walkitout (walkitout) wrote,

Bad Banks, No Biscuit

Calculated Risk summarized this article from Housing Wire.


I'll do my own summary, because I love me some additional distortion. Not.

Part 1 involves the HELOC winter occurring particularly in some western states but increasingly nationwide. The FDIC (that would be, the folks what regulate banks. Kinda) sent letters 'round to the banks saying you may violate TILA (Truth-in-Lending-Act, and let's not forget there's a major judgment as to whether lenders violated TILA by doing bait-and-switch on loan terms that just went class action and favored the borrower and is sitting in front of an appellate court and will likely go all the way to the Supremes in play that has every Moneybags in the country shivering in their footwear) if you freeze all HELOCS and unfreeze on a case-by-case basis. What does this mean?

Banks are trying to reduce the money they have loaned out. They have to have some fractional reserve to cover what they've loaned out. Their fractional reserve, er, teleported out of this universe when a variety of exotic financial instruments based on mortgages became illiquid and/or worthless. Since raising additional reserves by selling stock or otherwise getting investment is Really Freakishly Hard in this financial environment, the easiest thing to do is reduce the loans outstanding. By freezing them. To wit, freeze the home equity loans.

Why would the guvmint want to stop the banks from doing this? Well, if the banks freeze up, there's no money for the Peepul, and if the Peepul have no money, then they can't buy anything, and Bidness goes belly up and then the banks have no money, and the Peepul lose their jobs and then etc. let's just say Great Depression and have done with it. Essentially, the FDIC is treating uniform freezing of HELOCs as a run on the banks. Which is weird, but makes sense. They are expressing it in legal terms (because they are regulators, and responsible people -- unlike, say, Chuck -- don't go around saying run on the banks -- oh, wait, but _I_ just said run on the banks didn't I? Whups!) -- you contracted with these people to make money available so don't just take it back unless some clause in the contract says you can.

Part II involves how banks are treating the properties they now own (REO, no, not the rock group from lo, these many decades gone). Economists (because they are even more stupid and optimistic than I am) have been assuming that lenders who own property would, say, obey the rules and Do the Right Thing to maximize value of these properties (pay the taxes, maintain insurance on the property, pay utilities, blah, blah, blah). In practice, it turns out that lenders are Clever People who are, in fact, really rational. They have computers and people who are numerate (unlike, apparently, commentators on the economy typically quoted in MSM). They repo'd these properties because they could collect PMI if they foreclosed and they thought they'd get more that way than through a short sale or workout program. Then, once they _had_ the property and couldn't unload it (really, at _any_ price in some cases), they figured, if I don't pay the taxes, I'll save that cost AND the local taxing authority will put a lien on it, take it off my hands and I won't have to pay _anything_ on it anymore.

Sounds kinda immoral, doesn't it? It's unclear from this argument if doing this is actually Against the Law or just not Good Practice, and what the implications would be for someone who might, say, sue the bank for Bad Behavior (shareholders in the bank? neighbors of the REO? the taxing authority already strained to the limit patrolling all these REOs?).

I don't understand why we treat professional bad behavior so much more leniently than, say, junkie bad behavior. No loser shooting up and jacking cars to get to the next fix could _possibly_ do this much damage. Not even a million of them.
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