Fighting Over the American Home: Handcuffs versus Hope and Change

Matt Stoller is a fellow at the Roosevelt Institute.  You can follow him on twitter at

Over the past four years, we’ve watched as public officials pushed financial and legal power to the large banks – the latest episode in this saga was the mortgage settlement between state officials, Federal regulators, and the banks themselves.  But there is also an undercurrent of resistance to this, resistance which could be growing stronger over time.

So what comes after the mortgage settlement? Will there be yet another multi-billion dollar transfer of wealth from taxpayers to banks in the near future? If I’m reading the tea leaves correctly, I suspect the answer is, yes.  This time, it will flow through Fannie and Freddie, government entities that are responsible for trillions of dollars of mortgages. There’s been a deeply bitter fight over this giant pot of money, centering around Federal Housing Finance Agency (FHFA) acting head Ed DeMarco. DeMarco controls Fannie and Freddie, and so far, he has refused to write down principal for homeowners on GSE controlled mortgages. But Treasury has been attempting to get DeMarco to change his mind, using the prospect of simply paying off Fannie and Freddie with bailout funds.

Housing finance isn’t just a question of money, it involves the deep fabric of America – the home, savings, the rule law and the meaning of property, and the very space of the nation. It’s also a question of politics, and realigning interest groups that had been allies or opponents. With that in mind, it’s worth looking at how the last few years of bailouts and foreclosures have clarified factions in our politics.

There are two schools of thought on fixing the housing market.  The first is the Tim Geithner school, which we’ll call the “hope and change” school.  Hope and changers, who occupy most elite positions in the administration, in banks, at the Fed, in the economics establishment in Congress, at housing nonprofits like the Center for Responsible Lending, in regulatory agencies, believe that the housing market will come back when the economy returns.  Foreclosure problems may be tragic, or overblown, or not, but ultimately are incidental to fundamentals, like matching housing supply to demand or increasing employment through boosts in aggregate demand.  Warren Buffett is probably the most famous member of this school.

The second is the “law and order” or “handcuffs” school, which has (loosely) as members people like former FDIC chief Sheila Bair, former SIGTARP Neil Barofsky, iconoclastic investors such as Bill Frey, foreclosure fraud defense attorneys, Congressional actors like Maxine Waters, criminologists like Bill Black and various securitization experts and bloggers.  The handcuffs believes that law and order is not incidental to the breakdown of the housing market, but is central to it.

Obviously these aren’t fast and hard divisions, they just represent the two major frames of thought around the housing crisis.  It’s not a partisan breakdown – most people in both parties are part of the Hope and Change crowd, but a chunk of the left isn’t, and there are a few right-wingers like Chris Whalen and various right-wing investors who are outraged at the abrogation of property rights.

The handcuffs crowd sees accounting fraud and bank servicer abuses as driving a perverse incentive structure.  There are significant incentive problems in the servicer model, with servicers having incentives to foreclose rather than modify or write down principal, even when that would make sense for the investor and the homeowner. There are suspicions of widespread fraud in the foreclosure process, such as fee harvesting, excess servicing charges, and misrepresentations to investors about what the trust actually holds. This is all leading to enormous pain for homeowners, and losses for investors.

Accounting fraud, according to the handcuffs crowd, is a major impediment to fixing the housing market. The generic logic is as follows.  If regulators forced banks to write down mortgages on their books to their real world value, banks would lose a lot of money.  Right now, if a borrower has a $100,000 mortgage, the bank is going to do anything it can to keep that loan on the books at $100,000.  That debtor might only realistically be able to pay $70,000, and the house might only be worth $50,000 in foreclosure.  But if the bank can keep that loan on the books at $100,000 for a few years, whether that loan is performing or not, whether that home is unoccupied and the copper wire is being stripped or not, the bank will.

According to the handcuffs school, this gap between accounting fiction and reality on the ground is causing needless foreclosures and massive blight across the country.  Were banks required to write the loan down to, say, $60,000, then the bank would be perfectly willing to do a work-out with the homeowner at $70,000.  The homeowner would be current, the bank wouldn’t have to foreclose, and value would be preserved all around.  Executives, though, would show lower profits due to the accounting loss, and banks might have to retain more capital or do a capital raise.  But the deflationary spiral, where foreclosures drive housing values down which causes more foreclosures, would end.

The hope and change crowd thinks this line of thought is foolish.  To them, accounting fraud, or rather, regulatory forbearance as the case may be, is a useful tool to ward off chaos.  They take the previous history of banking crises as their guide (as Vern McKinley details in his book Financing Failure).  In the early 1980s, major American money center banks were insolvent, due to the recycling of petro-dollars to South American countries who couldn’t pay them back.  Citigroup, for instance, made substantial loans to developing countries all around the world, and in a highly inflationary and low growth environment, these countries effectively defaulted.  Rather than being taken over (and despite plans by the New York Fed to nationalize the banking system), these banks were allowed to earn their way out of the hole.  They were undercapitalized, but that capital hole was gradually filled by profits over the next few years.

The hope and changers believe that this is what is happening with the big bank servicers – the housing market will eventually come back, as the extra houses built during the boom are sopped up by new household formation.  That’s Warren Buffett’s famous “hormones” will fix the housing crisis argument.  Buffett is of course highly conflicted, owning stakes in Wells, Moody’s, Bank of America, and profiting mightily from TARP directly through his position in Goldman and indirectly through his other positions.  Many of the hope and changers are so conflicted, but this doesn’t mean that there isn’t a policy logic behind their ideas.

To these people, restructuring the banks, or even forcing them to take write-downs, is a pointless political conflict with a powerful and important constituency.  Geithner famously represented this view when he talked about “air in the marks” in Lehman’s book, as detailed in the Valukas Bankruptcy Report.  On a moral level, the hope and changers basically believe in the foundational myths of Wall Street, as described by Karen Ho in her ethnographic analysis of the investment banking industry Liquidated.  This myth is that people on Wall Street are the best of the best, and naturally deserve to be in charge of capital allocation because of their smarts and willingness to take charge.

