TAIBBI: Bernie or no Bernie, 'Times' columnist Paul Krugman is wrong about the banks

[pat_k]

35. Yes. And they did the railroading with fabricated paperwork.

Just to add insult to injury.

Within the industry, there are numerous studies and publications demonstrating the advantages of working with borrowers to avoid filing default against them in the first place. In this day of instant decimation of public records, pretty much the instant default is filed, the value of the mortgaged property drops by about 30% or more.

If a borrower is willing to sell, it is, of course, far better to grant a forbearance to enable them to do so, particularly if there is equity in the property. It's a win win for everybody. Cost of foreclosure is avoided. The borrow has a shot at recovering equity if there is any. The mortgage holder gets paid back -- or at least maximizes the percent of loan paid -- and the borrower avoids having their credit ruined (which can make it harder to get job, raises interest on any unsecured debt, and so on). Short sales and deed in lieu have the same effect. The banks didn't offer these options until after they've initiated foreclosure proceedings. The property is still flagged as "distressed," and the credit of the borrower is still ruined.

Giving the borrower a chance to sell is just one of the many standard loss mitigation procedures they refused to engage in.

Even if the foreclosing entities had not initiated foreclosures when they knew they could not lawfully demonstrate a right to foreclose, it is almost the definition of bad faith to knowingly damage the other party by enforcing a contract when there is a clear alternative that minimizes loss for all involved. (Sure, a contract holder has every right to enforce a contract and financially ruin the other party for a legitimate business purpose, but inflicting damage on the other party and yourself is not a legitimate business purpose when you are well aware that the damage can be avoided or minimized.)

Evidence that they knowingly opened themselves up to civil liability is readily available. Published analyses warn them that they risk liability if they fail to take reasonable steps to modify the contract to avoid borrower default while minimizing damage to themselves.

Sorry to go on and on, but this aspect does not get enough attention. Misleading investors and fabricating documents to initiate foreclosures deserves all the attention it got. However, even without those aspects, initiating so many foreclosures in bad faith is also a central factor of the collapse of the world economy. Had they conducted themselves reasonably, the losses to bond holders would have been far less. (And thus, they would have minimized liability to them too.)

P.S. Although they supposedly cleaned up there act on fabricating documentation on subprime lending, ttrustee and servicer failure to engage in loss mitigation continues for securitized retail mortgages. Incentives for servicers in the trust agreements encourage "railroading" over protecting investors.