Friday, November 11, 2011

A Deal That Would Not Sting

As discussed previously in this blog space, it appears that the investment and commercial banks most responsible for the 2008 mortgage crisis, are close to securing a big win at the bargaining table. Even though an agreement between the banks and the government has not yet been announced, all signs point to disappointment for distressed homeowners and those who hoped that Wall Street banks would be held accountable for their reckless behavior in the run-up to the foreclosure crisis. On its face, the currently under-discussion twenty-five billion dollar settlement seems like it could be a stiff penalty; however, as Gretchen Morgenson of The New York Times reports, in actuality, if this deal is agreed upon, big banks will only be required to pay five billion dollars in cash - and the rest in credits - divided amongst a dozen banks. Not much accountability or “heavy burden” there.

This cash from the proposed settlement would be split in the following way: $750 million to the federal government, $90 million to state bank regulators, and $60 million each to the roughly forty-five participating states, and the remainder of the $25 billion would be part of loan modifications, consisting of credits to banks for reducing the principal owed on mortgages that they own or service for private investors. Nevertheless, if past settlements and loan modifications are any indication, borrowers will not be seeing much relief. For this reason, the Attorney General's from New York, Delaware, and California have withdrawn from participation in these settlement talks.

31 comments:

  1. Jessica Bradley (Memphis Law)November 11, 2011 at 5:48 PM

    After reading the original NY Times article, I have to agree- the burden imposed on the banks is not enough to ensure accountability and it seems to miss the mark on actually assisting the homeowners that were affected by the crisis. As Gretchen Morgensen notes, a great number of the mortgages affected by the conduct of the banks will be excluded from aid through the settlement, most notably borrowers with loans taken through Fannie Mae and Freddy Mac would be excluded. Additionally, one of the terms of the agreement gives $1500 in cash to those who lost their homes to foreclosure since 2008, but those who were wrongfully evicted from their homes would not recieve payments. The settlement completely misses the target, and it comes as no surprise that a number of Attorney Generals have decided to withdraw from participation. Unfortunately, this deal seems to indicate the government is having great difficult regulating and reigning in corrupt financial institutions. If the government is unable to check these powers on behalf of the people, who can?

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  2. Kenneth W (Memphis Law)November 11, 2011 at 11:39 PM

    Mr. Cummings, you have definitely opened my eyes. At first glance these numbers seem large enough to provide some relief to those affected by the housing crisis; but as you explained, after distribution, there is little money to go around to even attempt to rectify the disastrous impact on homeowners. Furthermore, as Jessica noted above, some loans are even excluded from settlement. Where is the accountability!? We are now approaching 2012 and there is still no accountability! It would just seem logical to me that after identifying the problem relief would follow soon for homeowners who fell victim to the housing crisis. I am frustrated that so many Americans could be affected by a crisis in which the government has yet to achieve recourse. From the looks of it, there will be no recourse anytime soon. So I agree with Jessica, if the government can't succeed in checking the "economic powers," who can?

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  3. If the government is unable to check the banks, it is important for private investors to keep going after these banks instead of accepting this mass settlement. The Rolling Stone article states that a group of 22 investors were able to settle an action with Bank of America for half of the amount that proposed in this mass settlement. Indeed, this settlement does look more like a bailout than anything else. In fact, I think that the government is aiding this bad behavior by encouraging this settlement. The Rolling Stone article indicates that there is some pressure for the government to get the deal done before the next election. Thus, this is more like a PR campaign rather than an attempt to get real reciprocity. I applaud the attorney generals of California, New York, and Delaware from pulling out of these talks. Even though many of the major banks and corporations reside there, these AGs have shown that their loyalty ultimately resides in the people that were affected by this mess. Hopefully, other states will also step up and show the federal government that this deal is not in the best interest of citizens.

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  4. As Jessica Bradley pointed out, the really unsettling thing is the fact that "a great number of the mortgages affected by the conduct of the banks will be excluded from aid through the settlement, most notably borrowers with loans taken through Fannie Mae and Freddy Mac." (Couldn't have said it better.) Not only are those giants HUGELY responsible for this mess, but their CEOs are looking at expected $2 MILLION dollar BONUSES at this year's end - which will of course be coming out of taxpayer bailout money. That absolutely boggles my mind. Are these institutions so untouchable? I agree with Jessica Reeves that at this point the government is seriously flirting with the role of enabler. There is small hope that lawmakers are starting to take notice of the nation's unrest and impatience, however: according to CNN, "Members of Congress are calling on the Federal Housing Finance Agency, which oversees the government's conservatorship of the firms and approved the pay packages, to suspend the bonuses."

