For Lenders, the Name of the Game Is Extend and Pretend
Thursday 11 November 2010
by: Paul Krugman, Krugman & Co. | Op-Ed
Foreclosed homes in Toledo, Ohio, whose liens were sold to private investors, are foreclosing with less discretion. (Photo: Fabrizio Costantini / The New York Times)
I’m finding it difficult to write about the recent foreclosure mess in the United States.
Amid the revelations in October that so many mortgage lenders might have been sloppy when processing foreclosure paperwork, attorneys general in all 50 states have now announced they are investigating lenders’ foreclosure practices.
It’s clear that there has been massive malfeasance on the part of the banks (again), but it’s less easy to decide what should be done about it.
One thing is obvious: the main argument in favor of turning a blind eye to this whole situation and avoiding a temporary freeze on foreclosures is wrong.
Some Obama administration officials have suggested that we need to let foreclosures proceed because it’s important that those properties be seized and sold so that the mess can be cleaned up.
That sounds reasonable, but let’s look at what actually happens to foreclosed homes.
The fact is that a startling number of those homes are not on the market: there is a huge “shadow inventory” of houses that have been seized but not yet offered for sale. The Wall Street Journal estimates that this inventory stood at about 5.2 million homes in October.
If mortgage servicers really wanted those homes sold and the issue resolved, they would be allowing more short sales — essentially, letting the current owners sell the homes for whatever they can get. Then they hand the proceeds over to the bank and call it quits.
There are a lot of short sales happening out there, but there are also cases in which short sales are being refused, and foreclosures are taking place instead.
The official reason for any aversion to short sales is the potential for fraud (for example, the homeowner can sell the house cheap to his cousin, or whomever, and then maybe even move back in). But how hard is it to police that potential fraud — at least, to police it sufficiently enough in order to avoid gross abuses?
Remember, a house sold for less than its value is still a better deal for the lender than a house not sold at all.
An alternative explanation for banks’ preference for foreclosures and their willingness to sit on foreclosed homes for long periods of time is that this is simply a game of extend and pretend.
Essentially, a short sale means that lenders have to acknowledge their losses, while an empty, foreclosed home can be kept on the books at an unrealistic value.
If I’m correct, then the paperwork crisis presents an opportunity for the Obama administration to help fix a major market failure — an opportunity to prod lenders into either allowing short sales or striking deals with homeowners, and to stop the socially harmful buildup of this growing shadow inventory.
But this is an opportunity that is, as usual, going to waste.
Backstory: Problematic Paperwork
In September, allegations surfaced that American banks with bad loans on their books might have been rubber-stamping foreclosure documents. The issue came to a head in early October when some of the largest lenders in the country, under pressure from state and federal regulators to authenticate the legitimacy of foreclosure claims, put a moratorium on their foreclosure operations.
Lax lending standards during the United States’s recent housing boom have been blamed for leaving many homeowners with mortgage loans that they could not afford. This year foreclosure rates have soared to record highs across the nation, which has generated an enormous amount of paperwork.
There’s no quick fix for the lenders’ problem, given the complicated legal nature of the securitization process — the method by which mortgage loan payments are pooled to form collateral for a bond issuance.
In a foreclosure, the long chain of legal documents detailing the securitization must be verified; at that point the breakdowns occurred. Banks and mortgage servicers were buried by the high number of foreclosures, leading to speculation that at times so-called “robo-signers” — bank employees who approved hundreds of documents a day — were haphazardly pushing through paperwork rather than carefully sorting it out.
By the end of October, major banks such as Bank of America and GMAC Mortgage had resumed foreclosure operations. But Federal Reserve Chairman Ben S. Bernanke said that regulators are examining mortgage companies’ processes. Mr. Bernanke said a report is expected in December.
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Paul Krugman joined The New York Times in 1999 as a columnist on the Op-Ed page and continues as a professor of economics and international affairs at Princeton University. He was awarded the Nobel in economic science in 2008.
Mr Krugman is the author or editor of 20 books and more than 200 papers in professional journals and edited volumes, including "The Return of Depression Economics" (2008) and "The Conscience of a Liberal" (2007).
Copyright 2010 The New York Times Company.
All republished content that appears on Truthout has been obtained by permission or license.
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Obama Villa Idiotes Won't
Thu, 11/11/2010 - 17:14 — Vic Anderson (not verified)Obama Villa Idiotes Won't STAY M.I.A. !
"...a major market
Thu, 11/11/2010 - 18:32 — Erich von Freemason (not verified)"...a major market failure..."
