The real foreclosure mess: Lack of accountability for banks

By Allan Sloan
Fortune
Tuesday, October 26, 2010; 11:28 AM

The biggest danger to the U.S. capitalist system doesn't come from communists or community activists or left-wing academics. It comes from some of the nation's biggest financial institutions. These companies, which helped create the financial meltdown that touched off the Great Recession, have now found yet another way to undermine the public's faith in capitalism and markets: the foreclosure fiasco.

Even before the foreclosure problem appeared, the level of public distrust of our financial and political systems was approaching the pathological. It's going to get even worse when the true lesson of this episode sinks in. To wit: If you screw up big time when you deal with a giant bank, you're toast. If the giant bank screws up when it deals with you, it gets a do-over.

Sure, many - probably most - of the people whose mortgages are being foreclosed got in trouble because they overreached or lost their jobs, or got conned into teaser rate mortgages: about half of the subprime loans by banks like Countrywide, now part of bank of America were adjustable rate refinancings by people who had fixed prime mortgages. But if we're going to have rules, they ought to be binding on everyone. If I'm supposed to obey the law and pay my bills, the people I'm paying ought to have to obey the law, too.

You miss a payment on your credit card or send it in a few days late, you get whacked. Forget to make a loan payment, your credit rating gets vaporized. But if a bank doesn't do its job properly - for example, if you can't get a knowledgeable and competent human on the phone to deal with a loan modification or a paperwork screwup because the bank is holding down back-office costs to save money - it ends up being your problem, not the bank's.

It's utterly shocking, even to a congenital skeptic like me, to see that giant institutions such as Bank of America, GMAC and J.P. Morgan were allegedly using misleading affidavits to oust people from their homes. Employees of these institutions - the "robo-signers" - repeatedly misled courts by saying they had examined documents they hadn't examined and had reviewed documents they hadn't reviewed.

If you or I as individuals did that, we'd be kicked to the curb by the legal system in about two seconds. If we said that we hadn't wanted to spend the money to do things right - the real reason that robo-signers exist - it would take only one second for the system to whack us.

But how will the system deal with the big outfits that are found to have filed false information in court? They'll be attacked, sued and investigated, and you can bet that at some point their chief executives will be hauled in front of Congress for public show trials by posturing politicians. But in the end, I'm sure, these institutions and their chief executives will get what amounts to a slap on the wrist compared with what would happen to regular people who behaved the way these banks (and possibly other banks) did.

People in this country may be uninformed or misinformed - but they're not stupid. They'll catch on to the message soon, if they haven't already: There's one deal for average people, but a different, far better deal for the really big and powerful.

Yes, you can make a case that there's rough justice here: People made up stuff on their mortgage applications to get into homes they couldn't afford, and banks made up stuff to get them out. But the whole thing just stinks.

GMAC and BofA, which had suspended foreclosures for a while, have now resumed them in some states. By the time you see this, J.P. Morgan may have done so, too.

There's no way to tell at this point whether we're dealing with some overwhelmed back-office people in a few institutions who became robo-signers to meet their quotas and keep their jobs, or whether something more systemic and serious is wrong. My bet's on the latter.

Whatever happens, I hope that the bankers won't be as tone-deaf as they've been lately, and blame their problems on the Obama administration or plaintiffs' lawyers or the news media rather than on themselves. We're already starting to hear the whining about how the big guys are being mistreated for minor paperwork errors. Poor babies. With friends like these, the capitalist system doesn't need enemies.

Allan Sloan is Fortune magazine's senior editor at large.