These two schools tangle, repeatedly, and the hope and changers routinely win.  From the Housing and Economic Recovery Act (HERA) nationalizing Fannie and Freddie to TARP to killing judicial modification of mortgages in bankruptcy (ie. a write-down of debt) to HAMP to Dodd-Frank to the mortgage settlement, the hope and changers push their agenda of regulatory and legal forbearance for the banks.  Katie Porter documented, as early as the spring of 2008, that these banks break the law to foreclose on homeowners, and most of the regulatory agencies, particularly the Fed and the OCC, help them do so.  No one has been punished for these violations, except the victims.  Still, the courts are full of litigation from investors and homeowners are getting savvier about fighting foreclosures.  Moreover, the banks aren’t necessarily earning their way out of the hole as quickly as they need to be, considering they are attempting to reduce capital levels through dividends, bonuses, and buybacks.  And they are being stymied by the housing market itself, which hasn’t yet come back.  Banks have swollen inventories of properties in the foreclosure pipeline, which will depress prices when/if they come on the market.  There’s also the chain of title problem, where people are leery of purchasing homes out of foreclosure for fear that they will not have clean title to the property.

There are many proposed “solutions” to housing market woes, from the hope and changers.  They all boil down to, well, buying time and distracting the public until the housing market recovers naturally.  Some might call it PR, others might call it “confidence”.  The most recently proposed plan is the purchase of properties in bulk by private equity investors, who will then hire management companies to rent them out.  It probably isn’t a very smart strategy – PE firms will end up with a difficult low margin business and clouded title on their properties. Over the course of a few years, these firms will plan to exit the business with a modest profit, but this can only happen if the housing recovery actually happens and if they can scale the property management business.  Moreover, most suburbs just aren’t built to be particularly profitable rental prospects, and it’s not going to be easy to buy the right mix of properties to manage with tangled ownership of these homes by various trusts.  It’s not to say rentals can’t be profitable given the right rental price, but it’s unclear if it’s possible to get that necessary revenue.  Besides, given the lack of law enforcement in the mortgage market, high value foreclosed properties are probably being bought up by connected local real estate insiders.

Another proposed strategy is the “fire DeMarco” line of attack.  This strategy is about getting rid of FHFA acting head Ed DeMarco, or forcing him to pillage Fannie and Freddie to write down principal.  Largely the pressure for this attack is coming from the administration (through groups like Obama White House alumni Van Jones’s Rebuild the Dream and various administration aesthetically leftwing surrogates) and ex-Goldman Sachs executive William Dudley of the New York Fed, who are trying to force write-downs of debt without damaging the bank servicers.  The intended outcome of this strategy is to get Fannie and Freddie, who are exposed to a few trillion dollars of first mortgages, to write down debt on homeowners.  This will saddle the taxpayer with losses, which is probably illegal according to the FHFA’s mandate to maximize assets for taxpayers.  It will help certain homeowners by reducing negative equity, (while possibly slapping them with a big tax bill).  It will also aid the big banks, because these banks have over $300 billion of home equity lines of credit and second mortgages on their books, loans that probably won’t be paid off unless the first mortgage is reduced.  Right now, these banks seem to be pretending that these loans are worth at least 93 cents on the dollar (that’s BofA’s number), and regulators at the Fed, the OCC, and the FDIC are allowing them to go along with these inaccurate numbers as part of the overall multi-year forbearance strategy.

There isn’t great public data on second mortgages and home equity lines of credit.  As just one example, the Government Accountability Office blamed a bad data system run by Lender Processing Services for Treasury’s failed second lien modification program.  The handcuffs crowd generally believes that these second liens are causing massive distortions in the market, because they are kept on the books at excessively high values.  Rep. Brad Miller calls this the “bezzle” (a term first coined by John Kenneth Galbraith), describing in February, 2009 how second mortgages were systematically overvalued by financial institutions as a form of embezzlement.  They perceive pressure by the New York Fed’s William Dudley and the Obama White House as attempts to aid the big bank servicers by helping them increase the value of their second lien books, or simple PR antics to ward off blame for the housing crisis by blaming DeMarco.  DeMarco isn’t blameless at all – Fannie and Freddie are still giving charitable donations, overpaying their executives, committing routine foreclose fraud, etc.  Dave Dayen is worth reading on this.  Yet, the pressure to put pressure on DeMarco to force write-downs is intense – someone is feeding ProPublica plausible-sounding inaccurate stories, which the organization continues to publish and proudly stand behind even when proved wrong.  These stories tend to portray DeMarco as the man holding back the recovery.

It is this fight, pitting the hope and changers against the handcuffs or law and order crowd, that is the essential dynamic in the housing finance mess.  Certain individuals flip between the two – New York Attorney General Eric Schneiderman stalled the mortgage settlement for a year or so, before joining the administration’s side.  And the terrain changes constantly, with new legal and political avenues opening and closing all the time.  But this is why it’s not an obvious or easily described fight.  Many seemingly virtuous groups, like, say, the Center for Responsible Lending, take the side of the big banks, because they believe that it isn’t possible to win against the power of Wall Street, and thus carving out a few rights for homeowners in a rigged market is the best one can do.  They want to “help” homeowners, and believe that if the banks get forbearance they will be able to get billions in relief.  PICO, a faith-based group, was obsessed with making HAMP work, because its leaders recognized that some homeowners saw reduced payments through that program.  Much of the liberal establishment aligns with the hope and change crowd for different reasons, namely a mixture of Wall Street foundation funding, intentional ignorance and groupthink on the core questions at hand, and simple loyalty to the President.

