From "Left, Right, and Center," at KCRW, on October 15, 2010, "The Mortage Mess"
Intro: ...I'm Matt Miller, your moderator in the political center. Robert Scheer is on the left and special guest, David Frum, is on the right. Welcome all to a confusing and somewhat scary week in the mortgage market. As this kind of incomprehensible -- or seemingly incomprehensible -- mess metastasizes, there's growing concern. The bank stocks on Wall Street were slammed. The attorney generals from all fifty states united to say that we have to investigate what seems to be a breakdown in the title system which underlies property rights which underlies capitalism! So we have this fundamental breakdown, I guess, because of the greed and hastiness of the banks to package these things up in ways that plays fast and loose with the documentation underlying free markets?
Bob Scheer: Well, throughout English law and throughout hundreds of years of American history -- up until the 1990's -- when you bought a house, whoever owned it, the bank or you, it was registered at the county government courthouse. You paid a fee. If it was sold, they changed that. You had a very clear record of home ownership. That did not suit people who wanted to securitize mortgages and turn them into stocks. They wanted to swap 'em and dice 'em and change 'em. You didn't want to hve to run to county courthouses all the time. So Fannie Mae and Countrywide, in partnership, developed the MERS system to allow them to do that on computers with no paper trail -- and to do it nationally. They did this without any change in the law or any authorization. So there are 65,000,000 homes that are now in that computerized system. And when they go into court they've been reversed. The banks have been reversed in court. This is a company in Reston, Virginia that is owned by Fannie Mae/Freddie Mac, Bank of America, Wells Fargo, JP Morgan and so forth. And there's somebody called "MERS" which is this computer -- this robo loan officer -- that is the owner of record! And they're trying to foreclose someone's house! The person says, "Wait a minute! I never meant to deal with this computer or MERS! Who are they?" And judges have been throwing out these cases all over the country. So the basic idea of who's the owner -- can you foreclose on a home if you don't know who owns it! -- and what the state attorneys general are saying is belated. They never should have surrendered the power of county, local, and state governments to regulate these things... It's an absolute disaster. Now, what Obama should do is turn to the man, Tom Donilon, whom he's just appointed to be his National Security adviser and who was the chief council and chief lobbyist for Fannie Mae when this was being done. He was the #2 guy at that agency. He's also was a big buddy of Obama and advised him during the preps and all that. Obama praised him. He said, "He has protean intellect and a remarkable work ethic"! Go ask that guy with the remarkable work ethic what this MERS thing was all about and why they did this thing with Countrywide that's now at the bottom of the biggest problem in housing that we've ever had.
Matt Miller: David, let me bring you in after a good, breathless exposition from Bob! David, I've been struck ... in the early response to this that at least, at the federal level, Republicans haven't seemed to be engaged in this or upset by it. Obviously the attorney generals on both sides are exercised about this. But it seems to me this is about property rights and contract rights, that if you don't dot the i's and cross the t's, it's like Hernando De Soto, "The Mystery of Capital." It's the difference between us and the third world. Supposedly. What you make of this?
David Frum: Well, you just jolted me there because I actually ghost-wrote it!
Matt Miller: That's why I thought of it!
David Frum: I was there in Peru for a month. You're absolutely right. It's one of his great contributions to the history of thought -- the power and clarity of title as understanding the success of the English-speaking countries. But forgive me if I make a petty point. Back when we were talking about the Chrysler bankruptcy. I remember a lot of people -- I wouldn't say necessarily literally Bob -- but a lot of people who share Bob's view of the world said, "We can't get hung up on a lot of legal technicalities here. We all know what's approximately right and approximately just so let's do that." I don't think there's a lot of suggestion that the people who are being foreclosed on with imperfect paperwork have, in fact, paid their bills. They haven't paid their bills. So rough justice says now they have to lose their homes. What we are now seeing is a wave of legal technicality that is going to protect a lot of people who maybe don't have a good moral claim. That said, absolutely, the title has to be clear and we seem to have, for reasons Bob says, stumbled into an epic disaster that's going to bring litigation on a scale that is going to boggle the mind!
Matt Miller: See, I think this is an important subtlety that we can cope with, at least on this show, which is that you can at the same time think that the recklessness, I'd say, of the banks in shortcutting these processes that underlie our system of contract rights and property rights is wrong, must be punished, must be remedied. And at the same time you can honor David's point that it's likely true, so far as I understand, that most of the people who are potentially being foreclosed on are way behind in their payments and many of them may be in homes that they could not have afforded. It was part of the heady go-go days of the housing market. Bob, can we hold both those thoughts in our minds? Or do we have to help the little guy no matter what?
