Tuesday, January 15, 2013

The price of doing business

It must be nice to be too big to fail.

Last week a settlement was reached between federal regulators and banks accused of defrauding homeowners in foreclosure actions, including the three largest US banks, in which the banks will pay $8.5 billion to homeowners who were harmed by the fraud.

The settlement also limits the banks' liability for "robo-signing" foreclosure documents without reviewing them prior to filing foreclosures.

About $3.3 billion will be paid directly to homeowners and the balance will be used to reduce mortgage amounts and to forgive principal still owed for homeowners who were underwater at the time of the sales. Homeowners who were wrongly denied loan modifications will receive some relief while those who lost their homes will get significantly more.

And therein lies the problem. The banks filed pleadings with the courts in an attempt to seize property without reviewing the documents and without proving their "ownership" of the debt. A lot of folks lost their homes as a result. The banks then took possession of those homes and resold them, pocketing the profits. It didn't matter if the house was underwater - so long as the balance was owed to the bank.

The entire scheme fed off of collateralized mortgage securities. By stripping the interest and principal payments and lumping high risk mortgages together, the banks created an atmosphere where investors wanted their scheduled payments and they didn't care if it was the bank coughing up the funds or the homeowner. The banks made money hand over fist with the scheme until the bubble burst bringing down the entire economy.

The same banks then received bailout payments from the federal government with few, if any, strings attached. The same managers who contributed to the crash continued to collect their paychecks and bonuses while homeowners lost their homes. The banks hoarded the money and refused to approve loan modifications for homeowners who owed more than their houses were worth.

At the height of the crisis we were told that the biggest of the banks were too big to fail and so we had to give them truckloads of money and easy borrowing terms from the Fed. But did anyone ever suggest that those same banks be broken up like AT&T?

And now for a token sum the banks will be let off the hook as regulators will close the books on their investigations. In the meantime, those who lost their homes will be left to pick up the pieces while the corporate executives will be collecting their huge bonuses.

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