Monday, December 26, 2011

The Poor Get One Strike; Banks Get Thousands

Frank Pasquale

Most readers of this blog are already familiar with draconian treatment of the poor by various law enforcers and state bureaucracies. Here's yet another example:

[A] one-strike clause . . . allows the public housing authority to evict [the tenant] if any member of her household or any guest engages in certain kinds of criminal activity. . . . Stories abound about the one-strike policy being wielded in seemingly egregious ways to evict "innocent tenants," such as a disabled elderly man in California whose caretaker was caught with crack. . . .The Chicago Reporter wrote in September that 86 percent of Chicago's one-strike evictions last year did not arise from criminal activity by the person named on the lease.

"These policies, the effect of them on children, families, women, families of color, were not thought through. And I think now a national conversation is beginning to rethink that," said Ariela Migdal, a senior staff attorney with the Women's Rights Project of the American Civil Liberties Union. Migdal pointed to a June 2011 letter from HUD Secretary Shaun Donovan to public housing directors, encouraging the directors to use their "broad discretion" to create a flexible set of standards for who will be admitted to and allowed to stay in public housing.

Certainly the Obama administration has ample experience deploying "discretion" and "mercy" in other areas.  For example, consider Barry Ritholtz's summary of a shocking Reuters report by Scott Paltrow on foreclosure fraud:

There have been . . . “tens of thousands of fraudulent documents filed in tens of thousands of cases.” Sworn affidavits have been filed containing false information. This is easily prosecuted perjury. . . . The size and scope of the fraud on the U.S. court system is unprecedented in U.S. history.

NY State court judge Arthur Schack, ruled in 2010 that pleadings by the Baum Law Firm— who handle 40% of NY foreclosures — were “so incredible, outrageous, ludicrous and disingenuous that they should have been authorized by the late Rod Serling, creator of the famous science-fiction television series, The Twilight Zone."  There has been no fraud prosecution to date. . . . [and banks] have routinely filed falsified mortgage promissory notes — in some cases, six different documents have been filed, all claimed to be the original. At the least 5 must be forgeries — an easy felony to prosecute.

 The administration slapped BofA/Countrywide on the wrist for massively discriminatory action.  Its OCC has initiated a program where "servicers agree[] to submit foreclosure fraud for review by 'independent' third-party companies" that is not credible.  Matt Stoller describes the dynamics that are now wrecking lives and neighborhoods around the country:

The attitude during the go-go days of the housing bubble was “here today, gone tomorrow,” as Joe Nocera and Bethany McLean make clear in their book “All the Devils Are Here.” This was a refinement of the financial deal makers’ code, “IBG-YBG,” meaning “I’ll be gone, you’ll be gone,” described by Jonathan Knee in “The Accidental Investment Banker.” In this environment, why bother getting your paperwork in order when the goal is to put someone into a predatory loan, reap fees and disappear tomorrow?

Now that these homes are in foreclosure, however, the lack of paperwork is a serious problem. And, since no one has yet been held accountable for the fraud perpetrated during the housing bubble, the business model of financial institutions is often still predatory. This fraud is now coming back to haunt our courts — for example, in the falsified foreclosure paperwork required to cover up the corner-cutting of the subprime lenders and the banks that funded them. . . .The [Obama] administration is now attempting to quash state-level officials by fiercely lobbying for a 50-state settlement to paper over the foreclosure fraud scandal. Obama may talk about his fealty to the “99 percent,” but his administration is engaged in an aggressive coverup of bank crimes.

 But wait, as they say in the infomercials, there's more.  It would be bad enough if the wholesale campaign of primitive accumulation via predatory loans and sloppy foreclosures merely contributed to destitution and inequality.  But, as CBS's 60 Minutes documents, the same banks evicting families are not exactly putting the empty houses to their "highest and best" use in many cities:

 Cuyahoga County ripped down 1,000 homes this year. And they have 20,000 more to go. That'll cost about $150 million dollars. . . . In theory there shouldn't be this many abandoned houses. When homeowners walk away, the bank is supposed to take responsibility. But one little known feature of the great recession is, that many banks are walking away too, unwilling to maintain a house whose value has crashed. "Very often a bank will take a property to the point of foreclosure, but won't go to the sheriff's sale, 'cause they don't want that property. They don't want the responsibility of the $8-$10,000 bill that comes with tearing this house down" [says Jim Rokakis, a former county treasurer].

