Let Banks (Not the Government) Be Banks

Note: The article written below is not meant to defend the actions nor advocate the interests of the American bank ing system in regards to the real estate market, or the financial markets as a whole. Occasionally I read a piece of information that seems to leap off the page and shout at me, and an article recently published in the Los Angeles Times featured just such a nugget.
In the article, which can be read here , it states that JPMorgan Chase has withheld foreclosing on over $22 billion worth of mortgages in order to focus on reviewing the terms of those mortgages, implying that the dollar amount of bad mortgage debt on their books is well over $22 billion. JPMorgan also managed to eke out a profit in the last quarter of 2008 (which, as always, could just be the result of some creative accouting), so God only knows what that means about the balance sheets of the other national bank s. In correspondence with the numbers on JP Morgan's books, 1 in every 54 American homes has been on the brink of foreclosure this year. This includes over 500,000 homes in California, and 1 in 14 Nevada homes, received foreclosure notices in 2008. The sheer size of these numbers can be daunting for anyone trying to take stock of the situation, including the policymakers whom we hold accountable for finding a solution. It's much easier to strike a deal when you can attach a face to an issue, such as the CEO of a major automobile corporation. Likewise, when you have one man perpetrating a $50 billion dollar fraud and losing money for charities, among other investors, immediate action can be taken. Unfortunately, the fact is that it is impossible to put a face upon a tragedy that has affected millions upon millions of individuals, and has been perpetrated by a web of self-interested corporation, agents, brokers, and bank ers. Each of those individuals has a unique set of variables that factor into the circumstances that led to their houses being foreclosed on, or in danger of being foreclosed on. They may have lost their job, they may be dealing with personal strife i.e. health issues, divorce, or death, or they may not have been able to afford the house in the first place.
Due to the complexity of the circumstances both causing and resulting from the status of mortgage, the idea that the government could possibly come up with a single solution that would be effective in preventing any further damage in the real estate market is extraordinarily naïve and unrealistic. Perhaps most alarming is this suggestion by a group calling itself the National Community Reinvestment Coalition.
In summary, their proposal to the House Finance Committee is to use eminent domain as a vehicle through which the government would be able to buy distressed properties at 30-50% of their original value, bypassing the secondary lien holders, and modifying the loans on their own terms. While most observers will probably give this proposal a slim chance of ever coming to fruition, the fact that it has even been suggested indicates that the government is in fact considering an intervention in the real estate market.
It need not be said that this would be of the worst conceivable outcomes of the real estate crisis. If the government were to take any action to interfere in the housing market, it would set a frightening precedence for future lawmakers to follow. bank s, and to some extent the GSE's, should be responsible for setting mortgage terms and for modifying them when necessary. The government can make suggestions, and should set terms on how TARP money can be used.
But the bank s are in the business of surviving, and as was highlighted by the LA Times story on JPMorgan Chase, the strong bank s will do what they can to stay in business. The reason that bank s create local branches is so competent individuals can micromanage in the unique effects of each local economy. The government is not remotely capable of performing such a task, which is what the eminent domain solution would require. One could certainly make the argument that several of our national bank s are just zombie corporations, but that is not the case. Having the government insure your assets and provide you with capital is not the same as having the government run your board meetings. It’s the difference between allowing for checks and balances within branches of the government, and turning the Justice Department into your own private think-tank.
Generally speaking, what is in the homeowner's best interest (remaining in their house) will also be in the bank 's best interest. The strong bank s will conform to this principle, and the weak will go the way of all individuals at an evolutionary disadvantage.