One of the most galling things to me about the foreclosure crisis has been the flagrant and apparent total disregard for the rule of law. The rampant and blatant abuses committed in the processes of mortgage origination, securitization, and foreclosure have only started to be addressed in the past couple of years, and we still have seen a paucity of criminal investigations over what appears to be naked fraud.
These issues have been publicized in blogs (such as Barry Ritholtz’ The Big Picture, Yves Smith’s Naked Capitalism, Adam Levitin’s Credit Slips, and many others), some state attorney generals are beginning real investigations, and there has been some judicial pushback over mortgage abuses, yet there has been little action from government officials over the trampling of long held property rights.
For this reason, it is sort of refreshing to see someone in officialdom address these issues. In a speech over the weekend at the Annual Meeting of the American Association of Law Schools, Federal Reserve Governor Sarah Bloom Raskin addressed foreclosure abuses and the importance of the rule of law. She said that:
“The failure of timely enforcement leads to the entrenchment of bad practices and an increase in the costs of correction. For example, turning to what will be the focus of my comments today – the role of mortgage servicers in the foreclosure crisis – the longer it takes for mortgage servicers to make the operational adjustments necessary to fix their sloppy and deceptive practices, the costlier and more difficult it becomes for them to sort them out and correct them”.
“More fundamentally, a failure by regulators to enforce the laws and regulations as strong antidotes to financial misconduct and unsafe and unsound practices by the institutions they regulate establishes de facto acquiescence to the dominant norms of the financial marketplace”.
Bloom Raskin acknowledges that foreclosure is “one of the factors hindering a rapid recovery in the economy”. Specifically, she says that problems in mortgage servicing (governance problems, issues with document preparation, and lack of regulation/oversight) have “hampered the ability of the courts and the markets to work through the foreclosure inventory in an efficient manner”.
Bloom Raskin says that “in 2010, the Federal Reserve and the other federal banking agencies began a targeted review of mortgage servicing problems at 14 large, federally regulated financial institutions that had significant market concentrations in mortgage servicing”. “Significant problems” were found at all of them (the abuses are lengthy, and I have discussed them ad nauseum here, but you can read the speech in it entirety if you are unfamiliar with this situation).
Bloom Raskin goes on to discuss possible responses to misconduct, amongst them sanctions, forced changes to business policies, the hiring of independent consultants as overseers, monetary penalties, and increased transparency. All of these ideas are good, although the most significant is monetary penalties, and those must be commensurate with the crime, and must be substantially more than a slap on the wrist.
Raskin says that the Federal Reserve and other federal and state regulators must create and implement an enforcement response, at least in part because dealing with these matters judicially is (necessarily) slow. I have a problem with this. This is what should have happened originally. We would not have had many of these problems if so many regulators were not asleep at the switch. I am not sure that I trust the same regulators who did a terrible job the first time around to do a good job now. The judicial process of sorting out these matters may be slow, but I have considerably more faith in state and federal judges than I do in regulators.
Respect for the rule of law is one of the cornerstones of our country, and we need to make it clear that nobody is above the law. The lack of criminal prosecutions for those who broke our economy is troubling in the utmost. Until we restore faith in the rule of law, I think a real economic recovery is impossible.