Monday I did an analysis of a study HousingWire reported as showing that profligate borrowers were the reason many 2009 mortgage modifications failed. I analyzed the reported data to show the 2009 mods left borrowers insolvent, and said it’s not surprising that mods that leave borrowers insolvent fail. In the ‘article’, Showalter rejected the idea that mod terms mattered. Instead he claimed the borrowers’ “lifestyles” explained who defaulted and who didn’t.

But here’s the thing. As I explained Monday, the key “lifestyle” choice was which debt to default on: when insolvent, did the borrower pay Peter (the mortgage servicer) or pay Paul (store/credit card debt)? Indeed, the study was a marketing   tool trying to sell the ability of a matrix invented by Veritas to identify which potential mod candidates would pay Peter, and which Paul, so the banks could modify loans only for the people who picked Peter. That focus makes the invocation of the irresponsible borrower myth in the article particularly egregious–both borrowers are trying to be responsible in the face of insolvency.

Friday HousingWire ran a six-and-a-half page big bank/mortgage servicer propaganda piece called “Living Large“, by Tom Showalter. The article, subtitled “A person’s lifestyle plays into whether they will pay their mortgage after a loan modification”, purports to explain why people default on loan modifications. Instead, it spins a bank-exonerating morality play not justified by the data supposedly being interpreted.

The latest example of bankers running our country is the weak mortgage servicing standards proposed by the Consumer Bureau.

Revolving Door Smacks Consumers Around

Hmmm… how come the rules are so bad, given mortgage servicers’ rampant fraud, predatory servicing and gross incompetence, all of which has been well documented by law enforcement (albeit not effectively prosecuted)?

The Lying Bankers Scandal should be called the Bailout Theater scandal. I don’t mean the perhaps decades-long part where traders manipulated LIBOR by 0.01% or so, up and down, for personal profit. I mean the part that started in 2007 when the bankers lied by much more so they’d look healthier than they in fact were. That part is bailout theater because Friday’s data dump by the New York Fed proves the Fed and other “regulators” knew what was happening and effectively approved.

Why? Apparently the Fed decided that allowing criminal fraud was necessary to calm markets, even though the fraud did nothing to actually make the banks safer or sounder: Bailout Theater. And for that, the top guy at the NY Fed at the time, our current Treasury Secretary Timothy Geithner, needs to be fired by President Obama and indicted if possible by Eric Holder. Not that I’m holding my breath on either point.

Every government in the United States has the power to take private property for a public purpose, so long as the former owner is paid ‘just compensation.’ And post-Kelo, we know that “public purpose” is very broadly defined. So can eminent domain be useful in solving our housing and foreclosure crisis? Maybe. The details matter.

The San Bernandino Approach

Eminent domain is the housing market solution du jour because San Bernadino County, California, and two of its largest cities, have formed an Authority to possibly take loans using eminent domain. According to Housing Wire, the communities have been approached by Mortgage Resolution Partners (MRP) and two nonprofits with plans to take underwater mortgages and refinance them at market value. A public hearing will be held by the Authority this Friday, 9 a.m. PDT (webcast available here, agenda here.)