Inside Financial Services

Unfair All Around

The AGs' mortgage settlement with the banks gives rewards to people who don't deserve them, and will end up being counterproducitve

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This mortgage settlement is an abomination. It provides a windfall to many people who don’t deserve one and is a slap in the face to those who’ve worked hard and acted prudently. The deal turns the very concepts of fairness and common sense on their heads. It is bad, bad, bad.

Here are the gruesome details of this madness: First, $17 billion of the settlement will go toward debt forgiveness and other forms of loan modification for borrowers who are delinquent on their loans. Another $1.5 billion will be for cash payments to borrowers who lost their homes to foreclosure “with no requirement to prove financial harm.” Three billion will go to guaranteed refinancing of borrowers who are current but upside-down on their loans.

But why should any of these people get anything? For five years now, we’ve heard how banks blew up the economy by pushing tricked-up mortgages on subprime borrowers who never should have gotten the loans in the first place. Well, guess what? Many of those people never should have gotten the loans in the first place! It makes no sense to reward them now for their folly. Others defaulted because they lost their jobs. They have my sympathy. But why shouldn’t they live up to the terms of the deal that they signed?

As it is, delinquent borrowers have already received a massive windfall. Something like 4 million mortgage borrowers in the U.S. are behind on their loans by 90 days or more. Their average delinquency is 20 months, we estimate. (Some of these delinquent borrowers even have the gall to rent their properties out!) That means these people have been living rent-free for two years and have received something like $70 billion in foregone mortgage interest expense! And now some of them are going to get another $17 billion?

That’s not just nonsensical–it’s unfair. What about the people who scrimped and saved for the standard 20% down payment, and who’ve stayed current on their loans despite the economy’s ups and downs? How is it that the people who played by the rules get nothing, while the ones who gamed the system get the big payout? And what do you think the people who did play by the rules will do the next time they apply for a loan?

Meanwhile, the idea of cash payouts to people who’ve already been foreclosed on is truly insane. No one disputes that those people had defaulted on their loans. No one disputes the lenders’ basic right to take their houses back. The controversy surrounding those foreclosures had to do with paperwork-related issues such as robo-signing (issues that have been corrected, by the way). The foreclosed borrowers suffered no harm whatsoever. They defaulted-and don’t deserve a dime.

And please, spare me your sob stories about how so many of these borrowers are hapless victims. A lot of them aren’t. A recent study by the New York Fed shows that fully one third of mortgages written in 2006 likely went to borrowers who bought their properties as a speculation. In the most bubble-intensive markets like Arizona, California, Florida, and Nevada, that number was closer to 50%. A lot of these people probably committed fraud to get their loans in the first place. They took a gamble and lost. They deserve nothing–either from the lenders or the government. Sure, plenty of other borrowers are honest and hardworking, and have been victims of the bad economy or just plain bad luck. They’ve fallen behind despite their own best efforts. That’s unfortunate. But crisis or not, it’s the kind of thing that happens in life.

Meanwhile, the worst part of this mess is the corrosive effect it has on one of the key pillars of American prosperity: the notion of the sanctity of contract law. The parties to these mortgages-these contracts-were adults who freely entered into the agreements. They knew (or should have known) exactly what they were getting into. Obligations were spelled out on both sides. It shouldn’t be too much to expect that both sides of a contract live up to its terms. The government has no business-no business, in a very fundamental way-swooping in to demand that terms be altered to favor one side of the deal over another. At the very least, this kind of meddling will make credit more expensive in the future and harder to get. At its worst, it undercuts the idea, uniquely American, that free people can be relied upon to make their own decisions and be responsible for the consequences of their actions without relying on help from Big Brother.

There is nothing good to say about this deal. It’s unfair to the banks and it’s unfair to the vast majority of mortgage borrowers. In a profoundly basic, way it’s un-American, too.

What do you think? Let me know!

43 Responses to “Unfair All Around”

  1. PMM

    Tom, I completely agree with your analysis!! That said, What was the reasoning behind the State Attorney
    Generals and the Justice Department pursuing this result? Is it to deflect attention away from themselves, or to
    allow the large Banks to get on with business. PMM

  2. Adam

    What about when the banks fail to produce legal documents and instead make up new documents? Seriously.

  3. mark byrum

    I forgot to add that I’m a big jerk. I like pretending I’m smart. I also make myself feel better by looking down on minorities.

