order. Remember, if the trustees had done what they repeatedly said in writing, in SEC filings, that they had done, none of this would be an issue.
Thus the Third Way plan also destroys contractual agreements without approval of the parties. Investors were entitled to get collateral with good title and, in the absence of that, to put back defective collateral to the seller. This would undo such contractual provisions for the sole benefit of one side, those on the originating/servicing end of the deal.
I don’t have much to contribute other than this. I really dislike arguments that TARP was successful because TARP made a profit, because the issue is a financial crisis, not a specific program. A financial crisis has three waves, a liquidity crisis, a solvency crisis, and a reform effort.
TARP stopped the liquidity crisis. Everything since Obama took office was about trying to deal with the solvency crisis, and the solvency crisis is directly linked to the infrastructure of servicing debt that exists within the Too Big To Fails banks alongside their junior mortgage debt exposure.
The first attempt to solve the solvency crisis was with a bailout through PPIP, but the subsidy wasn’t enough to get the MBS cleared. Then the appearance of a plan was through hoping that the economy would have recovered by now, that unemployment would be down, GDP up and housing stabilized and growing, clearing underwater mortgages. This too has failed – housing will likely fall 10% this year, foreclosures keep on churning and the servicing model is collapsing under its too-thin weight.
So by locking down on the ability for courts to vet out these issues, this is another attempted fix to the solvency crisis. The courts are needed to do their job. As Krugman has pointed out about Asia crisis and Stiglitz pointed out about Russia document problems and influence of the powerful to bully the courts create a perfect storm to bail out broken institutions in a crony way and not actually solve real problems during a crisis.
I’ll have more about what an alternative solution should look like, but this isn’t it. We need to remove servicing from loan modification process. That involves canceling the mess that is HAMP, creating a chapter M for bankruptcy, forced mediation before foreclosure, and an emphasis on principal writedowns. We need a serious investigation of the servicing industry, focused on criminal conduct and the software used. And we need to see if Dodd-Frank needs to be put into play for bank restructuring. That’s the price for fixing whatever the bank lobby wants done at the Federal level.
We know what we need to do in order to build out from this financial crisis and get the economy going again; it’s just a question of whether or not we’ll go for another bailout to paper over the losses.