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Mortgage Fraud Whitewash: $20 Billion “Get Out of Jail Free” Settlement Floated

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American leadership is reliable in one respect: it consistently undershoots my already low expectations.

Or maybe I have it backwards because I keep forgetting who the authorities are really serving, and it clearly isn’t you and me. As we will discuss below, the latest scam is that the banking regulators are finalizing a mortgage “breakdown” settlement, and they’ve evidently decided to let the industry off the hook for a mere $20 billion.

In Saudi Arabia, the royal family has just offered $36 billion worth of concessions in an effort to placate an increasingly unruly public (this appears to be in addition to pledges to spend $400 billion on education, health care, and infrastructure by 2014). This is in a country with a population just under 26 million, including over 5 million non-nationals who presumably aren’t eligible.

Now you can easily pooh pooh this comparison, since Saudi Arabia is an autocratic country desperately throwing around money to buy off dissidents, right? But this is the kind of money a leadership group will shell out when pressed to defend an existing order. And the US was very quick to hand out funds right, left, and center during the financial crisis. It’s continuing to do so now in less obvious ways, by continued life support for the mortgage market through Fannie and Freddie, the Fed’s super low interest rates and QE2, and non-monetary measures, most important its refusal to make any sort of serious investigation into what happened in the crisis and prosecute key actors.

Most observers, yours truly included, had expected very little from the multi-regulator “foreclosure task force” announced last year. It was clearly designed to be an even more cosmetic exercise than the stress test charade, which does take a certain amount of brazenness (or more likely, confidence in the public’s inability to follow the three card monte). But a bad situation devolved; the Treasury had appeared to be in charge, and that department at least tries to put a minimum level of professional spit and polish into its charades. When OCC acting chair and chief bank enabler John Walsh got up to speak in an official capacity about the process in last week’s Senate Banking Committee hearings, it was evident there was not even going to be an effort to pretend that this was a serious undertaking.

Even so, the mortgage “settlement” trial balloon floated in the Wall Street Journal this evening is an offense to common sense and decency. Notice how the word “fraud” is pretty much verboten in the MSM; the latest code word for what went awry is “breakdown”. This implies a benign sort of neglect, simply of not doing sufficient maintenance which led fussy machinery to quit working. It is mean to avoid contemplating, let along uncovering, Pinto-type decisions of weighing the costs of making the vehicle safer versus the litigation losses resulting from incineration by exploding gas tanks.

The magic number across the industry is a mere $20 billion in civil fines or payments to fund loan mods. We know from BP not to have a great deal of confidence in settlement funds. It is not yet clear what scope of activities get a free pass (fraudulent servicer charges and impermissible compounding fees? failure to convey notes to mortgage trusts as stipulated in the PSA? foreclosing on home where HAMP mods had been promised?) but the industry will want any waiver to be as broad as possible. But in any kind of settlement of fraud, like securities fraud charges, various responsible parties are also barred from working in the industry, sometimes for life. None of that is on the table.

The plan involves having servicers give borrowers principal mods, but obviously only to the extent of the fund amount. The WSJ story announces that mortgage investors will suffer no losses. This shows how backwards the logic here is. Investors would LOVE principal mods to qualified borrowers; it’s far better than taking 70%+ losses on foreclosures. So saving RMBS investors any pain should never have been a feature of the plan design. And that means it is really a fig leaf for avoiding writedowns on second liens, which are heavily concentrated in the four biggest TBTF banks.

The officialdom is taking the stance that only a small number of borrowers suffered wrongful foreclosures. The HAMP fiasco alone makes that patently untrue. And the regulators’ failure to compare servicer records with borrower records (the short time frame of the task force effort guarantees that did not take place) makes this a garbage in, garbage out exercise. And that’s before you get to the question of fraudulent servicer charges, which foreclosure defense lawyers say represent 50% to 70% of the cases they handle (it’s easier to win based on standing so court records do not reflect the borrower reason for choosing to fight the foreclosure). Without an audit of servicer software, this regulatory assessment was a simple “see no evil” exercise.

Nor do I see any mention of imposing new servicing standards on banks, another massive oversight.

The servicers, as well as Fannie and Freddie, would be required to provide principal mods. But given the meager settlement amount, this is a complete and utter joke. The mods will be too shallow and too few in number to help either borrowers or the housing market. Both J.C. Flowers and Wilbur Ross, both very tough minded investors, have found deep principal mods work, and research supports their views. Why are borrowers going to struggle to make home payments when they still face a loss and/or a big tax bill when they try to sell the home?

