Cracking down on destructive lenders

By Felix Salmon
November 27, 2009
Daniel Indiviglio, who even stands up for IndyMac and its "inequitable, unconscionable, vexatious and opprobrious" regional manager, Karen Dickinson:

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It’s almost quaint that there are still people out there who believe that all market participants are always rational actors making decisions in their own economic best interest. Take Daniel Indiviglio, who even stands up for IndyMac and its “inequitable, unconscionable, vexatious and opprobrious” regional manager, Karen Dickinson:

I’m a little confused about how Salmon proposes that the bank here wasn’t acting in its own best interest. If he means that its actions led to a judge awarding the home to the borrower, and that screws the bank, well that’s true. But I seriously doubt that the bank believed that its actions would lead to that outcome…

Had the mortgage contract been upheld, then Indymac would have repossessed the home, as planned. Clearly, that’s the outcome it expected its actions to bring. If Salmon means to speculate that the bank would have been better off if it had accepted one of Ms. Yaho-Horoski’s modification alternatives than force her to foreclose, then I’m not sure I can agree…

For whatever reason, it didn’t like the modification options Ms. Yaho-Horoski presented. Maybe it believed that they all had far more risk than just foreclosing and settling for whatever price it could obtain in the battered housing market. So the bank deemed foreclosure its best option.

On the one hand, this is trivially false, since IndyMac rejected a bid at full market price from Yaho-Horoski’s daughter: it’s inconceivable that after going through the expense of foreclosing on and selling the house, IndyMac would net more money than that. After reading judge Jeffrey Spinner’s decision, it’s pretty clear that Dickinson was a malicious liar who was acting not in the best interests of IndyMac but much more simply in the worst interests of the Yaho-Horoskis. If they suggested anything at all — even a desperate offer of simply giving IndyMac the deed to the house, in lieu of foreclosure — Dickinson was predisposed to reject it.

It’s also inconceivable that IndyMac thought it could get a significant amount of money out of Yaho-Horoski over and above the proceeds from a foreclosure sale. Yes, New York is a recourse state. But we’re not talking here about the only kind of situation in which lenders ever go after borrowers after they’ve foreclosed — a case where the borrower is wealthy, clearly has the money to repay the debt, and is simply refusing to do so because the value of the house has fallen. The borrower in this case was Diana Yano-Horoski individually, and all of the proposals she made involved using the combined income of herself, her husband, and her daughter. But Dickinson evinced no interest in maximizing the amount of money being put towards repaying the mortgage: she even “summarily rejected” the offer from Yano-Horoski’s husband and daughter to be added to the loan as obligors.

More generally, it seems that Indiviglio’s fundamentalist beliefs about what banks do are utterly unfalsifiable. This case isn’t a cut-and-dried example of a bank acting against its own best interest, yet he still refuses to accept that’s what was happening. It’s almost as if he doesn’t understand that banks are run by humans, and that humans are fallible, especially in emotionally-fraught circumstances: they get caught up in an us-versus-them mindset which confuses the best outcome for themselves with the worst outcome for their opponents, or they just panic and do something stupid, like lying to a judge or pulling an emergency brake cord on a subway train.

I’m not saying that “Indymac is just pure evil” — the straw man that Indiviglio sets up as the onlypossible alternative to his sunny world where everybody always acts in their own best interest. I’m saying that certain corporate officers, in certain situations, make mistakes — and often make very large mistakes. In the case of the housing market in general, and foreclosure proceedings in particular, those mistakes happen quite often, if not always as egregiously as in this case. Loan servicers are simply overwhelmed by the sheer quantity of mortgages in default, and frequently rush to foreclosure even when there are much better options available.

It’s both in the national interest and in the best interest of the loan servicers collectively to put a brake on such actions: if everybody’s rushing to foreclose at the same time, that just creates a glut of distressed property sales which in turn drives down property prices further and perpetuates the vicious cycle. On the other hand, if everybody else is slowing down, then immoral banks like IndyMac can try to act as free riders and grab all the collateral they can, free-riding on rest of the banking community. Such actions should be opposed by all three branches of government, including the judicial branch. Which is one reason why Jeffrey Spinner is such a hero.

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