    See http://www.cnn.com/2011/11/13/business/bonus-pay-block/

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  5. Zach H - Memphis LawNovember 15, 2011 at 1:44 PM

    I think the criticism of this deal is overblown. To start, the criticisms contradict each other. People are mad that homeowners aren't getting enough relief, but then also mad that the deal is primarily in credits to write down principal on homeowners loans instead of being in cash to go to the government?

    The criticism also seems based on the assumption that this group of banks is responsible for the economic meltdown, and this is their shot to pay it back. In those terms, $25B is obviously inadequate. But the AG suit isn't that broad, it is focused on improprieties in handling mortgages they service. That is why mortgages backed by other groups (Fannie Mae, et al) are not included, and it is why the majority of the money is going to write-off on mortgages. The "credits" may not be cash payments, but that doesn't make the losses any less real.

    That said, it must be carefully applied. I disagree with the idea of simply writing off $25B in principal and "marking to market" the loans. This would help people who are underwater, but it wouldn't help people who can't make payments unless you refinanced the loans completely, and even then they still might not be able to make payments, which does nothing to help homeowners on the verge of foreclosure. In addition to writing off principal, you need to have a system that will prevent foreclosures.

    It is important to remember that the allegations in this suit represent a small part of this mess, and any settlement will seem small compared to the overall damage done. FHFA (the agency that oversees Fannie Mae and other psuedo-governmental financial agencies) is filing separate suits against investment banks over alleged fraud in their role in CDOs and other mortgage backed securities. Private investors are also filing their own suits over similar matters. I'm assuming they are 10b-5 allegations, so the plaintiff's are going to have either prove the banks knew the securities were junk, or were extraordinarily reckless in selling them.

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  6. From the NYT article: "The banks contend that they have seen no evidence that they evicted homeowners who were paying their mortgages. Then again, state and federal officials conducted few, if any, in-depth investigations before sitting down to cut a deal."

    So, state and federal officials have managed to strong-arm $25 billion out of the banking industry without having conducted in-depth investigations or provided any evidence of harm. And you see this as an injustice to the borrowers ?

    Why should the banks be required to write down $20 billion dollars worth of principal on mortgages given to people that are not in foreclosure and to whom the government cannot establish harm has been done? How does achieve "justice" for those who were "wrongfully evicted"? If, in fact, such people exist.

    Taking out a loan to purchase a home that you could not afford and, being evicted from a property that you do not own, does not make you a "victim". And insisting that the terms of a mortgage be met does not make the lender a "predator".

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  7. "Anonymous" makes a valid point, and I think it is important that we view the economic crisis objectively. It is sometimes easy to get caught up in the frustration of our struggling economy and vilify the corporate giants, especially because it's human nature to ask, "Who is responsible for this?!?" It makes us all feel a little better to have someone to blame and direct that anger toward.

    I wouldn't go so far as to victimize banks either though (not to suggest that Anonymous' post did so). The banks and financial agencies have a lot of the responsibility to bear, but "Anonymous" is right, not everyone who suffered from their lending practices is a "victim" of those entities - many of them of victims of their own ignorance and poor money management skills.

    The bottom line is, there is plenty of blame to go around, and the educated approach to this problem is one that considers all the variables and avoids the urge to look for one or two scapegoats.

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  8. Spencer (Memphis Law)November 16, 2011 at 6:44 PM

    I agree with Katie and Anonymous. As the mortgage meltdown progressed, I see two "categories" of blame: homeowners who neglected to understand what they were signing, and the banks who intentionally or recklessly hid the terms from the borrowers.

    The issue is to determine the line between the blameworthy parties. Sometimes it may be clear - key terms may have been misrepresented in the documents or oral statements to the borrowers contradicted the writings. Otherwise, finding the line just comes down to social policies.

