- The Washington Times - Tuesday, April 5, 2011

The article “Administration proposes banks spend $20 billion to fix botched foreclosures”(Page 1, March 29) describes the assault on “deep pocket” banks by the attorneys general of 28 states, backed by the federal government’s principal financial agencies, to force the banks to fix a problem largely of the government’s own making.

In essence, the American public would be made to pay so that the promises made by the affordable housing lobby do not turn out to be hollow.

The government’s position that any borrower whose housing costs exceeded 31 percent of their income was entitled to a reworking of the loan by their lender and/or servicer completely short-circuited the housing sector recovery. This policy overturned the normal market imperative to consign the worst loans to foreclosure first. Instead, it was the most ill-considered loans that were kept afloat and given the highest priority for loan modification in the form of reductions in monthly payments or, in some cases, a reduction in the loan balance. Thus, millions of the least credit-worthy borrowers - those with poor credit histories who chose to purchase “too much house” and those who used their homes as ATMs - found a place at the head of the line of those seeking a bailout. The inevitable result of this lure of “free money” was a deluge of claimants swamping loan-servicing companies and seeking loan adjustments that the servicers were often not authorized to make.

A major disruption occurred when housing critics and their attorneys mounted a legal challenge to the long-accepted documentation system (MERS) that enabled trustees to act on behalf of mortgage securities holders in processing foreclosures. This controversy over legal fine points put a great many pending foreclosures into a state of limbo. When companies cut corners on paperwork to cope with the flood of claims, they were condemned for not strictly adhering to procedure and when they didn’t, they were accused of causing unnecessary delays. The backlog was made even worse when housing authorities decided that every borrower was entitled to one-on-one consultations with workout specialists whenever he wanted to discuss a loan, even though most borrowers had no right to a reworked loan either by law or by contract. Despite this chaotic situation, almost no foreclosure actions were pursued on loans that were not already deeply delinquent and very few homeowners could prove any serious financial damage caused by paperwork delays.

The cynicism of the states’ attorneys general suit becomes apparent when one notes that the purported victims of the paperwork problem are not to be the beneficiaries of the suit. Instead, any award is to go primarily to a quite different set of borrowers: those who are “underwater,” meaning their loan balance is greater than the value of their house. Apparently, the prospect of acquiring private-sector money with which to distribute grants of as much as $50,000 in the form of mortgage debt reduction to select constituents is just too hard for politicians to pass up.



The likelihood that most of the grants would go to subprime borrowers in “underserved” neighborhoods allows the affordable housing lobby to claim that it made good on its promises. And the banks will find a way to pass the cost of all this onto the rest of us.

VICTOR CHOLEWICKI

Washington

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