Similarly, many of the handcuff crowd doesn’t seem like they are interested in helping ordinary people.  I have spent time with several right-wing investors who are somewhat obsessed with “strategic defaulters”.  That said, these investors do want to write down debt on homeowners for self-interest reasons, which is actually a very powerful incentive.  They just want bank servicers to comply with the law and they want second liens written down as well, so that their wealth doesn’t get eaten by the big banks.  Many of them are idealistic from the capital markets perspective, and point out that there will be no private mortgage market in a few years, that it will simply all be government-supplied credit.  They fear, rightly, the day when whether you can get a mortgage will be subject entirely to political whims.  Ironically, these people are most closely aligned with foreclosure fraud fighters like Lisa Epstein and Lynn Symoniak and foreclosure defense attorneys like Max Gardner, people who got their start fighting against illegal foreclosures but have become experts on securitization.  Helping people is their business, and they are very good at it.

In a future post, I’ll go into what I’ve found around second liens.  There isn’t great data, but there’s enough to suggest that the Office of the Comptroller of the Currency should be far more aggressive on write-downs than it has been.

Print Friendly
Tweet about this on Twitter0Digg thisShare on Reddit0Share on StumbleUpon1Share on Facebook0Share on LinkedIn4Share on Google+0Buffer this pageEmail this to someone
This entry was posted in Guest Post on by .

About Matt Stoller

From 2011-2012, Matt was a fellow at the Roosevelt Institute. He contributed to Politico, Alternet, Salon, The Nation and Reuters, focusing on the intersection of foreclosures, the financial system, and political corruption. In 2012, he starred in “Brand X with Russell Brand” on the FX network, and was a writer and consultant for the show. He has also produced for MSNBC’s The Dylan Ratigan Show. From 2009-2010, he worked as Senior Policy Advisor for Congressman Alan Grayson. You can follow him on Twitter at @matthewstoller.


  1. Leviathan

    Look, it’s actually quite simple. The Great American Waiting Game is nearing the finale. As a nation we operate on a four-year cycle. Are you better off than you were four years ago is not some rhetorical question. It is a wake-up call, a cosmic alarm clock.

    When the answer is a resounding “no” for the vast majority, people will finally start to ask “why not?” Then they will realize that NO ONE got frogmarched to jail except for Madoff. Then they will understand that the “value” of their house in never coming back and they are trapped. And then they will understand that neither party gives a crap about their mounting problems: the fact that they can’t afford gas for their car, they haven’t got a job or a raise in two years, and their kids’ teachers are about to strike because a 24% raise in salaries over the past 7 years is not enough (the public/private sector divide is very much on peoples’ minds).

    Count on it. Trouble is coming.

    1. Lambert Strether

      From one of my favorite obscure lefty blogs:

      One can’t help overhearing the conversations in the breakfast lounges of Holiday Inn Expresses. There’s both a Mary Kay mini-convention and a fire equipment mini-convention currently at the one in Zanesville, the lounge is filled with Mary Kay saleswomen with full Mary Kay hair and make-up, mostly crew-cut men in their respective districts lettermen’s jackets and sweatshirts. The giant flat-screen above the gas fireplace is set to Fox News. I’m often, and rightfully, accused of holding Middle Americans in snide contempt as right-wing know-nothings, and when Fox News first flashes to an anti-Obama story and everyone in the room groans in loathing for Obama soft waves of familiar uh-huh ripple over me, but then Fox News follows up with a story about Romney, everyone in the room groans with contempt for the Stiff One. A firefighter says, too loudly, to his table mates, fuck them both, there’s not a shit’s worth of difference, quickly realizes he spoke too loud, turns to an adjacent table full of Mary Kay representatives, and apologizes for his language. All four Mary Kay representatives laugh, one louder than the others, who then says, they’re all lying, self-serving fuckers. All laugh.


      I mean, everybody, but everybody, knows Romney and Obama are peas in a pod. ObamaCare is RomneyCare, for pity’s sake.

      Even the tribalists know it (which is why the career “progressives” are cranking up the Veep fight, the Supreme Court, and all that).

      1. Jim Haygood

        Tragically, at least half of those Mary Kay saleswomen and fire-sprinkler guys will troop to the polls in November, hold their nose, and vote for the ‘least bad’ candidate.

        In doing so, they confer legitimacy on a petrified 150-year-old duopoly that has no legitimacy.

        If you don’t vote third party, do your country a favor and don’t vote at all. Friends don’t let friends vote Depublicrat!

        1. Mac

          If you choose to vote neither republican odor democrat,write in m mouse and m mouse. I will does as much good as any third party.

          1. C


            The issue for any third party is ballot access. The D’s and R’s effectively strangle third parties by keeping them off the ballots. This is done through rules ostensibly designed to keep ballots ‘short’ or limited to ‘serious candidates’.

            In most states these rules operate on a cycle based upon past performance. A party is allowed to put candidates on the ballot if they gained a fixed percentage of the vote in the previous general election. Thus, in most states, you will never get a third party on the ballot until they can amass a set percentage of write-in votes during a general election. These rules affect not only ballot access for presidential candidates but also “downticket” races such as mayor. Indeed in some states the percentage is computed based upon the turnout in the presidential race thus making it an even higher threshold than for mayors.

            By casting your vote for a mouse you thow it away. By casting your vote for a third party you raise the chances of getting a serious challenger if not now then four years from now, and if not nationally, then at least locally.

          2. tom allen

            If only there were a third political party that had built up such ballot access. If only they held extremely popular policy positions. If only they had a common-sense, extremely likeable, not at all bullshitty presidential candidate.

            Oh, hello Dr. Jill Stein. Why are you and the rest of the Green Party banging your heads on those tables? I mean, when you’re not gaining ballot access in more and more states? :-)


        2. PQuincy

          While there are plenty of reasons to rail at our elite duopoly of parties, asking people to vote differently is not an effective way of changing them. It took the fight to end slavery and the Civil War to change the party landscape the last time, after all, and the parties are much more entrenched now.

          But they are not entrenched because of voter happiness, of course, nor because of elite machinations, or anything like that. They are structurally entrenched by the American structure of winner-take-all single candidate electoral districts. The only major exception is the Senate, where we have winner-take-all staggered 2-candidate districts, which mostly works the same way. But note that pretty much the only elected “independents” in our national politics are Senators (or Congressmen from one-district states).