    Personally, I think both are to blame, but not necessarily in all situations. Sometimes the borrower is solely to blame for spending beyond their means and not asking questions. Some borrowers foolishly relied on future market driven equity. On the other hand, many lending institutions should not have preyed on un-savvy borrowers.

    The financial institutions need to have more oversight to prevent another mess, and they should be held accountable for their actions. This is one instance where I believe the government should not let free market completely take over. I'm not suggesting complete control; use as little regulation as necessary. But keep in mind there will always be foolish borrowers, and we cannot curtail the free market to the point of totally protecting everybody.

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  9. Natasha--Memphis LawNovember 17, 2011 at 3:13 PM

    It does appear that borrowers will not see much relief if the banks are able to distribute low value loan modifications over tons of borrowers. The effect to the individual borrower is minimal in comparison to the effect to the lender who is able to aggregate the credits from all the loan modifications.

    Also, characterizing a penalty as a credit seems counter-intuitive if the aim of the settlement is to be punitive in nature. The effect of the penalty is that while a lender pays for their part in creating the lending crisis, the lender gets reimbursed (in the form of credits) for loan modifications.

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  10. Zach H - Memphis LawNovember 17, 2011 at 7:58 PM

    People blaming the borrowers here need to take a step back and look at how the lending system works, and what these charges are actually alleging.

    The charges here are all against mortgage servicers. When you want a loan for a new house, you go to a mortgage originator like your local bank. They look at your income and assets and evaluate the real estate. It is the originators responsibility to determine if you will be able to repay your loan, based on the data you provide them. It is also their responsibility to make sure the house is worth what they are loaning you. However, so long as you appeared to meet minimum requirements, originators had no incentive to dig too deep because originators had basically no risk in making a bad loan. Immediately after they give you a loan, they turn around and sell it to a mortgage servicer.

    From what I can tell looking at other sources, the charges here are looking only at mortgage servicers and only at the narrow issue that the servicers violated foreclosure laws by "robo-signing" foreclosure documents, essentially the foreclosures were being processed without being reviewed. Seems like there has been some bad reporting around this issue, no wonder the commentary is so confused.

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  11. I think both Spencer and Zach both make good points. Both homeowners and financial institutions are to blame for the crisis. However, allocating the blame between these two parties proves much more difficult.

    When examining this situation, I think it's important to keep in mind that many borrowers, even intelligent ones, are not particularly familiar with the lending process. Banks can easily use the foreign, formalistic nature of lending practices to their advantage.

    While borrowers have a duty to ask questions, know what they are signing off on, and spend within their means, some amount of trust in the lending representative is required. Lenders who intentionally hide or misrepresent terms, fail to properly review information, etc. should definitely be held accountable in some way and be subject more oversight in the future.

    That being said, we can not victimize or protect everyone, particularly those who borrow foolishly, despite being informed, or those who intentionally misrepresent their financial information to lenders. Lenders must rely on this info to accurately determine a borrower's financial capability, yet it is not that difficult for more savvy borrowers to manipulate information to secure loans higher than they should receive. Unfortunately, sometimes people just make bad choices, and they, too, must be held accountable for these decisions.

    However, since this settlement doesn't seem to effectively create accountability for either group, I have to agree with Jessica Bradley and others that it misses the mark.

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  12. "It is the originators responsibility to determine if you will be able to repay your loan, based on the data you provide them. It is also their responsibility to make sure the house is worth what they are loaning you." -- Zach

    The key part of that statement is "based on the data you provide them" . As it turns out, most people were only to happy to stretch the truth on their mortgage applications:

    "There has been plenty of talk about “predatory lending,” but “predatory borrowing” may have been the bigger problem. As much as 70 percent of recent early payment defaults had fraudulent misrepresentations on their original loan applications, according to one recent study. The research was done by BasePoint Analytics, which helps banks and lenders identify fraudulent transactions; the study looked at more than three million loans from 1997 to 2006, with a majority from 2005 to 2006. Applications with misrepresentations were also five times as likely to go into default." -- The New York Times

    Couple this behavior with the non-recourse rules in many states that allow borrowers to simply walk away from their mortgages without penalty, and borrowers were effectively given a free, one way bet on the housing market.

