No sooner have the preliminary outlines of an inadequate settlement of mortgage servicing abuses been leaked, but the banking industry is engaged in a full court press to stop it.
The astonishing part is that the banking industry continues to maintain that it really didn’t do anything wrong, all it did was make some technical errors. That so grossly understates the degree of its recklessness and malfeasance as to be beyond relief.
It’s no surprise that the so-called Foreclosure Task Force which spent a mere eight weeks reviewing servicer activities and didn’t find much. The timeframe of its exam assured that it would not verify servicer records and accounts against borrower experience and records. It is almost certain that they also did not look at how servicer software credited payments and charges, when there is widespread evidence of violations of agreements with borrowers and RESPA.
And to the extent they looked at “improprieties” in foreclosure documents, it’s a given that they did not go beyond robosigning, when that is arguably the least significant form of malfeasance. There is ample evidence of fraud to cover for the failure to convey notes to securitization trusts, ranging from the misuse of lost note affidavits to document fabrication (bogus allonges being the most common fix).
In addition, pooling and servicing agreements also have specific provisions as to level and procedures for charging certain fees. Yet studies have determined that a specific servicer will apply the same charges across all borrowers and investors, irrespective of the requirements of particular securitizations. So it’s blindingly obvious that this exam was cursory, looking at one or two points of failure in a slapdash fashion and completely ignoring other issues that are at least as important.
And the most important issue that was and continues to be ignored is: why are servicers counterfeiting transfer documents in the first place? It’s pretty obvious why all the authorities are trying to ignore the worst form of chicanery. But it is not clear why the parties most directly harmed, the investors, are doing nothing, at least so far.
As an attorney and former Congressional staffer pointed out by e-mail, the problem with the failure to convey assets into the trust as stipulated in the pooling and servicing agreement is not breach of contract issue. It is a contract formation failure issue and the remedy is restitution. And if you argue that the contract was never formed, that would seem to surmount a restriction in pooling and servicing agreement that 25% of the investors need to band together to sue the trustee to then enforce the contract.
RMBS investors thus have a nuclear weapon in their hands. If they want deep principal mods, and we are told in no uncertain terms that they do, a credible threat of litigation on this front ought to bring recalcitrant banks and trustees to heel, quickly. The last thing the mortgage industrial complex wants is litigation on an issue that would both call into question the validity of RMBS and if successful, would leave the banks with massive damages. And you don’t need to do this publicly and rattle the markets; some investors with the right legal top guns could spell out the consequences if the banks failed to get off their duffs and enter into serious negotiations.
Now perhaps these very conversations are underway now, but I strongly suspect not. The continued arrogance of the banksters is a big tell. And you therefore have to wonder why nothing of the kind is happening. A sad but obvious reason is fixed income investors don’t have any incentives to rattle the cage. Their job is just to beat the index by a little bit and call it a victory. We are also told that some investors are afraid of rattling their relationship with their banks, since they depend on them for information (hate to tell you, but if you think your bank is your friend, I have a bridge I’d like to sell you). But there are some investors, such as the major public pensions fund like Calpers, who take a more aggressive stance.
But there is a second, more ugly, possibility. I’m not a fan of conspiracy theories, but it would not be a stretch to imagine that if the Fed or the Treasury were to get wind of any such contemplated litigation, they’d use every avenue at their disposal to discourage it. China is already worried about the wind-down of Fannie and Freddie. What would the reaction be if the US media were to start discussing, as Adam Levitin put it in Congressional testimony, that RMBS are not mortgage backed securities?
Now contrast this magnitude of mess with the banking industry howls over comparatively meager punishments, per the Wall Street Journal:
The nation’s largest banks haven’t yet seen a proposal that is designed to help resolve mortgage-servicing errors that affected troubled borrowers. But industry executives are bristling at the administration’s new approach, disagreeing that principal reductions will help borrowers and, in turn, the broader housing market….
The proposal “would bring with it enormous costs that would far outweigh any potential benefits,” Chris Flanagan, a Bank of America Corp. mortgage strategist, said in a research note Thursday.
Even an amount of $20 billion “would accomplish little” in addressing borrowers who currently owe $744 billion more on their mortgages than their homes are worth, Mr. Flanagan added.
Yves here. You have to love the contradictions: principal mods won’t work (funny, private investors Chris Flowers and Wilbur Ross beg to differ) but we won’t offer a solution of our own. And even if mods did work, it would take a much bigger number, but we can’t have that because even a paltry number is way way too much. Note we have this posture co-existing with Timothy Geithner doing a “Mission Accomplished” tour in Europe.