If you assume a combined first and second mortgage balance of $200,000 and a mod of 10%, or $20,000, which is too low to make much difference to borrowers and well short of what investors would accept (given 70%+ expected losses on a foreclosure, 25% to even 50% is a no brainer), you get 1,000,000 mods. That sounds peachy until you realize that nearly 30% of the homes in the US, a total of 15.7 million, are underwater and prices are projected to fall further this year. And most are underwater by more than 10%. So even if this works as advertised, who gets help is likely to be capricious and the amount of help will be insufficient.

And as Marcy Wheeler correctly points out, this program is really HAMP 2.0. When a small group of bloggers visited the Treasury last August, HAMP was such an obvious failure that the staff didn’t even try hard to defend it. One of the excuses offered by Geither was that Treasury lacked authority over servicers (a point I disputed, since Treasury has plenty of leverage at its disposal). So there isn’t even any reason to believe the banks (ex perhaps the Fannie and Freddie loans) will live up to their commitment do a paltry number of mods. As Marcy noted:

…basically, it sounds like HAMP II–a “plan” that still lets banks decide how to implement that “plan”–with the sole improvement on HAMP I that it requires 2nd Liens to be “reduced” (but not eliminated) in the process of modifying the first liens.

The deal wouldn’t create any new government programs to reduce principal. Instead, it would allow banks to devise their own modifications or use existing government programs, people familiar with the matter said. Banks would also have to reduce second-lien mortgages when first mortgages are modified.

The good new is it does not sound like there is a deal agreed. The powers that be have yet to corral the state AGs (since when were they going to be part of this scheme?) and the servicers themselves.

So readers can help create heat on the officialdom. It would be very useful to come up with estimates of various types of damages (and it needs to be bottoms up, not “the global financial crisis cost X trillion and at least 25% is the fault of these clowns). First would be a list of types of damage done, and it should be mutually exclusive, and ideally collectively exhaustive. Next are any factoids that would help dimension the level of overall damage per category. For instance, some readers yesterday started using the Massachusetts lost recording fee estimate to try to ballpark the recording fees lost to MERS on a national basis.

Having the level of damages (which would certainly wipe out the banks, but we want everyone reminded of that fact, that any “settlement” is yet another gimmie) then serves as a basis for talking about monetary settlements and other required behavioral changes. The adverse reaction to the Center for American Progress’ Fannie and Freddie “reform” trial ballon apparently did put the powers that be on the back foot; reader information gathering and ideas here would be of great value in putting forward an even more forceful rebuttal to this disgraceful proposal.

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61 comments

  1. Paul Repstock

    Ahhh Yves.. I am so sorry that all your hard work is being flushed down the toilet of expedience. What else can we expect in a world where money talks and justice walks. When even the president is corrupted by it, there is little hope.

    Look at the different responses to the situations in Egypt and Libya. Mubarak had no oil so everyone shooed him out the door, Gaddafi has the ability to turn off lots of oil so nobody says more than a few feeble tut tut’s..:(

    1. aet

      Why are you trying to change the subject?

      And I notice that you at least are happy enough toplet this slide.
      You a banker too?

      1. Paul Repstock

        You have me wrong. I was just illustrating the similarity.

        A settlment like Yves posted about would make any decent person puke. As usual money goes to money and the ordinary people can go *^#)%! themselves, if they survive..:(

  2. Moss

    They should let individuals write off a loss on a home that is lost to foreclosure. 3k Max per year just like any loss suffered from say a sale of a stock.

    1. Paul Repstock

      If you seek an equitable settlement, how about requiring that every ‘human’ person who was harmed by this scam, be made whole. Not likely to happen when they are ready to bust heads over previously settled union conracts that only amount to a few millions.

      There is no point in agreeing to some future token benifit; they will just find some method of making it worthless.

      Time for all people everywhere, to have their Egyptian Moment my freinds.

    2. Darla

      I blog on foreclosures and evictions – (see name link) and this article is awesome.

      I like your suggestion – right now the government TAXES people on foreclosure loss… those who could not short sell (due to market prices or bank refusals) were forced into foreclosure and with a lovely gift to boot.. taxes to be paid on the difference between loan (toxic induced loan) and the price the banks sold it for (when they wouldn’t negotiate with you).

      yup the gift that keeps on giving – as long as government PROFITS from foreclosure fraud – why should they do anything else?

