Maybe It’s the Lawsuits that Stop Banks from Making Loans

John Ransom
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Posted: May 10, 2013 12:01 AM

When New York Attorney General Eric Schneiderman announced this week that he’s going after top banks Bank of America and Wells Fargo for violations of the national mortgage settlement agreement, he had a point.

Unfortunately that point resides mostly at the top of his head. Schneiderman, like many New York Attorneys General, is playing politics for the bleachers even though he’s hurting their case.   

“The settlement included 304 ‘servicing standards,’ or rules over how to conduct fair and timely service to homeowners applying for some sort of relief,” reported the Wall Street Journal. “Mr. Schneiderman said his office has found 339 violations of those standards by Wells Fargo and Bank of America since October.”

By contrast the attorney general says that, since the settlement, 7,500 homeowners have worked with state attorneys and the 94 housing counselors that Schneiderman hired for $60 million to enforce the terms of the agreement, according to the New York World, and another 8,5000 have received some sort of modification under the agreement.  

That means that the New York Attorney General has spent $60 million to find that banks are not complying with the terms of the agreement in only two percent of all the cases.  That means that each housing counselor, paid for with tax dollars, has only found 3.6 violations since October.

I wonder what they do all the rest of the time. 

I think the wrong party is getting sued-- and screwed-- here. 

Two percent doesn’t seem to be a very big number, especially when one considers that the banks have to comply with 304 different rules and regulations under the settlement.  

After all, many of these mortgages were forced on the banks by the federal government when the Feds shut down the subprime lenders supported by Fannie Mae and Freddie Mac.  And once a settlement agreement was reached, banks had a tremendous number of backed-logged houses in foreclosure, a process that was often suspended during settlement negotiations between banks and federal and state governments.

Frankly banks have been overwhelmed. 

“U.S. home repossessions rose to a nine-month high in November,” reported the Huffington Post, “even as the number of homes starting on the path to foreclosure declined to the lowest level in six years. Banks completed foreclosure on 59,134 homes last month, an increase of 11 percent from October and up 5 percent from November last year, foreclosure listing firm RealtyTrac Inc. said Thursday. Last month marked the first annual increase in bank repossessions since October 2010, when allegations of abuses by the mortgage industry compelled many lenders to temporarily halt foreclosures.”   

The World reports that about a third of the 7,500 New York homeowners now working on modifications will get their terms reduced. When you add in the other 8,500 previously modified loans, it comes to about 10,600 loan modifications against a potential 339 violations of the agreement.

That’s not just bad public policy; it’s also bad economics as well.

The assumption of course should be that the goal here is to keep the greatest numbers of families in their home, not to trick big banks into violations of a complex agreement so another Attorney General can run for Mayor of New York or Governor of “Longk Islandt.”   

But the numbers don’t suggest that Schneiderman is trying to help anyone but himself.  You see, the State of New York has paid $176,991.15 to find each of 339 violations, assuming every violation would be provable in a court of law.

The average price of a home in New York State is $237,100. It would be much more efficient just to give homeowners enough cash to get current on their homes.

And that’s not the only way that New Yorkers have been hurt.

According to Zillow.com’s Home Value Index, a proprietary measure of home prices, U.S. home values have risen 5.1 percent year-over-year, while New York State has seen only a gain of 0.9 percent over the same time period.

Compare US States

Zillow Home Value Index

Y-o-Y

US

$157,600

5.1%

California

$343,700

16.0%

New York

$237,100

0.9%

Florida

$134,800

8.9%

Pennsylvania

$143,200

1.3%

 

There are about 4.5 million owner-occupied housing units in New York State. At an average value of $237,100 that means that New York State is lagging the rest of the country in housing prices by about $450 million.

That translates into a loss of home price value of $10,000 per home.

That $10,000 in extra equity would likely make a much bigger difference in keeping a family in their home.

But more importantly, a stand down by big government would allow banks to get back to doing what they do best for a living: loan money.

At Bank of America consumer real estate loans in the U.S. declined by over 15 percent year-over-year, although they made up the business overseas. Global banking for Bank of America is generating close to 22 percent returns, while consumer real estate generated losses of $1.3 billion through loans forced on them by the government.      

With 304 provisions of a mortgage settlement agreement to deal with, and an overzealous attorney general who wants to be president of the United States and still mired in losses and lawsuits not of their own making, why would BofA loan money here at home?