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Fiduciary
Foolishness
Put
on your thinking caps and walk through a little true story
with me:
A socially minded for-profit real estate company that partners
with nonprofit housing counseling agencies identifies some
families who are in default on their current mortgage but
who could afford payments on a mortgage for the current
market value of their home.
They make an offer to the lender to buy these mortgages for
an amount that would work out to TWICE what the bank would
make on the property if it went to auction, which is what
it will likely do if there is no intervention.
The bank says no.
Let me repeat that: Given an opportunity in these sucky times
to do something that generates impressive social benefits
that are hard to come by even with hefty public subsidy—keep
a family in their home with affordable payments and prevent
a vacant building and all the community costs that come with
that—at the same time as it generates a good (in fact, a much
superior) financial outcome for them, they declined.
Why?
Because the company that wants to buy the mortgage is going
to reduce the principal, give the family a new mortgage, and
“let” them stay in their home. A purely market-rate transaction,
no subsidy. But the family doesn’t end up on the curb.
That, says some bank higher-up who has likely never faced
foreclosure him or herself, but who has had his or her own
institution bailed out from well-deserved bankruptcy, constitutes
“moral hazard.”
Someone should tell these yahoos that people who are standing
in the shards of their own shattered glass houses shouldn’t
throw barefoot tantrums.
These are the same people who don’t want to sell vacant property
at a discount to nonprofits for rehab before they are stripped
of their copper piping and overrun with drug dealers and rats
because they are afraid it might violate their “fiduciary
duty” to their shareholders (or to the investors in mortgage-backed
securities for which they are the trustees) if they don’t
hang onto them in the hopes a speculator might give them a
little bit more money.
Now, I know the case law on the definition of “fiduciary duty”
has been pretty bleak (i.e. Ben & Jerry’s was forced to
sell when Unilever made a high enough offer). But I looked
up the definition and all it means is a legal obligation to
act in the best interests of another. Call me crazy, but getting
a pretty good price now and doing something that is going
to help slow the foreclosure tsunami sounds like damn good,
pragmatic stewardship of real estate-invested funds to me.
But the best and the brightest at the big banks can’t figure
that out.
They understaff their sales divisions, even though it’s long
past time to stop being in denial about all the vacant property
they own. They’re still being dragged kicking and screaming
to the table to do mortgage modifications at all—even when
they are being paid for them by the federal government.
The director of the Center for New York City Neighborhoods,
which is coordinating foreclosure prevention activities across
the city, was recently asked by City Limits magazine
what would make the most difference to his work. He said if
the banks called them back.
And then when they do call, they refuse to lower the principal
anyway, which is what is necessary in most cases to make a
mortgage mod work. What they are doing—temporary interest
rate reductions, extended terms, and balloon payments—sounds
suspiciously like some of the stuff that got us into this
mess. And not only that, but as City Limits reports,
if a trial modification doesn’t become permanent, the borrower
owes back arrears for the time of the trial. Great deal.
However, principal reduction might constitute a “moral hazard”
and they don’t want to touch it.
If they do it themselves that is.
Mind you, they’ll sell off large pools of mortgages for 30
cents on the dollar to private equity firms, who will
reduce the principal and set up new FHA loans for 70 percent
of the mortgages—a not-so-bad approach, though it’s indiscriminate
and therefore offloading the risk onto the taxpayers. (Worse
is that they just dump the other 30 percent, which tend to
be in the poorer, hardest hit neighborhoods, like the ones
in which the company I refer to above is working.)
The fact is, these banking institutions have absolutely no
standing to speak on moral issues. They have begged and pleaded
for decades not to be held to any standards of morality or
prudence and just be left alone to be lean-mean profit machines.
But they clearly can’t even do that properly, and the rest
of us lose either way.
So the idea that, as headlines are saying today, Wall Street
gets to “punish” Democrats for passing a very basic and modest
(and popular with the voters, who are their actual constituents)
financial reform package is ludicrous. They should be ignored
like the spoiled, whiny, selfish children they are.
—Miriam
Axel-Lute
www.mjoy.org
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