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.