    If you bought a home and the price of that home increased, you kept all of the capital gain. If the price of that home decreased beyond what you had mortgaged it for, you simply walk away and stick the lender with the loss. This is predatory borrowing, and no one should be considered a "victim" for engaging in this behavior.

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  13. Zach H - Memphis LawNovember 20, 2011 at 3:24 AM

    Anon-

    Three quick points:

    1) None of the current federal lawsuits revolve around origination. There is a securities fraud charge related to the selling of synthetic CDOs, and there is this suit, relating to violations of foreclosure laws/due process. Even if you obtained an outsized mortgage through fraud, you still deserve due process before being foreclosed on. If the foreclosure is coming as a result of investigation into fraud, I could understand. However, these are typical foreclosures that don't take that into account.

    2) Your source cites a high of 70% of recent early payment defaults, but this is a small subset of loans. It does not put that into context of all mortgages originated to determine how many were based on fraudulent data. The report is also from January 2008, just one month after the recession officially began. Logically, it makes no sense that a huge swarm of fraudulent buyers inflated the market. More likely, fraudulent buyers were attracted to an already loose lending environment.

    3) Borrower fraud does not excuse lender fraud/negligence. If there was lender fraud, it didn't just affect fraudulent borrowers, it affected ALL borrowers. Your cited article goes on to say: "Too often, mortgage originators and middlemen looked the other way rather than slowing down the process or insisting on adequate documentation of income and assets. As long as housing prices kept rising, it didn’t seem to matter."

    I worked in the industry during the peak of the bubble, and both witnessed and directly experienced the lending environment. Loan originators were focused on volume. They put a lot of pressure on appraisers to meet whatever number they needed to make a deal. At a minimum, many loan originators were negligent in their duties. I don't have any direct experience with it, but evidence suggests this was driven by similar negligence in the secondary market.
    See, for example, the recent settlement in the WaMu class action: http://online.wsj.com/article/SB10001424052702304584004576419740497824126.html

    While I'd have no problem prosecuting fraudulent borrowers, I am more concerned with the larger, systemic problems that tanked our economy. The housing bubble was not driven by foreclosures of fraudulent borrowers who overextended. It was driven by negligent and fraudulent lenders, the failure of regulators to do their job, and investment banks who securitized these risky mortgages and marketed them as a low-risk investment. The root of all of this is the problems with lenders. The fact that some borrowers being foreclosed upon deserve what they have coming because they were fraudulent borrowers is cold comfort when it is four years since the "official" start of the recession, nationwide unemployment is at 9%, and the Eurozone is on the brink.

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  14. "The housing bubble was not driven by foreclosures of fraudulent borrowers who overextended. It was driven by negligent and fraudulent lenders ... The root of all of this is the problems with lenders ..." -- Zach

    Really? Please explain for us the incentives for "negligent and fraudulent lending" . Is the ultimate goal to wind up with an asset - the mortgage - that the borrower cannot payback? How does the "fraudulent lender" make money under this scenario? Is it to purchase a property through the mortgage holder that can later be sold once the borrower has defaulted? If so, why not just buy the property directly instead of purchasing a mortgage to a property that is both historically overpriced and in a less desirable segment of the real estate market? Remember, the lender is the party who actually holds title to the property in question. He is not the myriad of middle men - originators, securitizes, etc. - who hope to profit by providing some service along the chain between borrower and lender. One wonders why all of these lenders had to be bailed out. I thought that the guys running the scam were the ones who were supposed to make the money.

    And what about the mortgage originators? What were their incentives? They could only write mortgages that they were certain others higher up the chain would purchase. If there were no demand for these mortgages they had absolutely no incentive to write them. Initially, and in the overwhelming majority of cases, that demand came from the GSEs. And what incentive did the GSEs have to purchase loans that they knew going in were of lower quality? They had to meet the quotas imposed by HUD as part of a government mandate. Those mandates were a direct result of policies pushed in the early '90s by leftists and their Democrat allies for a socially engineered outcome in home ownership.

    Now it is true that the market extended beyond the GSEs. As I pointed out in a previous post, the rewriting of Basel and other regulations, along with the low interest rates imposed by the Fed made securitized mortgages attractive to banks and other financial institutions that were not involved with mortgage lending. This increase in demand on top of that already being driven by the GSEs resulted in an explosion of lower quality mortgages toward the end of the mortgage bubble.