  4. VS

    I am quite baffled, so now one will intentionally be behind in the mortgage and get principal reduction. Else if I am paying properly then I would not get a principal reduction in my loan balance. Thanks to the AGs I am gettting FREE money from the banks.
    Now how about finding someother loophole and get more reduction in my credit card balance, Autoloans and what about student loans.

    Lawyers should start looking at all the places where loans have been given and give relief.

    May be US government then eventually will find a loophole and then not pay to China on all the bonds it owes to them.

    By not honoring the contracts and extracting a pound of flesh from Banks, it is setting a very dangerous precedent.

    Somebody should file a case in Supreme court that banks have been treated unfairly and they don’t have to pay to all the people who should not have been taken loan in the first place.

  5. Disgusted

    Obama’s Political Abuse Of Power At It’s Pinnacle..timed during an election year to reward the masses. This is all about Obama getting re-elected at any cost and this is not the last we will see. GSE pricipal reductions are coming next or…. should I say BUY THE VOTE from the masses. Give them something for nothing…fee the banks again and again like a the oblamavampire draining its victim..another hidden tax to consumers that are too stupid to realize like tolls on turnpike, parkway and bridges. We have lost control of the governement……Wake Up People, Vote Him Out!

  6. anne koons

    Its a typical Obama move did you expect something different. It also doesn’t help the real estate industry one bit as usual all he’s trying to do is buy votes nor does it help the banking industry.

  7. Kent

    “Many of those people never should have gotten the loans in the first place!” – and yet the banks gave them loans – both sides share blame in some cases

    “A lot of these people probably committed fraud to get their loans in the first place” – how about offering some proof? Certainly some committed fraud, but “a lot?”

    I actually support your thesis that people who stopped paying their bills shouldn’t be given special treatment over those (like me) who have continued to pay despite a significant drop in my home value. There are some who deserve relief, but not nearly as many who are going to get some as a result of the settlement. Kudos for writing such a poor opinion piece on a position I support.

  8. AW

    I want some free money too. I’m driving a 22 year old car with 253,000 miles, get my shoes resoled etc so I can make my loan payment on time. I’m sure my bank must have ripped me off. I didn’t understand what the contract said, my wife wasn’t there, my lawyer did a lousy job, my dog ate the title. What a dope. Next time I’ll know better. I’ll buy a house and not pay for it, lease a car and not pay for it and buy a new pair of shoes and not pay the credit card bill when it comes. I love this country. Home of the FREE.

  9. Carl

    Just know that one of your votes will be canceled out by my vote for Obama. FOUR MORE YEARS!!!!!

  10. mark byrum

    Clearly Carl is black and ignorant. It’s too bad his kind get to vote. He’ll probably vote for Obama at least 3-4 times this year.

  11. sgr

    Still trying to get my head around people claiming that those who have been given money for a home they aren’t paying back (and won’t), and have lived in said homes (free) for months and even years, are harmed.
    I guess that’s Hope and Change?

  12. terry crews

    This argument makes it look like all of the borrowers took the “gamble and lost”, so it was a one-way bet. It was not. The banks who got involved in this also took the “gamble” on borrowers they knew couldn’t service the debt.

    And the idea that everyone would know exactly what they were getting into has inherent flaws in that the default position is the banks will rip you off unless you “know better” (not a trusting proposition to consumers) and that everyone could practically know and fully understand what they are getting into (especially with sales people pushing these mortgages so they could earn a commission) – again saying that you shouldn’t trust any financial oriented product.

    There’s plenty of blame to go around on borrowers, lenders and other third parties (i-banks and insurance companies). Each side will have to give and get. This is not a perfect solution, but a start. And I don’t see an alternative from you other than “just let the market forces work this out”. Market forces are what got us into this mess.

    Unfortunately the ones who get the short-end of the stick here are those borrowers who stayed current and honored their deal, those that couldn’t due to job loss, etc. and get no relief here (too late, damage already done) and banks (namely community banks) that operate genuinely on a “you can trust us” basis, stayed away from all this mess and are still unfairly painted with a broad brush by the media, politicians and a great percentage of the general public.

  13. terry crews

    This argument makes it look like all of the borrowers took the “gamble and lost”, so it was a one-way bet. It was not. The banks who got involved in this also took the “gamble” on borrowers they knew couldn’t service the debt.

