Who should sign off on the foreclosure mess?

Marketplace Staff Oct 21, 2010

Who should sign off on the foreclosure mess?

Marketplace Staff Oct 21, 2010


Kai Ryssdal: As with almost everything that happened in the fall of 2008, the government takeover of Fannie Mae and Freddie Mac happened over a weekend. We all woke up one Monday that September to learn we’d bailed out the two government housing companies to the tune of $200 billion.

The federal office in charge of keeping an eye on Fannie and Freddie said today the total outlay so far isn’t quite so bad: only $148 billion. But it could get worse.

The Federal Housing Finance Agency says the total cost to taxpayers, when all’s said and done, could run as high as $259 billion.

People are still trying to sort out exactly how badly the current foreclosure paperwork crisis could hurt the entire U.S. housing industry. There are some ideas being thrown around for how to get things back on track. Including one that’s as simple as signing on the dotted line.

It comes from Peter Swire. He teaches law at Ohio State. He was also, until this past August, a housing economist for President Obama.

Peter Swire: Great to be here.

Ryssdal: All right so what’s your idea? Some banker signs his name and everything’s fine?

Swire: Well, personal responsibility hasn’t happened as much as a lot of us would like during the whole banking and mortgage crisis. So one central idea is under what’s called Sarbanes-Oxley, the law we passed after Enron. Under other laws, individuals in a company have to sign their name and say they’ve got the system under control. I think that might be a good idea to consider for the banks right now in this mortgage mess.

Ryssdal: The idea being that if, say, Jamie Dimon, the CEO of JPMorgan Chase, or Brian Moynihan of Bank of America, if they have to actually personally certify it, they will be more diligent in getting their underlings to do the right thing.

Swire: That’s the idea that we’ve used in other laws, and I think it makes sense here.

Ryssdal: But, we’ve had Sarbanes-Oxley on the book for about eight or nine years, we still have financial crises and corporate problems. How do we know it’s going to work?

Swire: Well you know, we haven’t really had the same Enron problems. We haven’t seen that the accounting statements that are given out to investors have gone wrong.

Ryssdal: How then does a signature solve a problem that is caused by false signatures, right? I mean we had all these robo-signers, and now we have more signing. I mean, help me out.

Swire: Well, you know there was a man named Mr. Stephan who signed however many mortgages, thousands, for GMAC. I think when a senior official puts a name on it, it might be the head mortgage banker, or it could be the general counsel — that’s a serious statement at the top of the company. The question is how do we get credible promises from the banks that they’ve really done the work. And putting them on the line is probably the way to do it.

Ryssdal: How’s this going to work in practice though? Isn’t Congress going to have to pass some national law since foreclosures are adjudicated on a state-by-state basis?

Swire: No, not at all. A bank could decide to do that itself. Also the banks are talking to bank supervisors, they’re talking to the state attorneys general and federal investigators. We often have consent decrees when there’s been some area of problem. The consent decree should say we’re going to sign this and take personal responsibility.

Ryssdal: Where do we go from here then? How does this happen?

Swire: For this one, I think investigations are going to go forward, the federal investigation, the state investigations. We’re going to find out where there’s problems, where there’s not problems. I hope where there’s not problems we can start to signal to people, Look, we’ve actually looked under this rock and it’s O.K. There’s going to be some other things where there are going to be problems — some of it’s going to be house by house. Is this house subject to a good mortgage or not? There’s no replacement for that when you’re talking about one family’s real property.

Ryssdal: Say that again — we’re going to have to go house by house, loan by loan, to figure this out?

Swire: Some of it will have to be house by house, loan by loan. Who owns 12 Cherry Lane? We have to figure that out property by property. But a lot of the things such as, basically, are the systems in place? That’s where we want to get third-party audits, certifications or a series of representations and warranties, guarantees by the people who are running the system that they’re really back in place.

Ryssdal: Give me an estimate of how long it might take to get this, you know, pig through the python?

Swire: There’s two different things. One is, How are we going to clean up the documentation mess? That’s going to be litigated over the next couple of years. Another problem is, We have a backlog of between one and three years of houses that we need to sell into the market until we get that pig through the python. And that shadow inventory is why we need to be able to keep foreclosures going when they’re valid, so that we can clean through the inventory and get to the point where buyers and sellers are back into balance.

Ryssdal: Peter Swire — he teaches law at the Ohio State University. He was until August a member of the Domestic Economic Policy staff at the White House. Professor, thanks a lot for your time.

Swire: Great to be here.

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