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Kneale to Feds: Stay Out of Mortgage Mess

I should have listened to her.

Cut to early 2008, brunch at the self-consciously hip Coffee Shop in Manhattan, where the wait staff waits to be discovered by Hollywood, fashion or the next reality TV show.

Home with foreclosure sign
Home with foreclosure sign

April Charney, a legal-aid lawyer for defaulting homeowners in Jacksonville, Fla., is talking in ominous, apocalyptic tones about the housing debacle to come. Losses will surpass a trillion dollars, she declares, and bankers will go to prison for rampant fraud — massive forgeries, deceptive tactics, loans that were sold over and over again, Ponzi-like, to other banks in a fee-fueled frenzy.

April and I were seeing each other for the first time in three decades. We had been classmates in what used to be called junior high school, and we had worked together on the high school paper. And my thought was: What could a local lawyer in Florida know about the big picture on Wall Street?

Now much of her frightful forecast unfolds before us, and incumbent politicians, eager for outrage, are picking up torches and pitchforks once again to go bank-bashing. Some 40 state attorneys general are investigating, loudly, members of Congress are calling for a nationwide moratorium on foreclosures, and Rep. Maxine Waters — ever erratic and unpredictable — leads the mob.

Never mind that big banks such as Bank of America already have halted foreclosures on their own to take a harder look at just how screwed up all this really might be.

Government ought to stay out of this one.

Instead, the ten biggest banks that hold the largest share of troubled mortgages should pool their efforts to fix this mess themselves. Throw all the bad debt into a single, jointly owned fund, pro-rate and reassign the defaulted loans to the banks based on their share of the market, have every bank give up any claim to any loan that is assigned elsewhere — and move those damaged goods.

Banking rules and state laws may stand in the way of this: so change them.

But ultraliberal protectors of the poor, downtrodden homeowner — or advocates for deadbeats, depending on your view — won’t let that happen. They will argue that because banks used robo-signers and lost track of the paperwork, they don’t deserve to be paid back on the loans they made.

That paternalistic and infantilizing spin dodges one irrefutable truth: The people who lost their homes to this flawed foreclosure wave weren’t evicted unjustly — they failed to pay their bills. They stopped paying their mortgages (because they couldn’t, or because they chose to walk away) and defaulted on their loans.

And that remains true no matter which bank turns out to own a defaulted loan, no matter whether five banks wrongly think they own the same loan.

My old lawyer pal from my school days specializes in letting these people stay in their homes, a commendable effort to help poor families. But she does so by showing in court that the foreclosing bank can’t produce any documents proving it still holds the original mortgage. Gotcha! We sure showed those meanie banks!

Isn’t this just plain wrong?

You borrowed a few hundred large from a bank, bought a new home and started out paying interest on it and promised to pay it all back, eventually. And now you want to stay in the home, gratis, because someone lost the receipt?