naked capitalism

Attorney General Tom Miller of Iowa, who is leading the whitewash once known as the 50 state attorney mortgage settlement negotiations (7 have defected), reliably, every few weeks, has gotten word to the media that a deal is weeks away. This has been going on so long that it is easy to ignore it, particularly since the absence of key states is going to reduce the importance of any settlement being reached.

Note we’ve been skeptics of a deal happening unless the AGs capitulated on a release of liability. Remember the overall context: even though there is rampant evidence of all sorts of mortgage abuses (see the interview of Attorney General Beau Biden for a quick overview), the attorneys generals never investigated (I have this from a senior person on the Federal regulatory side, there was not even document discovery before the negotiations started). You can’t negotiate if you don’t have a credible threat to go to court.

So the banks know that the AGs are carrying a gun loaded with blanks. They also know the AGs have painted themselves in a corner: they’ve floated trial balloons of settlements of $20 billion or more. The banks won’t agree to that for just robosigning, so the only way a deal gets done is for a juicy enough “get out of liability free” card. And that means a release for things the AGs never investigated and have no idea how bad the rot is. As Biden put it, it’s like having a contractor admit he screwed up on the gutters and agreeing to pay for the damage related to a resulting leak you had, then offer to give you 10% more if you sign away your rights to sue him over the roof or the foundation. Would any person with an operating brain cell do that? Answer: only AGs who were never going to go after the banks anyhow. Case in point: Illinois attorney general Lisa Madigan, who will sue small fry over mortgage-related frauds (hat tip Josh Rosner), but won’t go after the big boys. And of course, we have Miller, who is so deeply identified with this charade that he no doubt feels pressured to get something done in order to save face.

We have a combo plate of stories, one in the Wall Street Journal yesterday morning and a further critical tidbit from Reuters this evening that together give an overview of Miller’s latest effort to push a deal over the goal line. The latest idea is as bad as we feared. It gives banks a broad waiver in return for very little. That was always the only deal that might ever get done here, and Miller is now officially trying to arrange a give-away with a few sops to borrowers as a camouflage.

The “what the borrowers might get” trial balloon was leaked to the Journal is pathetic. It is a refi plan for borrowers who are current on their mortgages but underwater. Oh, and you have to be one of the lucky ones whose mortgage was NOT securitized!

As we’ve discussed ad nauseum, any payment reduction plan (and note they are even discussing only short term relief as a possible outcome, this might not even be a typical refi) is not going to provide that much in way of payment reduction. Extra money is always nice, but the number of borrowers it saves will be few. And it is pretty much guaranteed that the banks will also demand that borrowers waive other rights in return for this great deal. This is more a small stimulus program than a “help stressed borrowers” plan.

And it’s completely inequitable. The banks did damage as servicers. The borrowers who have been hurt most by the abusive practices are the ones whose mortgages were sold to securitization trusts. Yet it is the borrowers who have the best arrangement, some in the 20% that deal with the bank that lent them the money in the first place, that will get a break! It is massively unfair in the case of Countrywide, where 96% of its mortgages were securitized. Any relief will go to loans originated through the old Bank of America, and pretty much not through Countrywide. This deal is particularly unlikely to get the latest defection, California AG Kamala Harris, back to the table, since Countrywide was, not surprisingly, particularly active in California, where it was headquartered.

And as we anticipated, the inducement that had led the Miller camp to hope it might clinch a deal is a juicy release. From Reuters:

Originally, the states were only considering immunity for shortcuts taken during mortgage servicing and foreclosures, including the so-called “robo-signing” of documents to evict people behind on their mortgages.

In recent days, the state attorneys general agreed to release major banks from claims that they made legal errors when first originating the loans, such as approving loans for borrowers without verifying any income, according to two people familiar with the talks.

In exchange, banks would agree to refinance mortgages for borrowers who are current on their payments but owe more than their homes are currently worth, the sources said.

This is very troubling. Investors should be up in arms. Any release the banks get here is worth multiples of what the banks will pay for this (note that because investors are conservative creatures and have ongoing relationships with banks, having attorneys general pave the way is particularly important for them).

The failure to verify income is the tip of the iceberg of origination abuses. The most serious is chain of title, where the banks promised to investors to take a series of steps to convey the mortgages properly to the securitization trusts within a stipulated time frame. For reasons we’ve explained in gory detail in earlier posts, retroactive fixes or waivers simply won’t work. That is why the banks have resorted to widespread forgeries and document fabrication. Every day, I get multiple examples like this on document, erm, improprieties. And judges witness rampant incompetence on a regular basis:

Rocha Baltazar and Martha AP Transcript Motion to Vacate Default Order Rocha v U S Bank 10-12-11

As a lawyer I know said, if a bank is so bad at doing its job that it can’t foreclose, it deserves to go out of business. And that’s capitalism. But things don’t seem to work that way in America any more.

