Opinion

Felix Salmon

Cracking down on destructive lenders

By Felix Salmon
November 27, 2009

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.

Comments
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The Atlantic Business channel seems like a spin off of the vaguely libertarian wing of the pre-Palin Republican party. It’s kind of offensive and useless. Mix 5 year old conventional wisdom with new technology: Atlantic Business Channel. And I haven’t even mentioned Megan McArdle by name.

Posted by lark | Report as abusive
 

To be sure, this Indiviglio character seems mostly to argue that things are true just by definition. Of course the bank was acting in its own best interest, BECAUSE THAT’S WHAT BANKS DO. Oh, well then: Q.E.D, I guess.I don’t know anything about the man, but he sounds like a somewhat clever kid from a somewhat privileged background who et up all his Libertarian Free Market Catechism and asked for seconds. What else do you do with such a person but put him to work sullying the formerly good name of The Atlantic? He might be a danger to himself or others in the real world.

Posted by Craig | Report as abusive
 

It would be nice if our corporations acted in the national interest, but they seem congenitally incapable of ever doing such a thing. To me, this is the most curious, and depressing, part of our recent experiences. We seem to have forgotten that there even is a national interest and seem quite willing to sacrifice it for a quick buck.

Posted by Neil D | Report as abusive
 

The deal these guys got from the FDIC was unbelievable, getting assets at a discount and then getting guarantees against possible future loses. ALL WITH TAXPAYERS MONEY!When they purchased Indymac it was on the condition that they continue working with borrowers as the FDIC started to do (HAMP program etc.) to preserve homeownership and neighborhoods. Since then they have systematically denied short sales and loan modifications, always “because of investor guidelines” even if the loan was backed by Fannie Mae or Freddie Mac. We have had to go to Fannie Mae and Freddie Mac in order to have Onewest uphold their contractual obligations. Onewest is foreclosing because it is more advantageous. The more homes that they foreclose on the faster they collect on their investment. Very few seem upset that they are not upholding their end of the purchase agreement.What’s the expression on Wall Street, “Pigs get fed, hogs get slaughtered.” Isn’t that what happened to the mortgage industry in the first place? Generally speaking, all other lenders are playing by the rules. There are plenty of lenders who are not helping homeowners at all but they did not benefit from any tax money so no one can make them. Onewest is all greed and I hope they get more of what they deserve.

Posted by Opinion | Report as abusive
 

Salmon’s observation “banks are run by humans, and that humans are fallible …” is spot on!It’s not hard to spot examples that shows businesses and individuals that don’t act in their best interests. If they were, we wouldn’t have this financial crisis! The investment bankers lobbied hard to get financial regulations loosened and repealed in late 90s, so that they could do whatever they wanted; this they promptly did, for 10 years, but in the process they almost brought down the house!The politicians who aided their efforts to loosen regulation were ostensibly pro-business. But is that really the case? One could argue that these bankers and their friends in Congress together worked successfully to bring their own demise (well maybe not their personal demise, since both groups seem to do very well despite the mess they made, but you get my drift). So do we call them rational or irrational players?Obama and Co. are now trying to clean up the mess, reintroduce rules and regulations in an effort to make financial market work better, with more stability and transparency. Yet, they are now being denounced as anti-market or socialists or some such nonsense. If these Obama denouncers really love capitalism as they claimed to, they should thank Obama and join him in the efforts to save it. Again, do we call these denouncers rational or irrational? If I had to choose, I’d call them STUPID! Yes, I would, because if they get their way, capitalism (already in ICU) would be dead in another 10 years and we’d have revolutions. All because its professed devotees are too stupid to know any better.

Posted by jian | Report as abusive
 

Please, the borrowers took a sub-prime mortgage in 2004 because either their credit history showed they were over-extended and did not pay on time, and or they income for his doll business was so overstated that a Conforming Underwriter would not believe it.Then when they claim Mr. Horoski had so many medical issues, which I have seen no prove of any substantial medical bills, instead of selling a house over 3400 square feet when the real estate market was flying, they choose to live in a large house beyond their means and choose INTEREST ONLY and take out more and more money.An INTEREST ONLY loan when they were in their fifties, when they knew they had supposed medical problems.Where is the responsibility???When did they ever plan on paying back a house they bought for $200,000 and then owed over $500,000Please do not blame the banks totally, no one put a gun to their head before or during the refinance. They had choices, such as moving and downsizing.Borrower claims it was like “dealing with organized crime.” The wife kept asking the bank attorney at least twice are you doing “crack.”Why was crack on Diane Yano’s mind so often. Very interesting if they would document their medical problems??Were does she work as an English professor?Definately won’t be sneding my sons there, since her response to the Banks Attorney seemed to be “You must be doing crack.” Seems like a quite limited response from a College English professor.Anyhow–she plays the race card, he complians about organized crime, meanwhile they take no responsibility or regreat any of their choices.If one household is allowed to have their mortgage debt reduced to the current market value, then everyone should. That is why it could not be offered.The borrowers in good faith during a 2 year foreclosure process could have paid at least the real estate taxes, while they enjoyed the protection of the police and fire department of Suffolk, not to mention court services, and the salary of Judge Spinner.Have any of you questioned whether their stated income was accurate on their 1003?The couple did not even have kids to support when they went into foreclosure. Not sure why so many posters feel the Horoski’s deserved and needed to live in such a large home.His Internet doll business could be run from anywhere. Much less expensive places to live than Suffolk in the USA.Once the Holoski’s provide their 2004 1003 and income documents and they support each other, I will then be able to better understand judge Spinner’s decision.But not until then–

Posted by Elizbeth Nickerson | Report as abusive
 

Salmon said..”"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 I would imagine that the bank was planning on garnishing her wages after they got a judgement against her for “over and above the proceeds from a foreclosure sale.”"Face it, they stopped paying the mortgage less than a year after taking it out and then never paid anything again for the next FIVE years, according to the facts found in the judge’s court ruling. I can only wonder if they deducted property taxes on their tax return for all those years when they didn’t really pay them?

