naked capitalism

Not only has the gutting of regulation made it hard to win criminal prosecutions for financial fraud, but the Fed plans to eviscerate a key sanction against predatory lending. If you somehow still had any doubts as to whose interests are really being served by banking regulators, look no further than this latest largely under the radar move. From Zach Carter at Huffington Post:

The Federal Reserve is pushing a new mortgage regulation that would effectively eliminate the most powerful federal remedy for predatory lending.

The regulation would severely limit a practice called “rescission,” used to strike down demonstrably-illegal or fraudulent loan contracts and void a bank’s ill-gotten gains from such predatory lending practices. When a mortgage borrower wins a rescission case in court, the bank loses the right to foreclose, and has to give up all profits from interest and fees on the loan. The borrower still has to repay the principal — the original amount of money extended by the bank — but can’t be kicked out of the house.

Under the Fed’s new proposal, however, borrowers would be required to pay off the balance of the loan before the bank loses its right to foreclose — that means borrowers could still lose their homes, even in cases where banks have broken the law.

What gets interesting is how recission plays into the securitization model. The borrower is still on the hook for the principal, but with no ability to foreclose, it’s hard to compel the borrower to repay. And remember from our previous discussions of securitization, that “banks”, meaning servicers, are keen to foreclose because they get to repay themselves for fees (including junk fees and foreclosure-related charges) and principal and interest advances (remember they keep advancing principal and interest even when the borrower has quit paying, in theory they could stop once the loan is severely impaired, in practice pretty much no one does). The investors get whatever is left.

So the banks’ argument no doubt includes the need to alleviate the impact of recission on servicers. But there are far more surgical approaches (addressing how to deal with servicer fees and advances in cases of recession, probably with different treatment when the servicer is independent versus when it is under the same corporate umbrella as the originator that created the fraudulent loan). But it’s much easier to opt for simple seeming solutions that give the banksters what they want.