However, the banks may want to simply buy their way out of the problem with the AGs by setting up a compensation fund. That would be the wrong move. The investigation must dig into every single nook and cranny to expose the fraud, and then radically change the way the modification process works. Criminal and civil penalties should not be out of the question, as well. The banks simply aren’t going to change unless forced to, as Levitin says in this article. And the federal regulators have no interest in doing that at the moment, as Levitin said today in Congress. Maybe we should be asking about their incentives. …just as an aside, take a look at the numbers in this Congressional Research Service survey:The banks, who have been subjected to bad publicity, have played down the investigation and want to see it end as quickly as possible. The state attorneys general, however, say that there is an opportunity to fundamentally change the way banks deal with defaulting borrowers so that more people can stay in their homes by modifying their mortgages, and that they will take the time needed. “The large banks say they are doing everything they can to avoid foreclosure, but that is not the reality on the ground,” said Patrick Madigan, an assistant attorney general in Iowa who is a lead figure in the investigation. “The question is, Why?” Mr. Madigan mentioned some theories, saying any or all could be true: “Is it the fact that the current servicing system was not designed to do large numbers of loan modifications, is it being understaffed, incompetence or the servicers having the wrong financial incentives?”
This is why the banks are fighting tooth and nail. It may be the reason for Treasury as well. UPDATE: If you want to check out Julia Gordon’s testimony today before the committee, which was also excellent, here it is. Lots of great stuff in there.A far greater threat to the broader financial system is the possibility that investors will force financial institutions to buy back hundreds of billions of dollars in soured mortgages, according to a Congressional Research Service report prepared for Thursday’s hearing and obtained by The New York Times. Loan buybacks could shift $425 billion in losses on mortgage-backed securities from the investors that owned them to the banks that helped originate or assemble the securities, according to the report, far more than most estimates floated on Wall Street.