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    The U.S. Government Does Not Believe That Homeowners Deserve Help

    By Michael Maiello on Thu, 02/09/2012 - 10:28am | Politics

    Two big stories in the foreclosure mess today, both of them depressing.  The first, via Atrios, was broken by Bloomberg and reveals that Fannie Mae, which owns billions worth of underwater mortgages, canceled a program where the agency, as the holder of the debt, would write down the principal due on underwater mortgages to bring them more in line with present home values because executives were, "philosophically opposed to writing down principal balances."

    As Atrios points out nobody forced any lender to extend credit to any borrower.  They did that all on their own, in pursuit of profits.  I take the argument one step further.  Banks are institutions supposedly staffed by financial experts.  In the case of mortgages, they are extending credit for the purchase of an asset which will serve as collateral for the loan.  Who is better qualified to project the direction and magnitude of house price changes over 5, 10 or 30 years, a school teacher or a trained banker?  Well, I guess we know that the answer is, "it depends."  But, who should we expect to have such expertise?  We certainly wouldn't expect the banker to be able to handle 30 6 year olds for 9 hours a day, right?

    It feels silly to have to say this five years after home values peaked, but the bankers were making a bigger bet on continuously rising home prices than the borrowers were.   When a mortgage deal is made, the borrower is typically an ordinary person with limited knowledge of finance and markets.  The lender is the expert.  It is not like when you shop for most things -- it is a complex deal where the lender tends to act as an advisor (not legally, by the way, they have no fiduciary responsibility) but certainly practically.  I have come close to buying property but have always pulled back.  In each case the mortgage brokers and the potential lender and the lawyer, all of whom are incentivized to get the deal done and who get very little, if anything, if I walk away, quickly become credible sources of information.  Who else are you going to ask?

    The other depressing mortgage story is that the Obama Administration has successfully pressured three of four holdout District Attorneys to accept a $26 billion settlement to the foreclosure fraud issue with five of the nations largest mortgage lenders.  The deal will give a $1,500-$2,000 payout (depending on the number of claims) to robo-signing victims and the like.  People who had their homes taken unfairly by banks who abused the legal foreclosure process will not get their homes back, nor with they recover anything close to what their homes are worth.  They are receiving, instead, nuisance payments from parties who, of course, have not even agreed that they have done anything wrong (but have oddly promised not to do it again).

    The deal also includes $20 billion in other aid that will help about 1 million people who are current on underwater mortgages.  That's an outrage.  There are 11 million underwater mortgages out there.  Why is there help for fewer than 10% of underwater borrowers?

    Meanwhile, as the WSJ journalist so smartly points out, the banks carrying these loans are no longer carrying them at 100 cents on the dollar.  The value of the loans was written down long ago.  Obviously, the banks now want to collect more than the current carrying value of the loans so that they can "write up" assets in future years.  Their interests are not aligned with the interests of their borrowers who would at least like their loan balances to reflect the value of what was purchased with the money.  That's where the government should step in, but apparently won't.

    Which wraps us back to the Bloomberg story -- the people making the decisions here, and the people advising the President, fundamentally disagree with everything I've written here.  They see the schoolteacher borrower as somehow on even footing with the banks and they believe that borrowers should eat the losses involved in these transactions.

    This, I suppose, is market discipline.  Market discipline does not apply, apparently ever, to the banks themselves.  When they got in trouble, the Treasury and Fed propped them up until they could function again.  They are, to a large extent, still propped up institutions.  Zero interest overnight money is fuel for them, even as anyone trying to keep safe savings can't keep up with current inflation rates.

    But every government attempt to help individual borrowers, which has focused only on homeowners and has ignored people with credit card, student loan or small business debts, has been a colossal joke.  It doesn't have to be that way, of course.  The Federal Reserve can, if it wants, legally pay a person's mortgage.  Or reduce the interest rate to zero by replacing the mortgage loan with a zero interest loan.  That's extreme, but it could happen.  There are many less extreme solutions including writing down loan principals to current values or, if you insist, writing them down to the midpoint of current values and the value at the time of purchase so that borrower and lender share losses 50/50.

    These things don't happen because people with power and influence don't want the to happen.  The current situation is not the result of dispassionate market results.  Will is the issue here.  The government is not willing to help.