  3. za

    I like this figure better: $22 million per county, roughly 3300 counties, times 4 transfers for BK remoteness, equals about $290 billion.

    Then add in taxes on, say, $5 trillion of MBS when the REMICs lose their passthrough status.

    Let’s call it a nice round figure of, oh, $half a trillion to begin settlement negotiations.

    1. mezcal

      That’s better but still overlooks the equity strip at the individual homeowner level.
      So lets add, say, another $5T to your estimate as a desired outcome.

      Given the offensiveness of the proposed $20B settlement I propose a counteroffer at $20T.
      The People will begin negotiations from there.

      1. Cedric Regula

        Well, I sold my RMBS bond fund in 2004 when it seemed to me not to pass the sniff test anymore.

        And clobbering the securitization industry by yanking the tax exempt status of REMICS is the nuclear option I’ll support at this point in time.

        Having sold my house in 2005 and since then happily paying rent to those apartment rentiers, I’ll welcome the opportunity to compete re-entering the housing market and buy a house for me with my cash bid going up against everyone else’s cash bid.

        But if I have to first buy out everyone else’s house and they get to keep it, and then the USG creates money out of either Treasury debt or thin air with a “new” GSE system so there is a GSE subsidized market for everyone to sell their house I bought with money they will tax or inflate from me, then this Little Person is going to head for a different country where they don’t do things like that to little ol’ me.

        Negotiation finished.

  4. Allen C

    “I keep forgetting who the authorities are really serving, and it clearly isn’t you and me.”

    Where are the class action lawsuits?

  5. Bob Falfa

    Indecent Proposal II – they’ve struck the deal, now they’re just negotiating how much the rest of us get screwed in the end.

  6. EMichael

    I still fail to understand why investors do not take a more proactive role on modifications.

    I know nothing that would stop them from demanding servicers use principal reductions to save the investors from greater losses.

    1. Jason X. Ray

      The investors were never allowed to purchase these mortgages. Normally, an investor would come in and buy these assets at a lower price, then re-negotiate the terms for the ‘borrower’; this would allow the investor to make a nice profit while ensuring the ‘borrower’ would be able to pay the obligation.

      The government changed the accounting rules so the banks did not have to write off their losses.

      A free market would have allowed the banks to go insolvent (as they truly are; technically and morally) and the debts to be written-down to reflect a true price. My interpretation is that the government is doing its damned-est to ensure the banks remain in their current position regardless of the amount of people being thrown out on the street.

      1. Ray L Phenicie

        “A free market would have allowed the banks to go insolvent (as they truly are; technically and morally) and the debts to be written-down to reflect a true price.”

        Hence the name of a website, ‘Creditwritedowns.com’ of a fellow blogger of nakedcapitalism.
        Your assessment is 100% spot on, but the same general philosophy is evident in all areas of government-business interfaces-give the corporations what they want and essentially no rules are in place in the market place,-even the Mafia has rules on how they do business.

  7. Leviathan

    They will not “fix” this problem ever, because the point of these little attempts is to keep the poor dumb animals from losing hope that they will ever get to eat the carrot dangling from the stick in front of them (they won’t).

    Still, they should try to pretend a little harder, the administration that is.

    Mix it up a little.

    How’s this: Use the fund to offer delinquent homeowners a deed-in-lieu and up to $10,000 for a deposit and a couple month’s rent. They clear out, move on, and the market is one step closer to clearing.

  8. F. Beard

    Since our banking system, government backed competitive counterfeiting, cheats savers of honest interest rates and drives borrowers into non-serviceable debt then it can be argued that it has cheated everyone.

    Then since everyone has been cheated, the solution is pretty straightforward; send all US citizens an equal and large bailout check of new debt and interest free United States Notes. Of course this one time bailout should be combined with fundamental reform too.

    Without a genuine free market in private money creation it is impossible to have genuine free market capitalism. What we have instead is a system of relatively free serfs working for bankers.

  9. MikiG

    I’m 10 months behind and the bank has done nothing so far. I have no idea what or where the future will take me but if I get three years mortgage free I’ll have a hundred grand stashed.
    A deal? Why deal with the bank that initially refused to modify my loan (perhaps because they couldn’t as they apparently don’t hold the paper)? Pay a reduced mortgage equivalent to rent to stay in a house with no value and no prospect of getting any value? I might as well hang on and see what happens and live cost free for a as long as my lawyer can make that happen. Then when I do get kicked out pay rent and be free to move (with my nest egg) as jobs and moods dictate.
    It makes better business sense to me than dealing with the socialists who took public funds to pay off their captilist debts. Call it my private civil disobedience. HAMP One didn’t work and HAMP 2 won’t either because I’m not one of the wealthy people needing help.

