The new draft bill is expected to take a tougher stance toward troubled financial firms than the administration’s original plan, and may take out some language that would allow for temporary bailouts.

Robert Reich argues that a stronger approach regarding too big to fail is long past due. It should have been a reality earlier, but was blocked by the fact that Congress and the White House have strong financial and other ties to Wall Street, he contends. Anything short of truly breaking up big banks won’t be enough, Reich writes.

Congress won’t go as far as to unleash the antitrust laws on the big banks or resurrect the Glass-Steagall Act. After all, the Street is a major benefactor of Congress and the Street’s lobbyists and lackeys are all over Capitol Hill.

The Street obviously detests the notion that its behemoths should be broken up. That’s why the idea isn’t even on the table. But it should be. No important public interest is served by allowing giant banks to grow too big to fail. Winding them down after they get into trouble is no answer. By then the damage will already have been done.

Whether it’s using the antitrust laws or enacting a new Glass-Steagall Act, the Wall Street giants should be split up — and soon.

Meanwhile, there has been little talk about the optics created by the massive government response to the problems in the banking system, while many homeowners find themselves on their own. Sen. Dick Durbin (D-Ill.) chastised banks this weekend for causing neighborhood blight by failing to take care of their foreclosed houses, Bloomberg reports. Durbin spoke in Chicago at a “Showdown in Chicago” protest sponsored by labor and community groups, and timed to coincide with the American Bankers Association annual  conference in that city.

“As long as those plywood boarded-up houses are sitting there, we are not going to have an economic recovery,” he said. “These banks have to realize they can’t sit on these neighborhoods, sit on these families and sit on economic opportunity across America.”

But as usual in this crisis, the focus on regulation and speeches has missed what’s actually happening on the ground. And that’s the really scary part, according to the Miami Herald (via Patrick.net). Homeowners in South Florida, the Herald reports, are walking away from their mortgages in droves. The walk-away phenomenon — once more a theory than a reality — is a now a measurable occurrence.

As property values have plummeted by an average of 50 percent, such strategic defaults now make up a sizable chunk of South Florida’s foreclosures. In the fourth quarter of last year, they accounted for an estimated 28 percent of all defaults in Miami-Dade and Broward counties, according to recent research from the credit bureau Experian and Oliver Wyman, a New York-based international consulting firm.

That’s up from 8 percent in the same quarter two years ago. With property values down even further now, researchers are certain the numbers have risen even more.

With the social stigma of foreclosure eroding, experts say it is becoming easier for discouraged borrowers to justify throwing in the towel.

“People are saying, ` Everyone is doing this, and I do not feel any compunction in fashioning my own bailout,’ ” said Roy Oppenheim, a Weston real-estate and foreclosure defense attorney who conducts weekly seminars that discuss strategic defaults and other financial options for distressed borrowers.

Looks like homeowners are deciding they’re too big to fail as well. That can happen when bank executives and employees take home big bonuses after being bailed out by the government — it looks like they’re getting away with something, and any homeowner underwater on a mortgage can see that. Unless the government genuinely cracks down on big banks, it’s not unreasonable to expect that more homeowners will likely rationalize their decisions to strategically default. As things stand now, major financial institutions can make risky decisions knowing full well that, in the end, the government will be a backstop. What message does that send to a troubled borrower struggling to keep making payments on their mortgage?

This post has been updated.

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Tavis Smiley interviews Barack Obama in October 2007 (YouTube: BarackObamadotcom)

As the housing market began booming in the mid-2000s, Wells Fargo & Co. teamed up with prominent African American commentator and PBS talk show host Tavis Smiley and financial author Kelvin Boston, the host of “Moneywise,” a multicultural financial affairs show, to host something called “Wealth Building” seminars in black neighborhoods.

