A Regulatory Nightmare in Reverse

by JUSTIN GRANT

The Obama administration has altered more federal rules than the George W. Bush administration, prompting one commentator to call this administration “a killing ground for protective rules.” In spite of this, cries continue to ring out that the economy is suffering from over-regulation. If only businesses could be left unfettered, goes the familiar refrain, they would act more freely, hire more workers, and make the country more prosperous.

Apparently, the lessons from the housing market meltdown were not enough. To review: regulation had been relaxed. Glass-Steagall, which kept banks and investment firms separate, had been overturned. Predatory lending—often targeting minorities—, bizarre mortgage products like “pick a pay” loans, and of course, the securitization of subprime mortgages—often with AAA investment grades—meant the Fed, once it finally did react, was too late in coming to the rescue. The result was the bursting of the housing bubble, the Great Recession, and of course, the bailouts.

HAMP is one of the programs that was enacted following the meltdown in an attempt to keep homeowners solvent, thereby benefiting both them and the banks. But rather than willingly participate in these mutually beneficial programs, many banks continue to do everything possible to obstruct the processing of applications to HAMP. On its face, it seems to make little sense, but as it turns out, banks have a greater interest in refinancing through their own programs, rather than government assistance. Here is why:

  • HAMP mortgage modifications require that a homeowner’s payments be reduced to 31% of their income. This is to ensure long-term solvency and can be done through interest rate reductions and by reducing the amount of the principal that is amortized. In-house modifications have no such requirement, meaning the bank can make significantly more money per month, or simply collect more money from the homeowner before foreclosing.
  • Homeowners do not incur any fees at all on a HAMP modification. Oftentimes, banks charge more in fees on their own products than they receive as “incentive payments” for completing HAMP applications.

As an example, a retiree with a monthly income of about $1,600 would need to have her payment reduced to approximately $500 under a HAMP modification. If she had a $165,000 loan, this would mean reducing her interest rate to 2%. The bank, however, has an incentive to keep the interest rate as high as possible, so it might offer a 4% in-house refinance, which would come out to a payment of $689.60. That is 43% of the retiree’s income and is likely too high to be tenable long-term. Additionally, the bank can charge exorbitant fees.

On its face, there is nothing wrong with a bank trying to do what is best for its shareholders. But, Bank of America engaged in widespread fraud in order to avoid processing HAMP applications. According to whistleblower Gregory Mackler, Bank of America intentionally lost documents, improperly applied homeowners’ payments, and made a concerted effort to steer individuals from HAMP modifications to their own products. Bank of America settled several similar suits for a fraction of the profits they have made, but in spite of such blatant disregard for the law, no criminal charges have been brought against anyone responsible for these fraudulent policies.

Bank of America and all financial institutions realize that the fines they face for their wrongdoing come nowhere close to the profits they make by engaging in that fraud. As long as regulation continues to be lax, the penalties for blatantly criminal activity continue to be civil handslaps, and there is a complete lack of criminal charges, we can expect to see more of this sort of conduct.

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