    1. F. Beard

      Sounds like a plan; a self-service Jubilee. Let the savers gnash their teeth in envy if they oppose a general bailout of the population including themselves.

    2. Bill

      I have a friend who is in your situation. He hasn’t paid in 18 months. BoA owns his mortgage and cant legally foreclose on him in the state of utah. He hasnt heard anything from the bank in 18 months, then yesterday they sent him a letter expressing their wish to refinance his loan. Clearly they wish to get him into a new loan on which they can foreclose. His and your story make me feel like a sucker for continuing to pay my mortgage as my ltv drops.

      1. EMichael

        I would be real careful here and first figure out whether your state allows banks to go after you personally for their loss on the mortgage with deficiency judgement after the foreclosure.

    3. backwardsevolution

      MikiG – “I’m 10 months behind and the bank has done nothing so far. I have no idea what or where the future will take me but if I get three years mortgage free I’ll have a hundred grand stashed.”

      The bankers’ behaviour is unconscionable. They have committed fraud, deceit, theft.

      Exactly what you are doing. You bought a house that you cannot pay for (or I guess you can, but just elect not to). You are planning on “making money” off this fiasco. That’s why many people stayed out of the housing market, because they knew it was going to take a dive.

      The banks are milking the system from the top and you are milking it from the bottom. As far as I’m concerned, both of you need to be kicked out on your asses.

  10. Bravo

    How about crafting a solution that shares the pain between those who financially engineered the crisis and way too many of the rest of us who chose to ignore the ultimate price we all would pay for failing to recognize the “regulatory capture” possessed by the banking industry which contributed so greatly to the crisis, and which continues to this day with this grossly inadequate proposed settlement. Do something that would make a difference. Require that first and second liens be written down on a pro-rata basis to 90% of current value for credit worthy borrowers. Non- credit worthy borrowers are out of luck, they get foreclosed on. Replace the existing debt with a new shared appreciation mortgage that fixes the MERS problem and provides for a 50/50 split between borrower and lender of the ultimate sale or finance proceeds of the house within a given time frame (10 years?). That would allow time for the market to recover from this boondoogle in which the financial engineers and the head in the sand general public both contributed. Then give the banks the ability to defer prospective loss on their writedowns over the term of the shared appreciation mortgage, giving the market the necessary time to recover and thus minimize loss for both borrower, lender, and the country as a whole. To provide additional incentive to make it happen, give the financial engineers indemnification from criminal prosecution.

    1. F. Beard

      How about crafting a solution that shares the pain between those who financially engineered the crisis and way too many of the rest of us who chose to ignore the ultimate price we all would pay for failing to recognize the “regulatory capture” possessed by the banking industry which contributed so greatly to the crisis, Bravo

      Because it is not right to lump the victims in with the villains? Plus you assume that government backed fractional reserve banking can be made to work properly with proper regulation. Well, it’s been 317 years and counting and the current banking model is still causing grave problems.

      But what would be expected of a system that is rooted in fraud, based on theft of purchasing power from all money holders including the poor and violates the commandment against usury between fellow countrymen?

      What’s left now is restitution and fundamental reform.

  11. ECON

    As a citizen north of USA it is unbelievable to witness how all the platitudes that describe the goodness of America enshrined in the Constitution and Bill of Rights have been prostituted to the sole advantage of the rich and powerful.
    “We the people…” has no substance. Empires fall apart from within by the “patriots” in America who have no allegiance to country or flag but to their own neoconservative individualism

  12. Cedric Regula

    I guess my expectations were ground down so low, I was surprised to see anything proposed at all that would amount to more than a PR Band Aid for the Admin.

    Looking backwards thru the microscope, I think I just read somewhere 4Q profits for the big banks totaled $20B. So (if) they are paying a one quarter penalty.

    To make everyone whole again would wipe out the banking system and probably the Treasury and/or Fed (depending on how they do that anymore) and after going thru so much effort to save the banking system, that would be a nonsensical goal even by Gremlin standards of reasoning.

    But the really annoying thing again is the individual players get to keep all their ill gotten gains with impunity, or even face starting a new career working their way up at the local McDs, and ultimately the bill gets passed to ignorant stockholders.