Smiley was the keynote speaker, and the big draw, according to Boston and Keith Corbett, executive vice president of the Center for Responsible Lending, who attended two of the seminars. Smiley would charge up the audience — and rattle the Wells Fargo executives in attendance — by launching into a story about how he hated banks, and how they used to refuse to lend him money for his real estate projects in Compton, Calif., and elsewhere. After Hurricane Katrina, Smiley also emphasized the importance of building assets and wealth, saying those who had done so were able to leave New Orleans, while people with nothing had to stay behind, Boston said.

Illustration by: Matt Mahurin

“My spiel was the financial planning process, how you want to be able to save and invest for the future, and to have a plan of action,” Boston said. “Then Tavis talked about his experiences with the banks, and how people should be thinking about some real estate.”

The seminars in some cities drew standing room only crowds, with numerous Wells Fargo representatives on hand, seated at carrels to meet one-on-one with potential borrowers who lined up after the speeches, which were usually held in hotels. The free, day-long events were heavily advertised in the black media, and launched in eight cities, including Baltimore, Chicago, Richmond, Va., and San Francisco.

But what appeared on the surface as a way to help black borrowers build wealth was actually just the opposite, according to a little-noticed explanation of the “Wealth Building” seminar strategy, contained in a lawsuit recently filed by Illinois Attorney General Lisa Madigan.

Wells’ plan for the seminars all along was to target black borrowers for higher-cost subprime mortgages, not for wealth-building, the suit charged. And the seminars were a part of the bank’s overall illegal and discriminatory practice of steering black and Hispanic borrowers into riskier and more expensive loans, the suit said.

“According to a former Wells Fargo Home Mortgage employee, one of these ‘Wealth Building’ seminars held in Maryland was planned for an audience that would be virtually all African American,” the suit said. “The plan for the seminar was for Wells Fargo Home Mortgage employees to talk about subprime mortgages, although they were directed by Wells Fargo Home Mortgage to use the term ‘alternative lending’ when marketing these products.”

The former employee, who is white, was scheduled to speak at the seminar, but was told by a manager that she was “too white,” and that only black employees could make presentations, the suit said.

Wells Fargo, one of the nation’s largest mortgage lenders and a recipient of $25 billion in government bailout money, has denied all the charges in the Illinois suit, as well as other allegations of unfair lending. The bank did not respond to requests for comment on the seminars. Smiley, an author and advocate who hosts the late night talk show, “Tavis Smiley,” and who organizes the State of the Black Union symposiums each year, also declined comment.

Corbett pointed out that Wells’ outreach to the minority community through the seminars wasn’t unusual. Lenders sponsoring financial literacy sessions, holding wealth building seminars, or contributing to local minority advocacy organizations, became a common marketing strategy as the subprime market grew. Some of the efforts were genuine, aimed at finding new customers in minority neighborhoods once deprived of credit. But sometimes they were used instead as a cover to push predatory loans, Corbett said.

“The wealth building seminars are certainly needed,” Corbett said. “But, if, in fact, Wells was selling bad products out of them, it was totally wrong.”

Boston, for his part, described himself as the small player in the seminars, giving an opening talk before Smiley went on. Boston said he spoke in general terms about the need to save money and to invest. Neither he nor Smiley ever mentioned or discussed subprime loans, he said.

“Basically we were just speakers for hire,” Boston said. “We didn’t have any role or any control over what else happened. The main point is that we were not involved in any of their discussions or in anything they sold.”

Corbett said that after the speakers finished, bank employees and other financial experts were offering credit checks, real estate counseling, and other kinds of assistance. Corbett said he also believes some employees were signing up people for loan pre-approvals, on the spot, though he couldn’t be sure of what kind of loans they were. He said attendees lined up to talk to the Wells employees in both events. “If they weren’t actually selling loans, they were setting up borrowers for the kill,”  Corbett said.

Once their speeches were over, however, Boston said he and Smiley  had nothing to do with the workshops and counseling. He said he and Smiley together did about 15 seminars over a period of about two years. He declined to comment on how much he or Smiley were paid.

