Maybe It’s The Lawsuits Stopping Banks From Making Loans

When New York Attorney General Eric Schneiderman announced this week that he’s going after Bank of America and Wells Fargo for violating the national mortgage settlement agreement, he had a point.

Unfortunately, his point is mostly just at the top of his head. Schneiderman, like many New York attorneys general, is playing politics for the bleachers even though he’s hurting their case.

“The settlement included 304 ‘servicing standards,’ or rules over how to conduct fair and timely service to homeowners applying for some sort of relief,” the Wall Street Journal wrote. “Mr. Schneiderman said his office has found 339 violations of those standards by Wells Fargo and Bank of America since October.”

By contrast, the attorney general said, since the settlement some 7,500 homeowners have worked with state attorneys and the 94 housing counselors Schneiderman hired for $60 million to enforce the terms of the agreement; another 8,500 have received some sort of modification under the agreement, he said.

That means that the New York attorney general has spent $60 million to find out banks are not complying with the terms of the agreement in only 2 percent of all the cases. That means that each housing counselor, paid for with tax dollars, has found only 3.6 violations since October.

I wonder what they do the rest of the time. The wrong party is getting sued -- and screwed -- here.

Two percent doesn’t seem to be a very big number, especially when one considers the banks have to comply with 304 different rules and regulations under the settlement.

After all, many of these mortgages were forced on the banks by the federal government when the Feds shut down the subprime lenders supported by Fannie Mae and Freddie Mac. And once a settlement agreement was reached, banks had a tremendous number of backed-logged houses in foreclosure, a process that was often suspended during settlement negotiations between banks and federal and state governments.

Frankly, banks have been overwhelmed.

“U.S. home repossessions rose to a nine-month high in November, even as the number of homes starting on the path to foreclosure declined to the lowest level in six years. Banks completed foreclosure on 59,134 homes last month, an increase of 11 percent from October and up 5 percent from November last year,” the Huffington Post reported. “Last month marked the first annual increase in bank repossessions since October 2010, when allegations of abuses by the mortgage industry compelled many lenders to temporarily halt foreclosures.”

About a third of the 7,500 New York homeowners now working on modifications will get their terms reduced, The World reported. When you add in the other 8,500 previously modified loans, it comes to about 10,600 loan modifications against a potential 339 violations of the agreement.

That’s not just bad public policy, it’s bad economics as well. The assumption, of course, should be that the goal here is to keep the greatest numbers of families in their homes, not to trick big banks into violating a complex agreement so another attorney general can run for mayor of New York or governor of “Longk Islandt.”

But the numbers don’t suggest Schneiderman is trying to help anyone but himself. You see, the state of New York has paid $176,991.15 to find each of the 339 violations, assuming every violation would be provable in a court of law.

The average price of a home in New York State is $237,100. It would be much more efficient just to give homeowners enough cash to get current on their homes.

And that’s not the only way that New Yorkers have been hurt.

According to Zillow.com’s Home Value Index, a proprietary measure of home prices, U.S. home values have risen 5.1 percent year-over-year, while New York State has seen only a gain of 0.9 percent over the same time period.

There are about 4.5 million owner-occupied housing units in New York State. At an average value of $237,100 that means that New York State is lagging behind the rest of the country in housing prices by about $450 million.

This translates into a loss of home price value of $10,000 per home. That $10,000 in extra equity would likely make a much bigger difference in keeping a family in their home. But more important, a stand-down by big government would allow banks to get back to doing what they do best for a living: loan money.

At Bank of America, consumer real estate loans in the U.S. declined by over 15 percent year over year, although they made up the business overseas. Global banking for Bank of America is generating close to 22 percent returns, while consumer real estate generated losses of $1.3 billion through loans forced on them by the government.

With 304 provisions of a mortgage settlement agreement to deal with, and an overzealous attorney general who wants to be president of the United States, while mired in losses and lawsuits not of their own making, why would BofA loan money here at home?

John Ransom is finance editor at Townhall.com and the host of Ransom Notes, a nationally syndicated radio show covering the connection between politics and finance.