  13. wild bill

    The Flag and the US Constitution will have big ol’ tire track down the middle after this fraud settlement is “negotiated” between the OCC and the banks.

    In actuality the OCC is fining the American people for the banks illegal actions.

    The taxpayers bailout the banks, the OCC fine the banks, the taxpayers bailout the banks again to pay the fines.

    Here is a novel idea: How about handcuffs over fines!!

  14. Obsvr-1

    Without punishing the fraud and crime, without disgorging the ill gotten gains, without haircuts to the investors and banksters by writing down the principal to market values; there will be no cure.

    This is another kick the can down the road, smokein’ the hopium approach. These guys continue to hope that the market will recover to re-flat and re-float the homes.

    This $20B is a smoke screen from the banks/servicers as they absorb the funds with fees and incentive payments. After $20B is consumed, we will be right back at square one, homeowners screwed, investors holding ‘crap’, servicers breaking the law and banksters enriched.

    When will the politico’s step up and provide leadership to push DOJ to prosecute crime and force the fraudulent toxic crap back onto the originators (banksters) and force haircuts through debt restructuring. While they are at it, resolve the TBTF by breaking them up.

  15. curlydan

    according to my calculator math when I was reading the article, yes, it would be 1M $20K mods to equal $20B.

    Another way to judge the correct amount of the settlement versus the problem is to estimate the total amount of underwater mortgages there are. Here, $20B seems way too low.

    1. Yves Smith Post author

      Lordie, you are right, how embarrassing. Maybe I need to do simple stuff like this by hand in the future. I ran this on my HP 12C three times to check, it must have a register error….it’s supposed to take extra zeros beyond what it can show on the display as as “10 to the X” power…..good old scientific notation stuff. This is really annoying, means I can’t use it for economy level computations, just transaction level computations, unless I adjust first. I like using the actual values precisely because it’s easy to muff the orders of magnitude when you are in a hurry.

      But also recall Treasury allotted IIRC $75 billion to HAMP….which they didn’t even begin to use.

  16. Hugh

    This is another great example of a commission or task force being set up with its conclusions written in advance, in this case to cover both for past wrongdoing and its consequences. It is surprising how little has changed.

    Back in early 2009 shortly after the meltdown we were saying that the whole banking sector was bankrupt and that there would be no real help for homeowners, because any such help would expose the actual value of the banks’ losses and hence their insolvency. Everything the Bush and Obama Administration has done has been to cover up this fact in the hopes that with time, some bubble blowing, and backdoor dumps of bank losses on to taxpayers, the banks could work (read steal) their way back to solvency.

    If you consider that there was an $8 trillion bubble and you can supply your own estimates but I will use a 40% loss with regard to it, that is $3.2 trillion, and that’s before we get into all of the derivative losses associated with that. And because of all the fraud, the failure to follow servicer agreements, MERS, the banks/financial sector potentially are looking at eating all of that, and more. However with the connivance of our government, they are trying to stick all that liability either with the homeowner or taxpayers.

    I say this in almost all my comments but this is pure kleptocracy in action. If this plan is any indication, I would say we are in late stage kleptocracy, basically, we are at a point where the powers that be are barely exerting any effort to paper over the size and scope of their lootings. You got a multi-trillion dollar problem, write a report and promise $20 billion (that does seem to be the magic number nowadays) to fix it, not meaning to spend that much anyway. I mean if you are not a looter, you are a rube, and why waste good lootable money on the likes of them/us?

  17. Ted

    This thing is so crazy. Why didn’t they give them our money with a stipulation like lower all mortgages to 2%. They’re getting our money basically for free and at 2% they could still make money – just not enough to keep paying incrementally larger and larger bonuses. This settlement idea is ridiculous. The banks already got paid for the mortgages through securitization and bailouts to their investors, why are they being allowed to double down on their profits from the bankend of the loan to the front end – in foreclosure!!?? The only real way to straighten this out is to prosecute the banksters and claw back all their illegal profits that allowed them to grow so grossly large that they’re a heavy burden on society and keeping them fed and full is bankrupting all the states. If we don’t – it can only get worse. The banks are not dealing with us as human beings, only as numbers in a spread sheet and that is exactly the way they should be treated.