          I therefore suggest: if you don’t like our duopoly, figure out a way to change our voting rules. Some recent changes can make a very modest difference — for example, first-second non-partisan primaries (like California’s new system) probably have a substantial effect on _which_ candidates from the two parties have the chance to get elected, though they don’t by themselves threaten the parties by themselves. Open primaries might have some effect at the margins, too, though less than first-second primaries. But only proportional representation or instant run-off/ranked voting or something like that will open the path to a multi-party landscape (and the resulting coalition politics) in the United States.

          Until we change voting rules, complaints about the two-party system are just hot air.

          1. Nathanael

            Proportional representation (in multi-member districts) and approval voting (for single-member districts) are the best system I’ve found.

            But how do you get it implemented? Whoever’s in power will refuse to implement it.

            Put it on the agenda for after the revolution, I guess….

  2. John Regan

    I think we have to accept the fact that we are past the point of “write-downs” and “workouts” that can only marginally, and temporarily, forestall the inevitable. The imbalances are too great, and there’s no saving the system as it is. You’re plugging one hole in the dyke, which only increases the pressure and water flow to another hole in the dyke. And the holes are everywhere.

    Not to mention there are too many conflicting interests and the power differential is too great. The powerful interests will prevail in every conflict because it is all determined politically. Again, this reality is systemic and unchangeable, unless you change the system itself.

    Debt jubilee and reset is the only answer:

    Let me just give you one more thought to chew on. “Wealth” that is someone else’s debt is only as good as the debtor’s ability to pay. Home mortgages are a significant part of the problem, maybe even the trigger, but there is a huge debt architecture worldwide, only a small fraction of which is rationally payable. That is why the reset is inevitable. It’s going to happen, one way or the other. What we need is to get out in front of the problem and do it peacefully with the law, before it’s done violently and lawlessly.

    1. Westcoastliberal

      Thanks, John, well said. I myself have been saying the same thing since 2008. All this administration has done is “PR motivated”. Obama had the chance to take the Banksters to the woodshed; in fact had them gathered at the White House quakeing in their boots. Instead of reading them the riot act and forcing them to solve the problem, he let them off the hook with “HAMP” which of course was voluntary and which of course was only “cover” so he could say he did something.
      Right now we have millions of pissed-off Americans who I hope will NOT vote for ANY incumbents this Fall & will vote for the 3rd party candidate where we have that choice.
      I am personally still waiting after 4 months for the OCC review of my foreclosure which was with Chase Home Finance. The trigger was a $900+ monthly payment increase caused by the originator not correctly calculating the escrow requirement. Truth in lending? I think not! Still waiting…

      1. John Regan

        $900 per month doesn’t sound like a “mistake”; sounds more like deliberately understating the payment so that you would qualify and they could make the loan which, you know, is what they like to do. At least at the moment they do it.

        They’re prally still carrying the loan as an “asset” at full value so they can misrepresent to investors their true financial condition.

        It really is criminal to play these kinds of games with the places people live in.

  3. Tao Jonesing

    Actually, the two schools of thought are “pro-fraud” and “anti-fraud.” Framing the pro-fraud school as “hope and change” and the anti-fraud school as “handcuff” implies that fraud is benign and enforcing the laws against fraud is harsh.

    In that sense, this post seems aimed at legitimizing the pro-fraud school’s thinking, a goal that is confirmed by the attempt to falsely equate people who want to punish strategic defaulters as members of the “handcuff” school of thought. Anybody who advocates slapping handcuffs on people for a perfectly legal, civil breach of contract is not an advocate of “law and order” but something else entirely.

    1. Leviathan

      Quite so. A better name for the “hope and change” school would be “delay and look busy but fix nothing.” This administration has thrown so many lead-weighted life-vests into the water to “save” struggling home-owners that it’s a wonder journalists don’t openly jeer when a new or revamped program is unveiled in Washington. But they don’t, and therein lies the problem.

      Yesterday the WSJ in all seriousness asked why less than 3% of foreclosees who qualified for “free” and “independent” case reviews had stepped forward to claim their prize after a full year. So I took the bait and tried to find out if I qualified. It took two hours to get an answer, and I was lied to or given bad information half a dozen times along the way. I was so angry I wrote the following letter to the WSJ’s editor. I append it for your amusement.

      Dear WSJ:

      While I appreciate your efforts to keep your readers informed about the utterly feeble efforts of this administration to remediate the foreclosure crisis, I am compelled to inform you that today’s article led me down a Kafkaesque hole filled with unnecessary frustration and ultimate disappointment. I would like the two hours of my life I wasted back, please. But since that’s not really possible, I’ll let you in on a secret I discovered about the government’s settlement with the big banks. Are you ready? They don’t really want anyone who underwent a foreclosure to have their case reviewed, and so they are hiding information about the program from potential beneficiaries. Crazy, I know, but it’s true.

      For the benefit of other interested parties, I am sharing with you what I learned. First of all, it doesn’t matter who owned your loan, only who serviced it. Bank of America owned my loan, but didn’t service it, so they don’t have to care about whether my foreclosure was conducted legally. Does that make sense to anyone? Not really. That only took an hour and 4 phone calls to learn. When I tried to contact my former servicer, Select Portfolio Servicing, Inc., I ran into a robotic brick wall. If you don’t have a current loan with them, you can’t talk to a human. Time wasted: 20 minutes. So, in desperation I turned to HUD, which had no real information about the settlement provisions on THEIR website either. I know, strange! But they did refer me to a non-profit in my area that could help prevent foreclosures (ahem), so I called them. Several calls and 20 minutes later I had more information (“we used to have that number handy but they didn’t really help anyone so we stopped giving it out”) and one last phone number to try. This one was actually tied to the program I wanted and a website ( that had all the information I needed! Success! Well, sort of. You see, the website told me definitively that there was no relief for me because my servicer was not part of the settlement. So, I’m back where I started, only two hours older.