In 2005, before the subprime crisis, Boston said, the main worry in the black community over mortgage lending was the banks were lagging behind in their lending to minority neighborhoods. He said expressed his concerns about this to Wells Fargo. Smiley, he said, also later raised questions about subprime lending tactics with the bank. “Tavis definitely had some dealings with them on this issue,” Boston said.

Nonetheless, in hindsight and with the collapse of the subprime mortgage market, Boston said he has second thoughts about participating in the seminars.

“Were we probably used? We probably were,” he said. “If I had the chance to do it over again, would I do it in a different manner? Probably.”

“You look back now and you feel for the homeowner who could have qualified for a better mortgage and got the costly type of mortgage. That concerns me a lot, not just for Wells Fargo, but for everybody out there, Citigroup, Countrywide … they were all doing the same events.”

But at the time, Boston said, having a major bank doing outreach in the black community was considered an encouraging development, after so many years of redlining and restricted access to credit. “We all thought at the time that we were doing a positive thing,” he said.

Boston said he quit doing the seminars after his contract ended two years ago. Smiley, he said, continued to work with Wells Fargo, particularly on his annual State of the Black Union symposiums. On his Website, Smiley recently posted a statement regarding Wells Fargo that said, “in this economic climate, we continue to be reminded every day that there is no perfect company.”

Smiley said in the statement that his relationship with Wells began in 2005, as part of the bank’s  “commitment to increase financial literacy in the African American community.” He said that “the partnership with Wells Fargo focused on building personal wealth, which for most Americans begins with buying a house.”

According to the statement, Smiley also has had partnerships with other companies, but has never served as a spokesperson or representative for any of them, including Wells Fargo. The statement also said Wells Fargo will no longer be one of the sponsors of his Black State of the Union event in 2010, although the bank sponsored the event as recently as last spring.

“Given the fact that Wells Fargo has been an industry leader, they have partnered with many African American and Latino national civil rights organizations on various community initiatives,” the statement said.

The Illinois lawsuit against Wells is one of many such actions winding their way through the court system around the country, offering more details of alleged discriminatory tactics by lenders during the height of the subprime boom. As TWI reported last week, housing advocates call these lawsuits the “smoking guns” of the housing crisis, providing what they see as proof that lenders deliberately targeted minorities for high-rate and risky subprime mortgages, while white borrowers with similar incomes and credit scores received lower-cost loans.

In a city of Baltimore lawsuit against Wells, former employees charged that Wells Fargo loan officers referred to minority borrowers as “mud people” and called subprime mortgages “ghetto loans.” But some prominent black bloggers find the “wealth building” seminars just as egregious, and question why Smiley, Boston, and anyone else who participated in them hasn’t been called on further to account for their actions.

“If Tavis Smiley was white, Wells Fargo and ‘Ghetto Loans’ would be front page news,” wrote Genma Stringer Holmes, a Nashville, Tenn., business owner and blogger who has blasted out several posts on the seminars.

Holmes said Smiley should speak out more against discriminatory subprime lending practices – but he hasn’t been forced to, because the black media has been silent on the issue, she said. The scandal that remains is that the ads and seminars targeted the most vulnerable members of black community, according to Holmes. “People who follow Tavis will follow him off a cliff,” Holmes said.

Boston said he still does seminars and presentations pushing wealth building, but he focuses on avoiding foreclosures and helping with loan modifications. He recently wrapped up work on an upcoming show on helping homeowners facing foreclosures, he said.

This story has been updated for clarity.

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We will not go back to the days of reckless behavior and unchecked excess that was at the heart of this crisis, where too many were motivated only by the appetite for quick kills and bloated bonuses.  Those on Wall Street cannot resume taking risks without regard for consequences, and expect that next time, American taxpayers will be there to break their fall.

Senate Banking Committee Chairman Christopher Dodd (D-Conn.) and Rep. Barney Frank (D-Mass.), who chairs the House Financial Services Committee, have vowed to pass sweeping reforms of the finance industry later this year, including the creation of a new federal watchdog designed to protect consumers from the more abusive practices of the banks. But those proposals — yet to be unveiled — face a tough road ahead considering the other controversial items left for Democrats to tackle this year, namely health reform and climate change legislation.