There is no concern for communities, none for struggling families, none for the public treasury.  There is simply a Kafkaesque interlinkage of contracts and incentives that keep the foreclosure machine humming (along with Potemkin programs like HAMP), putting families on streets with dubious documentation for the paper gains of banks and servicers.  The law enforcement apparatus will hammer a disabled man for inadequately monitoring his caretaker, but moves slowly and ineffectively (if at all) against a wholesale abandonment of legality. Glenn Greenwald's and Bernard Harcourt's books on such discrepancies, already damning, appear to have understated the extent of our 2-tier justice system.

Banks' Economic Impact

This is not simply a problem for lawyers, but for anyone concerned about the overall health of the US economy.  The foreclosure disaster is only one particularly pure example of a financial system prone to overcentalization,  bubble-blowing, opacity, and disregard for long-term productivity.  Henry Mintzberg has warned that the economy will never be "fixed" as long as problematic alliances between business and government consume such a disproportionate share of resources:

When economists boast about America’s great productivity, what they have in mind is exploration – finding ways to do things better, especially through superior processes. But much of this “productivity” has in fact been destructively exploitative. Think of all the corporations that have fired great numbers of people at the drop of a share price, leaving behind underpaid, overworked employees and burned-out managers, while the CEOs escape with their bonuses.  To see where this leads, imagine a company that fires all of its workers and then ships its orders from stock. Economic statistics would record this as highly productive – until, of course, the company runs out of stock. American enterprise is running out of stock.

There have been a number of recent studies on the productivity of the financial sector (see, e.g., here, here, here, and here). Many have asked whether it increases GDP, but perhaps the more telling question is how it raises GDP.  Mike Konczal recently evocatively compared the foreclosure crisis to an earthquake or storm affecting millions:

Imagine a natural disaster that hit the United States and internally displaced over 5 million families.  We’d understand that would require a major policy response.  But for the 5 million estimated foreclosures, and the millions more that are going to happen, there’s no response from the administration to match this challenge.

US GDP probably got some kind of "bump" in 2006 as some homes of Katrina victims were rebuilt.  But I've heard few people try to describe hurricanes as a form of "creative destruction," or "information creators."  Maybe the hurricane lobby just needs to donate to the right think thanks.

A New Way Forward?

Is there any solution to these problems? The Clinton administration diverted law enforcement resources from financial to health care fraud, and later Bush did the same thing in response to terror fears.  Health care fraud detection and deterrence has become extraordinarily sophisticated.  For instance, as Wheeler, Fuller, and Broussard have noted (in 4 J. Health & Life Sci. L. 1, 2011):

Recently, the number of Medicare- and Medicaid-affiliated government contractors charged with detecting fraudulent and abusive practices by enrolled providers has expanded dramatically. The contractors' role has been to monitor and investigate providers rather than simply to administer these programs.   [T]he healthcare government contractor landscape continues its transformation with an increased number of contractors actively pursuing the recovery of erroneous payments and the identification of potential patterns of fraud and abuse.

There is a veritable alphabet soup of entities devoted to this goal, including Program Safeguard Contractors (PSCs) and Zone Program Integrity Contractors (ZPICs).  They perform "auditing, data mining, and improper billing and fraud investigation."  

In my next post on financial institutions, I will outline some potential lessons for financial fraud prevention from the realm of health care fraud.  The critical conceptual issue here is to begin to see the banks as a sector as permanently embedded in a web of state subsidy and support as health care, defense, and energy.  Mintzberg convincingly complains about "the energy companies with their cozy tax deals, the defense contractors that live off government budgets, and the pharmaceutical companies that buy their innovations and price what the market will bear, thanks to patents that governments grant, but without policing their holders."  I also worry about all these sectors. But it may well be the finance sector that is the most menacing to economic growth, and the least accountable.  We cannot simply accept lawlessness in the sector as the status quo.  Creative and forceful responses are possible, and have precedents both historically, in other nations, and in other sectors in our own economy.

Simulposted: Concurring Opinions.

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