    " ... the failure of regulators to do their job ..." -- Zach

    Now here we can agree. And just how many of these regulators have been terminated for their incompetence? ZERO! In fact, the left always believes that the answer to any problem is to further empower the very regulators whose incompetence was largely responsible for the problem to begin with.

    "... and investment banks who securitized these risky mortgages and marketed them as a low-risk investment." -- Zach

    It's important to remember that the investment banks who securitized many of these mortgages also held them - at least the higher rated tranches - for their own accounts. The assessment of their risk was left to independent credit ratings agencies that had been granted special status by the government as diviners of all credit risk by a 1975 amendment to the SEC's Net Capital Rule. The securities in question were marketed in tranches of low to high risk mortgages with the higher risk tranches paying higher rates and shouldering greater default risk than the lower risk tranches. Of course, the real quality of any of these mortgages begins with the truthfulness of the borrower as related to their ability to make the payments involved.

    I suggest that you read this article, written in 2000, as an introduction to the foundations of the crisis: The Trillion-Dollar Bank Shakedown That Bodes Ill for Cities, City Journal

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  15. Zach H - Memphis LawNovember 20, 2011 at 6:59 PM

    Anon:
    Motivation for secondary market: good question. Generally I think they just didn't appreciate the risk they were taking on because the potential for profit was so huge. If a borrower paid off the mortgage, profit. If a borrower goes into foreclosure, profit from fees and then you can resell the property. Many also profited from securtizing these loans in other divisions of the bank. It all made sense on a micro level, just not macro. This is the negligent part. Some would say reckless. The real fraud was when they began to realize how weak these assets were and started fudging the numbers in shareholder reports.

    Motivations of originators is much easier. The majority of originators did not hold on to the loans. They made their money selling the mortgage and forgot about it. Outside of morals, they had little motivation to watch for fraud or make sure the assets were sound investments, especially when secondary markets were flippant about these requirements.

    Regulators: You should examine the involvement of OTS. The problem was not incompetence, or too many regulations. OTS consciously chose to stop enforcing regulations. This was epitomized in the famous photo op showing OTS staff cutting up federal regulations garden sheers. OTS believed that this would spur activity. And it did. Their mistake was assuming that banks would regulate themselves to weed out bad loans. We saw how that turned out. As for no one being fired, the entire OTS division is being eliminated and folded into the Office of the Comptroller of the Currency. The OTS director who oversaw this mess is gone, but I can't speak for lower level workers.

    As for securitizers, the question is, did they provide accurate information on the risks to the ratings agencies? Did the ratings agencies just fail to do their job? Either way, did securitizers know the CDOs were riskier than they were being marketed as, violating 10b-5? I'm reserving judgment on that until I see more evidence.

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  16. Zach H - Memphis LawNovember 20, 2011 at 7:00 PM

    Ultimately, it seems you're arguing based on ideology and as a result have tunnel vision. You note two of the causes (borrowers taking out too much and the government creating a moral hazard) without acknowledging others (lender and securities negligence/fraud, lack of regulation). Borrowers were a contributing factor, but they were bit players in the system and had no power and little capital. They were a symptom, not a cause.

    You argue that the government set up an environment that encouraged the crash, with low interest rates and lowered requirements from HUD, along with federal insurance on lenders, creating a moral hazard situation that encourages risky behavior. Let's assume this is true. Where is the accountability for all of the other participants? Are lenders excused from reckless behavior simply because they believed the government would bail them out?

    I think the moral hazard argument has merit, however if regulators actually did their jobs, it is moot. OTS decided to abandon its mission and let the market regulate itself. With no one to regulate the market from a macro/community perspective, the greed and hubris of market participants, inflated by the moral hazard climate, drove everything straight into a crash.

    The next question is, if you eliminated both the moral hazard inducing insurance program along with regulations, would there still be a crash? I would say yes. I don't doubt that regulation decreases efficiency and can slow growth. However, without it, there is no party looking out for the benefit of the community. Like in this crash, everyone is so focused on their own immediate profits that they don't stop to look at the macro fundamentals to see if their short term gains will be beneficial in the long run. Regulation is imperfect, but I think it is a necessary evil and efforts should be on perfecting it rather than abolishing it in total. I also think that if you eliminated government insurance and regulation, the markets would develop their own programs recreating these systems. Whether this would be superior to government action is a matter of opinion.