Sorry, Krug, but this was a failure of government. Easy credit at artificially low interest rates, Fannie/Freddie promising to buy all mortgages, regulators who raped any bank that didn't provide enough loans to low-income people, and Congressional Democrats blocking attempts to increase regulation of Fannie/Freddie or investigate them for fraud and corruption; these are what caused the bubble. Oh, and economists saying that a housing bubble would be a good thing.
Here's a blast from your past, Krugman:
During phases of weak growth there are always those who say that lower interest rates will not help. They overlook the fact that low interest rates act through several channels. For instance, more housing is built, which expands the building sector. You must ask the opposite question: why in the world shouldn’t you lower interest rates?
May 2, 2001 (interviewed by Lou Dobbs) KRUGMAN: I think frankly it’s got to be — business investment is not going to be the driving force in this recovery. It has to come from things like housing... DOBBS: We see, Paul, housing at near record levels, we see automobile purchases near record levels. The consumer is still very much in this economy. Can he or she — or I should say he and she, can they bring back this economy? KRUGMAN: Well, as far as the arithmetic goes, yes, it is possible. Will the Fed cut interest rates enough? Will long-term rates fall enough to get the consumer, get the housing sector there in time? We don’t know.
August 14, 2001 Consumers, who already have low savings and high debt, probably can’t contribute much. But housing, which is highly sensitive to interest rates, could help lead a recovery…. But there has been a peculiar disconnect between Fed policy and the financial variables that affect housing and trade. Housing demand depends on long-term rather than short-term interest rates — and though the Fed has cut short rates from 6.5 to 3.75 percent since the beginning of the year, the 10-year rate is slightly higher than it was on Jan. 1…. Sooner or later, of course, investors will realize that 2001 isn’t 1998. When they do, mortgage rates and the dollar will come way down, and the conditions for a recovery led by housing and exports will be in place.
October 7, 2001 In time this overhang will be worked off. Meanwhile, economic policy should encourage other spending to offset the temporary slump in business investment. Low interest rates, which promote spending on housing and other durable goods, are the main answer.
Eric - I don't think that
Thu, 11/11/2010 - 19:26 — Diane (not verified)Eric - I don't think that anybody expected the level of fraud and corruption that the Bush administration chose to overlook because the housing bubble was working to cover up the reality that job growth and wages were stagnant throughout Bush's terms. The reality is that the low interest rates were not the problem - in fact, many of the worst loans were at higher rates because the borrower had sub-standard credit. The housing bubble was a government failure, not because the government encouraged loans to people who had never had homes but because the government chose to overlook the transgressions of the lending industries.
Their were loan officers
Thu, 11/11/2010 - 19:54 — Anonymous (not verified)Their were loan officers reviewing all of these loans. To bad they were paid commission on the number of loans processed. Strange that no one up the chain of command new these were bad loans. Then the mortgages were sliced and diced by wall street and sold off as AAA securities. Now the banks can't find the paperwork of ownership. So they foreclose with false documentation. They have been foreclosing on homes that have been paid off or have been sold to other owners. Are the homeowners entitled to their day in court? Are we going to allow the banks to bend the rules of law and will they be allowed to present false documents? Or will require them to present proper legal documentation. Luckily I live in a Judicial state and am entitled to my day in court. The reason this blew up was a bill that went through congress with 100% approval requiring notarized materials be recognized by all courts. This is were we get into paper mills were documents were signed and notarized with false paper work. When are these people going to be held responsible for their illegal actions?
For Money-Printers, the name
Thu, 11/11/2010 - 21:57 — Can You Do Simple Math? (not verified)For Money-Printers, the name of the game is also "Extend and Pretend" - Krugman, how embarrassing for you. Time to send central planners packing, along with their magic fiat money system - show us one civilization that has prospered using fiat money for more than forty years. T.O. needs to get someone like Antal Fekete to write their economics articles - Krugman is a fraud, along with everyone who is currently running our economy. He criticizes them for not doing ENOUGH criminal behavior, in direct violation of the Constitution. End the Federal Reserve Bank, and dump Krug - and maybe the New York Times, while we're at it. Anyone here ever made money following Krug's predictions?
Not sure why Paul draws this
Fri, 11/12/2010 - 00:46 — Reasonable My Ass (not verified)Not sure why Paul draws this conclusion:
"Some Obama administration officials have suggested that we need to let foreclosures proceed because it’s important that those properties be seized and sold so that the mess can be cleaned up. That sounds reasonable"
Yes, let's throw millions onto couches or into homeless shelters. How is this reasonable?