    And the idea that everyone would know exactly what they were getting into has inherent flaws in that the default position is the banks will rip you off unless you “know better” (not a trusting proposition to consumers) and that everyone could practically know and fully understand what they are getting into (especially with sales people pushing these mortgages so they could earn a commission) – again saying that you shouldn’t trust any financial oriented product.

    There’s plenty of blame to go around on borrowers, lenders and other third parties (i-banks and insurance companies). Each side will have to give and get. This is not a perfect solution, but a start. And I don’t see an alternative from you other than “just let the market forces work this out”. Market forces are what got us into this mess.

    Unfortunately the ones who get the short-end of the stick here are those borrowers who stayed current and honored their deal, those that couldn’t due to job loss, etc. and get no relief here (too late, damage already done) and banks (namely community banks) that operate genuinely on a “you can trust us” basis, stayed away from all this mess and are still unfairly painted with a broad brush by the media, politicians and a great percentage of the general public.

  14. barrydemo

    I’ve been saying this for over 20 years. If you can’t afford the monthly payments, either buy a smaller house or wait until you can make a larger down payment.

  15. VS

    I wonder why did Republican AG signed to this deal. Are they not in favor of Free enterprise

  16. Pat

    Let’s face it, this was all done for show. More pandering by Obama to make himself look good to the supposed “downtrodden.” However, as you point out, the hardworking, honest people who have continued to service their loans should be the ones to be rewarded, not the freeloaders.

    In terms of providing a stimulative effect for the economy — which I’m not sure it was intended to do — the money will be too little, too late, and spread too thin. I’d much rather see the banks allocate the money to small business loans. Why not fund initiative, rather than playing this silly game?

  17. linques

    I agree completely but this is no different than prudently planning for your child’s college education or your own late-stage medical care. You may sleep a bit more soundly but financially you’re a schmuck. The incentives are designed for either end of our society, not the middle. As I’ve said for several years now, gotta get worse before it has a chance of getting better.

  18. Pat

    Further to Tom’s agrument about the sanctity of contracts, wasn’t that the government’s position when it insisted that it HAD to bail out AIG to the tune of $180 billion; i.e., that they HAD to honor Goldman’s and the other banks’ credit default swaps? Now, though, contracts mean nothing. It’s amazing how this administration blows in the wind to satisfy its own purposes. (Contracts meant nothing in the GM and Chrysler deals either…just ask any bondholder.)

  19. Barack

    How is this all my fault? Plenty of GOP AGs signed the deal. All you rich folk need to remember how much the Dow has increased during my first term.

  20. David

    Then why are corporations allowed to re-do the terms of their loans and contracts when they get into trouble. Many just walk away from pension obligations they signed. Reorganize, shed debt, etc. Are individuals the only ones that have a ‘moral obligation’ to complete their contracts. Aren’t corporations people. Would that they had the morals of most of the people I know.

  21. Flabergasted

    I completely agree with your assessment of the mortgage agreement. Being a retired bank director, I can say with assurance that mortgages are going to be more expensive and harder to get for many home buyers. The Obama administration’s concept of fairness is, “what’s mine is mine and what’s yours is mine also”. They are bound and determined to reinvent the term of “fairness” which translates into a redistribution of wealth in the United States at the expense of people who have worked hard all of their lives, played by the rules, honored their contractual agreements and been successful. The mortgage agreement by the AG is just one more of many very bad decisions made by the Obama administration to perpetuate the entitlement mentality of rewarding people for their failures. A sad commentary and another nail in the coffin of our free enterprise way of life.

  22. Paul Szydlowski

    It’s not the first time this administration has stomped on contract law – just ask GM and Chrysler’s former bondholders. And that’s just one violation of the rules that make for a sound economy. Another is the violation of the concept of risk/reward. When the downside of speculative behavior is removed, we lose the stick that keeps people from doing stupid things. Clearly, if the prospect of losing one’s home or going bankrupt wasn’t enough to stop such behavior, creating an expectation that someone else will pick up the pieces if we get ourselves in a financial bind is only going to make matters worse sometime in the future.

  23. rivvir

    Most of you friggin’ people must be from yahoo. Instead of an intelligent assessment of a lousy situation all you can think of is, what else, obama. As for “free money,” is it? I get so sick looking at the comments by the idiots i wind up having no wish to actually assess just what is happening under this plan. Are home “owners” actually getting free money or are they being enticed into servicing their debt, debt which still means they are paying 10′s of thousands of $$$ or more than the inherent value of the property in order to get several thousand $$ back. Is that what’s happening or not? I saw a couple of intelligent posts here, no more than that. Most of you belong in a class for the mentally challenged.