Now one can hope that “attorneys general” means only Miller at this point, that he has made an offer and may be unduly optimistic about conning his fellow AGs into following his lead. It was revealed that only Harris, who bolted the talks, and Miler were present at the one of last negotiating sessions.

But an astonishing number of media outlets, and even some commentators who really should know better, keep parroting the bank/Miller/captured Federal regulator Big Lie that a deal will help the housing market. The ONLY parties it will help are the banks, and the banks have proven repeatedly through their actions (HAMP abuses, illegal foreclosures on active duty servicemen, widespread servicing fraud like force placed insurance and pyramiding fees) that they care only about their bottom lines and will do whatever they can get away with.
And that includes gaming a refi plan, just as they gamed HAMP. The banks have repeatedly, consistently engaged in bad faith dealing and looting. Further concessions simply reinforce their destructive behavior.

It’s baked in that any relief program will deliver even less in reality than it will in theory, which is at best 2.5% of mortgages in the US.

Securitization expert and Georgetown law school professor Adam Levitin makes clear in a blistering post that the threat of litigation is the only hope we have of implementing the sort of serious changes needed. And it is the combination of deeply underwater mortgages and a broken servicing model that is impeding a housing recovery, not the threat of litigation:

It’s time that we recognize that negative equity is the critical problem in the US economy. Fix negative equity and you will fix the US economy. That is because negative equity is the key for repairing household balance sheets, and that is the catalyst for getting consumers spending again, getting banks lending again, and getting businesses hiring again. If we’re serious about dealing with negative equity, we need to address it directly and not engage in an extend and pretend dance.

It’s also time that we recognize that negative equity didn’t just appear by itself. This wasn’t a freak weather event. It was a man-made disaster. We ended up with negative equity because of a housing bubble inflated by very deliberate acts by a limited number of financial institutions that profitted greatly from bloating the economy with cheap and unsustainable mortgage financing. We witnessed a macro-economic crime and are living with the consequences of it…

We do have one way of clearing the housing market: foreclosures. But foreclosures are an incredibly slow and inefficient method of market clearing, even in the best of times. Foreclosures are rife with negative externalities on neighbors, communities, and local government, and they can result in the market over-clearing because of information problems (foreclosure sale purchasers don’t have a right of inspection pre-sale, so they can’t tell if the plumbing has been torn out before they buy. No refunds. Even if the house is packed with dead cats. Yup. That’s a real case.)….

There’s only one way to skin this cat. The negative equity has to be eliminated. Period. We hoped at first that we’d grow out of it. Fat chance. This is the anchor weighing down the ship. So now it’s just a question of whether we try to clear the market via foreclosure or whether someone pays to clear the market, meaning that the book values at which mortgages are carried are written down to market values or something close to it.

Who should pay? This is basic justice. Those who broke the economy should pay to fix it. You break it, you take it. We bailed out the banks because they are indispensible to the economy as a whole, but that doesn’t mean that they shouldn’t have to pay now. $20-25 billion is a fine price tag for robosigning. But this isn’t and shouldn’t be about robosigning. Robosigning was symptom of a much larger endeavor in reckless lending, in which corner cutting was the order of the day, from MERS to securitization paper work to no-doc loans. All of this was done to maximize profits and to enable a housing bubble that was hugely profitable to a limited number of financial institutions and with extraordinary collateral damage. Simply put, there needs to be accountability for blowing up the economy (emphasis original).

I strongly suggest you read Levitin’s post in full.

The whole pretense is that massive losses do not already exist. Homeowners know they exist. Investors know they exist. This is not about litigation somehow creating costs. That’s bank propaganda. The costs are baked in and will ultimately be worse if we continue on the inertial course of coddling financiers and allowing their foreclosure doomsday machine to mindlessly chew up homeowners and communities when a significant portion are salvageable. And investors, who are the ones who should have a say in this matter, and not their agents-gone-amok servicers, would greatly prefer deep principal mods to viable borrowers rather than bank-enriching, economy-wrecking foreclosures. And since the only tough-minded regulators, the FDIC and the nascent CFPB, have been muscled aside, the only leverage on the banks is the court system.

The good news is that there is so much litigation in the pipeline and about to be filed that the banks will find it difficult to make a clean escape from their “wreck the economy for fun and profit” project. But the AG effort offered an opportunity to come up with a serious, tough minded solution. That can still happen through the defecting AGs led by Eric Schneiderman, and their ranks will hopefully grow when the ones remaining in the original group see what a sellout the latest version of the deal truly is.