The U.S. government proposes to sue the nation’s largest banks for fraud that led to the housing crisis. Why stop with the banks? Others in the housing industry were surely involved. Better yet, why doesn’t FHFA just sue itself?
Of course, we’re joking about suing the housing industry (well, there might be some merit…). But we’re serious about this blame-game lawsuit. Is it possible that banks weren’t perfect during the feeding frenzy housing boom? Sure, we’ll stipulate that. But so were the ratings agencies, who are monopolies under government law. So were many REALTORS, who happily took overpriced bids on one hand, while saying, “Yeah, we know it’s a bubble,” on the other. And let’s not forget consumers, who eagerly played along with the entire shell game.
That’s how irrationally exuberant bubbles work, don’t you know?
But to say that banks defrauded investors – as sophisticated as Fannie Mae and Freddie Mac – seems a stretch. If organizations of their scale, with their resources, overseen by a government regulator didn’t catch them “in the act” then who could have? Certainly not the everyday borrower who gladly accepted his $1 million dollar pre-qualification letter on his teacher’s salary.
It doesn’t matter that we’ve seen tons of evidence that Fannie Mae and Freddie Mac actually promoted “marginal” lending practices, as we’ve written about here, and here, and here. It has become a Cracker Jack box joke that Barney Frank said he’d “like to roll the dice a little more” to marginal borrowers. We reported that Fannie Mae’s own former Chief Credit officer Edward Pinto said:
…from the time Fannie and Freddie began buying risky loans as early as 1993, they routinely misrepresented the mortgages they were acquiring, reporting them as prime when they had characteristics that made them clearly subprime or Alt-A….Market observers, rating agencies and investors were unaware of the number of subprime and Alt-A mortgages infecting the financial system in late 2006 and early 2007. Of the 26 million subprime and Alt-A loans outstanding in 2008, 10 million were held or guaranteed by Fannie and Freddie, 5.2 million by other government agencies, and 1.4 million were on the books of the four largest U.S. banks… [emphasis added]
We spent over $700 billion “to promote financial stability” under TARP, fearing a banking system collapse on the scale of the 1930s. Since then, we’ve lowered interest rates to levels not seen since 1945, devastating the dollar, driving up energy and food costs, all in an attempt (misguided, but let’s continue) to support an economic and housing recovery. Today, nearly 9 our of every 10 mortgages is purchased by a GSE (read: backed by taxpayers). Still, the housing market struggles. Foreclosures in some states could take a decade to clear the courts. And too many real estate agents are glad to just “hang on another year.”
Against this backdrop, does it make any sense to now sue the nation’s largest banks, and some European ones, for $200 billion. Not to mention the threat of putting a few hundred executives in jail?
Wow. Great idea to restore confidence in government and the markets.
Of course, some people, including some REALTORS I’ve seen commenting online, think this is great. Go get the banks, they say. They caused this whole problem, they rationalize. Banks aren’t lending, so punish them, they demand. One wonders if some in the housing industry understand how they get paid.
Let’s stipulate there is a fraud case to be made (but only if we sue all those homeowners who haven’t been paying their mortgages for the last three years, too). The scarier argument that should worry real estate brokers most is the “banks aren’t lending” line. For the facts, check the Federal Reserve website, indicating revolving credit lending up 8%, non-revolving credit lending up 7.5%. Even in places where mortgage lending has slowed or become more stringent, do we really have to ask why?
It’s hard to blame banks for not wanting to lend into a still-declining market. Pile on the threat of government punishment and it’s little wonder that banks would rather seek to lend to the next iPad manufacturer in China, rather than risk the wrath of such luminaries as Frank and Dodd.
In fact, Bank of America has started doing that last week. On August 31, BoA contacted the National Association of REALTORS to let them know they were exiting the correspondent mortgage lending business. BoA protests (methinks a bit too much) that the move is designed to improve customer service and manage lending oversight. But we suspect the real reason is that BoA is planning a post-lawsuit exit strategy from the housing market. You don’t walk away from $138 billion in correspondent lending business deals in the middle of a recession without a serious reason. And that is: when every new loan becomes new fodder for government lawyers and investigators, and the risk of C-suite executives is jail time if their employer makes home loans, it’s time to move in a different direction.
And that means banks purposefully exiting the mortgage business.
That might seem like a big guess, but is it? When a big bank closes off the hundreds of little third-party mortgage brokers from its pipeline, it’s not a sign they are just hoping to control quality. They are trying to control quantity. It’s a global economy, remember? Banks can make money all sorts of ways. Gold mining, for example, or shale deposits, or investments in growing industries in the Baltics, South America or Australia. Plus China and India. It’s only the U.S. housing industry that thinks it’s a big player for banks; but that’s because they still think all business is “local.”
Big banks might one day decide: Leave the housing market to the community bank lenders. We’re sick of the CRA, FHA, HUD and other strings that pull us in one direction, then noose and hang us in the other. They’ve already left the reverse mortgage business. And they’ve left the college lending business, after it was nationalized by the U.S. government last year. Banks are in the business to make money and at lower risks. If every time there’s a housing problem the alphabet-soup of government falls scalding upon them, they eventually learn to avoid getting near the stove.
The traditional wisdom against this kind of thinking is that banks make too much money in housing; they’ll never exit. These days, I’m not sure any traditional wisdom counts. Put a few big bankers in jail and see what that does to mortgage qualification standards. Force the banks to take $25 billion in TARP money each, let them pay it off with interest, then hit them with a few billion dollar lawsuit, and you’ve just done what any mob boss dreams of doing.
And there’s always the community banks, right? Those corner-banks that everyone seems to love – as opposed to the evil “big banks” out there. Well, consider this: All of the 7,000 community banks combined only comprise 21% of the banking business. Last year, only eleven community banks were chartered nationwide. Once FHFA sues the big banks out of the business, or merely causes them to significantly decrease their participation in mortgage lending, won’t we all be glad to know that Ike Godsey is still around to lend us a few dollars from the general store’s till?
And this is how we’re supposed to help the housing market recover. Right.