Why Should Defaulted Borrowers Get A Break?

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Financial columnists of a certain political bent spent last week wondering whether the $13 billion JPMorgan Chase will pay as part of its mortgage settlement is enough to atone for its sins. So far, many have found it wanting. Michael Hiltzik says the $13 bil isn’t nearly enough, although he never gets around to explaining why. Jonathan Weil is also disappointed. Peter Eavis actually affects to bring math to bear on the question, and seems to think the number’s too low, too:

So far, JPMorgan has paid or set aside about $25 billion [including this week’s $13 billion] o meet claims that the loans should not have been sold. That sum is 2.5 percent of the total, though the figure could increase as the bank strikes other settlements.

Some mortgage market experts contend that 2.5 percent is too low given the suspected number of loans that should never have been sold to investors.

“Some mortgage experts”? Well that settles it, then!

Actually, this whole debate is beside the point. Here’s why: not much of the $13 billion will go to make whole the entities that were harmed by Morgan’s actions in the first place. That would be the buyers of the MBS the bank put the loans into, and they’re basically out of luck. Instead, and outrageously, a big chunk of the money is going to a group who doesn’t deserve a dime: the defaulted borrowers.

Under what logic does it make sense for deadbeats to get relief? By many accounts they never should have gotten mortgages in the first place. A lot of them committed outright fraud against the banks. What’s more, many defaulted borrowers have already received a windfall in the form of months (sometimes years) of rent-free living. Now on top of that, they’re going to receive loans modification and, in some cases, cash payments? This makes no sense.

For that matter, what about the borrowers who stayed current on their loans? Presumably many of them sacrificed mightily to do so, and for their efforts they get . . . exactly nothing.

This isn’t fairness in any sense of the word. Instead, it’s government-enforced wealth distribution, from an unfavored group (the big banks) to a favored group (low-income and minority borrowers). What’s more, it appears the Obama administration will essentially stop at nothing to extract large sums from the big lenders. The Wall Street Journal reported this week that a main reason Morgan essentially capitulated on the issue (for $13 billion, it could have litigated it for years) was that it had a real concern that if it didn’t agree to a huge payout, the government might indict the company and potentially put it out of business. The notion that the biggest bank in the country fears that the government would willfully bring it down is deeply disturbing.

If JPMorgan Chase did something wrong, it should make amends to whomever it did the wrong to and perhaps pay a fine. In this case that’s the buyers of its MBS securities. That anyone else beyond bond investors are even getting a dime from this settlement is outrageous.

What do you think? Let me know!