Keeping our eyes on the (economic recovery) prize

This week, despite encouraging reports showing sales of previously occupied homes rising 10% in September, the media and the bar continued to fan the flames, suggesting that investors might have actionable claims due to allegedly faulty documents, underwriting defects and servicing. The story crucially relied upon the public’s misunderstanding of loan underwriting and securitization. Minor aspects like typographic errors, while technically being errors, have no material effect on loan losses.

In the face of rampant generalizations about the banking industry, the public is being urged to believe in broader, systemic difficulties, potentially setting the stage for another crisis.

The Obama Administration needs some good news coming out of the economy. It does not need regulators to be whipping up a second-round of systemic risk by presenting administrative errors as indicative of underlying fault lines. Instead, Shaun Donovan and team should be championing the banks that have proactively addressed the challenges of the foreclosure wave and – of course – punishing those who continue to lag.  Different banks are dealing with the challenges of the foreclosure crisis in different ways. JP Morgan, for instance, proactively addressed processing challenges presented by the foreclosure wave beginning more than a year ago; and Bank of America famously halted foreclosures to undertake process as well as individual document reviews before proceeding with foreclosures this week.

Ally Financial, one of the largest remaining TARP institutions, took a leadership role in addressing foreclosure documentation problems in recent weeks, halting foreclosures with Bank of America and similarly reviewing their processes and case pipeline.

Ally is also on the Federal government’s list of financial firms ready to be restructured and divested. With the markets topping 11,000 points and pent-up demand among investors to acquire new debt, valuations are supportive for the US Treasury to get out of Ally without a loss – and most likely, with a sizeable gain. We have an incredible opportunity at hand for the administration to kill three birds with one stone:  alleviate growing systemic risk concerns, bolster confidence in the financial services sector, and continue to liquidate TARP investments.

Unlike CitiGroup and AIG, however, Ally is privately held and cannot be sold to a manufacturing company due to Bank Holding Company restrictions. So, as was the case with AIG, Treasury must take the next step: relinquish control while the going is good, convert the government’s preferred stock to common equity and sell that to the public in conjunction with an IPO and requisite secondary public offerings.

The foreclosure wave is evidence of a recovery process, with economic growth on the horizon once loan losses become settled. If policymakers, Elizabeth Warren’s TARP oversight panel and the courts can stay focused and positive they can maintain progress toward economic recovery, make steps to bring mortgage industry documentation and processing into the twenty-first century, and put this credit crisis to rest.

Dr. Mason is the Hermann Moyse/LBA Chair of Banking at the Ourso School of Business at Louisiana State University, a Senior Fellow at the Wharton School, and Monetary Policy and a Partner at Empiris, LLC.