Privatize the Pain of Mortgage Foreclosures

Big banks and other major players in the mortgage lending market want another bailout — this time in the form of a free pass.

They want to skate by while Americans lose their homes to foreclosure in epidemic numbers. The banks want to pursue foreclosures even when they badly botched the paperwork and are unable to prove who actually owns the mortgage loans.

They don't want to do any extra work or take any reasonable risk to keep some borrowers in their homes.

They want to move on and leave it to others — federal agencies, communities, neighboring property owners — to clean up their mess.

The unspoken threat is that a continued moratorium on foreclosures will further depress the housing market. The economy as a whole won't rebound without a healthy housing market.

There's another threat inherent in a lawsuit filed earlier this month against Bank of America by the Federal Reserve Bank of New York and two major bond-trading firms, Pimco and BlackRock. They want a federal court to order Bank of America to buy back $47 billion worth of bad mortgages. The mortgages were packaged into mortgage securities and sold by Countrywide, the mortgage firm that Bank of America bought at the federal government's behest in 2008.

The Fed says the securities are worth 50 cents on the dollar, so Bank of America would take a $23.5 billion loss. A few more deals like that and the bank's entire $115 billion capitalization is gone, and we're back into systemic risk territory.

But easing uncertainty in the housing markets can be achieved without letting the banks and other mortgage holders skate free.

Six months ago, this might have been an even bigger crisis. But Congress passed the Dodd-Frank financial regulatory bill. The nation now has a Financial Stability Oversight Council with the authority to unravel situations like this.

It should get to work immediately to determine the extent of risk in the market, perhaps imposing another round of stress tests.

Many foreclosures, in the meantime, should go forward. In some cases, the borrowers never had the wherewithal to make the monthly payments. In others, the homes have lost so much value with the collapse of the real estate market that borrowers have walked away from the loans.

But many mortgages are salvageable. Keeping families in these homes through loan modifications that reduce monthly payments often makes more economic sense than foreclosures — for homeowners, lenders, loan servicers and investors.

Existing federal programs, while imperfect, could have a significant impact if administered aggressively and with good faith by the financial services industry.

But big banks and other major players in the mortgage-lending market have not been aggressive, acted in good faith or taken reasonable risks to keep families in their homes.

They should be made to pay a painful price if they continue to dodge their responsibilities.

The starting point is for customers, regulators, the courts, public officials and the general public to hold them accountable in all of their community interactions. Until they come to the table with real proposals to rescue salvageable loans, they should be forced to have their foreclosure paperwork in order for every case. They should be cited and answerable in court whenever a foreclosed property fails to comply with local housing and nuisance codes.

Until they begin acting responsibly, they should receive no favors, no courtesy, no consideration — no free passes.

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