Dodd, for his part, shot out a statement this afternoon saying that Obama “got it right.”

Failure to act leaves our economy at risk.  We will not allow our efforts to be stalled by well financed special interests intent on keeping the status quo.

Meanwhile, the finance industry is spending upwards of $250,000 per day on lobbying and advertising to kill the Democrats’ reform plans even before they’re even unveiled, according to Common Cause, an advocate for campaign finance reform.

“Great speeches are no match for the bottomless pockets of big corporations looking to kill reform legislation,” said Common Cause President Bob Edgar. “[I]t seems corporate industries can fight back almost any public desire for change by spending enough money on lobbying and campaign contributions.”

Waters: When you bought the loan from this mortgage company, you had to look at it to see what you were buying, right?

Coffin: Not loan by loan.

Waters: Not loan by loan. You got packages?

Coffin: [Nods in agreement.]

It’s a curious response. You wouldn’t buy a car without taking a test drive, wouldn’t buy a house without a walk-through. Yet here were servicers snatching up mortgages with such urgency and nonchalance that they didn’t even care to investigate their soundness.

Waters says she has constituents who have been victims of mortgage fraud, their incomes falsified by mortgage originators to justify the terms and to make the loans look less risky than they were to entice the servicers vying to buy them up — situations that proved disastrous to all parties when the housing market tanked and home prices went underwater.

Complicating the issue, Coffin said, “many of the companies who originated those loans are out of business.”

Try squeezing the accountable party out of that mess.

Rep. Carolyn Maloney (D-N.Y.) has a bill that would require banks to make some of these disclosures, but with health reform and climate legislation certain to consume the rest of the year in Congress, The Times is urging federal regulators to take these steps instead:

First, banks must be barred from automatically enrolling customers in overdraft programs. This must be a service that customers opt in to — and only after they are provided full information about the fees and the penalties they will incur. These disclosure statements must meet the same rules laid out in truth-in-lending laws, since overdraft charges are essentially short-term loans.

Banks must also be required to warn customers in real time when a debit card charge will overdraw their accounts — and what fees they will incur if they still decide to proceed with the purchase.

This will require new technology. But there is almost no chance that the banks will invest in it unless they are legally required to do so.

“Until that happens, buyers beware,” The Times warns. “That cup of coffee may be even more expensive than you realize.”

White House officials met with mortgage servicers Tuesday to pressure them to do more to modify loans voluntarily, but Frank is skeptical.

“Congress has provided every legislative tool recommended by people in the mortgage industry, and in the administration, that we were told would be helpful in facilitating the modifications we need to diminish the flood of foreclosures which has been so much a part of our national economic problem,” Frank said in a statement, which continued:

[P]eople in the servicing industry and in the broader financial industry must understand that if this last effort to produce significant modifications fails, the argument for reviving the bankruptcy option will be extremely strong, and I think there is a substantial chance that the outcome will be different.

The different outcome Frank envisions, of course, would have to take place in the Senate, where he noticeably isn’t. Still, another House push could put additional pressure on the 12 Senate Democrats who voted against the bill the first time around, particularly if the number of foreclosures continues its steady rise.

In a letter today to Federal Reserve Chairman Ben Bernanke, 10 House lawmakers are asking why Goldman — which last year converted to a bank holding company in order to tap bailout funds — is still allowed to behave largely unregulated, like the investment bank it previously was. The resulting dynamic, the lawmakers conclude, is that Goldman has been granted the best of all worlds: It’s bank status made it eligible for taxpayer-funded gifts — which it’s repaid — while a February exemption from bank regulations allowed it to invest those funds without the risk-limiting oversight of the government.

Despite its exemption from bank holding company regulations, Goldman Sachs has access to taxpayer subsidies, including FDIC-backed bonds, TARP money (since repaid), counterparty payments funneled through AIG, and an implicit backstop from the taxpayer that allowed a public equity offering in a queasy market.  The only difference between Goldman Sachs today and Goldman Sachs last year is that today, the company is officially gambling with government money.  This is the very definition of “heads we win, tails the taxpayers lose.”

