Jon Tester has expressed his opposition to mortgage write-down in bankruptcy (cramdown). "I just think a deal’s a deal. I have a lot of empathy for folks who tend to get led astray, but I just think it’s going to create some problems," he says.
The underlying Rick Santellian-assumption is that homeowners entered into good faith deals with banks, and should now have to live up to them. When Bill Black was on Moyers recently, he made mention of Fitch — the smallest of the ratings agency — and what they found when they began looking at loan files after the markets had collapsed. "The results were disconcerting," he said, "in that there was the appearance of fraud in nearly every file we examined."
So I asked Bill — where did this fraud originate? He pointed me to a document released by the FBI entitled Financial Crimes Report to the Public For Fiscal Year 2007:
Here’s the key quotation: "Based on existing investigations and mortgage fraud reporting, 80 percent of all reported fraud losses involve collaboration or collusion by industry insiders."
Even the Mortgage Bankers Association’s group that tracks mortgage fraud cites this FBI passage as accurate:
The FBI reports that, based on existing investigations, 80 percent of all reported fraud losses arise from fraud for profit schemes that involve industry insiders.
Source: "Mortgage Fraud: Strengthening Federal and State Mortgage Fraud Prevention Efforts" (2007). Tenth Periodic Case Report to the Mortgage Bankers Association, produced by MARI.
Deals are frequently not enforced in accordance with their original terms. The central premise of U.S. bankruptcy law (which is distinct from the Germanic pattern) is the reorganization and every reorganization involves renegotiation of the original terms in a manner that disfavors some creditors. "Strategic" bankruptcies have been common in the U.S. for at least two decades. The term refers to corporations that would not traditionally be considered insolvent filing Chapter 11 petitions so that they can restructure their debts, escape future contract obligations (e.g., labor contracts), and/or reduce future liabilities (e.g., for asbestos claims).
Lenders frequently renegotiate terms with borrowers, e.g., troubled debt restructurings (TDRs) because they know that the alternative is a default that will cause even greater losses to the lender.
Based on existing investigations and mortgage fraud reporting, 80 percent of all reported fraud losses involve collaboration or collusion by industry insiders.
Tester sits on the Senate Banking Committee, he knows all of this. It’s pure demagoguery. He also knows that despite all the trillions in bailouts to banks, no meaningful help has been given to the homeowners who relied on Alan Greenspan’s guarantee that there was no housing bubble, the market would never collapse and home prices would always continue to rise.
One of the things banks have been pushing for in the Housing Bill is a provision that negates their liability if in the course of bankruptcy proceedings it’s discovered that they committed fraud when the loan was originated. Non-disclosure of fees and penalties, interest rate hikes, etc., etc. I guess that all just falls under the category of being "led astray."
Hey, a deal’s a deal, right?