Not only has the gutting of regulation made it hard to win criminal prosecutions for financial fraud, but the Fed plans to eviscerate a key sanction against predatory lending. If you somehow still had any doubts as to whose interests are really being served by banking regulators, look no further than this latest largely under the radar move. From Zach Carter at Huffington Post:
The Federal Reserve is pushing a new mortgage regulation that would effectively eliminate the most powerful federal remedy for predatory lending.
The regulation would severely limit a practice called “rescission,” used to strike down demonstrably-illegal or fraudulent loan contracts and void a bank’s ill-gotten gains from such predatory lending practices. When a mortgage borrower wins a rescission case in court, the bank loses the right to foreclose, and has to give up all profits from interest and fees on the loan. The borrower still has to repay the principal — the original amount of money extended by the bank — but can’t be kicked out of the house.
Under the Fed’s new proposal, however, borrowers would be required to pay off the balance of the loan before the bank loses its right to foreclose — that means borrowers could still lose their homes, even in cases where banks have broken the law.
What gets interesting is how recission plays into the securitization model. The borrower is still on the hook for the principal, but with no ability to foreclose, it’s hard to compel the borrower to repay. And remember from our previous discussions of securitization, that “banks”, meaning servicers, are keen to foreclose because they get to repay themselves for fees (including junk fees and foreclosure-related charges) and principal and interest advances (remember they keep advancing principal and interest even when the borrower has quit paying, in theory they could stop once the loan is severely impaired, in practice pretty much no one does). The investors get whatever is left.
So the banks’ argument no doubt includes the need to alleviate the impact of recission on servicers. But there are far more surgical approaches (addressing how to deal with servicer fees and advances in cases of recession, probably with different treatment when the servicer is independent versus when it is under the same corporate umbrella as the originator that created the fraudulent loan). But it’s much easier to opt for simple seeming solutions that give the banksters what they want.
28 comments
Comments are closed.
Shouldn’t regulation changes like this require Liz Warren’s review? This appears to be so anti-consumer that Ms Warren should promptly march over to the Fed and inform Mr. Bernanke with the point of her boot.
Per Bloomberg:
“A coalition of consumer and civil rights groups, including Consumers Union and the NAACP, sent a letter to the Fed on Nov. 16 asking the central bank to hold off on updating truth-in- lending regulations until the CFPB starts work.”
http://www.bloomberg.com/news/2010-12-16/fed-mortgage-recission-plan-sparks-fight-between-lenders-consumer-groups.html
You said
This begs the question, “why?”. Why would a profit-driven financial company keep sending money out the door when they are not contractually required to do so? If they were required to continue to front this money, then their motivation for foreclosure would be clear. But presumably it’s easier from them to simply stop fronting the money, than to send it out and try to recover it in a subsequent foreclosure.
Many things are posted here which are contrary to the viewpoint presented by the mass media, but most of them ultimately make sense if you follow the money. But this, as presented, does not. Can you explain further?
I understand that the servicers are contractually obligated to forward the principal and interest payment to the mortgage holders even if the borrower does not pay it.
In return the servicer gets to add late fees and gets first lien on any proceeds from a foreclosure. In an additional theft profit motive, the servicer gets to add other bogus fees as part of the foreclosure process. The servicer is required by law to credit borrower payments first to principal and interest, not late fees. By violating this law or by making an erroneous fee that is contested by the borrower, the servicer sets up a win/win situation where the servicer credits borrower payments to late fees, not principal and interest, and that generates more late fees.
Some lenders and servicers even have a business model where they do not expect the borrower to pay off the loan, their model to maximize profits is to foreclose on 100 percent of borrowers.
Brent,
The servicers actually *are* contractually obligated to front the principal and interest payments, at least for a certain amount of time (usually 6 months). These requirements are either in the servicer contracts or the securitization agreements, or both. This is why the servicers often want to rush to foreclosure – not only do they get to collect certain fees along the way, but they recoup the fronted costs they are required to provide before anyone else gets a slice. Hence the severe disconnect in incentives between investors/holders of mortgages and servicers.
Thank you John and Matt. What you say makes sense. It still seems strange the the servicers wouldn’t stop forwarding the money as soon as they are allowed (6 months delinquency, I guess) but by then I guess they’re far enough in the whole to want to foreclose anyway.
It seems even more complicated. Some properties the servicer has motivation to speed foreclosure. In other properties the servicer has motivation to stall forecloser.
The average months not paid keeps increasing for mortgages that are late and/or been given a default notice.
When the executives are motivated by things like foreclosure fee skimming and some benefit by selling packages to related parties, foreclosure is expedited.
When the motivation is not to recognize a loss on a servicer related HELOC or second, then the foreclosure action may be stalled. Possibly other motivations to stall are to increase fees. A recent article described servicer cram downs of home insurance at 4X or 10X the usual rate on non mortgage payers.
Welcome to Amerika – “The strong do as they will and the weak will suffer what they must” – Thucydides
Where is our Consumer Zar when their needed?
Oh look. Obama’s pinky sticks out when he sips from his tea cup as he watches the rule of law burn under his administration’s directives….
Very dainty.
Another plea for common sense by Joseph Stiglitz…
from
http://www.project-syndicate.org/commentary/stiglitz134/English
Unconventional Economic Wisdom
New Year’s Hope against Hope
Joseph Stiglitz
“”So this is my hope for the New Year: we stop paying attention to the so-called financial wizards who got us into this mess – and who are now calling for austerity and delayed restructuring – and start using a little common sense. If there is pain to be borne, the brunt of it should be felt by those responsible for the crisis, and those who benefited most from the bubble that preceded it.””