To its credit, Goldman at least is being honest about its unique position. The company’s Chief Financial Officer David Viniar told Bloomberg earlier this month that, “Our model really never changed.”

“We’ve said very consistently that our business model remained the same.”

Signing the letter were Reps. Alan Grayson (D-Fla.), Ron Paul (R-Texas), Walter Jones (R-N.C.), Brad Miller (D-N.C.), Dan Lipinski (D-Ill.), Elijah Cummings (D-Md.), Tom Perriello (D-Va.), Maxine Waters (D-Calif.), Jackie Speier (D-Cal.) and Maurice Hinchey (D-N.Y.).

The six questions from the lawmakers to Bernanke follow:

1) In the letter granting a regulatory exemption to Goldman Sachs, you stated that the SEC-approved VaR models it is now using are sufficiently conservative for the transition period to bank holding company.  Please justify this statement.

2) If Goldman Sachs were required to adhere to standard Market Risk Rules imposed by the Federal Reserve on ordinary bank holding companies, how would its capital requirements differ from the current regulatory regime?

3) What is the difference in exposure to the taxpayer between these two regulatory regimes?

4) What is the difference in total risk to the portfolio between these two regulatory regimes?

5) Goldman Sachs stated that “As of June 26, 2009, total capital was $254.05 billion, consisting of $62.81 billion in total shareholders’ equity (common shareholders’ equity of $55.86 billion and preferred stock of $6.96 billion) and $191.24 billion in unsecured long-term borrowings.”  As a percentage of capital, that’s a lot of long-term unsecured debt.  Is any of this coming from the Government?  In this last quarter, how much capital has Goldman Sachs received from the Federal Reserve and other government facilities such as FDIC-guaranteed debt, either directly or indirectly?

6) Many risk-management experts, most notably best-selling author Nassim Taleb, note that VaR models can dramatically understate risk.  What is your overall view of Taleb’s argument, and of the utility of Value-at-Risk models as regulatory tools?

Or did they?

In a letter today to the Federal Reserve and other key financial regulators, Senate Banking Committee Chairman Christopher Dodd (D-Conn.) called on the officials to examine a section of the new law, which doesn’t take effect until next February, requiring the companies “to review every six months any account where the interest rate has been raised since January 1, 2009, and reduce the rate if the review indicates that the cardholder has become less risky or the circumstances that warranted the increase are no longer present.”

In addition to any future interest rate increases, all interest rate increases that have taken place this year will become subject to the mandatory 6-month review. I ask you to immediately notify all credit card companies under your respective jurisdictions that they will be held accountable for all interest rate increases during this time period and will be subject to the review requirement once it takes effect.

Numerous reports in recent weeks have indicated that card issuers have raised rates and lowered limits on even their most reliable customers. If Dodd is right here — and if the law is enforced — those customers may very well see there rates reduced to prior levels in February. Of course, the companies can still make out like bandits in the meantime.

Sen. Richard Durbin (D-Ill.) (WDCpix)

During George W. Bush’s ill-fated push to privatize Social Security, conservatives condemned the use of surplus retirement taxes to help offset the deficit. But few Democrats or Republicans decry the government’s custom of padding its coffers with fees from an agency with a mission that’s more significant than ever: the Securities and Exchange Commission.

For two decades, the SEC has made more money in fees from the entities it regulates than it receives from Congress through the budget process – about $350 million more in this year alone. With the agency taking heat for its Bush-era enforcement lapses, most notably the failure to stop Bernie Madoff’s infamous fraud, lawmakers and advocates are debating the right amount to spend to ensure stronger financial cops on the beat.

Illustration by: Matt Mahurin

Sen. Dick Durbin (D-Ill.), chairman of the appropriations panel that funds the SEC, unveiled a bill Wednesday that would give the agency $1.13 billion for the next fiscal year – an increase of $100 million, or nearly 10 percent, above the Obama administration’s request.

