As I've tried to make sense of the Robo-Signing, Document-Backdating Foreclosure Scandal That Never Ends, a couple of things have popped in my head: Animal House and Alan Greenspan.
Stay with me here. Imagine Greenspan as Flounder, the callow freshman trying to pledge Delta House. The Delts persuade Flounder to loan them his father's car, then take it on a spree, smash it up and return it much worse for wear. The only explanation they have for Flounder: "Hey, you fucked up. You trusted us."
Greenspan was no neophyte back in the 1980s when, between government gigs, he signed on as a consultant to Charles Keating's Lincoln Savings and Loan. But he did seem to have a sense of innocence about him, that same starry-eyed idealism he'd possessed a few years before when he'd penned an article in Ayn Rand's journal declaring that no company could afford to risk its "reputation for honest dealings and a quality product" by "letting down its standards for one moment or for one inferior product; nor would it be tempted by any potential 'quick killing.' "
As Lincoln Savings came under fire, Greenspan wrote a letter to regulators pronouncing the management of Keating's S&L as "seasoned and expert." The S&L, he said, was "a financially strong institution that presents no foreseeable risk" to the Federal Deposit Insurance Fund. Lincoln eventually perished in a conflagration of recklessness and fraud, costing taxpayers $2.66 billion.
Now imagine Keating, before heading off to jail, taking Greenspan aside and explaining: "Hey, you fucked up. You trusted me." In the for-real world, Greenspan told the New York Times: "I don't want to say I am distressed, but the truth is I really am. I am thoroughly surprised by what has happened to Lincoln."
Despite his distress, the episode didn't seem to have much of an impact on Greenspan's thinking. As Fed chairman -- the Dean Wormer, if you will, of the financial system -- he still maintained a certainty that markets and bankers could be trusted to protect consumers and investors from fraud and folly. His inaction during the housing boom, many critics say, allowed predatory lending and wild speculation to cripple the economy.
Greenspan is no longer in the picture. He spends his days as a sort of professor emeritus, explaining there was nothing he could have done to prevent what he calls a "once-in-a-century credit tsunami." It's hard, though, not to detect a whiff of Greenspanian idealism in the forces that have helped bring about the current controversy over the tactics used to speed the banking industry's foreclosure machine.
Foreclosure has traditionally been a laissez-faire activity. The feds have mostly left it up to the states to oversee foreclosures. Many state courts and administrative agencies, though, aren't equipped to handle the flood of filings or to assess the propriety of the paperwork submitted by banks and other "loan servicers."
But why worry? Why worry whether brand-name banks will do the right thing when it comes to taking away people's homes? Don't they want to maintain "a reputation for honest dealings"? Why would they be tempted by the potential for a "quick killing" via foreclosure -- instead of, say, modifying homeowners' loans and helping to keep the stream of income from the loans coming in?
There's the problem. The banks often no longer own the mortgages they're servicing. The rights have been sold off, through securitization, to investors around the world. The banks still service the mortgages, but they earn little simply collecting payments from month to month. The real money is in defaults: late fees, legal fees, inspection fees, pricey insurance. These add-ons can total thousands of dollars per loan, consumer groups say, and sink homeowners who are barely getting by so deep in default they have little chance of recovering.
Which is why, consumer advocates claim, the honor system hasn't worked well in terms of the Obama administration's effort to get banks to rewrite borrowers' loans on more affordable terms. It may also be why some banks may have given in to the temptation to flood courts with inaccurate or perjured documentation.
The evidence suggests that the foreclosure scandal is more than a few procedural snafus. It's a serious problem, driven by the "anything-goes" culture of fraud that's permeated much of the mortgage industry over the past decade. Solving the problem will take more than putting banks on Double Secret Probation. It will take a change in philosophy: Trust -- whether among frat boys or bankers and regulators -- should be earned, rather than assumed.
Michael Hudson is a staff writer at the Center for Public Integrity and author of THE MONSTER: How a Gang of Predatory Lenders and Wall Street Bankers Fleeced America - And Spawned a Global Crisis .