THREE YEARS ago, a sharp real estate downturn caused big banks to founder. They were bailed out. Now, some are quite profitable. But as is increasingly apparent, the narrative doesn’t end there. The ending hasn’t been written, as the legal battles stemming from the crash continue to play out, injecting fear and uncertainty into the economy. As lawsuits multiply, millions of homeowners remain stuck in bad mortgages. Banks afraid of potentially vast liabilities won’t make the loans that can create jobs and unlock the true potential of the economy. A national effort to resolve, in one swoop, the legal aftershocks of the 2008 earthquake seems increasingly necessary - and the Obama administration needs to take the lead in promoting it.
Real estate continues to drag down the economy. Some of the most insidious effects are less obvious - how lower home values prevent workers in the hardest-hit areas from seeking better jobs in other cities, because they’re unwilling or unable to sell at a loss; how owners whose homes are “underwater’’ - meaning the mortgage is higher than the resale value - can’t qualify for the historic-low refinancing rates; how mortgages that were used to back securities are still in limbo, with banks prevented from refinancing them by legal obligations to investors.
The banks aren’t out of the woods. Those that were involved in mortgage lending are staring at years of lawsuits, with huge sums involved. Among the plaintiffs in such cases are private investors who bought mortgage-backed securities on (they claim) false assurances; the government, suing on behalf of Fannie Mae and Freddie Mac , over lax lending standards; homeowners who say they were scammed; and state attorneys general, acting on behalf of borrowers who were improperly foreclosed upon, via “robo-signings’’ and other shortcuts.
There are many interests colliding here, but the greatest of all is the US economy itself. It relies on a healthy credit market, confident consumers, and a mobile workforce. All are being held down by the uncertainty caused by protracted legal battles.
With hundreds of billions of dollars in play, the situation calls for a concerted negotiation process to provide quick and fair - but not excessive - settlements for investors who were truly misled and people whose homes were wrongly taken. The state AGs, meanwhile, should use their leverage to ensure that banks allow stable homeowners who are suffering under above-market interest rates to get more access to the low interest rates currently available to qualified borrowers. The banks, for their part, will have to take a short-term financial hit but would have far greater confidence in knowing they are free of liabilities. A clear legal landscape could unlock untold billions to expand the economy.
The only vehicle for such a process is the federal government, and the Obama Justice Department is trying to step in. But it is focusing on only part of the problem - the state AGs’ actions against banks for wrongful foreclosures - and it hasn’t been successful. California recently joined New York in pulling out of the Justice Department’s settlement process, on the grounds that the $25 billion deal under consideration isn’t nearly enough. Without two of the largest states involved, the talks are increasingly futile. The attorneys general of California and New York can’t be faulted for seeking a better deal. Many other states, including Massachusetts, have expressed concerns about what’s currently on the table. But they shouldn’t walk away from the idea of national settlement. The stakes are simply too high.
The Obama administration should not only increase pressure on all sides, but also launch a new effort to bring about a settlement of suits by mortgage investors, including Fannie Mae and Freddie Mac. This won’t be easy; the federal government, barring some unprecedented act of Congress, can’t force a settlement. But the president has barely been heard from on this issue, and the Republican leaders in Congress and on the presidential campaign trail have been largely silent, as well.
Perhaps they fear the embarrassment of being rebuffed by banks, lawyers, or state AGs. Maybe they’re genuinely queasy about interfering in the legal system. The righteous aversion to bailouts expressed by the Tea Party and Occupy Wall Street may have made politicians gun-shy about anything that could be construed as helping financial institutions.
But the victims of inaction aren’t financial executives. They are the homeowners who are desperate for refinancing, the small businesses seeking loans to expand, and the job-seekers praying for new openings. Despite a concerted effort by two presidential administrations, the mess from 2008 still isn’t cleaned up. Everyone involved - the private sector, public sector, and everything in between - needs to start mopping harder.