      In future, wouldn’t it be nice if your reporters actually included this information in, say, the body of their articles? And, rather than spitting back what banks and government agencies SAY, why not do some sleuthing to find out why so few former homeowners (3%) actually are using this supposedly helpful and free program? Here’s a hint: if any of these groups actually wanted the affected parties to access these services, it would be easy for them to post links and phone numbers to the above-mentioned website or the phone number I finally managed to wrangle out of the reluctant housing counselor: 888-952-9105. I hear Google has this program that lets people type in keywords that will direct them ELECTRONICALLY to websites they need. Furthermore, I am led to believe that (for a fee) Google will direct users to certain extra useful websites at the top of the page. I wonder if anyone told the government or the TBTF banks about this Google service? Maybe they couldn’t afford it.

      Anyway, thanks for listening to your loyal subscribers and readers. I get so much out of your paper, really I do.


      1. Westcoastliberal

        Hi Leviathan. Sorry you had to run the gauntlet only to learn your servicer is not one of the “chosen”. As I posted here, my servicer, Chase Home Finance, is one of the guilty and although I spent a considerable amount of time and effort to make and document my case over 4 months ago, I have still received nothing other than a confirmation that they received my package.
        I will post any results here when and if I receive a response.
        It seems to me the 3% response rate is the result of no effort on either the OCC’s or servicer’s part to “get the word out” regarding this program. I’ve not seen one ad or PSA regarding it. I only knew about it because since this debacle I’ve spent 1,000’s of hours looking for any solution.

        1. Leviathan

          I wish you luck! I imagine your odds are only slightly better than winning the Powerball, but perhaps the powers that be will decide that at least a handful of the reviews must end in success for the foreclosee, on the off chance that a WSJ reporter asks for those stats next year.

          I do love the thought of millions of notices being mailed to empty houses or (as in my case) to the new owners. Our house was bought by a very high powered litigator who would have known better than to forward it on!

          I do notice that my alma mater has amazing success at finding me wherever in the world I move. Perhaps banks could outsource the finding of “lost” foreclosees to college development offices.

    2. Lambert Strether

      Er, last I checked, false affidavits in foreclosure proceedings by servicers were frauds on the court, and felonies. The bankter perps — sorry for the redundancy — insulated themselves with multiple layers of obfuscation, but they are the ones who approved the contracts with the servicers, they are the ones who monitored those contracts for performance, they are the ones who set up the incentive structures, they are the ones who optimized IT systems to destroy chain of title, they are they ones who took oaths at hearings, they are the ones who signed off on SarBox. They call it “accounting control fraud” because those who control the accounting control the fraud (and collect the swag). And those are the C*Os of major banks. Me, I prefer “orange jumpsuits doing the perp walk” to “handcuffs” but no doubt these two pleasant outcomes can be combine in practice.

      1. Matt Stoller

        There’s a much longer history here than just the recent foreclosure fraud episodes. While the hope and change school is de facto pro-fraud, there is a theory behind what they do other than “let the banks steal”.

          1. diptherio

            Come on, get off your high-horse. All he’s pointing out is that some proponents of the “hope and change” school are proponents for tactical reasons, i.e. they think they will be able to get more for their constituents (homeowners) if they play ball. That’s why “hope and change” is a better label for this group than “pro-fraud.” There are, no doubt, plenty of pro-fraudsters in the “hope and change” camp, but they are not all the members. Got it? If you don’t think the “handcuffs and perp-walks” crowd has a snowball’s chance in hell of succeeding, and you additionally want to get something out of the banks, you might well make the tactical decision of supporting the “hope and changers,” even if you realize that it is allowing evil-doers to get away with fraud. They’d get away with it anyway. This type of calculation is familiar to anyone who has involved themselves in actual politics (as compared to political commentary).

        1. Leviathan

          When all the banks steal from their customers and the government covers their tracks it is called (and I quote the Dimon himself here) “brainfreeze.” There is no cure for brainfreeze except for laying off the 64 ounce slurpees, nor is brainfreeze a punishable crime. Get it: brainfreeze. A glitch in the system. Nothing to see. Move along.

        2. Z

          Theory … excuse … cover … I’m not sure there is much of a difference. They have to concoct something to provide some token intellectual cover to their various misleading mechanizations … which are cover of their own … that they use to continue to not only keep the kleptocratic financial system in place but also keep the banksters that run it out of jail, in positions of power, and filthy rich … banksters that gave obama record amounts of financial campaign contributions in 2008 and I suspect will do so again this year.

          The alternative to their “theory” could be to just come out and admit that they are representing the criminal banksters’ best interests. In 2008, obama did … and will continue to in 2012 … run as a populist. It’s the democrat thing to do. Running as a candidate for the banksters probably wouldn’t be a very effective campaign credo, hence the bullshit.



          Why should anyone be impressed that they managed to dream up some BS theory to justify their corruption? I don’t for one second that seriously. People always manage to make excuses for the things they do. They don’t have the right to expect other people to take those excuses seriously.

          Nobody did this for scientific reasons. Nobody did this for theoretical reasons. They did this to make their buddies richer, and the rest if just window dressing.

      2. David LeForge

        Try and find an attorney with deep enough pockets to challenge the fraud, forgery, document manufacturing and so on. We have a clear cut case of all of the above, but the judicial system just ignores the illegal activities and dismisses the case based on fraudulant documents and lies. Oh by the way don’t get me started. Wake up you stupid fools, they’re taking your homes and laughing at you. If you don’t believe that then you have’nt watched the GERRI WILLIS show last night. she litterly called the poor homeowners deadbeats. Gerri Willis you’ve got bigger balls than me. Just saying

        1. underwateFL

          To the outstanding legal minds reading NC. Please forgive me this sounds like a desperate fantasy.

          Could a national class action lawsuit brought by homeowners, against the major Bank fraudsters(COUNTRYWIDE/BAC), fly in a court of law, to encourage principal mods to fair market value?

          I am a conventional loan/fixed interest/high FICO score borrower but due to massive loan origination fraud/liar loans to unqualified borrowers, find myself financially ruined for life. Banksters/creditors get up to 20 years to extract deficiency judgements in “recourse” FL.

          How innocent I was! Never considered Banks would lend $$ to borrowers who could never repay.

