naked capitalism

This latest move by the Treasury Department to appear to Do Something about Big Bad Banks is so off the charts pathetic that I am straining to find an adequate description. It isn’t merely ineffectual; it looks instead like a deliberate thumbing of the nose at the financier-afflicted public, with the Treasury and the mortgage industrial complex elbowing each other in the ribs and laughing uncontrollably at how they’ve made their point, that the public be damned, while observing proper bureaucratic forms in the process.

The latest measure is to withhold (as in merely delay) $24 million in payments to three big banks, Bank of America, Wells, and JP Morgan, for their abuses under the Obama mortgage modification program know as HAMP. That averages $8 million each. And since this is merely a delay, the cost to the bank is the cost of not having the money sooner. Since they can borrow at pretty much zero, the economic cost is so miniscule as to not be worth presenting to the public. The abusive late and junk fees on a single abused borrower (which are ultimately paid to the bank out of the foreclosure sale) are bigger than the monthly cost per bank of the embarrassing sanction imposed here.

To give you an idea of how utterly insulting this penalty is, we need to give a bit of background. If you’ve been paying any attention to the mortgage crisis, you’ve probably taken note of efforts by the Bush and Obama Administrations to pretend to be doing something about foreclosures. The problem is that neither was keen to do all that much. Both were unwilling to apply real pressure mortgage servicers to make more mortgage modifications. Yet nobody’s soft touch vulture investor Wilbur Ross has reported good success with deep principal mods, Indeed, the overwhelming majority of mortgage investors would greatly prefer them if borrowers were screened to eliminate those hopelessly beyond redemption. After all, a 30% to 40% loss on a mortgage mod is a hell of a lot better than a 50% to 75%+ loss on a foreclosure. And the damage to investors is only getting worse as more borrowers fight in court. I know of disputed foreclosures where the loss was 400%.

So instead, we’ve had a series of mod programs that have largely failed because they worked within a rigid and badly malfunctioning securitization model. The worst, in terms of collateral damage, was HAMP, because it was bloody clear servicers gamed the program. The banks falsely told borrowers they had to be in default to participates, kept losing paperwork of those who got trial mods, kept them at a lower payment level longer than the stipulated three months, never notified borrowers they would have to make up the shortfall plus late fees if they did not get a permanent mod, and led many borrowers who were rejected for permanent mods to believe they were going to be approved. And there was a common horror story too: borrowers who had been approved for permanent mods who nevertheless lost their homes because the servicers were using the so-called “dual track” approach, continuing to process the foreclosure while the modification was under consideration. Borrowers were advised to ignore legal notices when they called their servicer. Yet the notices were valid, and many borrowers lured into inaction by their bank lost their home unnecessarily, since the department that was handling the mod could not be bothered to call off the area grinding forward with the foreclosure, even when distraught borrowers pleaded for intervention.

HAMP was so clearly a disaster that Treasury Department officials didn’t try very hard to defend it in a meeting with bloggers that I participated in last August. The best they could do was claim that it helped the housing market by spreading out foreclosures over a long time period. Given that home prices continue to fall in the overwhelming majority of markets in the US, even this alleged benefit was at best temporary in nature, and hardly an offset to the borrowers who were struggling but able to stay current who participated in HAMP and lost their home as a result.

The insulting bit is the latest move. To encourage banks to participate in HAMP, it was a voluntary program with no penalties for non-compliance save the Treasury could claw back incentives. And in that blogger meeting, Treasury fell back on the pathetic excuse that it really had no power over servicers (Geithner made the same claim before the Congressional Oversight Panel, and it did not go over very well, see the testimony starting at 101).

But that’s ridiculous. The states of Arizona and Nevada are suing Bank of America over its actions under HAMP, which violate consent decrees, and Arizona (and I assume Nevada, their lawsuits were broadly similar) ALSO sued Bofa for consumer fraud. Coming up with litigation strategies is over my pay grade, but truth in advertising is a Federal matter, and I’m sure there were other threats of litigation against servicers that Treasury in conjunction with other Federal agencies could have made if it had any real interest in bringing the banks to heel. I’m sure if Treasury had put on its thinking cap, it could have come up with a basis for inflicting some real pain on the banks over this cynical misconduct. Or they could threaten to audit servicers for compliance under the RESPA and the Truth in Lending Act. I’m certain they are a cesspool of violations.

Other observers were equally unimpressed. Alan White at Credit Slips’ headline to his post on the detailed report was “Too Big to Comply.” From the Shahien Nasiripour story at Huffington Post on this travesty:

“All this appears to be is that, after the servicers seemingly violated their agreements with Treasury with impunity, Treasury’s sole response is to give them a temporary time-out before paying them in full,” said Neil M. Barofsky, the former special inspector general for the Troubled Asset Relief Program. His critical reports on the bailout earned him plaudits in Congress for looking out for taxpayers, but enemies at Treasury, which administered the TARP.

“It further reaffirms Treasury’s long-running toothless response to the servicers’ disregard of their contract with Treasury, and by extension, the American taxpayer,” added Barofsky.

But it’s worse than that. This sick joke of a “penalty” looks to be a message by the banks via its minions in the officialdom:

Think you can lay a glove on us? Dream on. The most you can impose on us is symbolic punishment, and as we continue to cement our control, pretty soon you won’t even be able to do that.