Foreclosure "scandal" again
By Arnold Kling
I am starting to get angry with some of the pundits. I probably should just chill for a few days. A few random points.
1. I opposed TARP from day one. I wanted to see the insolvent banks put into bankruptcy. Now, some of the same folks who say that bailing out the banks was necessary to save us from another Great Depression are telling us that we need to stick it to the banks.
2. If you say that “the law is the law” and “rules must be enforced as written,” that can be a consistent position and I can respect you for it. But then don’t turn around and say that we should empower mortgage counselors to rewrite people’s loans.
3. I wish that some of the pontificators had some business experience.
The way I look at it, we have two business processes and two record-keeping processes. One business process is old-fashioned lending, where the bank that makes your mortgage loan is still the holder of the loan years later. The other business process is securitization, where your mortgage loan is sold, pooled, sliced and diced, and could be sent around the world and traded every day.
The county record-keeping process is designed to support old-fashioned lending. The securitization process uses different record-keeping that is computerized.
The modern record-keeping process that supports securitization does work. These incredibly complex securities are tracked properly.
The interface between the modern process and the older process is, not surprisingly, a compromise. But to toss around words like “shoddy” or “sloppy” or “fraud” is going rather far. If you want the record-keeping process to adhere perfectly to the traditional process, then you effectively eliminate securitization. I think that would be fine, but it would have been more helpful to have made that determination in 1968, before the government created GNMA, and before it created Freddie Mac in 1970.
It is safe to say that what is going on now is not helping “little people” against “the banks.” It is an assault on a process that has done little or no actual harm to borrowers, and which supports the complex allocation of mortgage cash flows under today’s securities.
In the end, the biggest losers will be the unemployed, because the assault on the foreclosure process is going to keep the housing market in limbo for years. That in turn is going to make economic recovery something that does not begin until well after President Palin takes office.
Have a nice day.