Fuck you Paul, you'll never experience any of it.
Krugman is dead wrong, and
Fri, 11/12/2010 - 00:54 — Liberal Economist Vomit (not verified)Krugman is dead wrong, and obviously not an attorney, no Bankster will ever allow a family member to purchase a short-sale and there is no "official story", banks are operating under their profit model, doing only what recoups the greatest profit. Idiot Krugman seems to be belching moral-hazard nonsense,
And like a typical mainstream journalist, refuses to acknowledge the massive fraud from the Banksters that blew up the housing bubble to being with. His considerations are meaningless in the context of epic organized crime.
Yes let's let the banks
Fri, 11/12/2010 - 00:57 — ABC Head (not verified)Yes let's let the banks trump over hundreds of years of real estate law in order to foreclose, and then have congress rubber stamp their fraud with new corrective legislation. (Krugman=clueless.)
What part of "this is where people live" doesn't Paul understand?
"Sorry, Krug, but this was a
Fri, 11/12/2010 - 02:33 — Anonymous (not verified)"Sorry, Krug, but this was a failure of government. ...Fannie/Freddie... regulators who raped any bank that didn't provide enough loans to low-income people, "
you are speaking blithering propaganda to one of the world's most eminent economists. You should be ashamed of yourself, and you should be doing your homework.
The only "requirements" imposed by government regulators was a ban on "red-lining", that is, drawing a big red line around pre-eminently "colorful" neighborhoods and denying people credit based on geography alone rather than actual credit history.
(to be continued, fil-terr thinks post is too long)
(continued) I personally am
Fri, 11/12/2010 - 02:34 — Anonymous (not verified)(continued)
I personally am not a pretentious snob, I choose to live in one of the "less better" areas of my city because it saves me money and unlike others i'm not afraid of minorities or immigrants. Red-lining would punish someone like me, who makes well over the median and chooses responsibility over pretense. That was what was banned, of course you're too busy listening to fox news selectively obfuscate that important detail. Red-lining was very racist and had nothing to do with credit-worthiness.
"Idiot Krugman seems to be
Fri, 11/12/2010 - 02:37 — Anonymous (not verified)"Idiot Krugman seems to be belching moral-hazard nonsense,
And like a typical mainstream journalist, refuses to acknowledge the massive fraud from the Banksters that blew up the housing bubble to being with. "
This statement is irrational and hypocritical.
You imply moral hazard does not exist, then insist massive fraud has taken place.
By the way, bankers aren't lawyers either, and like anyone will do whatever they please when they think nobody will find out(and rightly so given how obfuscated securities have become).
"For Money-Printers, the
Fri, 11/12/2010 - 02:44 — Anonymous (not verified)"For Money-Printers, the name of the game is also "Extend and Pretend" - Krugman, how embarrassing for you. Time to send central planners packing, along with their magic fiat money system - show us one civilization that has prospered using fiat money for more than forty years. "
britain? china?
rome operated on so-called "fractional reserve lending", also known as the money multiplier effect.
Even on the gold standard currency still worked the same way: if the money supply wasn't high enough, you either cut the value of your currency by printing more, or your economy suffocated and collapsed.
This anti-currentcy, anti-lending garbage grew out of online neo-nazi propaganda, i remember doing research on it and tracing it down myself. It's hogwash.
Maybe I have to reassess my
Fri, 11/12/2010 - 09:01 — Steve M. (not verified)Maybe I have to reassess my views re: Krugman (I USED to be a fan). He wrote under the heading "Problematic Paperwork": "leading to speculation that at times so-called “robo-signers” — bank employees who approved hundreds of documents a day — were haphazardly pushing through paperwork" REALLY?! Problematic paperwork?! How about fraud (proven in multiple courts of law in multiple states) on a massive scale? "leading to speculation" "Speculation" REALLY?! How about sworn testimony from the robo-signers themselves? again in innumerable cases in multiple states. When you preface or support your arguments with the industry (and federal government) position that there is just some sloppy paperwork, everything else you say is worthless. You have given your readers a false premise (whether or not your conclusion is valid) which they then weave into their thought process as 'accepted wisdom'. Even more offensive is the fact that it is from a supposed liberal source. The reason this is so pernicious is that Krugman will later be quoted by a conservative reporter as acknowledging that this was merely 'messy paperwork' as opposed to massive fraud. This loss of media perspective allowed the country to start a war in Iraq with the 'liberal press' as tacit if not active co-conspirators.
