Is anyone surprised? A mortgage finance industry built on sloppy paperwork, which reaped record profits processing consumers as if they were so many sheep to be fleeced, is caught churning out foreclosures built on sloppy paperwork, so homeowners can be dispossessed on the cheap.
It is tempting to wish upon lenders all the retribution that our legal system can rain down. The Attorneys General of all 50 states, hardly a monolithic group politically, are so incensed that they have joined together and launched a full bore coordinated investigation into whether vast numbers of foreclosures were prosecuted based on false certifications and other violations of law. The US Attorney General is gearing up for a similar investigation into the possibility of rampant fraud or other criminal violations. Private consumer watchdogs have long been raising similar allegations in defending borrowers facing foreclosure.
We stand on the verge of massive litigation that could dwarf the tobacco cases and other national consumer protection efforts. Yet we still have a weak economy to think about, and widespread turmoil in the housing market doesn't help.
Millions of home owners may have had their legal rights violated, but tens of millions of Americans are also anxious about their home values; nearly 30 percent of homeowners with mortgages are drowning "underwater". Even more worry about their ability to pay their mortgages.
Lawsuits that drag on for years may some day bring justice for some borrowers. But in the meantime, how do other borrowers hang on? And what is the impact on the rest of us if home prices plummet again, as a cloud of uncertainty keeps the home buying market perpetually overcast?
The best result from litigation therefore may be mediation.
As the 50-state Attorney General task force faces off against a range of lenders and loan servicers, both sides should keep the ultimate goal in mind.
Is the goal of the AGs to prove that wrongdoing was done? Or is it to get each home owner a fair hearing for his or her individual situation, one that offers a chance to work out a modification or other alternative to foreclosure?
Do the lenders want to simply keep insisting they have done nothing wrong that really matters in the hopes of simply adding to the tidal wave of foreclosures? Or do they want to clear the air, restore the public's confidence in them, and move forward to alternatives to foreclosure?
Promisingly, reports so far indicate that the coalition of the AGs is focused more on modifications than reparations: "Instead of paying a huge fine, maybe have the servicers adequately fund a serious modification process," lead Iowa Attorney General Tom Miller suggested. Hopefully recent election results won't diminish their resolve or their unity.
The AGs should insist on a remedy that has proven a valuable antidote against unnecessary foreclosures: mandatory mediation. As reports by the Center for American Progress and others have shown, states and cities "with fully implemented [mandatory mediation] programs such as Connecticut, Philadelphia, and Nevada report settlement rates nearing 75 percent, with the majority of homeowners remaining in their homes."
Unlike robo-signing and other practices that blindly push through foreclosures and ignore alternatives, mediation programs give the borrower a chance to sit face to face with a lender and a neutral third party and analyze the individual facts of each case. Borrower evidence of ability to pay a modified amount, which seems repeatedly to get lost in the foreclosure shuffle, suddenly cannot be ignored. And perhaps not surprisingly, even when foreclosure is the fair result, cases resolve faster once borrowers have had a chance to be heard in person.
Mandatory mediation clears the system, something we desperately need. It does so in a way that feels fairer than what is currently transpiring. But if it's so sensible, why would this alternative to the current crisis need to be mandated?
Voluntary loan modification programs have fallen far short for years now. While many factors contributed to the logjam, it is clear that the incentives and the very structure of the home mortgage finance system tilt the table towards foreclosure as the route most mortgage servicers will follow.
Most servicers work for investors who own pools of mortgages. The complicated agreements governing how servicers handle their work compensate foreclosure more than mediation. It takes more time, knowledge and staffing for a servicer to process modifications than it does to call up lawyers and start a foreclosure. And while foreclosure may yield less money for investors in the long run when all the costs are factored in, many of the foreclosure costs come "off the top" from the foreclosure sale, and are not borne by the servicer making the decisions.
In short, the mortgage pooling system that was set up to encourage private money to flow into mortgages and make them cheaper for consumers is now a virtual doomsday machine for the economy. Unfortunately, Congressional forces believing in an unfettered financial system, even when it operates out of control to the detriment of all of us, have blocked attempts at bankruptcy reform and other proposals that could have stopped millions of foreclosures.
The Attorneys General, however, wield a different club, one based on current law and requiring no action at the federal level. And in today's Washington climate, that just may be the advantage needed to unlock the national foreclosure mess.
David M. Abromowitz is a Senior Fellow at the Center for American Progress, www.americanprogress.org, and has written extensively on the foreclosure crisis.