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Washington's Robo-Signing Bank Heist

May 18, 2011

At last Wednesday's "CBS Town Hall," President Obama said he was "trying to . . . figure out how we can get the banks to do more" on modifying mortgage loan payments. Perhaps, he said, people whose mortgages are underwater should get a "principal reduction, which will be good for the person who owns . . . the home."

Mr. Obama has decided that taxpayers have no appetite for bailing out homeowners who don't make their payments, or for rescuing those whose homes are worth less than their mortgages. Instead, he's backing a proposal by his Department of Justice and state attorneys general to force major banks to cough up the dough.

The money would come from a settlement with JP Morgan Chase, Citibank, Bank of America, Wells Fargo and other banks accused of "robo-signing," in which foreclosure documents were signed by bank employees or agents without properly certifying all the papers. The attorneys general admit that virtually no one was erroneously foreclosed upon because of robo-signing. The banks foreclosed on people who were on average 18 months delinquent, and after multiple attempts to modify the loan had been tried and failed.

But Justice and the state attorneys general are demanding $20 billion for sloppiness, which they will then be able to hand out to voters?and potential supporters. The money won't come from the banks; it will come from their customers, millions of whom will pay more in fees and interest and will, in some cases, be denied credit.

This stinks. It's not only corrupt, it's bad policy.

The proposed settlement says that only homeowners behind in their payments are eligible for relief. But roughly 90% of underwater borrowers are current, so reducing the mortgage balances of delinquent borrowers would create an incentive for responsible borrowers not to pay. Iowa Attorney General Tom Miller has tried convincing other state attorneys generals to follow him in establishing a hotline to provide advice on how to tap a "Foreclosure Relief Fund."

Moreover, reducing the mortgages of people who are unemployed or otherwise unable to make reasonable payments could further delay a housing recovery. As loan modifications and foreclosures have picked up in recent months, the number of delinquent homes has been decreasing. In any case, as one bank source told me, $20 billion will not heal a housing market in which there is a trillion dollars of negative equity.

Part of the proposed settlement monies would go to the federal government, with the rest split among the states. States could put their share into general revenue. But one government official familiar with the proposed settlement told me that states could also spend their money on direct payments to homeowners, homeowner assistance programs, nonprofit housing counseling, legal aid, consumer education, mediation and even community development.

The federal government could spend its share of the loot on a long list of programs, including, as one government official familiar with the proposed settlement said, a "borrower's transitional and educational fund." Just what does paying someone's junior college tuition or funding a sabbatical from work?simply because his mortgage is underwater?have to do with repairing the damage of "robo-signing?" Nothing.

The proposed settlement is a money grab in search of a crime. A fairer way to punish banks would be to have them generously compensate the handful of people wrongly evicted because of a "robo-signing" abuse, after providing them with an expedited way to have their claims heard. And, of course, to return their homes.

It is fundamentally unfair, even devious, to fleece banks out of billions, ignore victims of "robo-signing" who were wrongly evicted, and then hand out cash to cronies. The $20 billion bank stick-up is a transparent attempt to pay some voters a thinly disguised election year bribe, while pretending the money didn't come from millions of middle-class families with a checking account, loan or credit card at an affected bank.

This is not the behavior of a transparent, honest and accountable leader, which Mr. Obama held himself out to be in 2008. The real Obama turns out to be fully versed in the Chicago Way. The bank heist is merely the latest example.

This article originally appeared on WSJ.com on Wednesday, May 18, 2011.

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