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Foreclosures and Guilt: The "Home Loan Moral Hazard Scorecard"

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Jamie Dimon and the other mega-bankers who derailed the economy have a new PR campaign to sell you. They're saying that families who can't pay their mortgages must bear the blame -- all the blame -- for the foreclosure crisis. That means the public should just ignore banks' widespread lawbreaking in the registering and transfer of property titles. For the bankers who would appoint themselves the nation's moral arbiters, It's always somebody else's fault.

Not that we should be surprised. After all, the Mortgage Bankers Association, which calls itself "the voice of the real estate finance industry," did a short sale on its Washington DC headquarters which left CEO John Courson uncharacteristically speechless. It seems he didn't want to talk about how he walked away from the loans he took out to buy that building. But before the cat got his tongue, Courson managed to lecture homeowners on their "legal obligation" and the terrible "message they would send" by walking away from their mortgages.

Morality and law for thee, but none for me.

John Courson paid $79 million for his Association's headquarters and sold it three years later for $41.3 million. In his defense, anyone who loses nearly $38 million on a single real estate deal is, in fact, uniquely qualified to speak for the real estate finance industry. They mismanaged their finances so badly that they brought down the economy. They needed to rescued by the rest of us, a privilege they're working overtime to deny others. They claim that struggling homeowners are "undeserving" of help, even if the other party in their transaction has broken the law or violated a contract.

The bankers have benefited from a stacked deck, or what's known as "moral hazard." That's the term for what happens when people don't bother protecting themselves from risk because they know somebody else will take care of it for them. The banks are saying they've been reasonable business partners, giving their borrowers all the information they need to make good decisions while asking no special favors for themselves. Does that sound right? We created the "Home Loan Blame Game Scorecard," which is at the end of this post, to find out.

As CEO of JPMorgan Chase, you'd think that Jamie Dimon might hesitate before saying "We're not evicting people who deserve to stay in their house." His argument rests on the idea that homeowners bear sole responsibility for taking out loans they couldn't repay. He might be shocked, shocked, to learn that his own employees have relentlessly been trying to push these loans on people:

2010-10-18-chaseexclusives.JPG

The "blame homeowners" argument is hypocritical, but it's been effective. It helped bankers get themselves massive bailouts, pay themselves huge bonuses, and walk away with the profits they made by selling and trading these mortgages at inflated prices. And it's helped them avoid having to write down their books to reflect the actual, reduced value of the assets they're holding. That means millions of homeowners are propping them up by paying mortgages at property values that the banks themselves artificially inflated.

Now they want to use the same argument to get around the fact that they've been breaking property laws on a massive scale for years. It's just "paperwork," they say. But any homeowner who filed false affidavits - a crime that's legally equivalent to perjury - would be looking at jail time. Remember: Law and morality for thee ...

"But if these people had paid their mortgages, there wouldn't been a problem." That's a pretty compelling argument (if you're willing to ignore the widespread lawbreaking by the banks). But why couldn't they pay their mortgages? In many cases, it's because banks have violated HAMP rules for helping distressed homeowners modify their loans. That's breaking the law.

As the Wall Street Journal reported last week, the banks are "largely unsympathetic" to the idea of a foreclosure freeze, and they consider reports of widespread lawbreaking merely a bureaucratic problem. ""If you didn't pay your mortgage, you shouldn't be in your house," said a portfolio manager at Greenwood Capital Associates. "People are getting upset about something that's just procedural."

"Procedural" ... you know. Abiding by the law. Doing what the little people do ...

Bank of America has been a particularly egregious violator of HAMP's legal requirements, which means that many of the people it's foreclosing on shouldn't even be in that position. Yet you could almost see CEO Brian Moynihan rolling his eyes sarcastically as he said of the missing titles, "We'll go back and check over our homework one more time."

Please, Mr. Moynihan, don't trouble yourself. Allow us to check your "homework" for you. Surely bankers that hold homeowners to such high moral standards won't object to a thorough and very detailed audit of these transactions by the proper authorities. I'm sure such ethical and meticulous leaders want to know how many home appraisals were carried out by "friendly" appraisers, for instance, rather than ones who were known to come up with whatever number the bank wanted. And I'm sure they'd want to know if any of their employees had misled borrowers, perhaps by telling them that they could be sure that refinancing would be available long before their adjustable rate mortgages went up.

Remember, they're lecturing homeowners for not managing their finances well, when their entire industry would have collapsed because they didn't manage their finances well.

In a famous (and probably apocryphal) story, it's said that FDR finally got frustrated during a meeting of his economic advisors. After hearing talk about loan rates, interest, borrowing, and various financial mechanisms, the story says that FDR finally blurted out "What the hell! It's all our money, isn't it?"

That's how bankers feel about the current foreclosure crisis: It's all their money. Who cares about titles and property laws? If a homeowner hasn't been making their mortgage payments, the argument goes, then surely they should lose their house to somebody . It doesn't matter whether its Chase or Citi or Wells Fargo. As long as the banks agree among themselves who gets to put that family into the street, what's it to you, pal? And if the family's only in trouble because their bank (whoever it was) broke the law, well, we can't blame the bank if we can't find them, can we?

We're not saying that no homeowners bear responsibility for defaulting on their mortgages. Sure, some people should've known better. But three million homes have been foreclosed upon in the last three years. That's a systemic problem. One in every five houses is underwater. That's a systemic problem, too. The only factors common to the system as a whole are the bankers, and the rules that let them get away with running up housing prices in a gambling frenzy and walking away with everything when they fell. They've written millions of loans without proper risk management. Many experts were warning us that the housing bubble was about to burst, and they were getting paid extraordinarily well to understand the dangers.

Bank stocks took a steep hit last week, and why shouldn't they? The executives running them aren't very good at what they do. It's about time bankers took some responsibility for their failures. It's about time banks shared some of the lost value of these properties with homeowners - not just those who are defaulting, but all affected homeowners.

Stockholders should can the executives who have so badly mismanaged their banks. To paraphrase Jamie Dimon, we're not about talking evicting people who deserve to stay in the corner office. Word to Brian Moynihan: If you can't manaqe your business, you don't deserve to keep your job. Nothing personal, of course. For those who want to see the finance industry run by competent people, firing you is what we would call "just procedural."

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 MEET THE HAZARD MASTERS:  THE HOME LOAN MORAL HAZARD SCORECARD




















































HAZARD

BANKERS

HOMEOWNERS

ADVANTAGE:

Were financial professionals

Yes

No

Bankers

Cheated on property laws, taxes, titles, etc.

Yes

Mostly no

Bankers

Got rich off the deal

Made trillions

Some got to buy boats or flat-screen TVs

Bankers

Acted as unfair trading partners

Yes; had FICO, databases, teams of economists

A few hid things, but the banks knew anyway

Bankers

Could influence politicians with fat campaign contributions

Yes

No; never attended $20,000/plate fundraising dinners

Bankers

Able to influence public opinion with PR campaigns, etc.

Yes

No

Bankers

Absolutely shameless about blaming others for financial mismanagement after accepting massive bailout

Yes

No; most feel guilty about missing a payment and ashamed if they default

Bankers

Forced to bear financial burden of overpriced homes

No

Yes

Who else? 

_______________________________

Final score: To be determined in the court of public opinion, and in the corridors of Washington power.

Richard (RJ) Eskow, a consultant and writer (and former insurance/finance executive), is a Senior Fellow with the Campaign for America's Future. This post was produced as part of the Curbing Wall Street project. Richard also blogs at A Night Light.

He can be reached at "rjeskow@ourfuture.org."

Website: Eskow and Associates