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    Naked Capitalism: The Top Twelve Reasons Why You Should Hate the Mortgage Settlement

    Here are the top twelve reasons why this deal stinks:

    1. We’ve now set a price for forgeries and fabricating documents. It’s $2000 per loan. This is a rounding error compared to the chain of title problem these systematic practices were designed to circumvent. The cost is also trivial in comparison to the average loan, which is roughly $180k, so the settlement represents about 1% of loan balances. It is less than the price of the title insurance that banks failed to get when they transferred the loans to the trust. It is a fraction of the cost of the legal expenses when foreclosures are challenged. It’s a great deal for the banks because no one is at any of the servicers going to jail for forgery and the banks have set the upper bound of the cost of riding roughshod over 300 years of real estate law.

    2. That $26 billion is actually $5 billion of bank money and the rest is your money. The mortgage principal writedowns are guaranteed to come almost entirely from securitized loans, which means from investors, which in turn means taxpayers via Fannie and Freddie, pension funds, insurers, and 401 (k)s. Refis of performing loans also reduce income to those very same investors.

    3. That $5 billion divided among the big banks wouldn’t even represent a significant quarterly hit. Freddie and Fannie putbacks to the major banks have been running at that level each quarter.

    4. That $20 billion actually makes bank second liens sounder, so this deal is a stealth bailout that strengthens bank balance sheets at the expense of the broader public.

    5. The enforcement is a joke. The first layer of supervision is the banks reporting on themselves. The framework is similar to that of the OCC consent decrees implemented last year, which Adam Levitin and yours truly, among others, decried as regulatory theater.

    6. The past history of servicer consent decrees shows the servicers all fail to comply. Why? Servicer records and systems are terrible in the best of times, and their systems and fee structures aren’t set up to handle much in the way of delinquencies. As Tom Adams has pointed out in earlier posts, servicer behavior is predictable when their portfolios are hit with a high level of delinquencies and defaults: they cheat in all sorts of ways to reduce their losses.

    7. The cave-in Nevada and Arizona on the Countrywide settlement suit is a special gift for Bank of America, who is by far the worst offender in the chain of title disaster (since, according to sworn testimony of its own employee in Kemp v. Countrywide, Countrywide failed to comply with trust delivery requirements). This move proves that failing to comply with a consent degree has no consequences but will merely be rolled into a new consent degree which will also fail to be enforced. These cases also alleged HAMP violations as consumer fraud violations and could have gotten costly and emboldened other states to file similar suits not just against Countrywide but other servicers, so it was useful to the other banks as well.

    8. If the new Federal task force were intended to be serious, this deal would have not have been settled. You never settle before investigating. It’s a bad idea to settle obvious, widespread wrongdoing on the cheap. You use the stuff that is easy to prove to gather information and secure cooperation on the stuff that is harder to prove. In Missouri and Nevada, the robosigning investigation led to criminal charges against agents of the servicers. But even though these companies were acting at the express direction and approval of the services, no individuals or entities higher up the food chain will face any sort of meaningful charges.

    9. There is plenty of evidence of widespread abuses that appear not to be on the attorney generals’ or media’s radar, such as servicer driven foreclosures and looting of investors’ funds via impermissible and inflated charges. While no serious probe was undertaken, even the limited or peripheral investigations show massive failures (60% of documents had errors in AGs/Fed’s pathetically small sample). Similarly, the US Trustee’s office found widespread evidence of significant servicer errors in bankruptcy-related filings, such as inflated and bogus fees, and even substantial, completely made up charges. Yet the services and banks will suffer no real consequences for these abuses.

    10. A deal on robosiginging serves to cover up the much deeper chain of title problem. And don’t get too excited about the New York, Massachusetts, and Delaware MERS suits. They put pressure on banks to clean up this monstrous mess only if the AGs go through to trial and get tough penalties. The banks will want to settle their way out of that too. And even if these cases do go to trial and produce significant victories for the AGs, they still do not address the problem of failures to transfer notes correctly.

    11. Don’t bet on a deus ex machina in terms of the new Federal foreclosure task force to improve this picture much. If you think Schneiderman, as a co-chairman who already has a full time day job in New York, is going to outfox a bunch of DC insiders who are part of the problem, I have a bridge I’d like to sell to you.

    12. We’ll now have to listen to banks and their sycophant defenders declaring victory despite being wrong on the law and the facts. They will proceed to marginalize and write off criticisms of the servicing practices that hurt homeowners and investors and are devastating communities. But the problems will fester and the housing market will continue to suffer. Investors in mortgage-backed securities, who know that services have been screwing them for years, will be hung out to dry and will likely never return to a private MBS market, since the problems won’t ever be fixed. This settlement has not only revealed the residential mortgage market to be too big to fail, but puts it on long term, perhaps permanent, government life support.


    by Donal on Thu, 02/09/2012 - 11:46am

    I don't know who wrote this but I watched Schneiderman on Rachel Maddow and that's not at all what he said.  I'm not even going to pretend I understand it all, but it sounds like it's an open-ended deal with no homeowner rights taken away (they can still sue; the difference is that the AGs will help and there will be money for attorneys) and it didn't exempt the banks from any future actions against them.