Three suggestions: 1) Bring
Fri, 11/12/2010 - 10:15 — Anonymous (not verified)Three suggestions:
1) Bring out the guillotines.
2) Distribute ill-gotten gains to those about to be foreclosed so they can pay off their mortgages.
3) Nationalize the banks.
I see a lot of "a government
Fri, 11/12/2010 - 10:26 — Anonymous (not verified)I see a lot of "a government failure" in comments while "a George Bush failure" is never mentioned.
Can someone tell me why?
Regulators, bankers and
Fri, 11/12/2010 - 13:04 — Jail the Banksters (not verified)Regulators, bankers and management at Fannie Mae worked together to inflate the bubble. In other words, what securitization and Clinton era deregulation allowed was manipulation of the housing market.
John Dugan, at the OCC, also contributed by openly protecting Banks from oversight and holding back State Attorneys from coming after lenders. The whole pyramid scheme was an adventure in looting for the elites in this (and other) countries, Keep in mind the epic of fraud, the fact that most Americans salaries aren't increasing, and housing is something that everyone needs. Unfortunately, what troubles Krugman the most is offending the elites who provide his paychecks.
Hay krugman (my X-hero how
Fri, 11/12/2010 - 14:31 — rhonda the broken homeowner (not verified)Hay krugman (my X-hero how about this: I paid my april and may payments but GMAC "misplaced" them defaulted me then later "found" the checks and returned them to me. Then I was approved for HAMP sent my payments, and GMAC then ordered foreclosure sale and received all moneys to cure default and was receiving Hamp payments and still trying to foreclose. They are criminals doing this shit on purpose. How about we worked in the construction industry for 28 years building for corp america...then lost our job due to the criminal actions of wall street, the banks the lenders and servicer DESTROYED our jobs..then got hundreds of billions in tarp bailout from us and are now attempting to wrongfully foreclose in order to crush us and steal our home..how about that so don't be stupid and think we homeowners are all loosers...were not...oh yeah GMAC received over 80K from us in 3 years on a 300K loan and our banalance has only dropped about 10K...they are theives. I got a 9th grade education and can see what they are doing...why can you ??? This sucks and looks like u do 2. Peace out from caliornia. We need help
Short sales might not be so
Sat, 11/13/2010 - 01:39 — JLG (not verified)Short sales might not be so easy to police. Look at how hard the banks are to police. But surely where there is a will there is a way. Let the banks engage the real estate agent (no "For Sale by Owner" for this one). The agent works directly with the owner and reports to both the owner and the bank, but the bank gets to choose the offer. The owner gets out, the bank gets the best offer and the agent get a commission. If there was a "will" (beyond obviously that of the homeowner) at lot more reasonable efforts could be made to keep people in their homes as well.
Fri, 11/12/2010 - 07:33 —
Sat, 11/13/2010 - 11:35 — Erich von Freemason (not verified)Fri, 11/12/2010 - 07:33 — Anonymous (not verified)
"you are speaking blithering propaganda to one of the world's most eminent economists. You should be ashamed of yourself, and you should be doing your homework.
The only "requirements" imposed by government regulators was a ban on "red-lining", that is, drawing a big red line around pre-eminently "colorful" neighborhoods and denying people credit based on geography alone rather than actual credit history."
I have done my homework. You are completely wrong when you say that all they did was ban redlining. And, if Krugman was one of the world's most eminent economists, he wouldn't have encouraged the creation of the housing bubble (I can provide links to his own writings, if you'd like).
Sandra Thompson, Director of the Division of Supervision and Consumer Protection at the FDIC, said before a hearing of the Committee on Financial Services of the U.S. House of Representatives (February 13, 2008, video available at C-SPAN's web site), "studies have pointed to increases in lending to low- and moderate-income customers and minorities in the decades since the CRA's passage," and, "data for 1993 through 2000 show home purchase lending to low- and moderate-income people living in low- and moderate-income neighborhoods grew by 94 percent – more than in any of the other income categories."
In a 2002 study exploring the relationship between the CRA and lending looked at as predatory, Kathleen Engel and Patricia McCoy noted that banks could receive CRA credit by lending or brokering loans in lower-income areas that would be considered a risk for ordinary lending practices. CRA regulated banks may also facilitate these lending practices by financing lenders. They also noted that CRA regulations, as then administered and carried out by Fannie Mae and Freddie MAC, did not penalize banks that engaged in these lending practices. (Fordham Urban Law Journal, Volume XXIX, April, 2002) I'm sure you can find insiders who would word it even stronger, and say that Fannie/Freddie encouraged unsound lending standards, as Congressional Democrats had their back.