The Journal did provide more details as to how a program might work. It at least has a few teeth in it:
Any settlement that includes loan write-downs would require banks such as Bank of America Corp., Wells Fargo & Co. and J.P. Morgan Chase & Co. to complete modifications within one year from the settlement’s date, said people familiar with the matter. Banks could face additional fines if they don’t comply with the terms of the settlement, and they would have to hire independent auditors to provide monthly updates on their progress and compliance with the terms.
Penalties could be assessed depending on the volume of loans that are 90 days or more delinquent in each bank’s servicing portfolio, and by the extent of any deficiencies uncovered by bank examiners, these people said.
Any settlement that includes loan write-downs would require banks such as Bank of America, Wells Fargo and J.P. Morgan Chase to complete modifications within one year from the settlement’s date, said people familiar with the matter.
Elizabeth Warren of the Consumer Financial Protection Bureau has floated a figure of about $25 billion for a unified settlement, according to people familiar with the situation.
The push for write-downs likely would focus on loans that banks service on behalf of other parties, and not for loans that they hold on their books. The settlement would require servicers to comply with existing investor contracts, and some of those contracts could complicate efforts because they give investors authority to reject reductions of loan balances.
The requirement to comply with contracts is bizarre; a settlement like this presumably could not override third party agreements (but it could acknowledge that fees would be waived in the event program compliance conflicted with the requirements of an agreement). Foreclosure defense attorneys did not like the idea of the servicers running these programs and wanted to see an independent party in charge.
An American Banker article by Cheyanne Hopkins on the same topic is pure industry stenography. Some extracts:
Are servicers being hit with a $20 billion fine?
No. Regulators have not agreed on a dollar figure, and $20 billion is in the words of one source involved in the negotiations “a crazy figure.”
Some banking regulators are arguing against an amount that high; it seems the big force behind a huge number is the Consumer Financial Protection Bureau and the state attorney generals.
A monetary penalty will no doubt be levied, but government officials disagree over what the fine should cover. Bank regulators see it as a penalty for being sloppy while other officials see the money as a way to repay wronged borrowers. On Thursday, regulators on both sides said an agreement has not been met.
Keep in mind, too, that in order for this to be a global settlement, all of the government entities involved would have to agree, as would the banks. While banks acknowledge their servicing systems need improvement, they continue to argue that the vast majority of foreclosures were justified.
So notice all the drive by shootings in one little section. The settlement leak is deemed to be “huge” and “crazy” when it is by any objective standard (except the banks’ intolerance for pain) way too low. The people pushing for the settlement are the evil CFPB and the state AGs (who said they were doing this in tandem? The AGs might decide to join forces, but tactically that is a foolish and unnecessary move. Regulatory violations are a completely different kettle of fish than state law violations. If the state AGs did join, it would fit the fact pattern of Tom Miller, the Iowa AG heading the effort, saving face while engaging in a sell out). And the writer perpetuates the fiction that the banks have the right to negotiate with the authorities on a equal footing. Sadly, regulators have become so craven and complicit that that has become their default posture, but the government has the ability to make life very painful for the banks (let’s just start with REMIC violations) but chooses not to use its considerable leverage.
Now get this part later on:
I read the settlement will include principal reductions. Is that true?
Not yet. While it’s true that some agencies want to force the banks to cut principal on troubled loans, that issue is one of several that’s unsettled. It is clear that any settlement will include some kind of enhanced modification program. The Federal Deposit Insurance Corp., for example, has been pushing a program that would streamline modifications in return for a clearer path to foreclosure if the borrower redefaults.
But the banks are adamantly opposed to forced principal reductions, and it’s unclear if regulators can make them, especially since the agencies don’t even agree. The CFPB and Department of Housing and Urban Development want a strong principal reduction program, but the OCC wants to instead focus on fixing safety and soundness problems.
Aha! So it isn’t just the evil CFPB and the state AGs who want principal mods, as the writer suggested earlier; HUD wants them too. And it appears the only agency that isn’t keen is, predictably, the banking industry toadies at the OCC.
No matter where the regulators really stand, it serves the industry to promote the image that the two sides are far apart and the regulators are not at all unified, regardless of where the facts actually lie. But the fact that such a meager amount is likely to be walked back is testament yet again to the fact that we now have rule by banks, with occasional gestures to disguise that fact, rather than rule of law.