    1. Paul Repstock

      Beyond a certain level of wealth it becomes difficult to find new ways to enjoy it. Therefore, some turn to inflicting hardship on others, think forclosure and waterboarding. A sad way to get your jollies…:(

    2. YankeeFrank

      Yeah — I wrote to my bank asking for a copy of the note on my mortgage and they put a negative mark on my credit report and in the letter telling me this they said they will not remove it. I found online that this was done to many others as well. They are thugs using whatever leverage they have to scare us from protecting our rights. They are really and truly thugs. But then again, they are criminals acting with impunity, and when have such criminals ever been anything but thugs. In any event, call it a gut feeling, but I think they are going down sooner rather than later. People I know who have always been completely apolitical are starting to get angry. When it reaches a tipping point a shrug of the people’s collective shoulder will dislodge this corruption and it will all come toppling down like the house of cards it is.

      Ian Welsh has a great post on this today — I like his list of what needs to be done:

      1. confiscatory taxation on the rich (90%+)
      2. public financing of political campaigns
      3. an end of speech=money
      4. breakup of media oligopolies

      http://www.ianwelsh.net/wisconsin-time-to-teach-some-politicians-a-lesson-by-ending-their-careers/

      I will add:

      5. criminal prosecution of banksters who caused the housing bubble/collapse
      6. disgorgement of ill gotten gains from mortgage control fraud and foreclosure fraud
      7. end of revolving door between business/government perhaps using a 5 year window between each type of position/compensation

      I’m sure there’s more, anyone have extra demands?

      The key thing is we don’t want just money from these pigs, who seem to live, eat and breathe the stuff. They seem to think throwing money around will fix the problems they’ve created, or at least they’re hoping it will. The fact that they are even proposing such a thing means they are on the defensive and starting to get scared. Good, let’s not play our hand too quickly or sell our demands on the cheap.

  18. Doug Terpstra

    This looks like yet another lame attempt to sweep fraud under the rug and cure the lost-note problem, all in order to protect investors from unsecured loans, to shield MERS and servicers from lawsuits, and to let banksters escape moral/prison-hazard. But if $20 billion is intended to fund ‘voluntary’ mods where the total housing mortgage market is over $10 trillion and 11 million properties are underwater (CoreLogic.com), it is laughably inadequate and hopelessly inept. It is less than $2K per underwater mortgage, one or two payments at most, without even touching the iceberg of derivative leverage. It’s like lowering the water level two inches in a twelve-foot-deep pool to save someone stuck on the drain from drowning. It looks more like a press release about appearing to do something.

    In any case, everyone now knows that what the Feds take from one pocket, banks take more from taxpayers for the other pocket via Fannie and Freddie. In a tragicomedy of errors, this new, unimproved HAMP 2.0 is another justice-delaying tactic that will ultimately fail. It will finally clarify for everyone that continuing to pay on an underwater mortgage is for suckers, and thus it will only incentivize strategic default. Hmmm … on second thought … not a bad plan after all … or, as Gilda Radnor would say, “Oh … … never mind!”

    One assumes this would require everyone, including state AGs, to sign on. Good luck with that. But if (big if) other states begin to follow Arizona in requiring a documented title-note chain for all foreclosures, then the banks and servicers nightmare has only begun and this will all be moot. (See today’s links)

  19. Ned Zeppelin

    Time for a Jasmine Revolution to coincide with the emergence of the cherry blossoms in D.C. This is outrageous, as bad as TARP. Crony capitalsim, and proof the fix is in.

  20. Bravo

    To elaborate on my prior post, establish a modification process that starts with the MERS mortgages, as it has certainly been well argued here that they are defective, at best. First determine the property’s current value. If the first mortgage balance is equal to or less than 90% of current value, then require the second lien holder to write off 100% of its loan. In that case, require borrower and lender to enter into a new first mortgage with the current lender on the same terms, albeit with a mortgage that fixes the MERS problem. Then in this instance, require the second lien holder alone to enter into a new shared appreciation mortgage with the borrower with a 50/50 split of the upside in the given time frame (10 years).

    In cases where the first mortgage balance is greater than 90% of property value, require that the first and second lien holders write their loans down to the cumulative 90% of current value on an INVERSELY proportionate basis (ie, if the 2nd lien holder holds 10% of the outstanding debt on the property, it absorbs 90% of the loss down to 90% of property value, and vice versa for the 1st lien holder). A new first mortgage fixing the MERS problem is then written at 90% of value on original terms and retained by the original first lien holder. A new second shared appreciation mortgage is then written providing for the 50/50 split of upside with the homeowner, with lender upside being shared between the original 1st and 2nd lien holders on the same percentage basis that they shared writeoffs. Simple. Rational. Doesn’t further tank the economy by taking down the TBTF banks. Seems to represent a far more equitable sharing of pain by all parties associated with the boondoggle than the one currently on the table by the captured regulators.