Posted by Davein Philly | Report as abusive
 

Salmon says..”"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.”"Huh? So you think that giving people free houses is the proper remedy for when banks should be modifying instead of foreclosing so it won’t ruin the real estate market? Are you serious!I guess you’ve never heard of the legal term “unjust enrichment”, which is the exact term that will be used when Judge Spinner’s ruling gets overturned on appeal.Well, this case turns contract law on it’s head, sad to say. I can only hope that the Horoski’s have made no needed repairs to the home for the last 5 years and now the termites and the leaky roofs and other such things have grown into much more costlier problems to fix, because it seems pretty obvious to me that they are professional deadbeats.

Posted by Davein Philly | Report as abusive
 

Hey, I have naive pro-corporate prejudices that I imagine to be libertarian, can I please have a column in the Atlantic?

Posted by HAL | Report as abusive
 

From your excerpt it appears the loan wasn’t owned by Indymac anymore (since Indymac doesn’t exist that supports this assumption). It looks like the bank doing the negotiating was the servicer. What is the penalty to the servicer if they end up causing a loan to be abrogated? Is there any? The servicer has no incentive to work out the loan. They get more money in keeping it in foreclosure.

Posted by zach | Report as abusive
 

Zach, not sure how you can say with certainity that servicer has no incnetive to work out the loan.I have seen that it varies bank by bank, homeowner to homeowner,Maybe I missed what Greg and his daughter made monthly.Daughter looked straight out of school. Greg appears to be Ebay and an online doll company. Not sure how Eay reports earnings, but I would assume it would just be total dollar sales. Up to the ebayer to report accuarately to the IRS.In otherwords, if their combined income was $4,000 a month–they were only offering to pay 25% monthly.That obviouslly is $1,000 a month. I would assume taxes and insurance must be combined $750.So IndyMac would get $250 monthly towrads their $525,000 in debt. In al due respect,would you sell a home for over half a million and take back owner financing accepting $250 a month. Plus sure his income varies month by month being toy sales. So their was that uncertainity. Borrower has health issues, so what money would be used to maintain the house. I assume with health issues he would not be able to do much maintenance.IndyMac did not originate or approve the loan.As Davein noted, borrowers took $100,000 out and still appear to have been able to make somewhere between 7-9 payments before stopping payments.The borrowers could not afford the house in 2004 with taking $100,000 cash out. The fact that such few payents were made is very curious. 1003 and tax returns should be compare.Funny with al the National news, daughter was on ABC news the other day, originator even if he was out of the business has not posted at all.Foreclosures as devasting as they are, do allow younger, better able to afford individuals the opportunity to enter the housing market.Once borrowers have used their house as an ATM and sat in it for over (4)four years–2005 to now with no payments, not even real estate taxes they have been afforded their chances.Why did the Judge not question why the house went into FORECLOSURE so soon after taking $100,000 out.IN REALITY, BORROWERS HAvE MADE NO PAYMENTS ON THEIR HOME OUT OF THEIR POCKET SiNCE REFI IN 2004. The 7-9 payments made were probably drawn from their $100,000 cash out.Renters in most states have eviction started after 3 days–Horoski’s have had over 1600 days as homeowners to figure out an economic solution versus the 3 days a renter gets!!!

Posted by Elizabeth | Report as abusive
 

what happen is what needed to happen, the banks and the others want to say homeowners over extended their self in borrowing to much, that may be 1/2 true however let’s not let the banks off the hook. the homeowner could not get a single dime without the bank approval, the homeowner did not create the arm loans, the banks knew exactly what they was during when they gave the homeowners these exotic loans that would mature in 2 or 3 years never qualifying the borrowner on the mature rate or payment, they did not care because before the ink was dry they had already sold their loan on wall streets to investors, they allow borrower to purchase homes on stated income not verifying their income or any other documents that was requested. the bank was paying brokers to give borrowers higher rate on their loans and they did not know it(kickback) to broker, now that it is time to turn the note over to the true investor that bought it at the time the loan was originated they want to foreclose and mislead the public and government that the homeowner are not turning in their paperwork, this is a pack of ties,i have talk to several inside workers at banks and they was told to lose paperwork so the modification could never take place and they would have justification in foreclosing on the homeowner. if the government did not bail the bank out and let them fail and struggle they would be more willing to work with peoples to stay in their home butwhen you have been given billions of dollars to survive at taxpayer expense you can bully the homeowners around and dictate what you will and will not do and lie to the government about who fault it is. if there was a forum or website for each bank for homeowners to discuss with is going on with their bank you will find they are getting the run around,homeowners have been waiting for 6 or month for a decision and some are decline with no reason and those that was given a trial modification never got a pernament modification. the bank are dealing with unclean hands, this was plan and the banks never intended for the homeowners to keep their home. we can write laws for everything but why was their no laws into effects on interest rates and pre-payment penalty. they have some now.investor and banks got us in this mess and they are doing it again. investor are now buying homes at dirt cheap prices because they have cash which allow them to outbid regular first time home buyers and then they put them on the market after 90 days for 40 to 70 more in a 3 more period. this is inflating the market again and the banks that are lending the money to the homeowners to purchase these investors properties are not questioning this high increase in such a short period of time.the american people need to stand up and fight and not let the banks push them around anymore. we need more judges willing to stand up against these banks and hold them accountable for their action.the average homeowners do not have the knowledge and funds to fight corporate america and they know that and they take advantage. enough is enough

Posted by marie jackson | Report as abusive
 

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