Issue of the week: A fog over foreclosures

last updated 8 January 2015

The growing foreclosure scandal “is becoming both a financial and a political hot potato,” said the Financial Times in an editorial. The financial consequences alone could be staggering. Banks might be forced to repurchase mortgage securities they sold if the underlying mortgages that they bundled into the securities are tainted by errors. This week, the New York Federal Reserve Bank joined several large investment firms in demanding that Bank of America repurchase $47 billion in such securities. Total liability for banks could be in the hundreds of billions. And “the politics are even worse,” said Steven Mufson in The Washington Post. Senate Majority Leader Harry Reid and other congressional Democrats have called for a nationwide foreclosure moratorium, figuring they can pick up votes by sounding “a populist note” and casting the issue as bullying banks vs. helpless homeowners. But the calculus isn’t so clear for others. President Obama has stayed “fairly neutral,” urging the banks to fix their errors but resisting a moratorium that could paralyze the housing market—and thus the recovery. Meanwhile, leading Republicans are defending the banks, creating “a recipe for legislative inaction.”

Politics aside, a moratorium would only make a murky situation even more opaque, said Barbara Novick in The Wall Street Journal. “Postponing the resolution of these debts”—though it might sound attractive to a politician in a tight re-election race—does consumers no good, because it would “actually prevent consumers from extricating themselves from loans they can’t afford.” A moratorium would also make the housing crisis worse by “preventing supply and demand from reaching equilibrium.” And it would make institutional investors, whose purchases of mortgage-backed securities fund the housing market, think twice about continuing to invest in housing.

Still, we shouldn’t let concerns about the housing market blind us to basic issues of fairness, said Ann Woolner in Bloomberg.com. “What the banks did here still deserves punishment.” Before a bank can take away someone’s shelter, it’s obliged to show some “care, attention to detail, and respect for property rights.” The alternative is to invite the sort of lawless foreclosure that Bank of America executed against Charlie and Maria Cardoso, said Joseph Tauke in DailyCaller.com. Earlier this year, BofA changed the locks on their Spring Hill, Fla., home and removed all their property “even as a Realtor employed by the bank itself told it that there was no mortgage on which the Cardosos could skip payments”; the Cardosos had paid cash for the property. It turns out that BofA was relying on bad documentation and was foreclosing on the wrong address. This is the same bank that this week lifted its own foreclosure moratorium, saying it has fixed its paperwork errors. Pardon me if I’m skeptical.