    When Rachel asked him why this didn't happen sooner he said the success of the progressive grass roots movements had a lot to do with getting it done and shifting the focus on keeping it open-ended, with no guarantees for the banks.

    The clip is here.


    by Ramona on Fri, 02/10/2012 - 4:25pm

    I watched Joe Biden's son this morning and he made the same points. And attorney Biden has been working on this for a couple of years.

    He is pleased at this 'scriveners settlement'; it mostly has to do with the processing fees and the false affidavits filed through these 'processing scams'.


    by Richard Day on Sun, 02/12/2012 - 12:38pm

     

    Hey, what do I know? But in a Sunday OpEd, Too Many Unanswered Questions, and Too Little Relief, the NY Times is also underwhelmed:
     
    What do banks get in exchange for the relief? The answer, in short, is a sweet deal.
     
    The banks did not get the blanket release they originally sought from legal liability for all manner of mortgage misconduct. But the settlement still shields them from state and federal civil lawsuits for most foreclosure abuses, including the wrongful denial of loan modifications, excessive late fees that enriched the banks but could make it impossible for borrowers to catch up on late payments, and conflicts of interest that led banks to favor foreclosures over modifications. Going forward, the banks will have to adhere to tougher standards for servicing loans and executing foreclosures. But past sins in servicing and foreclosure are largely absolved.
     
    The banks are not off the hook for criminal prosecutions related to the mortgage mess or for private lawsuits. They are also not off the hook for wrongdoing in their aggressive pooling of mortgages into securities and other practices that inflated the bubble. Thanks for the settlement’s narrower legal releases goes to New York’s attorney general, Eric Schneiderman, and a handful of other state attorneys general, who refused to accept a deal that would have blocked further legal action.
     
    Which brings us back to the question of whether a new investigation will indeed get off the ground. We are skeptical. The Obama administration squandered several months resisting Mr. Schneiderman’s insistence on a broader investigation, raising questions about its willingness to now get tough with the banks and bankers. As a practical matter, that delay has allowed some potential violations to draw closer to expiration under statutes of limitation.
     

    by Donal on Sun, 02/12/2012 - 7:07pm

    I know Donal.

    But who is in charge now?

    Eric Schneiderman!

    And rather than put the foxes in charge of the henhouse we now have one hell of a rooster lookin over all of this! ha

    And Beau Biden aint an idiot.

    And if Beau says there are going to be consequences; I believe him!


    by Richard Day on Mon, 02/13/2012 - 5:28am

    Eliot Spitzer was a bit of a rooster, too.


    by Donal on Mon, 02/13/2012 - 7:51am

    It occurred to me while reading here that the middlemenpersons,  realtors and/or mortgage brokers, must be alternately roflao and sighing with relief that their part in the mortgage frauds have so far been mostly ignored --  and they are the main culprits.  Are they being threatened with prosecution or even just  asked to kick back their commissions? 


    by EmmaZahn on Thu, 02/09/2012 - 12:27pm

    I have mixed feelings about this.  So far as I can tell, the most serious consequences have fallen around the middling level.  It's brokers and loan officers who have attracted the most FBI attention.  The banks, which should have known better, managed to portray themselves as victims of fraud and abuse, as if an organization with the size and power of say, Chase, can't be bothered to do its own due diligence on a no doc loan application.

    This is not to say that there aren't abusive brokers out there.  The incentives in that field are awful (and have not been changed one bit -- a broker always wants the transaction to go through at the highest price possible since they get paid as a percentage).  But going after brokers isn't going to solve the problems.  In the end, a broker is just helping somebody ask the bank for money.  The bankers have to sign the checks.  The buck starts there.

    This kind of reminds me of the Wall Street scandals in the post dotcom era.  A bunch of mid-level execs took the fall for what the C-suite wrought.


    by Michael Maiello on Thu, 02/09/2012 - 12:35pm

    No doubt that the banks were complicit and bear blame in proportion to the profits they reaped on the loans but that does not exonerate the loan originators and borrowers, even the ones duped by an unscrupulous culture.  Ultimately they are the ones who enabled unscrupulous bankers to limit their own legal liability.  

    Having spent a career in the financial industry enforcing compliance to rules, regulations, laws and fiduciary responsibilities, I know first hand how difficult that can be.  I also know how going along to get along can come back and bite you even on the slightest of waivers.  I much prefer the feeling of righteousness that comes from sticking to principles over the slimy need-a-shower feeling from bruising them.  