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  17. Andrew H - Memphis LawNovember 20, 2011 at 7:45 PM

    While not normally a fan of "big government," hasn't the corporate and banking scandals of the 2000s taught us that these entities will require more supervision? Congress has acted to a degree (Sarbanes-Oxley, etc.), but if these bad actors are never punished punitively they will never stop?

    It may be good public policy to keep our banks and corporations in business and not bankrupt them through punitive damages, but where does one draw the line on good faith mistakes that occur (BJR) versus repeated corporate scandals defrauding and costing the taxpayers millions of dollars?

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  18. While I agree the settlement may not punish the big banks to the extent most would prefer, isn't some punishment better than none? At least enforcing this settlement would convey the message that the American citizens negatively impacted by these events are angry and will continue to be if this type of behavior persists. Yes, I would like to see the big banks hit harder for what they did to those striving for their "American Dream" but at least enforcing some type of settlement sets the precedent that further punishment awaits if the big banks do not appropriately comply with regulations.

    As has been stated, if participating states are not happy with the settlement, they can withdraw and choose not to accept the mass settlement. Either way, we, as citizens and those affected by the big banks' actions, must continue to be the watchful eye, not be afraid to ask questions, and certainly not be afraid to stand up for what we feel is fair and just!

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  19. Robert_(Memphis Law)November 21, 2011 at 1:37 AM

    I agree some punishment is better than none and its sends a message that banks will be held responsible for their reckless behavior which caused this mess. Furthermore, the government needs to get out of the business of bailing out banks and corporations because only furthers this reckless behavior. I am glad to see that states like California, according to reuters, are going after the players in this crisis like Fannie Mae and Freddie Mac and are not participating in a settlement with the banks. ().
    Maybe the banks and the mortgage giants will get the message and stop acting irresponsible. However, this will require the government to take steps to stop encouraging this behavior and as Elizabeth said, for citizens to be vigilant in their business with banks and mortgage lenders.

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  20. I agree with Anonymous (Nov. 15 post). Banks do not hold all of the blame for the high foreclosure rate. It seems pretty common sense budgeting principal that you do not buy something that you cannot afford. Just because the bank approved you for a $500,000 loan, does not mean that you can afford it. Individual home owners need to take responsibility for their own greed and inability to live within their means. It seems to me that Americans have become too accepting of the concept of debt. While people who have degrees in business or finance might argue that debt is a good thing. I like to stick with the basic principle that my parents instilled in me, debt is bad and if you want something you must practice patience and take time to save up to purchase it.

    However, it should be noted that the banks are not completely blameless. The banks should be held accountable for their deceptive practices in having people sign for fluctuating interest rates that would sky rocket after a short period of time. There is enough blame to go around, so banks and individuals both desire their fair share of the responsibility!

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  21. Wow, Zach and Anon covered pretty much all corners of this issue. I agree as well that banks don't have all the blame.. but I enjoyed how Anon threw the statistic out about the technology banks use uncovering the percentage of fraudulent borrowers. If the banks had that technology... why didn't they use it... BEFORE they lent money to the fraudulent borrowers? This is the reason banks do deserve blame. It is their responsibility to investigate, to use due diligence, in deciding who to offer a loan to and who to turn away. And yes, they can be fooled but they should make it very hard for borrowers to fool them. This is the bank's JOB. I'm pretty sure that most of their borrowers don't make it their JOB to receive fraudulent loans. What's that that we learned from the Dubya administration? "Fool me once, shame on you. Fool me twice... well, you can't, you can't get fooled again."

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  22. Being a later poster than others, I have a few bandwagons on which I can jump! I agree with Jessee, who agreed with several other posters, in that multiple parties, including homeowners, are to blame. It's no secret that "bigger is better" and in some number of instances, homeowners wanted more house than they could have afforded. Any deal that's "too good to be true" is just that. Assuming a loan with very little apparent responsibility is not exactly responsible.

