Saturday, May 07, 2011

Deutsche Bank--L.A.'s Big Slumlord

L.A.'s Slumlord Millionaire

By Kevin Drum
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A couple of days ago, the Los Angeles city attorney's office sued Deutsche Bank. Why? Because it's a slumlord.

All I can say is: Good for Los Angeles. The foreclosure mess of the past three years has been one of the biggest black marks on both the banking industry and the Obama administration, which has essentially punted the entire issue, hoping that if it kicked the can down the road long enough, the problem would just fade away as the economy improved. HAMP, its primary program for loan modifications, has not only been a miserable failure on its own merits but has failed to change the incentives in the housing industry, which are almost Dickensian in the way they reward the most egregious possible behaviors. As Mike Konczal put it a few months ago, "Obama's Treasury team took a system that had a terrible design and doubled-down on it."

The problem is simple: The HAMP program provides only modest incentives for banks to perform the kinds of loan modifications that might genuinely help distressed homeowners. Opposed to that are the lucrative fees that loan servicers make by stringing homeowners along—fees for insurance, appraisals, title searches, legal services, etc.—and then eventually allowing them to default anyway. Loan modifications, even with the HAMP incentives added in, are still net money losers. There's way more money to be made by offering homeowners a sliver of hope, collecting fees along the way, and then foreclosing after all. Peter Goodman lays out the gruesome details here.

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