Foreclosure freeze could put banks at home in DC

October 7, 2010

It’s not just JPMorgan and Bank of America that need to worry about President Obama’s rejection of a bill potentially unfriendly to homeowners and Congress investigating reports of improperly evicted borrowers. The fallout risks further erosion of the whole industry’s already shaky position in Washington. Wall Street could easily find itself in the crosshairs again next year.

With financial reform passed and a bank tax looking unlikely, big banks had been looking forward to some time out of the harsh glare of Washington’s spotlight. But as fast as a mortgage lender “robo-signing” its way through a pile of foreclosure orders, politicians are calling for hearings into charges that some financial institutions played fast and loose with the procedures for reclaiming homes.

It’s a bipartisan effort ahead of the midterm elections. The lead Republican on the Senate Banking Committee is urging regulators and lawmakers to examine mortgage practices at BofA, JPMorgan and Ally Financial, formerly known as GMAC. The president, meanwhile, said “no thanks” to legislation that could have made it harder for homeowners to challenge dodgy foreclosures.

The imbroglio will surely keep the bad headlines coming for the banks involved. Many politicians will urge the stoppage of foreclosures, but really there’s little time left this year for Congress to do more than talk. It’s on extended vacation until after the November elections and will likely obsess over tax issues when it returns.

But industry lobbyists fear a renewed wave of public invective against banks will make for an unexpectedly rough 2011. The more Wall Street — and its campaign cash — is considered radioactive, the harder it will be for banks to influence lawmakers and regulators as they implement the sweeping reform bill that passed last summer.

Banks would love to see, for instance, a narrow interpretation of new limits on activities such as proprietary trading. And the more unpopular banks are, the greater the likelihood they eventually get nicked with new taxes by revenue-hungry politicians. Conversely, the more politicized the housing issue, the less chance for reform of Fannie Mae and Freddie Mac — another big issue for the banks — any time soon.

The year hasn’t even finished, and Wall Street may have just secured itself another long and grueling battle on Capitol Hill.

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Many potential home buyers have learned that buying a foreclosed property may look like a good deal at first sight, due to the lower asking price, but it’s complicated, lengthy, and in the end, costly too.
This is why the banks are already finding it increasingly hard to get rid of foreclosed homes they’ve come to own, and there’s a substantial clog in the market, as well as a growing ‘shadow inventory’.
This legal problem of epic proportions is a new wrench stuck in the banks’ wheels, and it’s going to impede their efforts to raise cash from selling real estate, as it drives home prices further down. At the same time, this is putting the banking system under additional pressure, as the value of leveraged, mortgage based derivatives plunges.
This thing is also going to make it less appealing for banks to lend money to people looking to buy a house, further weakening demand.

If you think 2011 is going to look better than 2010, think again.

Posted by yr2009 | Report as abusive