    Of course, the lenders share this blame, but perhaps an argument can be made to show the flaws in a system where loans don't stay where they originate? Extending a loan to a less-than-creditworthy buyer and then turning right around and selling the loan to another lender seems to have been a disaster waiting to happen.

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  23. The banks still don't have a handle on what is going on with homeowners. All that the banks are concerned about now is how their financial health rates, so that they can continue loaning out ten dollars for every dollar they actually have in average collected account balances. Don't get me wrong, access to credit is a must for the American economy, for our workers, and for our companies. A bank who took on too many risks should not be forced to close under this stress, but they should be forced to slow down their lending until the strength of their books is healthy again. Part of the problem is in how the banks financial health is rated. Why is it that foreclosing on a homeowner who might be able to actually pay the loan at a reduced amount only to take a loss in the liquidation of the property viewed as superior to keeping the homeowner in their home and reducing their note to something they can afford? If banks had to take a huge rating decrease in their financial health when they took losses on foreclosed properties, they would be alot quicker to help the homeowner. And why not, credit agencies kill the homeowners credit when the homeowner takes a bad risk that results in loss. Conversely, the banks financial health should be rated as improving when they are able to keep a homeowner who could pay a reduced payment in the home, even though the reduced payment would result in less profit.

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  24. The concept of discounting the mortgage to the amount of the loss that would be incurred in foreclosure sounds good and I am in favor of it; however in practice, I'm not sure it will work. A bank is simply not going to do something like this when it could hurt their bottom line. A bank is in essence a numbers machine programed to make the number at the bottom as big as possible with the only parameters being the measly regulations the government has in place.
    I said in another post and still believe that banks should be held partly accountable for the 2008 debacle and the crisis in Europe now. They are lending money even though these financial firms are leveraged beyond any reasonable level. The banks will simply unload the bad investment and keep all the fees and closing costs.

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  25. Gray N. Memphis LawNovember 28, 2011 at 3:38 PM

    In an era where banks and other financial institutions are errant with their investments and loans but are rarely punished for their recklessness, this deal at least places some blame on these institutions. Not everyone is satisfied with the settlement though. As The NY Times writer, Gretchen Morgenson points out, only 5 billion of the 25 billion settlement will be in the form of a cash payment by the institutions. The other 20 billion, "would consist of credits to banks that agree to reduce a predetermined dollar amount of principal owed on mortgages that they own or service for private investors." Be that as it may, some punishment is better than no punishment at all. Maybe the investment and commercial banks responsible for the 2008 mortgage crisis will learn their lesson. Only time will tell.

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  26. Salwa (Memphis Law)November 29, 2011 at 3:45 AM

    I agree with Katie in that the crisis can be attributed to a number of factors, and there isn’t just one to blame. Among the factors included is the inability of homeowners to make their mortgage payments. As more homeowners stopped paying their mortgage payments, foreclosures increased. As a result, this affected housing prices, which ultimately lowered homeowners’ equity. Another important consideration is the predatory lending practices of the mortgage lenders.

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  27. Those who are responsible for the recent financial crises do need to be held accountable for their negligent actions. However, going forward, I think that is more constructive to focus on passing a more efficient regulation scheme that will prevent future financial crises from happening instead of settling scores.

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  28. Brigid W (Memphis Law)
    While the borrowers of the subprime mortgages can technically be said to be partially to blame for not being able to make their mortgage payments, I think it is important to realize that those who were granting the mortgages knew that the borrowers did not have sufficient income to sustain the types of payment increases that the mortgage contracts called for. This is a classic case of these big, sophisticated parties praying on those less sophisticated and lending money irresponsibly in order to make a quick buck. Knowing full well that this system was unsustainable. That is why I think it is entirely fair to hold the big banks accountable, and it doesn't seem like this settlement will accomplish that at all.

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  29. Wow you can tell who works for the banks directly or indirectly. The fly doesn't wish to get eaten by the spider, but the spider weaves the web and nobody cares if the fly committed suicide, flew the wrong way or was drawn into the light. Really doesn't take a genius to figure it out. Look at history and know what you feel.

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    Replies
    1. I agree with Fly Man. I remember when the LOTTERY was introduced. The people who had money never bought tickets, it only preyed on the dreams of the poor. Great great point Fly Man...

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