Debating budgets for financial regulators may sound “as dry as dust,” Durbin acknowledged at a hearing of his subcommittee last month.

“But if you step back for a moment and translate their work into the real world,” he added, “you realize that their oversight … protects the savings and futures of American families, and ensures that economies in countries around the world will view our economy and the way we run it with respect.”

Given those stakes, the argument for beefing up enforcement spending at the SEC appears easy to make. Yet the tight fiscal times pose challenges; Sens. Chuck Schumer (D-N.Y.) and Richard Shelby (R-Ala.) won approval in April to give the agency an extra $20 million in 2010, but appropriators in the House have signed off on only half that number.

The money makes a real difference for SEC officials, who have seen their technology budget shrink by more than half since 2005 and their numbers of investigative attorneys remain more than 11 percent below 2004 levels, according to a recent Government Accountability Office study.

“It’s an ongoing problem the agency has dealt with,” Barbara Roper, director of investor protection at the Consumer Federation of America, said in an interview. “In the past couple of decades, there hasn’t been a careful review of the resources the agency needs to do its job effectively, what the real funding level of the agency should be.”

SEC Chairman Mary Schapiro told Senate appropriators last month that the White House budget request for 2010 would not allow her to hire more staffers than the agency has already brought on board this year.

Schapiro is seeking to add 1,000 positions for 2011 – nearly as many people as now work in SEC enforcement – which still would leave the agency smaller than the Federal Deposit Insurance Corporation.

The FDIC supervises about half as many financial institutions as the SEC.

Bill Black, who served as a senior banking during the 1980s savings-and-loan (S&L) scandal, offered a blunt assessment of the consequences of years of inattention. “Congress probably doesn’t know how” to appropriately arm financial fraud monitors, he said in an interview.

“I don’t mean this in an insulting way,” continued Black, now an associate professor of economics and law at the University of Missouri-Kansas City, “but to know what makes enforcement effective, it pays to know what’s going on at an institution, what goes on at the SEC. And they simply had not conducted meaningful oversight for most of the decade.”

After the S&L crisis, as Schumer and Shelby noted in their legislation, strike forces in 27 cities were set up to monitor financial fraud, backed by 1,000 FBI agents. Black recalled training federal prosecutors during that time on in the ins and outs of complex cases as well as serving as a free expert witness for the government.

Since Schapiro took the helm, the SEC has moved rapidly to restore its tarnished enforcement record. The agency has targeted 23 Ponzi schemes so far this year – with Allen Stanford’s alleged $8 billion fraud topping the list – and charged Angelo Mozilo, former CEO of Countrywide, with insider trading.

But the SEC is hardly the only agency with a checkered past to overcome.

Regulators at the Office of the Comptroller of the Currency and the Office of Thrift Supervision also have fallen down on the job of monitoring the health of the nation’s banks, advocates say. Recent weeks have been even harsher for the agencies, with the OTS on the brink of elimination under the Obama administration’s financial reform plan and the OCC losing a Supreme Court case in which it sided with the banks it policed – and against states that sought stricter consumer protections.

Unlike the SEC, the OCC and OTS are funded by fees they levy on banks. And though the SEC can face a rough road to securing more money from Congress, that fate is better than an agency getting cash from its regulated entities, U.S. PIRG consumer program director Ed Mierzwinski said.

“It’s the worst of both worlds,” Mierzwinski said in an interview. “They’re never dragged before appropriators. They don’t have to fight for their money.”

Regulators did fight over which would attract banks’ business, however, as “charter shopping” and lax enforcement became more common.

So should a financial regulator seek its budget in the politicized climate of Capitol Hill or from the companies it oversees? The question could be a central one as lawmakers take up legislation this month on the administration’s proposal for a Consumer Financial Protection Agency.

Mierzwinski supports funding the new agency through a combination of congressional appropriations and user fees paid by regulated entities.