Economist Stan Liebowitz wrote in the New York Post ("The Real Scandal - How Feds Invited the Mortgage Mess," February 5, 2008) that a strengthening of the CRA in the 1990s encouraged a loosening of lending standards throughout the banking industry. He also charges the Federal Reserve with ignoring the negative impact of the CRA.
For a step-by-step guide to how the CRA led to the housing crash:
http://www.businessinsider.com/the-cra-debate-a-users-guide-2009-6
In 1998, Jesse Jackson, Jr. extorted Fannie Mae out of $1 BILLION to be set aside for low-income minority loans. He even held a news conference to create publicity for the program, named "HomeStyle Chicago." Fannie Mae also "committed to provide $1 TRILLION in targeted lending for 10 million homes by the end of the decade. " You do know what "targeted lending" means, don't you?
http://www.allbusiness.com/banking-finance/banking-lending-credit-services/6799858-1.html
In 2003, an independent report commissioned by the Freddie Mac board criticized the company’s accounting practices, singling out 13 improper transactions involving Ron Blaylock, Jesse Jackson’s longtime financial backer.
Franklin Raines, Clinton's OMB Director, was appointed to the job of CEO of Fannie Mae. He left in 2004, as regulators were investigating him for accounting fraud. He is accused by The Office of Federal Housing Enterprise Oversight (OFHEO), the regulating body of Fannie Mae, of abetting widespread accounting errors, which included the shifting of losses so sen or executives could earn large bonuses (he was raking in >$20 million per year).
http://news.bbc.co.uk/2/hi/business/4116903.stm
In 2008, Raines, along with Timothy Howard (Fannie's former chief financial officer) and Leanne Spencer (Fannie's former controller) settled the suit for $3 million. The total settlements from all the suits was over $31 million.
Clinton also appointed Jamie Gorelick to a job in Fannie Mae (Vice Chairman), even tho she had no experience in finance or banking. During her tenure, Fannie covered up $9 billion in losses, and Ms. Gorelick was paid (salary and bonuses) $26 million.
During this time, Fannie gave millions in bribes, I mean campaign contributions, to hundreds of Congressmen. Who were the top recipients, according to their own records? Glad you asked. #1 - Sen. Christopher Dodd, (D-CT) Chairman of the Banking, Housing, & Urban Affairs Committee #2 - Sen. Barack Obama, (D-IL) Federal Financial Management Committee #3 - Sen. Chuck Schumer, (D-NY) Chairman of the Finance Committee #4 - Rep. Barney Frank, (D-MA) Chairman of the House Financial Services Committee
Then, as the crisis became evident, attempts to investigate fraud and mismanagement at Fannie/Freddie were blocked. Attempts to add more regulation were blocked.
http://www.youtube.com/watch?v=_MGT_cSi7Rs
I'll infer by your statement that you believe that you've reached your position because you've done your homework. Let's see it. Prove your case.
Fri, 11/12/2010 - 00:26 —
Sat, 11/13/2010 - 11:36 — Erich von Freemason (not verified)Fri, 11/12/2010 - 00:26 — Diane (not verified)
"Eric - I don't think that anybody expected the level of fraud and corruption that the Bush administration chose to overlook..."
http://www.youtube.com/watch?v=_MGT_cSi7Rs
Who's overlooking the fraud and corruption in that video? Who's trying to investigate the fraud and corruption in that video? Do you have any evidence that the Bush administration overlooked the corruption?
The Banksters need some
Sat, 11/13/2010 - 13:27 — Floresta (not verified)The Banksters need some serious jail time. I have friends and family in various stages of this whole effing mess.
Not one of them was able to negotiate a loan modification. Some are suing mortgage holders.
Looking at some of the postings here, perhaps some of you need to re-read Krugman's article again.
I never thought I would say
Sat, 11/13/2010 - 18:46 — Anonymous (not verified)I never thought I would say this about something written by Paul Krugman, but this article is so shoddy and inadequate to describe what's going on with foreclosure fraud that it's pathetic.
Hey, Anonymous on 11/13 at
Tue, 11/16/2010 - 14:58 — Frances in California (not verified)Hey, Anonymous on 11/13 at 23:46! Are you that disingenuous and sleazy guy, Glen Hubbard?