Turn On The Lights, Watch The Roaches Scatter, Part 22

A couple of Bloomberg stories highlight the real problems the banks are facing, and the fact that once again the government doesn't want to take the necessary steps to fix it.  First, Foreclosuregate is starting to rock bank stocks.

U.S. banks and government officials face mounting pressure to address concern that firms mishandled mortgage and foreclosure documents.


Shares of Bank of America Corp. and Wells Fargo & Co. yesterday fell the most in more than two months amid uncertainty about defective mortgages. Paul Miller, an analyst at FBR Capital Markets in Arlington, Virginia, raised his estimate for the cost of litigation and delays to banks to $10 billion yesterday from $6 billion.

An investigation by attorneys general in all 50 states into banks’ foreclosure practices fueled speculation about even greater losses if mortgage-bond investors successfully challenge the underlying loans and force lenders to buy them back. Industry experts also said faulty foreclosures may lead banks to agree to principal writedowns.

“The nation has been in denial about the scope of the problem, and it’s now just being revealed,” said Janet Tavakoli, founder of Chicago-based Tavakoli Structured Finance Inc., a financial consulting firm, in a phone interview. “This is a huge crisis for our country.” 

Second, the Obama administration feels like it can't touch anything here until after the election at the earliest...if at all.

Washington policy makers, who moved swiftly to calm markets during the subprime mortgage crisis in 2008, have resisted calls for similarly broad steps in response to concern that banks may have acted illegally to seize homes.


President Barack Obama and the federal agencies that share responsibility for housing finance are opposing calls for a nationwide foreclosure freeze, fearing further damage to the housing market. Even as bank stocks tumbled yesterday on concern that the mishandled loans will increase costs for lenders, the White House and federal regulators avoided any grand gestures designed to reassure investors.

Obama this week endorsed a coordinated investigation by attorneys general from all 50 states into whether lenders used false documents to justify foreclosures. Mounting a response on the federal level is complicated by the fact that responsibility for overseeing housing finance and foreclosure law is fragmented among U.S., state and local agencies, with no single regulator shaping policy. 

Any sort of call for any federal government TARP-style bailout two and a half weeks before midterm elections would be absolute political suicide for the Dems and they know it.  Obama's hands are at best completely tied behind his back, and at worst, he's not wanting to risk pissing off the banks again.  Making weak noises echoing the banks' arguments isn't going to hurt him too much (because the Republicans know they can't touch this), but it's certainly not going to help him, either.

Having said that, tearing into the banks right now would indeed help the Democrats greatly.  "The Republicans have repeatedly sided with the banks who have seemingly defrauded billions of dollars from taxpayers and taken thousands of homes from Americans without the legal right to do so.  If they regain control of Congress, justice will never be done."

Seems simple to me.  Sadly, things are always more "complicated" in Washington.