          1. Eric377

            How did bad loans to other people ruin you? Not saying it is impossible, just not obvious.

          2. reslez

            Eric: A half second’s thought would suggest “underwateFL” is deeply underwater on his home. He either flushes money down the toilet for the rest of his adult life or walks away, destroying his cherished credit rating.

      3. Tao Jonesing


        I’m guessing that you had not intended to reply to my comment, as I am all for enforcing the criminal laws against every kind of fraud out there. My point was that strategic default is not fraud and is, in fact, not contrary to any criminal law. Hence, to say that people who want to see strategic defaulters in handcuffs puts them in Bill Black’s camp is flat wrong.

    3. b.

      ‘Actually, the two schools of thought are “pro-fraud” and “anti-fraud.”’

      Indeed. Geithner gives a s**t abut hope, and he will do anything to prevent change. That is was ‘stablishment is all about.

      I call bollocks on this Stollerism, pars pro toto:

      “Many of the handcuff crowd doesn’t seem like they are interested in helping ordinary people.”

      Ordinary people are not helped in any way as long as the current fraud persists. Nobody can be “helped” to real estate as long as the very foundations of property law are eroded for expedience, profits and campaign donations. Nobody can be sure to keep whatever property they have. On top of that, it is nice to help people, but there are more and more first-time home not-buyers – and entire half-unemployed generation’s worth of them – plus all those of us who did not get into excessive mortgages and bought houses that they could not afford, and if “helping” those with debt amounts to propping up inflated housing prices with our taxes, that’s some mighty selective approach to “helping” right there. I prefer a bailout that goes to everybody, not just those that are in debt, be it by choice, adversity, or profitable fraud.

      You can pretend all you want that there is a choice between the rule of law and the rule of elites, but there isn’t. Those want are willing to trade justice for houses will have claim to neither.

    4. steelhead23

      Actually, I consider Matt’s analysis to be quite clever. What I find disingenuous is the DLC-type revulsion that anyone who is against Obama’s fiscal policies is a right wing nutjob. This may be apt for folks like Ron Paul and his acolytes, it is way off the mark for folks like Yves Smith, Matt Stoller, and many more of us on this blog. Do I want Fannie and Freddie to write down the principal on their loans? Yes, the second after the banks write-off their seconds.

      I have a bit of a question here. Why would losses incurred by Fannie Mae become taxpayer losses. It is my understanding that FNM is owned by investors, not the public. Even when FNM sells MBS bonds to investors, the prospectuses clearly state that there is no federal backstop – the bonds could lose value and the investors would lose money. Thus my question: by what mechanism would losses incurred by this private bank become public losses? Yes, I know that Geithner pledged to cover these bets. Is he authorized to do such things and were such bonds reissued or something to facilitate this guarantee? If nothing truly legal has occurred to put taxpayers on the hook, I think we should all create a class-action suit to extract every dime of loss from Geithner’s hide.

      1. Nathanael

        FNM was renationalized after it went bankrupt in 2008 or so.

        It was originally nationally owned before a stupid mid-1980s (?) privatization.

  4. Susan the other

    The thing that surprised me in this article was Matt Stoller saying that the bad loans to other countries during the 80s was eventually repaid. I haven’t read much on it, but my impression was that it was definitely not repaid but just shuffled onto other books. And so I assumed our 15T debt tab is, in part, so big because there was yet another stealth bail out of the bigs which was lost in the confusion, and all that bad debt they have been carrying in the shadows was slipped onto us taxpayers. Around 5T worth. Just my paranoia thinking here.

    Also: fake securitizations, missing notes, bezzled liens and hopelessly clouded titles create such an unmitigated mess, I would hardly use the facetious term “hand cuffers” to skim over the illegalities. The lawlessness needs to always be expressly stated, lest we forget.

  5. Capitol Sleeze

    Borrowers, alleged borrowers, typically are mentioned in passing as the elites quarrel amongst themselves, typical fluff. Stunning indifference and fake framing. I’m a taxpayer I want my trillion plus back for wars I didn’t ask for, I’d also like to to see certain members of congress, their friends on Wall Street, face the music as it were.

      1. sierra

        War is a Racket
        Wall Street is a Racket
        Congress is a Racket
        Out entire government is a Racket
        We need a moratorium on all foreclousures; bank writedowns of all the crap they are carrying on their books at, “93c” on the dollar (which will make them zombies) and a barring of any hedge/investor/otherwise funding of block purchases of foreclosed homes for “renting”.
        The 99% are too big to fail.

  6. Capitol Sleeze

    Matt – how did your former boss vote on destroying Afghanistan and Iraq (paid through foreign held debt)? He’s a good guy when it comes to handwringing over Florida’s lost homeowners and evicted little fish – but how did he vote on the big tickets?

      1. beowulf

        Ha ha, I bet he had a putdown all teed up (assuming that you would say yes).
        Grayson is a first round pick, I hope he returns to the Hill next year.

  7. Kelley Monahan

    Let me simplify…Portsmith New Hampshire Chamber of Commerce breakfast April 20th rare public appearance by (R) Sen. Kelly Ayotte and (D)Jeanne Shaheen.sponsored by… drum roll please… Bank of America….flinging money at both parties with equal vigor!

  8. Cheyenne

    The real division is between those who believe the rule of law is the foundation of democratic governments, and those who regard the rule of law a mere preference, like heated seats in a car, to be cast aside whenever in conflict with more fundamental aims (bonuses, anyone?).

    Thus far, the elites’ mantra that all will be well when the economy turns around (a ludicrous and indeed self-serving supposition) has bought them both time and excuses. Their kick-the-can strategy has caused the statute of limitations to run on many crimes, which in turn enables the elites to pay lip service to the rule of law while they continue stealing increasing sums of money.

    Some crimes (such as murder—and fraud on the court) do not have any statute of limitations, however. This will expose the grand elite pretense of caring about the rule of law at all for, well, the fraud that it is. Anyone who believes the elites intend to prosecute—once the economy turns around, of course—the ring-leaders of robo-signing factories is in denial.

