Wednesday, March 9, 2011

The Banks are Just Evil

So, as a recent post should have made clear, I'm not a big fan of the banks or the people who run them. But a story in today's Times just sent me over the edge. It reports that the CEO of Bank of America is balking at the mortgage reductions that all 50 state AGs and federal regulators are pushing for as part of the settlement of the outrageous actions the banks have taken in their role as mortgage servicers. The absolutely invaluable Naked Capitalism Blog has two great recent posts explaining why the settlement is actually not all that tough especially given how badly the banks have behaved. As Naked Capitalism and others point out, much of the settlement is just stuff that the banks either are already supposed to do or could be ordered to do without any "deal." In the mean time Felix Salmon points out that the deal is also essentially toothless.

Now, this all gets very complicated very fast. The banks don't own most of these loans, they are just paid to service them, i.e. collect the payments and foreclose if they are not made. It is in this role that there have been a variety of abuses. The reality is that the banks don't want to do loan modifications, i.e. reduce the loan amounts, because their payments as servicers of the loans are based on a percentage of that amount. So even though the investors who actually own most of the loans would almost be certainly better off getting some portion of a payback rather than foreclosing in this market, its not happening the way it should. Another reason the banks don't want to do modifications is that modifying the first mortgages would also mean modifying the second mortgage which many of these properties have and which, unlike the first mortgages, the banks often hold on their books.

So the banks are slime and need to be forced to do the right thing and there seems to be little prospect of that happening.

None of this, however, is the most outrageous part of the story. The thing that really got me, going back to the Times story, is two things that B of A executives said. First the CEO said that "There’s a core problem that if you start to help certain people and don’t help other people, it’s going to be very hard to explain the difference." Like the difference between bailing out B of A while many, many smaller banks have been allowed to go under? But wait, there's more. Another guy, the head of the unit that services delinquent loans at B of A, a Bank that exists only due to billions in tax payer funded bailouts, actually had the gall to say this: “It’s not that we don’t want to help troubled borrowers,” Mr. Laughlin said. “It’s a moral hazard issue.”

A moral hazard issue indeed. Really, I'm speechless.


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