    Holding all the people who should have known better accountable for the mess they made might be the best thing for them long term.

     


    by EmmaZahn on Thu, 02/09/2012 - 2:07pm

    Wow, you were a compliance exec?  Must have been a good firm.


    by Michael Maiello on Thu, 02/09/2012 - 2:12pm

    Right on destor.  The feds seem to be counting on the innumeracy of the public as a tool of bamboozlement.  One of the reporters on NH Public Radio described the settlement with an awestruck tone: "This could be worth TENS OF MILLIONS of dollars to New Hampshire residents!"

    What's that?  The price of 100-200 homes?  $15-$20 per resident?


    by Dan Kervick on Fri, 02/10/2012 - 1:18am

    Sheesh, we lose $7 trillion in home equity value, which should be a clue right there that the financial system tricked people into vastly overpaying for assets (and financing the purchases with debt) and our media doesn't even get that in the face of that, a $25 billion settlement is less than a peanut.  Is that innumeracy or something you should be hospitalized for?


    by Michael Maiello on Fri, 02/10/2012 - 6:29am

    "Counting on the innumeracy of the public as a tool of bamboozlement" seems like a winning bet to me…

    (My cynicism might be showing just a tad…)


    by Verified Atheist on Fri, 02/10/2012 - 7:27am

    Our NBC affiliate's local news slanted it to be a good thing this morning.


    by Donal on Fri, 02/10/2012 - 7:32am

    Watching the Morning Joe program this morning and everyone was gushing over how wonderful this solution was.  As one person put it, the housing market would now be a thing helping the economy recover rather one of the forces dragging it down.

    And this is the one slant those who want to get people, i.e. the average citizen, to be upset about this deal - that it will hurt the economy.  As long as people believe it will improve the economy, they will look the other way even if they believe injustices will be ignored and some homeowners are going to get screwed - the unlucky one who will need to be sacrificed on the alter of an improving economy and jobs market.

    Even at the beginning of this crisis, the polls showed those whose were not in danger of losing their homes were basically split over whether to bail out the individuals caught in the foreclosure mess.

    And this is probably a key problem - the foreclosure crisis being connected to the houses that were underwater crisis.  In many people minds I think see their struggle with a house underwater (a result of the housing bubble bursting) but not in immediate danger of being foreclosed on as fundamentally different than those who were in danger of losing their homes (a result of people buying a house they couldn't afford.  In fact, I think some of those who see their house underwater as a result of those who couldn't afford their homes and thus being foreclosed on as a reason their house is now underwater.


    by Elusive Trope on Fri, 02/10/2012 - 9:23am

    And the wizards who write editorials for The Washington Post decided that robo-signing and foreclosure fraud is "an essentially victimless crime."


    by Michael Maiello on Fri, 02/10/2012 - 9:26am

    I think the word "essentially" is the give away.  They are acknowledging there victims, that its wasn't a true victimless crime.  But they all want to just put this behind them and so are looking for a way to justify it. 

    And in the end, saying why it is bad needs to be summed up in three words that will counter the other three words - "will create jobs"


    by Elusive Trope on Fri, 02/10/2012 - 9:41am

    I think by implying their are no victims they are taking the bank line that, whatever happened to all of the legal documents regarding ownership and obligations that these people had it coming for getting behind on their mortgages.  This absolves the banks of the responsibility to abide by the terms of agreements that the banks wrote.

    The idea here is damned simple.  If somebody says that you owe them money, you have the right to demand proof of the obligation.  If I called up GE and told them that I want the promised interest and principal payments on their bonds due 2015 their reps would rightly ask me to either show them my coupon or direct them to a custodial account where the bonds are being held in my name.  If I could not do either, they would not pay me, even if I did legitimately purchase the bonds years ago.

    Why should a homeowner, which is as much a borrower as GE is, not be able to ask for proof while GE can?  Would it be considered a "victimless crime" if GE were forced to pay out any claim laid against it, by any one, at any time, with or without documentation?


    by Michael Maiello on Fri, 02/10/2012 - 10:13am

    Only "job creators" can be "victims."


    by Elusive Trope on Fri, 02/10/2012 - 10:57am

    Wow, $2000 bucks. Now I can retire in comfort.


    by erica (not verified) on Sat, 02/11/2012 - 1:12pm

    To add insult to the penury, it's only $2,000 if the low estimate of claimants materializes.  If more claims are made, the payout drops to 1,500. It's basically a fund for settling he issue, when the fund is exhausted, that's it.


    by Michael Maiello on Sat, 02/11/2012 - 1:57pm