naked capitalism

I may be overreacting but given the sorry behavior of banks throughout the crisis and its aftermath, better to be vigilant than sorry.

The Wall Street Journal provided a very sketchy summary of the counterproposal that the banks will put on the table in the foreclosure fraud settlements this week:

The 15-page bank proposal, dubbed the Draft Alternative Uniform Servicing Standards, includes time lines for processing modifications, a third-party review of foreclosures and a single point of contact for financially troubled borrowers. It also outlines a so-called “borrower portal” that would allow customers to check the status of their loan modifications online.

But the document doesn’t include any discussion of principal reductions. Nor does it include a potential amount banks could pay for borrower relief or penalties.

This seems innocuous, right?

Think twice. It depends on what they mean by “third party review of foreclosures”. I strongly suspect that the intent is to pull as many contested foreclosures as possible out of the court process, particularly those that involve chain of title issues, since enough adverse rulings have the potential to blow up the entire mortgage industrial complex.

If you think the banks aren’t already on to this one, think twice. One ruse already used regularly takes place in Chapter 13 bankruptcies. Even though the whole point of the bankruptcy process is to hold creditors at bay while the court sorts out who gets what, the foreclosure mills, operating on their clients’ instructions, try to break the bankruptcy stay (the term of art is that they file a motion for relief of stay). Even though this can be batted down, it still costs money ($800 is a typical cost) and a borrower who has filed for bankruptcy is by definition short of money.

Not all borrowers who go through bankruptcy hire experienced bankruptcy lawyers. The bank’s counsel tells the borrowers attorney that if he signs a harmless looking agreement, the bank will quit trying to break the bankruptcy stay. However, the agreement has language that results in the bank’s being able to seize the house outside the bankruptcy process in certain circumstances, ones that come up all too often as bankruptcies grind on (I’ve been promised a live example for NC and hope to discuss this in greater detail soon). It effectively strips out a lot of the protections provided by the bankruptcy process.

And there is plenty of reason to be suspicious of third party processes devised by banks. Brokerage customers are accustomed to the indignity of having to agree to arbitration in the event of disputes; the financial press regularly carries stories on the inadequate settlements that often result. An even more abusive example was credit card settlements. Credit card customers are required to agree to binding mandatory arbitration; some banks, in particular MBNA (whose portfolio has since been acquired by Bank of America) relied upon the National Arbitration Forum, a Minnesota based firm that assured business friendly results via its selection of arbitrators, resulting in settlements in favor of the consumer in just 6% of cases (see here, here and here for details). The Minnesota state attorney general sued the NAF for consumer fraud, deceptive trade practices, and false advertising. The settlement required that the NAF stop accepting all (repeat, all) new arbitrations except those involving domain names, which put it out of business as far as credit card and other consumer debts were concerned.

I’ll admit to being a bit surprised that the banks have decided to offer up single point of contact, but as we indicated, there are ways to deliver that that would even be consistent with how the 27 page state AG proposal set it forth, yet not actually amount to the designated case manager being all that accessible (note our issue here was not bad faith but pure queuing issues, since there will inevitably be certain peak calling times and call times ). For instance, the state AGs allow for someone who can’t reach the case manager to speak to a supervisor; it’s not hard to imagine that the “supervisors” will get a smidge more pay and training to justify the designation but are likely to wind up handing the bulk of the calls.

Now the examples cited admittedly involve arbitrations as a requirement of doing business with the vendor; cheeky as the banks are, I doubt they’d have the nerve to ask for anything as sweeping. But I can easily imagine them trying to get consumers to waive certain rights to go to court if they avail themselves of a dispute resolution process. Any such measure strips consumers of important rights and should be firmly opposed by the state attorneys general and the Administration.