Another practical consideration concerns Fannie Mae and Freddie Mac. Once government-sponsored and now government-owned, Fannie and Freddie encouraged robo-signing in order to process foreclosures quickly, because doing so helped them reduce their own losses, thereby reducing the losses to taxpayers. Edward DeMarco, who is the acting director of the Federal Housing Finance Agency, recently sent a letter to Shaun Donovan, the secretary of the Department of Housing and Urban Development, arguing that reducing the principal on mortgages would cost taxpayers money. Given that, how should any settlement handle the huge volume of mortgages that are guaranteed by Fannie and Freddie?
When I consider the banks' arguments, I'm torn.
On the one hand, they lack any moral standing. While they don't deserve 100 percent of the blame for the mess—anyone who lived beyond her means needs to look in the mirror—they managed to shift responsibility for the cleanup onto taxpayers. The banks' arguments that their violations against homeowners are only technical reveals contempt for their customers. Convicted criminals get better treatment. And one of the smartest people I talk to has argued repeatedly that the government—or the banks themselves—should have spent some of the money that was eventually spent on TARP to bail out homeowners back in 2007, and then we would never have had a foreclosure crisis.
But there may be some validity to the banks' practical arguments. It's too late to turn the clock back to 2007. And mortgage modifications that don't work aren't just ineffective. They are harmful, both to the economy and to the borrower. Keeping someone in a house he or she can't afford can be viewed as just another form of predatory lending.
What should alarm everyone, including the banks, is that the banks don't reside on the same planet as most taxpayers and consumers. Isn't it Business 101 that something has gone terribly wrong when those who are supposed to be your customers start to hate, fear, and distrust you?
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