    Rather, the elites know exactly what William Black does: unprosecuted criminal fraud is a metastasizing cancer that, unless eradicated, will ultimately kill its victim, in this case, our republic.

    In the mean time, enjoy watching our current steal-anything-not-nailed-down playpen of the elites grow in magnitude and brazenness.

  9. briansays

    the democratic convention will be held
    and obama will accept his second nomination in
    the boa arena in charlotte, nc
    that’s one of those swing states ya know…

  10. LOL

    “Moreover, the banks aren’t necessarily earning their way out of the hole as quickly as they need to be, considering they are attempting to reduce capital levels through dividends, bonuses, and buybacks.”

    Quite amazing anyone thinks that could work!

    “There’s also the chain of title problem, where people are leery of purchasing homes out of foreclosure for fear that they will not have clean title to the property.”

    Actually, I think after me paying off the wrong bank, I get sued by the massive and well paid legal staff of the “right” bank, then the sheriff comes by and arrests me for trespassing.

    “The intended outcome of this strategy is to get Fannie and Freddie, who are exposed to a few trillion dollars of first mortgages, to write down debt on homeowners. This will saddle the taxpayer with losses, which is probably illegal according to the FHFA’s mandate to maximize assets for taxpayers.”

    There are many paths the Foxes may take to the henhouse. We’ll have to try and watch for all of them.

    But on a more serious note, back when I was in engineering school I thought they should just close down the economics and political science schools altogether. Since then I’ve come to realize that these professions may serve some useful purpose after all. Sort of along the lines of zoology or maybe entomology.

    1. Nathanael

      Woodrow Wilson appeared to genuinely understand political science, and I have got to go read his class lectures some time.

      There haven’t been that many other poli sci professors who “tested their book” by running for office and winning.

  11. Aaron Layman

    Wonderful insights into the policies and psychology behind the mess we now call U.S. housing. Barry also has an interesting look at the subject this week with his multi-part series.

    As I mention in my post, I’m an optimistic skeptic. While I think there may be better days ahead in housing, I don’t think we’ll see them for several years. I don’t see how you can have a sustainable housing recovery without addressing the control frauds and rampant criminality in the financial sector.

    1. chris

      add (to the criminal elements) no jobs and a continued stagnation in wages – which, realistically, is the only thing that matters re:home prices (absent any further “liar” loans) – and it’s not hard to imagine decades more of a so-called “recovery” that will never – NEVER – manifest without revolutionary changes to our corrupt/failed status quo.

    2. chris

      just reading “Debunking the Housing Recovery” ( over at B. Ritholz and came across a comment (and Barry’s response) that said better what I was trying to say:

      “Dear Barry,

      I don’t know if you already planned to cover the topics of DEMOGRAPHICS and the 30-20 somethings EMPLOYMENT PATTERNS in your 5 part discussion.

      I would assume that the wave of baby boomers retiring that started in 2011 and should intensify for the next decade or so would factor in to the recovery(More supply), as well as the fact that the next decile of people behind the boomers represent a 5% smaller decile than the boomers (Less demand), and the fact that the people who side stepped the housing crash/ Y2K Dot Crash by going back to school now have debts and no nugget to get the 20% down payment on a house given the strengthened lending standards that have been re-adopted by the banking institutions (Transaction Friction). Given how housing cycles typically have been on a 7 year +/- cycle (3.5 down and 3.5 up) and the last boom was 14 years of up, I am wondering if we are ever going to see any material capitulation with the housing market.
      Barry Ritholtz Says:
      April 2nd, 2012 at 3:55 pm

      DEMOGRAPHICS & Baby boomers are in my Top 10 — but not the top 5.

      There is no doubt, it is an issue — but I also wonder what the impact of destroyed 401ks/IRAs are going to do to all those boomers. Will they be able to stop working and retire?”

  12. chitown2020

    The banks, the GSEs and Wall Street forced the American people into default by engaging in heinous criminal behavior with our notes. If the banks do not have the collateral on the books to back up their CREDITS than, they are insolvent and must be shut down. The U.S. Government must stop allowing the robbery and bankrupting of the American people to continue under the guise of money lent. There was no money lent. These financiers lent CREDIT…NOT MONEY…and they borrowed and gambled off of the credit they created out of thin air, exponentionally. As a result of all of the FRAUD THEY COMMITTED WITH OUR NOTES, the debt of these financiers is UNSUSTAINABLE. Anyone paying these crooks for an underwater mortgage are pretty much thanking these criminals for robbing them. There is no way to modify, refi or write down massive insolvent debts created by these criminal financiers. The result of this ongoing robbery is clear. The 99% are being forced by sneaky classware to continue to pay for hundreds of trillions of dollars of fraudulently induced credit created by the financiers backed by ZERO….This is worsening the economy for the 99%. The transfer of whatever remains of our wealth is being handed to the 1% on a silver platter by the Obama administration and all of the politicians in both parties. If the ongoing cooperation with these criminals by the American people continues, WE THE PEOPLE, the 99%, will wake up one day broke and homeless in
    the land our fathers conquered.

    1. On A Serious Quest For Knowledge

      And what better place to get it than at a think tank?

      Reading your webpage piqued my curiosity when you mentioned a couple of times that principal will cost taxpayers a bit of money. The visuals helped get the point across too.

      The financial structure, charter, and biz of the three Fs is quite complicated and I’m really squemish about believing I understand it completely, but I guess I can still ask a simple question.

      I’ve heard that out of around $6 Trillion in agency mortgages, a small amount remain on the books of the three Fs, and the rest has been securitized and sold off to someone(s).

      Could you please connect the dots and flesh out how principal mods will cost the taxpayers some money?

  13. LillithMc

    Over almost 40 years I sold homes to people who often settled down in a safe comfortable home for many years. My children are soon to be renters after ten years in their home. They are glad to leave after being underwater and trying to exist in this criminal mortgage environment. With the crash in home values came a crash in business including my son the contractor. We are creating nomads who will move to the jobs, rent and not know the experience of local community.
    After six years underwater with no end in sight, the technocrats can argue and play, but the people will move on. The damage is done.

