Too big to punish: Banks cut a deal on robo-signing scandal.
By the Editorial Board | Posted: Tuesday, April 12, 2011 9:00 pm
The 2008 financial crisis introduced most Americans to the concept of “too big to fail.” Now comes a not-unrelated corollary: “too big to punish.”
Federal banking regulators have begun signing deals with 14 mortgage-servicing companies — some of them arms of “too big to fail” banks — that would enable the servicers to avoid as much as $20 billion in fines for finagling foreclosure documents.
The consent agreements would end the government’s investigation into the so-called “robo-signing” scandals that erupted last fall. Mortgage companies acknowledged that they’d been processing home foreclosures without obtaining documents that established the provenance of the loans.
In most cases, that was because the mortgage companies had sold the loans, which then were chopped into pieces and sold as mortgage-backed securities. Determining precisely who owned the loans in default was problematic, so companies solved it by forging documents and signatures.
The consent agreements, in effect, will require the companies to promise not to do that again. The servicers will have to stop foreclosing while loans are in the modification process. They must promise to stop bouncing consumers from one office to another and establish a single point of contact.
But they may not have to pay a dime in fines. And, more significant, they won’t be required to try to work out mortgages that might be saved.
Getting a timely deal was important. More than 4 million homes are in the foreclosure process; many of them have been in limbo during the “robo-signing” negotiations. This has created uncertainty in the housing market.
But getting the right deal would have been better. Such a deal would have required banks to work out any loan that still could be salvaged by reducing principal to the point at which a homeowner could afford the payments.
That basic concept — don’t borrow more than you can afford — was widely ignored in the housing boom. The obverse was ignored, too: Don’t lend a customer more money than he can reasonably be expected to pay back, even if you can make a killing flipping mortgage securities.
With the housing market still depressed and the prospect of more foreclosed properties coming onto the market, it would seem to be in everyone’s best interest to salvage what can be salvaged. But with one in four homes under water — worth less than what is owed on it — workouts could get to be expensive, so banks avoid them if possible. And now financial regulators have made it possible.
The precipitous action by U.S. banking regulators — the Federal Reserve, the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the Federal Deposit Insurance Corp. — undercuts a parallel effort by the 50 states’ attorneys general to reach a settlement with the mortgage industry.
The Obama administration’s mortgage modification program, enacted in 2009 with funds from the Troubled Asset Relief Program, has been a huge disappointment. The idea was to help up to 4 million homeowners by 2012. About 540,000 have been helped so far.
Neil Barofsky, who is stepping down as TARP’s inspector general, called the program “poorly designed, poorly managed and poorly executed."
TARP helped the big banks get healthy in a hurry, but it failed many homeowners. And now, with the consent agreements, the Obama administration is letting the banks off the hook yet again.