    Get the political support of both the public and the investors who have the most to gain, such as members of the American Association of Mortgage Investors. Allow bank losses to be written off over a 10 year period to keep them alive. Fix the economy and the MERS problem in one fell swoop.

    1. Paul Repstock

      Actually, tanking the TBTF, would probably be the very best way to rescue your economy. These protected institutions are at odds with your social values. Maintaining their survival has guaranteed that the bucket of your economy will always have an enormous spigot in the bottom whereby any possible surpluss can be removed, ‘to service debt’. There will be no recovery with these banks in control!

      There are enough small banks and other institutions to handle all financial needs.

  21. GeneH3

    After two degrees in law and 35 years of corporate practice, maybe I have missed something. Maybe you can explain it, Yves. How can any kind of settlement insulate the banks from a civil action by private parties who do not join in the settlement? For example, how can AllState’s suits be preempted? How can a county that elects not to join a settlement be preempted?

    1. Yves Smith Post author

      Agreed. But I think this is to coopt the state AGs. And maybe they hope the press on “settlements” will deter 10% to 20% of private plaintiffs.

  22. MichaelC

    Its way too early in the discovery process to even contemplate settlement negotiations.

    For example MERS externalaties need to be identified , tallied and paid by the packagers, including the GSEs.

    Externality 1. RMBS are not asset backed.
    Cost Estimate: Back of the envelope cost calculation might be something like Total RMBS issued X spread between collateralized debt and non collateratlized debt , which would be several hundred basis points at a minimum.

    Originators should pay for their gross neglignece in following/enforcing their own PSAs.

    Externality 1a ; Tax bill due as a result of loss of tax preferemce- (good estimate in other comments)

    Externality 2. EVERY mortgage listed in MERS now has clouded title. This is significant because we’re no longer merely talking about the (relatively) small proportion of defaulting mortgages, but the entire homeowning citizenry that now bears a risk, at a cost, that he will not be able to pass clear title to a buyer.
    Cost estimate: Title inusurers should be able to price this risk, I have no idea where to begin, perhaps some discount rate based on the difference between prices for prop with clear/clouded title can be estimated.

    That’s my two cents for a start, but the numbers for these two aspects alone are multiples of 20B I’d imagine.

    1. dejavuagain

      Re Title Insurance -

      Let say you buy an REO with bad title because of MERS etc. MERS causes someone to provide Title Insurance saying the title is good.

      Five years later, you go to sell your house. Your purchaser goes to get a new title policy, but is unable to obtain one, since the MERS defects are still of record. Your title company will not provide a new policy to the purchaser.

      Or let’s say, your title company has gone under for whatever reasons or is not acceptable to the lender for your buyer.

      Then what.

      1. MichaelC

        Your first example decribes the risk that is now present in every mortgage that MERS touched. It needs to be quantified.

        Who has expertise to quantify that? My first reaction is be to look to title insurers for the expertise needed to price this risk.

        Existing homeowners should not be required to pay for this additional title risk. Instead it is a risk created by the MERS users and was incurred by the MERS officer’s actual employer. It should be charged back to that officer’s employer.

        The second piece isn’t relevant to my point. Title Insurer solvency is an insurance regulatory issue.

        1. dejavuagain

          I think the point it missed.

          The issue is not the title insurance on the first transaction, it is attempting on the second transaction 5 year later to sell to a purchaser that may not be able to find title insurance for whatever reason.

          In general, sellers are not able to assign title policies to purchasers.

          Perhaps these “special” policies will need to allow assignment of the policy – indefinitely.

    2. charles 2

      Title insurance is no more able to insure this kind of risk than Casualty insurance is able to insure against the consequence of nuclear war.

      1. GeneH3

        It is an interesting analogy. The problem is that casualty insurance usually excludes war. Title insurers don’t. And they will end up as crispy critters, just as if they were in a nuclear war.

    3. MichaelC

      I should have been clearer,

      The costs to remedy the clouded titles needs to be determined.

      Who pays for the remedy, if one exists?

  23. DAN G

    The best bet for the underwater motgagee is to just walk away. Then he doesn’t have to put up with the bank’s moral hazard maze trying to get a little relief. Her own moral hazard would be quickly put to rest if she saw in advance what the bank would put her through.

