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Financial Institutions and the Mortgage Crisis

April 1, 2011

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A word from our intern Seun Olatoye-Ojo:

The recent admission by several financial institutions that errors were made with mortgages – hence foreclosure of homes – has been quite disturbing. It’s good enough that these companies have admitted to the wrongdoing but did they really have a choice or were they caught red-handed? Recently, Sheila Blair of the FDIC made a case for a fair compensation of customers who lost their homes as well as those who have been overpaying for years due to these errors. A few questions have agitated my mind. First, is an act a mistake when you are caught or when you discover it on your own? Also, when is compensation deemed adequate? These are two questions that are certainly open for debate; you decide.

 JP Morgan Chase & Co admitted it had overcharged over 4000 members of the US Military and foreclosed a few homes in the process. This happened only after a lawsuit had been pursued by one of the affected service members. The bank has apologized but how do you quantify several months of trauma of foreclosure and collections in monetary terms? Is it just enough to return homes and overpayments and assume it is all square? I find myself providing more questions than answers to my previous questions but many foreclosure victims ask these questions too.

From a different perspective, the industry wide ripple effect of these actions cannot be ignored. Put more succinctly, it’s contagious. On the one hand, new home buyers are very hesitant to buy due to the news making rounds as per foreclosures and bank errors; on the other hand, high unemployment rate has further compounded an already complex problem. Conversely, there has been some improvement in these two critical areas even though they have not been as significant as we all hope for. We used to think irrational exuberance drove the stock market but these days “rational exuberance” is sort of driving the housing market. The least that the banks can do is restore some kind of confidence in the mortgage industry by cutting down – or even totally eradicating – mistakes. This can add some momentum to a kick-started industry currently experiencing the lowest growth rate in decades.