On Mortgage Fraud

Paul Krugman had a great op-ed in the New York Times a few days ago debunking banks’ claims that any proposed settlement with states and the federal government over lending abuses they perpetrated will hurt the economy.

What about the argument that placing any demand on the banks would endanger the recovery? There’s a lot to be said about that argument, none of it good. But let me emphasize two points.

First, the proposed settlement only calls for loan modifications that would produce a greater “net present value” than foreclosure — that is, for offering deals that are in the interest of both homeowners and investors. The outrageous truth is that in many cases banks are blocking such mutually beneficial deals, so that they can continue to extract fees. How could ending this highway robbery be bad for the economy?

Second, the biggest obstacle to recovery isn’t the financial condition of major banks, which were bailed out once and are now profiting from the widespread perception that they’ll be bailed out again if anything goes wrong. It is, instead, the overhang of household debt combined with paralysis in the housing market. Getting banks to clear up mortgage debts — instead of stringing families along to extract a few more dollars — would help, not hurt, the economy.

The whole thing is worth reading.