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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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