Stiglitz looks like Santa and is playing the part: common sense? dream on… Those responsible for the crisis and those who benefited the most won’t bear any pain unless they are forced to. The game plan of Bernanke, Summers and co was all along to get banks to lend again and household to add to their already excessive leverage. How could the administration be tough with the banks when it needs them to implement its economic plan… We need a bigger crisis to get some meaningful finacial sector reform, but can we survive it?
Why is there any expectation that this change would “severely limit” recission? The major incentive for the borrower in these cases is the reduction in their payment obligations to principal only. That’s a huge benefit to be had. That they might now be subject to foreclosure if they fail to pay the principal clearly diminishes the previous remedy, but does very little to reduce the practical benefit that recission brings. I don’t see the need for this change, but those who believe that lenders will now redouble their efforts to provide predatory loans or that borrowers with claims resulting from such a predatory loan will no longer file for recission if they remain with a lien on the pricinpal balance seems unlikely.
Well now banks don’t need to wait for the borrower to sell the house to collect their fraudulent loan money back, they can just foreclose and take it.
Waiting for the money and not being able to force foreclosure is part of the penalty to the banks.
Now there’s no penalty, they can just get their principle back right away.
Eric,
The way Truth in Lending rescission works is that the borrower *does* have to pay back the principal – they just have to do so after the security interest (which allows the foreclosure) is voided, which, as a practical matter, gives them leverage in negotiations to reach a sensible workout with their bank.
This change would require the borrower to pay the principal – and not just in the form of installment payments but instead all at once, in the form of a refinance or lump sum – prior to the security interest being voided. As a practical matter, most people nowadays cannot do that – either their home is underwater and they can’t refinance, or they’re behind and so their credit is shot, or they don’t have the up front funds. This guts the incentive for the bank to enter into a workout, and essentially kills the remedy for the vast majority of lower and middle income homeowners.
If a homeowner thus wanted to bring a rescission claim from the date this change takes place on, they’d need to show their attorney they have the cash or the ability to get the cash to totally pay off a sizable chunk of their mortgage. That’s just not going to happen, not now, not for the next few years, and in the cases that really matter – where it’s lower income folks who have been taken advantage of – not ever.
Bingo. Under existing rescission law, I can void the mortgage for a defrauded debtor and then file BK to discharge the debt. Although the value of the house will require the debtor to make payments over time equal to his new equity in the home less his homestead exemption, those payments go to all creditors not just the bank. And because the payments are to unsecured creditors, they need not include interest. Finally, if the bank is unsecured then the attorneys fees I earn to rescind the deal get paid from the debtor’s newly acquired home equity. If the bank’s lien becomes unavoidable until after full payment, the borrower has no ability to pay me for my legal services in unwinding the predatory loan. Ergo, the defrauded borrower will find no attorneys willing to take their cases.
I believe THAT is the reason for this proposed change in the law — to protect predatory lenders from the consequences of their fraud.
BTW, I am one of the few attorneys in California who has successfully sued to rescind a predatory loan and, I believe, the only one to do so notwithstanding the existence of a Settlement Agreement under which the borrower waived all claims against the lender. Hoffman v. Lloyd (9th Cir 2010)
Congratulations. I was reading the right to rescission on errors in documents is only for 3 years under this regulation. Considering there were probably all manner of significant and meaningful errors in documents where borrowers income or assets were under or overstated. Remember that Countrywide was paying brokers 3 percent commission on a subprime loan and only 0.5 percent on a prime loan. So brokers steered borrowers into subprime loans. Not to mention the Countrywide software which neglected to consider borrowers cash assets when determining if they qualified for prime.
I do not see much talk about what I can guess are the exhorbitant adjustable rate mortgage spreads compared to spreads from 1 to 2.25 percent above 6 month LIBOR.
The Federal Reserve banks are literally owned by the Banks, and the board of directors of the district banks are made up of bank executives. And now the major US servicers are part of the big 5 US banks.
I have been listening to the news about the new Republican Dominated Congress.
Nearly every new member called for less spending and FEWER REGULATIONS.
I have been listening to the news about the new Republican dominated Congress.
Nearly every new member called for less spending and FEWER REGULATIONS.
It looks like the Fed has been listening to the voice of it’s Master.
I will ask this question until I get an answer:
Why would anyone with serious money be willing to invest in a country where the powerful can change the rules on the fly and as they goddamned please?
Corollary question: Am I to understand that it is so bad elsewhere that investing in the US markets is mandatory?
Until they develop a vaccine for stupidity I wouldn’t hold my breath waiting for an answer.
China has the power and the bankers have the power, this fight is winding down and DAVID is not going to win
At this point, we should not allow the Fed to change any regulation policy without legislative approval (and Liz’s say-so, too).
This is a complete and total outrage. Folks I talk to are so blinded by fury they will take to the streets (in peaceful demonstrations )
What has happened lately to the role of the big investors(sovereign wealth funds, pension funds, municipalities,etc)?
Why aren’t they in the forefront takng on this financial imbroglio? Are they also suffering corruption and cozy relations with the bankataz and the Fed? What gives at the big investor level? Is anybody listening to us?
Back in the day there would be teach-ins,seminars, relentles demonstrations ,periodicals, pamphlets, civil disobedience, and academics–students and instructors got busy. Now? Not much goin’on IMO.
Government by the people, for the people, of the people.
Wait Scratch that….
Government by the banks, for the banks, of the banks
As of this evening….
http://www.huffingtonpost.com/2011/01/05/fed-caves-on-foreclosure-_n_805008.html
Fed To Back New Rules To Rein In Home Foreclosure Abuses
“WASHINGTON — The Federal Reserve has reversed its opposition to new rules reining in foreclosure abuses, and will support stronger regulations on the nation’s largest banks, according to a source familiar with the matter.”
Please be kind to the economy. Keep Ben and Timmy spayed and neutered.