  24. Blindspot

    Yes, it is a bad deal. And yes, a lot; a whole lot of individuals took out loansmortgages they could not afford. But, to act is though Wall Street is not horribly complicit and a lead in this mess is unblievable. Wall Street big banks kept calling on indepedent mortgage firms seeking more low doc, no doc and no income verification loans to fill the pipeline to make big fees, bundle and sell the mess with triple AAA stamping from complicit rating agencies that did not take the time, have the ability or professionalism to drill down and accurately rate what they rated as triple AAA. When the Wall Street banks, and other banks received their ballouts, the professional thing to do, as when any investor puts huge amounts of capital into any company was to require seats at the table. In this instance, at least 2 to 3 Board of Director seat with 1 Director being on the compensation committees, and 1 on the audit committees.

  25. RogueDave

    I agree with most of the points this commentary makes. Its a bad deal all around. But to intone the banks were victims of fraudulent applications ignores the right and responsibility of the banks to reject these applications. The banks failed in their basic job, adhering to the 4 C’s of Credit: Character; Capacity; Capital and Conditions, 5 when you add Collateral, as in overvalued housing bubble. Further, the banks failed to adhere to the reps and warranties of the securitization trusts and broke the chain of title by not recording the transactions at the county level. I shed no tears for the banks.

  26. Mike O--Savannah

    Where the hell is the ABA,the MBA, the US Chamber of Commerce and every other organization representing business and industry who should be standing up and filing legal challenges to this government’s continued trampling of our constitution and basic contract law???? Will WE, as individuals and collectively, continue to stand by and bitch while these socialists conquer America?

  27. mudwalljackson

    i say we give the medal of freedom to all those fine bankers who essentially committed fraud by robo-signing documents. fraud — that’s the american way? i guess it is to you tom.

  28. Randy Boyer

    Tom,
    Couldn’t agree more with you. The looters are out in force. But you forgot the icing on the cake — the $5 billion in cash payments to the states and federal government for restitution for foreclosed borrowers and other housing programs. Gee, I wonder how the unions and the other interest groups will get their hands on it — yet another political payoff to the entitlements crowd.

    Eric Holder (of Fast and Furious fame) should be investigated and fired, and Barack Obama will be fired in November.

  29. Randy Boyer

    Tom,
    Couldn’t agree more with you. The looters are out in force. But you forgot the icing on the cake — the $5 billion in cash payments to the states and federal government for restitution for foreclosed borrowers and other housing programs. Gee, I wonder how the unions and the other interest groups will get their hands on it — yet another political payoff to the entitlements crowd.

    Eric Holder (of Fast and Furious fame) should be investigated and fired, and Barack Obama will be fired in November.

  30. Nils

    As you know, the trueth is seldom relevant. And last week I learned that asking the right questions is right wing by itself.

    After four generations of full democracy politicians have learned too much. Our own fault?

  31. November Rain

    Tom, very well written breakdown of this fiasco. How many votes do you think can be bought with the bounty?

  32. Robert Rogowski

    I totally agree. Why should people who did “no doc” or “low doc” loans in which they did not disclose their true incomes or other data get anything? They should be lucky that they are not being sued.

    Underwater mortgage holders also deserve nothing. Will you pay me if I invest in a stock that goes down?? Hell, no. So why should someone who bet on the residential RE in 2005 with a “liar’s” loan get paid anything? The banks are being too soft going after these people.

    Personal note: I have in-laws in Sacramento who did liars’ loans and are now NOT paying the price. They tossed the keys to the banks and walked away. Look at what Canada does with its mortgage finance system: real down payments and no forgiveness on real estate gains until after 65.

  33. Tom Brown

    Not a joke, my name really is Tom Brown. I work for FTN Financial, the capital markets arm of First Horizon Bank. You and I have actually spoken back to back during one of our conferences many years ago. I couldn’t agree more with your comments. Contract law has been turned upside down and the American discipline that hard work pays off has been thrown down the toilet. Folks who speculated and lost are now going to be rewarded. Amazing. Used to think that stuff only happened in Europe but not anymore.