    1. EMichael

      I agree if, and only if, you live in a state where deficiency judgements are not allowed to recover the loss the bank takes on the foreclosure.

  24. Francois T

    As long as enough (more than 50%) people have a decent wage and job in this country, these criminal (as in “Screw the rule of law!”) endeavors shall continue. The elites will get ever more rich while political parties will keep gobbling up contributions by the hundreds of millions and select ever more corporate-friendly candidates, just like the Blue Dogs who are hard at work recruiting many more enemies of the People for 2012. Rinse and repeat.

    Alas, they won’t continue for long, since the total lack of meaningful reforms means we’ll have another big financial crisis sooner than later.

    The only sad thing is the amount of unbelievable pain and suffering needed to finally get all the REMFs at the top to either lose everything or to be forced to do the right thing.

    In the meantime, these whitewashs are becoming the norm.

    1. Ray L Phenicie

      -In the meantime, these whitewashs (sp) are becoming the norm.-
      From the Warren Commission to the 9 11 commission report-about five hundred million gallons of whitewash have poured into the banks of the Potomac and around the country. Usually, as this blog points to the truth about the financial and economic sector, other blogs usually manage to get out the truth on these other issues.
      Or books at Amazon.com

      This particular issue, being as complex and as innately opaque as it is (made that way by obscuration on the part of the industry players), lends itself to cover over with occasional daubs or sometimes whole tubs of whitewashing. However, that usually wears thin, and from what I can see, more and more, people are catching up to what is really going on.

  25. Main Street Muse

    “The officialdom is taking the stance that only a small number of borrowers suffered wrongful foreclosures.”

    Really? Aren’t we seeing record numbers of foreclosures since the crash? And most are foreclosures for the right reasons?

    At some point, ‘officialdom’ will need to wake up to the fact that the Great Recession has hit the middle-class with multiple punches – high unemployment, stagnant wages, highest foreclosure rate in years, increasing healthcare costs, and reduced home values are just a few.

    We need the same sense of urgency about salvaging the economy outside of Wall Street that Paulson had about rescuing his own personal favorite sector – finance – with TARP and those other helpful fund-laden programs offered to the banks.

  26. Karen

    Seems to me it would be very difficult to obtain and aggregate data on the damages to borrowers from servicer abuses. In so many horror stories, the borrower isn’t given anything consistent in writing telling him/her/them how much the servicer is charging them in fees and such.

    What I’d like to see to address servicer abuse is not a money settlement but a new law requiring fair and transparent servicer dealings with borrowers, laying out in great and unambiguous detail what constitutes fair and transparent dealings, and providing for restitution for wronged borrowers (as well as, ideally, personal sanctions against bank employees who violate the new law).

  27. Ray L Phenicie

    Numbers on the damages?
    Well not sure if this qualifies as a ‘from the bottom up’ but here goes.
    The government says that there are 46,703,000 regular mortgages out there.

    Starting with that then seems good.
    I was sure I saw a report by L. Randall Wray about this whole mess and his guess was that 50% of the mortgages out there were done fraudulently and would place the servicer at risk along with the residents living in those homes (I hate to say homeowner because we can’t say who the owner is now, can we-earthly version of Limbo.)

    What if the average value of those homes-again using Government number is $313,600? Now someone correct me if I’m wrong, please, but don’t 90% of today’s mortgages go through securitization? And that’s been the norm, again for almost a decade. So what do we have here?

    Just doing back of the envelope type arithmetic:

    Total value of the mortgages the government says are out there, using the average value given=$14.646 trillion.
    But 90% of that is in the securitization process=
    $13.181 Trillion. Just so we know then, given the fraud estimate given by Professor Wray that leaves
    $6.59073 Trillion open to possible restitution, no? After all, if the assets were not passed over to the trust as required by law (what kind of investment product does not consist of a verifiable asset?), then does not SOMEBODY owe somebody else SOMETHING for those fraudulent and empty misrepresentations?

    But ok, so if you don’t like that look at it this way:
    2,871,891 homes are in foreclosure-times the average value means $898,902,000 is the value of homes in foreclosure. Taking the %50 as done without passing all of the signatures and transferring the actual ownership to the trust means the servicers in court for foreclosure are barking up the wrong tree for the amount I’m showing now, and have caused damages to homeowners totaling $449,451,000.

    Damages?
    Restitution?

    I see both numbers, $6.59073 Trillion and $449,451,000 as something the largest banking institutions in this country have to work on.

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