After the mortgage crisis left many homeowners in foreclosure, the federal government cut a $3.6 billion settlement with banks accused of wrongful evictions and such. But now those settlement checks are being returned for “insufficient funds.”
As the New York Times noted, the government chose Rust Consulting to distribute the checks. But Rust failed to move the money into the account of the bank that issued the checks. That led to delays and now to checks being returned for insufficient funds. The consumer help line of the mighty Federal Reserve told homeowners their checks could not be cashed. Then the Fed issued a statement that Rust had corrected the problems and that the Fed would continue to monitor the payments. That will come as scant consolation to homeowners who have been waiting for assistance. But it is instructive in several ways.
The involvement of the federal government is no guarantee of efficiency or even, apparently, of solvency. The bouncing checks should also remind people that federal efforts to help people can have unintended negative consequences. According to a recent study by the National Bureau of Economic Research, the Community Reinvestment Act, federal legislation dating from the Carter Era, fueled the mortgage crisis with its “flexible” lending standards, low down payments and reduced credit standards. So the federal government is attempting to fix a problem largely of its own making. And even though the federal government takes increasing amounts of money from the people, there are limits to what it can and should attempt to do.