That mix also appeals to Ira Rheingold, executive director of the National Association of Consumer Advocates. But ensuring proactive enforcement involves more than providing an independent revenue source, he added.

House Financial Services Committee Chairman Barney Frank (D-Mass.) introduced a bill late Wednesday that would fund the new consumer agency in a manner similar to the SEC, with Congress okaying a budget and the agency asked to “recover the amount of funds expended” through fees on the companies it regulates.
Those fees, like the SEC’s generated revenue, will go to the general Treasury – and potentially help balance the government’s books.
Still, ensuring proactive enforcement involves more than providing an independent revenue source, Rheingold noted.

“Moving forward, we need to recognize that these regulatory agencies – no matter how you structure them – may be captured, may be subject to political whims,” Rheingold said. “The way you build safety valves into the system is if you have multiple enforcement mechanisms.”

Frank’s plan would open up two potential enforcement paths. First, the new agency would have the authority to ban forced arbitration in banking contracts, allowing private citizens to pursue certain fraud claims in court instead of being forced into private dispute resolution.

The bill would allow states to set stronger limits on financial practices of national banks without the threat of federal preemption, taking the handcuffs off state attorneys general, such as New York’s Andrew Cuomo and Illinois’ Lisa Madigan, who have doggedly pursued fraud cases.

Some analysts have suggested using the financial overhaul bill to strengthen the SEC’s protections for whistleblowers who report alleged fraud, although this provision was not included in Frank’s draft.

In the end, however, the best way to help regulators elevate enforcement efforts may be a matter of cold, hard cash. The SEC’s budget for policing rule-breakers was lower last year than in 2005, and is still smaller than the amount of fees the agency sends, no questions asked, to the Treasury.

“If you look at what we’ve now spent on the bailout because we weren’t willing to spend money up front on proper regulation,” Roper of the Consumer Federation remarked, “the cost of poor regulation dwarfs the cost of actually funding these agencies.”

This morning the Press Democrat ran a front page article titled: “Fight Against Blight“. It details the plight of Phyllis Sharrow of Petaluma who has the unfortunate luck of living next to a foreclosed property. Weeds have overtaken the lawn of the abandoned home next door and her property value is being affected. Calls to Bank of America to try to get the place cleaned up go unanswered. This has been going on for 2 years prompting her to put a sign outside her home with an arrow pointing at the foreclosure stating: “Bank of America. Your taxpayer bailout dollars at work. Our home values lose!”

And there’s a bigger shock for poor Ms. Sharrow: According to the Healdsburg Housing Bubble blog, Bank of America issued a notice of foreclosure but never completed the foreclosure sale. In other words, Bank of America walked away, letting the property sit there, in limbo, the owners gone and no one taking responsibility for it.

It looks like the home was never foreclosed on and therefore is not owned by the bank.

Is Bank of America just sitting on this loan and letting the property deteriorate? I’ve heard that banks are reluctant to foreclose because A) this forces them to recognize a loss on the loan, and B) if they do foreclose they are the owners and are responsible for the property taxes.

To me it looks as if that is what is happening here. But how long can this go on? You would think the banks would want to flush out these loans before the mid- to high-end foreclosure crisis is upon us.

Yes, you would think that — especially from banks propped up by a taxpayer bailout. So far, however, servicers are too swamped to modify large numbers of loans and — as this case illustrates — banks are walking away from their properties, even beyond the Rust Belt.

You can’t blame homeowners like Ms. Sharrow for feeling like they are hardly getting their money’s worth from that bailout. Maybe she needs to bring that yard sign to Washington, where few are paying much attention to the problem of bank-owned abandoned homes. Instead, as Sen. Dick Durbin (D-Ill.) pointed out recently, the banks own the place.

And those banks aren’t up against outraged and powerful lawmakers, calling them on the carpet for these practices. Business just goes on as usual. Meantime, in the real world, there’s a frustrated neighbor, a two-year battle, and a yard sign calling for attention.