Here’s a brand-new theory explaining why the economics of the mortgage business are so screwed up: It’s Martha Coakley’s fault.
This bit of bizarre logic was implied late last week by GMAC Mortgage, a day after the Massachusetts attorney general sued the company and a handful of other big home lenders that do business in the state.
GMAC Mortgage, a subsidiary of Ally Financial Inc., responded to the lawsuit by announcing it would more or less get out of the mortgage business in Massachusetts. It said litigation costs were making it too expensive to maintain most of its mortgage activity in the state. So, adios.
That news might have seemed like an interesting bit of legal maneuvering if the mortgage business wasn’t so important to our economy and so deeply mired in trouble.
True, any honest attempt to explain the home-loan meltdown will produce a truckload of blame to spread far and wide. But the excesses and deceptive practices of big players in the mortgage industry itself account for a very large share of the pain and misery we’ve suffered through.
Those big mortgage companies are taking legal fire from every direction. Borrowers line up to say they were misled. Investors who bought securities backed by mortgages say they were defrauded. And regulators claim lenders trampled basic legal rights when they tried to process the wave of foreclosures that followed the residential real estate boom.
State attorneys general from across the country have been negotiating as a group with mortgage lenders for months over a settlement of foreclosure-related claims. One infamous example: The work of so-called bank robo-signers who allegedly signed thousands of documents without properly reviewing them.
Massachusetts had been a party to the big multistate negotiation. But Coakley wanted to preserve the state’s right to pursue two additional kinds of foreclosure-related claims particular to Massachusetts — an arrangement that didn’t fly with lenders. That breakdown led the attorney general to initiate her own lawsuit last week.
GMAC Mortgage has plenty of company as a defendant in the case. Lending giants Bank of America Corp., Wells Fargo & Co., Citigroup Inc., and JPMorgan Chase & Co. were all named for allegedly committing fraud and failure to reduce loan payments for some homeowners. The lenders all said they would fight the allegations in court.
Ally Financial, the GMAC Mortgage parent, is actually a new name for the old carfinancing General Motors Acceptance Corp. It became a bank, changed its name, and took $17 billion in federal bailout money as part of the Troubled Asset Relief Program, otherwise known as TARP. (Point of comparison: Goldman Sachs Group and Morgan Stanley each took $10 billion in TARP money and later paid it back.)
Today, the federal government owns nearly 74 percent of Ally as a result of the outstanding loan.
The bank’s GMAC mortgage unit makes a few home loans directly but conducts most of its business with lending intermediaries. The company buys loans from mortgage brokers and smaller home-loan companies, creating bigger collections of loans that it sells to others.
Now GMAC Mortgage says it’s dropping its business with local brokers and smaller lenders. In a statement last week, the company said ‘‘recent developments’’ had ‘‘led mortgage lending in Massachusetts to no longer be viable.’’
That sounds like a dramatic reaction to the attorney general’s lawsuit. GMAC Mortgage certainly suggested legal costs were an economic tipping point that doomed the company’s business in Massachusetts.
But GMAC Mortgage is scaling back it’s so-called correspondent mortgage business all around the country. Ally Financial, reporting quarterly financial news last month, said it was losing hundreds of millions of dollars in the mortgage business. One response: reduce correspondent banking, which accounts for 84 percent of Ally’s mortgage business.
GMAC Mortgage is a relatively small presence in Massachusetts, too. But I’ve heard from smaller local lenders who depend on GMAC who now wonder how its departure might limit their access to credit.
All the negotiations over foreclosure issues — in Massachusetts and across the country — won’t change the outcome of home-loan conflicts. Most people caught in the foreclosure process are unable to pay their loans and will lose their homes.
But those cold facts don’t excuse many excesses that subverted or simply sidestepped legal principles that matter when a lender takes someone’s home. The people defending those principles aren’t the mortgage industry’s real problem.