Bob Scheer: First of all, if you foreclose a home the ultimate authority is going to be the state. A marshal is going to show up and kick you out of your house. Right? So the question is, was the power of the state used to make sure the contract was legally drawn, that the language was clear, that the person who got the mortgage was not defrauded. That's also an obligation of the state. And that used to be a power that was reserved to the states themselves. That was taken away. And what happened in this case ... See, I would argue that it's immoral to even get into the whole securitization -- the slicing and dicing -- because what it did was to free the people who made the contracts -- the banks -- from any obligation to ever collect. They sold them. They didn't care about the credit worthiness of the customer. They didn't care about the terms of the loans. They didn't care about the language or any of that because they were going to get rid of it. And the reason that you have this electronic registration is not some minor little technicality or dotting the i's. It said, "We are going to change the whole way these things are accounted for so we can trade 'em and swap 'em and so forth." So people coming in -- it's not just a question of dotting the i's. They're saying, "Wait a minute! I was defrauded at the very beginning. These terms were not clear. The agreement was not there. Who do I hold accountable?" Well, it's no longer Bank of America or Wells Fargo because they passed it on to someone else -- maybe twenty or thirty other people have now got their hands on it. So we're talking really about accountability for destroying the lives of tens of millions of Americans. This is not kidding around. We have forty to fifty million people who have lose their homes or who are now deeply under water. And, by the way, it's not just people who got these loans. If you foreclose houses -- whether it's with a condominium association or in a suburban block --people who own their houses outright or who made every payment are also hurt. The general housing values have gone down in neighborhoods right across the country. So what happened is that basically these people got to rewrite the laws without any laws! Fannie Mae and Countrywide changed the system of home registration. They bypassed the counties and the states and said, "We can do with the Reston, Virginia computer, and that's convenient to our marketing these things." That should have been illegal. These people should be held accountable. Maybe Barack Obama should turn to Tom Donilon who was the key lawyer who did this and who is now in charge of our national security! And he should ask him, "How in the world can you defend this?"
Matt Miller: By the way, Bob, do you not think that people getting into houses they couldn't afford is a piece of the foreclosure problem?
Bob Scheer: I think that we have always accepted a regulatory function to make sure that when banks extend loans the customer is protected, whether it's on credit cards, whether's it's done on housing. There's an obligation for clearer language. We know that people have difficulty reading the fine print. We know they have difficult following the terms. That's why we have rules of the road -- to make sure the customer is aware.
Matt Miller: So you see no personal responsibility on the part of borrowers in this?
Bob Scheer: Don't make a silly argument. The question is, the customer -- someone in Riverside, California, or someone in Florida -- who got swindled into [inaudible] and put him on the same level with these thieving bankers who got to write the laws, write the rules, and swindle tens of millions of Americans and see them as equal moral hazards -- which is what that argument is really all about -- is, I think, frankly obscene!
Matt Miller: No. It's the argument of people like Brian Schweitzer, the Democratic governor of Montana made on a stage that Dave and I were both on. So it's not that some Democrats don't acknowledge it. It's a piece of it, Bob. I'm not saying it's the entire thing. ...David, one thing I wanted to ask you -- and I urge people who are trying to follow this [to look at] a fantastic blogger named BarryRitholtz who writes a blog called "The Big Picture". He's an investor and sort of an analyst but one of these eclectic observers who also thinks that the banks have run amok in ways that's crazy. He says this could implicate all the mortgage-backed securities because the way they were constructed means they didn't include the proper legal underpinnings because of the shortcuts they were taking in all this stuff. That means that some of these fancy derivatives, the people who ended up holding the bag on those, could take those back to the banks. There's some estimates that it could means millions of dollars. Bank of America alone -- these warranties on all the securitized structured finance products -- they warranty that all the underlying instruments were created legally. That could also be a problem. You go down the line of what he's inventorying... David, where does this all go?
David Frum: Well, it reminds me of the old John Kenneth Galbraith joke that recessions catch what the auditors miss. That we are in deep trouble. We have a problem that is not just the problem of people losing their jobs, not just the problem of people being foreclosed on, but of a whole financial system that is clogged up. There are still 8 million Americans living in homes where the home is worth less than the mortgage. Even if they stay -- because they want to retain the home while the kids are in school, or it's too expensive to move -- that has a tremendous effect on their willingness to consume. It has a tremendous effect on confidence about the future. So this is going to be a long, slow workout. That forms the economic environment in which politics will be played.
Matt Miller: And the bad behavior of the banks -- just a last thought on this, Bob -- is still, when no one has gone to jail so far as I know for the entire financial meltdown over the past years -- and now this new set of issues which seem fraught with illegality... Are we ever going to see a perp-walk in the banking system from this entire thing?
Bob Scheer: Briefly, the reason I'm bringing up this Tom Donilon -- for goodness sake, he was the chief counsel at Fannie Mae! He was the guy from 1999 to 2005 who spelled this all out, who explained to Congress why this was legal, who defended it, and he's right there at the right arm of President Obama. I don't know why reporters aren't asking Obama about this. I know Fred Thompson, a Republican former senator has raised it. Some conservatives are raising it. I think it's a very big issue for the president. How in the world did he turn to a person who told us this was all legal and was at the real center of this storm?