There is no excuse for banks filing forged or back-dated foreclosure documents with state courts and county recorder offices. Unfortunately, that is exactly what many of the nation's largest banks did during the height of the recent financial crisis. And a new settlement approved by a federal judge in Washington last week essentially let them get away with it.
The problem stems from the federal government's efforts, through Fannie Mae and Freddie Mac, to increase homeownership by encouraging the securitization of home mortgages. Financial institutions could buy individual mortgages from originators, package them into financial products, and then sell them to investors. This was supposed to make buying a home easier by reducing borrowing costs. What it really did was set the stage for the housing bubble.
The banks packaging these loans often did not comply with state laws designed to track who owned which property. In the absence of good information, when it came time to foreclose on some of these properties, financial institutions would often file fraudulent paperwork because they lacked good information and sufficient manpower to track down the correct trustees. Fannie Mae was well aware of these frauds going back as far 2003, but did nothing to stop them.
These practices became widely known after the bubble burst, and the federal government as well as attorneys general from many of the largest states began investigations into the industry. Last Thursday, 49 states, the Obama administration, and the nation's five largest banks (Wells Fargo, Citi, Ally/GMAC, JPMorgan Chase & Co. and Bank of America) entered into a $26 billion settlement that provided immunity to the banks from future claims by the federal and state governments. But although the $26 billion settlement is ostensibly intended to punish banks for filing fraudulent papers, only $1.5 billion of that total, just 6 percent, will go to homeowners who lost their homes to foreclosure.
So where does the other 94 percent of the money go? The states and the federal government will get about $3 billion in fines. Borrowers who are current on their payments but want to refinance at lower rates will get $3.7 billion. Another $7 billion will go toward forbearance for unemployed borrowers. The last $10 billion will go to reducing principal for borrowers who owe more than their homes are worth. Not only is this a mere drop in the bucket compared to the $717 billion that these 11 million Americans still owe, but, as Pacific Investment Management Co.'s Scott Simon explains, this punishes the wrong party.
The banks fraudulently filed the foreclosure papers, not the investors who bought the securities the banks issued. But it will be the investors, not the banks, who pay for the principal write downs. "Think about this," Simon explained. "You tell your kid, 'You did something bad, I'm going to fine you $10, but if you can steal $22 from your mom, you can pay me with that.'"
The settlement made final last week doesn't redress the crime committed. It doesn't address the foreclosure crisis. It punishes innocent parties. No wonder the Obama administration can't figure out how to end our foreclosure mess.