    1. F. Beard

      The damage is done. LillithMc

      Some damage has been done but let’s not forget that the problem is merely lack of money in the right hands. A universal bailout ala Steve Keen would turn things around quickly and leverage restrictions would keep the problem from reoccurring.

  14. Tor

    Great article. I am surprise the idea of forcing bank writedowns isn’t getting more support from people of all politicial flavors. I think this could be a rallying point for people who otherwise wouldn’t agree on much.

    As you mention, it would be a huge incentive to work out deals with owners. Or for that matter, if they are going to forclose, at least get it over with quickly and not let it linger for years. And yes, there is that idea of following the rule of law, which has been pretty important historically speaking.

  15. looting class habitus

    And the THIRD school of thought, which our state has furiously silenced and walled off from domestic public discourse, is represented by the UN Special Rapporteur on Adequate Housing,

    She thinks way too hard about this, as far as our kleptocracy’s concerned. Security of tenure is an idea that could rip the debate wide open. The bankers’ ideological stranglehold on this country depends on one axiom: growth is the answer to everything. Hey, What else is there? Well, glad you asked: Security of Tenure.

  16. Tyzão

    I forget who said it, but it is worth repeating here — possession is 90% of the law. I’m guessing 5 years from now there will be a whole array of different local and state laws seeking to dissolve chain of title issues and unsatisfied mortgages. It will just depend upon whose name is on the deed at that point in time.

    At least we have deeds, this fact still seems to be uncontestable.

  17. Herman Sniffles

    Forget about the “handcuffers.” How about the “rope,chain, and cattle prod” faction?

  18. underwaterFL


    “How did bad loans to other people [financially]ruin you? Not saying it is impossible, just not obvious.”

    The cabal of loan shark originators, mortgage broker scammers and property appraising weasels compromised the integrity of the RE market, artificially inflating property prices.

    I borrowed the maximum my income allowed (170k) on a full document loan for a home purchase in 2004. Due to massive defaults by high-risk borrowers my modest little bungalow is worth 40% of the original price.

    I’m outraged working class people qualified for 300k mortgages! I don’t blame the unsophisticated borrowers. Bill Black believes the banks committed control fraud crimes. The control fraud crimes caused financial damages to thousands of underwater borrowers. I was simply musing about a class action lawsuit to remedy the financial losses (of borrowers) caused by criminals (banksters). I know, a fantasy.

    Bill Black:

    “Home lenders, particularly those making liar’s loans, typically committed endemic “accounting control fraud” on multiple levels. Control fraud occurs when the persons controlling a seemingly legitimate entity use it as a “weapon” to defraud. Accounting is the “weapon of choice” for financial control frauds. Mortgage frauds can be grouped into four levels, each of them exceptionally widespread: loan origination fraud by the lenders and their agents, the fraudulent sale of fraudulent mortgages, the fraudulent pooling and sale of collateralized debt obligations (CDOs) in which the underlying was largely fraudulent mortgages, and foreclosure fraud.”

  19. Paul Tioxon

    There is more to credit write downs, than what is on the books of the banks and their HELOCS and 2nd Mortgage loans. All secured creditors are also in line. How many hundreds of thousands of SBA Loans are in 2nd or 3rd lien position? The taxpayer is on the hook for those loans. As I previously pointed out, the operational complexities are beyond the bourgeois niceties of the law and order crowd. As if we don’t lock up enough people in this country for breaking the law. But hey, while we’re at it, lets head for 3 million locked up, now including everyone involved in the mortgage industry that broke the law. Clearly, they are a menace to society. But, I digress.

    The problem that Ed Demarco has with writing down anything, is that he then has to expunge the existing recorded lien and record a new lien. If there were any other secured creditors, with liens recorded, they would move up. So, a 2nd with Wells or Citi would become the new first lien. Unless of course, Demarco obtained a letter of authorization from those 2nd lien holders to subordinate as he re-wrote the new amount. And of course, if there might also be an SBA loan or a home improvement loan or the in ground pool contractor 3rd party financing or even a casino line of credit. Yes folks, even Las Vegas uses American real estate as collateral for lines of credit. What, you thought they extended credit because you look like James Caan? There are so many possible secured creditors spinning around this god forsaken free market lalapalooza of an economy, that not only Ed Demarco, but anyone with half a banking brain wouldn’t write down shit without title searches clearing the way for the slam dunks: those with one mortgage and one recorded lien. All others wait for foreclosure, bankruptcy or an Act of Congress.

    I have found that the banking industry is full of specialists who if they have not done mortgage banking on the lowly retail level do not know how complicated the lives of the average homeowner is. They are divorced, with ex spouses names still on the deed. They are liened with 3 and 4 recorded debts against title. This has been going on for decades. This is how we live. Apartment dwelling NYC intellectuals may not quite understand just how regional their parochial political take on the national scene really is. Matt Stoller is injecting a dose of reality, political and otherwise into a matter than is more than a cry for justice in land losing the rule of law.
    The rule of law with the promise of justice is another commodity. You can have all of the justice you can afford, Just ask OJ.

    1. Mechanics Lien

      Nixon get a grip. Just ask a reformed vulcan, Jack Abramoff – how the system is bought off. ‘Muricans can now see through the greedy cesspool like a sturgeon deftly navigating the deep. It’ll take some effort, but the fraud friendly war mongering degenerates will be brought to heel. First, we’ve got a foreclosure that desperately seeks a CEO auction:
      ” JP Morgan Chase CEO Jamie Dimon is still the poster child for today’s morally degraded, self-entitled banker mentality.”

  20. J Shannon

    Things are never so bad they can’t get worse cheer-up you’ll soon be dead!
    I see hope in that change!

  21. cwaltz

    What household formation? Considering children and parents are choosing to live together longer because of the cost of living I wouldn’t put money down on the whole household formation theory.

    1. Nathanael

      Squatters in vacant houses in Detroit — there’s your “household formation”….

Comments are closed.