Bank Regulators Called to Testify: Senators Barking Up Wrong Tree

Includes: KBE, KRE, XLF
by: Matt Stichnoth

Banking regulators are going to get spanked in Washington today:

WASHINGTON (Reuters) – U.S. regulators will be under pressure Wednesday to show lawmakers they are better policing foreclosures amid widespread evidence that lenders used shoddy paperwork to evict delinquent borrowers.

The Senate Banking Committee is holding a hearing on problems in the mortgage servicing industry and whether they pose a broader risk to the economy or amount to an isolated if nettlesome problem.

The issues facing the still-struggling housing market have been exacerbated by allegations that banks have used "robo-signers" to sign hundreds of foreclosure documents a day without proper legal review.

Regulators have been criticized for not catching the widespread flaws, which have reignited public anger with banks that received billions of dollars in taxpayer aid during the financial crisis. [Emph. added]

Is it bad form of me to point out that today’s Senate interrogators have all this backwards?

Despite the revelation that an epidemic of robo-signing has been underway for years in the nation’s mortgage servicing/home foreclosure industry, instances of homeowners actually being wrongfully evicted (as a result of, say, some crazy robo-signer gone rogue) are basically non-existent. Which is to say, the people who’ve been tossed out of their homes really were behind in their mortgages. They really did deserve to be evicted. The “shoddy paperwork” scandal really is just that: a scandal that begins and ends with shoddy paperwork. It does not “pose a broader risk to the economy.” If anything, slowing the foreclosure process in reaction to the paperwork mess—which is the government’s de facto policy on foreclosures—poses a risk to the economy by raising loss severity for banks, and limiting borrowers’ mobility.

From a macro standpoint, the quicker and cleaner the foreclosure, the better for GDP growth. Sorry..