naked capitalism

We are getting only odd tidbits out of the so-called settlement negotiations among the fifty state attorneys general, various Federal banking regulators, and mortgage servicing miscreants (meaning all of them). As Matt Stoller pointed out last weekend, the lack of transparency is troubling. Nevertheless, certain things are apparent.

1. There has not been anything even remotely resembling an investigation. As we have said earlier, the eight week Federal exam was a joke. As Adam Levitin noted:

…we don’t actually have a tally of servicer malfeasance. Neither the AGs nor the federal regulators have done the sort of investigation necessary to really know the full extent of servicer wrong-doings. Servicers might downplay the harms, but we just don’t know. This isn’t just robosigning. The banks forfeited their ability to make the “trust me” argument some point in fall of 2008.

How can you possibly settle when you don’t know the extent of the abuses? Yes, I know this is intended to be a whitewash, but in the stress tests, the Administration engaged in a lot of persuasive-looking theatrics to somewhat disguise the fact that the end result was pre-determined. This time, they aren’t even bothering to make the cover-up look credible. This is yet another sign of how the banks are effectively beyond the reach of the law.

2. The fact that the AGs and the Federal regulators have joined forces is another sign that no one has the guts to administer anything more than a slap on the wrist relative to the damage done. I should have realized Tom Miller, the Iowa AG who is acting as the leader of the AG effort, when he spoke warmly of the cooperation he was getting from Treasury in Congressional hearing last November.

The state and Federal issues are very different. It is one thing to coordinate, another to combine forces. The reason a joint effort is less powerful is that each group has the ability independently to do considerable damage to the banks. An effort with participants this disparate (the 50 AGs already have divisions within the group as to how tough to be on the banks, as do the Federal regulators) almost assures lowest common denominator, meaning less ambitious, demands.

3. The latest sign of the weak stance being taken by the supposed enforcers is that they have offered an outline of standards separate from an economic deal. From the Wall Street Journal:

U.S. banks received a 27-page proposal late Thursday from state attorneys general and several federal agencies that could require them to reduce loan balances of troubled mortgage borrowers, according to people familiar with the matter.

The document, sent to the nation’s largest mortgage servicers, doesn’t specify penalties or fines but instead represents a detailed code of conduct for how they must treat borrowers throughout the loan-modification process, these people said….

The proposal outlines formulas that would force banks to consider offering loan write-downs to troubled borrowers more regularly during the modification process. Banks have resisted reducing loan balances in part because of concerns that it could encourage more borrowers to stop making payments in order to receive smaller loan.

This is not normal negotiating process. You put all your demands on the table at once. And as much as the banks might howl, the authorities have the upper hand. Their timidity has very little to do with what could or should be extracted from the banks and everything to do with the authorities being reluctant to inflict much pain (or in the case of the OCC, being completely captured by the banking industry). This posture, that the powers that be cannot ask too much of those fragile banks, is completely contradicted by the fact that the banks have apparently gotten the New York Fed to agree that they are in such robust health that they should be permitted to increase dividends.

So you might still ask, why is it bad to put this part of the deal out first? Aha, see what is at work. The enforcer types have said “This is what we want you to do.” They might fight over details, but the next step is the banks will say, “That is gonna cost us $X.” That will then be traded off against any settlement amount that this group had in mind.

Of course, given how terrible the bank compliance was with HAMP and the failure of Treasury to set goals, supervise properly, and claw back payments to servicers, any “$X” that the banks say they will lose as a result of any new programs will wind up being much larger than the costs they actually incur.

Frankly, the best we can hope for is that no deal results. The Arizona Senate, by a 28 to 2 margin, passed a bill that would void foreclosure sales that lacked a full title history. The language is draconian:

ANY PERSON WITH AN INTEREST IN THE TRUST PROPERTY MAY FILE AN ACTION TO VOID THE TRUSTEE’S SALE FOR FAILURE TO COMPLY WITH THIS SECTION AND IS ENTITLED TO AN AWARD OF ATTORNEY FEES AS WELL AS DAMAGES AS OTHERWISE PROVIDED BY LAW IF THE PERSON SUBSTANTIALLY PREVAILS, INCLUDING AN AWARD OF ATTORNEY FEES FOR ANY INJUNCTION OR OTHER PROVISIONAL REMEDIES RELATED TO THE CLAIM.

The award of attorney’s means servicers have a lot to lose (sadly, the losses on the inability to foreclose are borne by the investors, not the servicer). If the failure to convey notes to trusts is as widespread as we believe it to be, having one or two of the epicenters of the foreclosure crisis effectively halt foreclosures (by only letting servicers that really do have standing to proceed), investors are not likely to take that sitting down. This may force them to pull the trigger and take action against trustees for falsely certifying that notes had been conveyed to securitization trusts in accordance with the terms of the pooling and servicing agreement.

Thus you could expect the banks to start offering mods if they had the sort of pressure on them that this legislation would provide, and indeed that might be happening. A reader in comments said Bank of America had suddenly gotten religion about offering mods. And having banks offer mods quietly, on a case by case basis, is less likely to produce resentment by other homeowners than a highly visible program. Of course that assumes the banks become competent at doing mods. They’ve had every reason to be bad at them, since saying they can’t possibly work operates to their advantage.

So we can hope that the banks overplay their hand, and that it results in no deal, but the Administration and the attorneys general are not doubt very eager, in classic Vietnam “peace with honor” fashion, to declare victory and go home. So the next best hope is that some of the AGs break rank with this “settlement” and declare it to be the farce that it so patently is.