  34. Hedge Fund Alpha Male

    Now, Tommy, don’t be too harsh on the governmental abuse of contract law and unfair redistribution of taxpayer money. Without such abuse in the form of bank bailouts/backstops, it’s quite possible that the bank panic of 2008/2009 would have forced a large percentage of your 2008-2009 fund holdings into bankruptcy. If the government had been fair, you quite possibly would be one of the people who is currently unemployed and unemployable.

  35. Gmoney

    I’ve read the comments…and we all agree. But what are we doing about it?!? We need to flagrantly tout our core values to all our peers: especially the ones that think this settlement has a hint of goodness in it. What a damning representation of the “free” world!

  36. John Reed

    “Without strong rules that align interests, we will see another race to the bottom,” Reed wrote. “Traders, management directors and even shareholders will seek to game even the best- written rules governing permitted trading in the hope that they can attain the supersized rewards made possible by high-risk investments.”

    The curbs could put more downward pressure on compensation for Wall Street, where firms already are slashing pay packages and changing compensation formulas as they grapple with lower revenue. Some are giving less cash and more stock, or deferring a greater percentage of total pay. Citigroup cut bonuses for investment bankers by an average of 30 percent, a person briefed on the matter has said.

  37. Genesis

    LETS NEVER FORGET THE GENESIS OF THIS MESS!!!
    Excerpts from NY Times
    Fannie Mae Eases Credit To Aid Mortgage Lending
    By STEVEN A. HOLMES
    Published: September 30, 1999

    In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

    The action, which will begin as a pilot program involving 24 banks in 15 markets — including the New York metropolitan region — will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

    Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

    In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980′s. ”From the perspective of many people, including me, this is another thrift industry growing up around us,” said Peter Wallison a resident fellow at the American Enterprise Institute. ”If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.”

    In July, the Department of Housing and Urban Development proposed that by the year 2001, 50 percent of Fannie Mae’s and Freddie Mac’s portfolio be made up of loans to low and moderate-income borrowers. Last year, 44 percent of the loans Fannie Mae purchased were from these groups.

  38. Genesis

    LETS NEVER FORGET THE GENESIS OF THIS MESS!!!
    Excerpts from NY Times
    Fannie Mae Eases Credit To Aid Mortgage Lending
    By STEVEN A. HOLMES
    Published: September 30, 1999

    In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

    The action, which will begin as a pilot program involving 24 banks in 15 markets — including the New York metropolitan region — will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

    Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

    In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980′s. ”From the perspective of many people, including me, this is another thrift industry growing up around us,” said Peter Wallison a resident fellow at the American Enterprise Institute. ”If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.”

    In July, the Department of Housing and Urban Development proposed that by the year 2001, 50 percent of Fannie Mae’s and Freddie Mac’s portfolio be made up of loans to low and moderate-income borrowers. Last year, 44 percent of the loans Fannie Mae purchased were from these groups.

  39. Hugh McColl

    Tom, I rarely agree with you; this time I do. Between the Federal Reserve’s INSANE zero interest rate policy and the demonization of the banking industry by demagogues, the politicians and Bernanke are essentially engaged in policies that are effectively PUNISHING THE PRUDENT, the liquid and the solvent.

  40. form_ener

    I could not agree more! My wife and I purchased a house we could afford, while those around us bought McMansions they obviously could not afford. Due to a career change, we had to sell our house. Three years on the market, making two mortgage payments, and finally selling at a significant loss. So where is my bailout for living within my means, making my payments, and losing thousands of dollars due to a housing collapse that was in no way my fault? Totally unfair. Irresponsible people get a bailout, and those of that played by the rules get squat. Don’t tell me they were duped or swindled, they knew what they were getting into, but wanted to live like kings on a serf’s salary.

  41. S Benton

    I think that if all of us who have been paying on time should strike and stop paying, if all of us who are paying ontime suddenly stop paying the banks would have no money to give out. If we at least threaten the banks that we will not pay our mortgage if no one else has to, then maybe instead of giving people who don’t pay a break maybe they will give all of us who do pay a break. It has to be a significant amount of people that all threaten not to pay at once. We need to start a people’s reform and stop rewarding people for bad behavior. Can we sue the banks for not treating all of the customers the same. It’s dicriminating if they are picking and chosing who they are helping. I think we can start something, if we all stand together. Let’s face it, if we all stop paying at once they have no money for leagal fees and to pay employees. Our money will still go into economy (even more of it, since there is no mortgage payment due)and we would just put the banks out of business.

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