Matt Stoller is a fellow at the Roosevelt Institute. You can follow him on twitter at http://www.twitter.com/matthewstoller.
I’ve been going over the mortgage settlement documents over the past few days – a lot has been released, with many implications. There is plenty to criticize. Subprime Shakeout has a great summary, and David Dayen has done a wonderful job going through the nitty gritty. Abigail Field has a spectacular review of the problems with the servicing standards. I’ll make a few criticisms of my own below. But I think the most interesting parts of the document release were the HUD Inspector General reports on the five banks and the DOJ complaint. What these prove is what we’ve always known – the law enforcement community knew exactly what these banks were doing. DOJ simply chose not to prosecute. There was intent to defraud, fraud, and frankly, according to HUD.
In fact, it’s not clear that the past tense is the correct tense to use. The Wells Fargo report is particularly interesting on that last point. Take it away, HUD OIG (italics are mine).
At the time of our review, affidavits continued to be processed by these same signers, who may not have been qualified, and these signers may not have adequately verified certain figures because they accessed a computer screen of data showing a compilation of figures instead of verifying the data against the information through review of the books and records kept in the regular course of business by the institution.
I’m sorry, but WHAT THE $&*@!?!? I’m so glad Eric Holder has cut a deal with Al Capone while Capone is still on a shooting spree. And note, this isn’t just robosigning, this is potentially overcharging homeowners with junk fees and just generally not verifying accurate data on who owes what to whom. There really is no lesson here except “crime pays”.
And keep in mind, that’s Wells Fargo, the “good bank”, the one owned partially by St. Warren Buffett, the one whose executives assured the public as well as a room full of Congressional staffers in 2010 that they did not use robosigners. It turns out that not only did they use robosigners, but senior executives knew about it and set policies designed to make sure that documents were signed without verification. And when the HUD OIG tried to interview the 14 affidavit signers disclosed by Wells, Wells allowed the IG to interview only 5 of them. Eventually, the bank allowed interviews with all of them, provided that bank attorneys were in the room, as well as private attorneys for each robosigner, who were also paid for by Wells. It also turns out that the IG interviewed 33 more robosigners used by Wells that the bank had tried to hide but ultimately had to admit employing.
And then there’s what the HUD OIG had to say about Bank of America when it demanded documents. ”Bank of America”, said the report, “only provided excerpts of subpoenaed personnel documents.” Get that? Bank of America would not comply with subpoenas.
It goes on and on like this (as Ben Hallman notes). These HUD OIG documents are breathtaking – the claim is that the banks actively impeded these investigations, through delay, obfuscation, lying, and incompetence. It’s rare to see a government official actually come out and talk about how an investigation was impeded. Kudos to the HUD OIG for the clarity of language.
We should all be pretty disturbed, though, at what this settlement means now that the details are out. Abigail Field has a remarkable analysis of the servicing standards put forward in the agreement, an analysis appropriately titled “The Mortgage Settlement Lets Banks Systematically Overcharge You And Wrongly Take Your Home ”. Fields points out that the standards basically set caps for the number of illegal fees and illegal foreclosures banks can engage in before getting into trouble. Banks are actually allowed, in the standards in this settlement, to foreclose on people who are current on their mortgage. Let me repeat that – according to Fields, banks are actually allowed, in this settlement, to foreclose on people who are current on their mortgage. Don’t Steal Too Much, is the essential message. Though I might modify it to, Don’t Steal Too Much, Pretty Please, based on the obvious criminality and contempt for law enforcement implied by the HUD investigative reports.
Beyond these reports (and the complaint by DOJ showing that Holder and the other attorneys general knew and understood what the banks were doing), the mortgage settlement is incoherent. The settlement will be challenged in court by investors. And the formula for settlement credits is bizarre and full of easter eggs for the banks. For instance, banks will now get credit for houses they were going to bulldoze anyway, essentially being allowed to unload low-value properties with clouded title on a dollar-for-dollar basis, which are actually worth pennies on the dollar (or perhaps value negative in areas where there are fines for not keeping up properties). Banks will also get credit for not going after deficiency judgments, which means they get credit when they choose not to sue foreclosed families who have no money. They aren’t suing for deficiency judgments anyway, by and large, because suing people who have nothing is, surprise, not profitable! But they’ll get billions in credit for this regardless.
So what is the rationale for this settlement, from the perspective of the administration? There are many different parts of the law enforcement and housing community, and they don’t all agree. Some groups, like the OCC, are simply in thrall to the importance banks and the implied social order of banker supremacy. But others, like I suspect Shaun Donovan, believe in the Lays Potato Chip Theory of principal write-downs. This theory goes, the actual settlement details are not important, as long as they force the banks to start writing down a few mortgage. Once the banks realize that writing down mortgages is profitable, because they are more likely to be repaid, they won’t be able to stop. They will have set up the infrastructure to do mass write-downs, and such infrastructure tends to be used. Nom nom nom.
I don’t, obviously, buy that, as I think the accounting fraud and executive compensation incentive structures get in the way of mass write-downs (as does mortgage banker DNA). But a blanket corruption argument is too simplistic and prone to imprecise hyperbole. I prefer the argument that a new legal system is being designed wherein property rights are increasingly based solely on political connections. With that lens in mind, this settlement fits into the overall policy arc of the Bush and then the Obama administration (you could trace this back to Carter, but I’m specifically focusing on the foreclosure crisis). From the nationalization of Fannie and Freddie to TARP to the Fed bailouts to Dodd-Frank to this settlement, the policy continuity of extreme creditor bias is ever-present. In plain language, the policy is foreclose first, ask questions later. And yes, this probably comes from the top, from President Barack Obama himself, and his reminder that it’s an important policy priority to ensure that whatever is done, we mustn’t accidentally help irresponsible homeowners and investors.
If the 2012 election feels hollow, this might be why. Such a massive Constitutional redesign of our American order should be debated, and a Presidential race is the right forum in which to do so. But since that’s not happening, social conflict a few years down the road is probably the more likely path. It is a hopeful sign that the Federal Reserve in DC and the New York Fed are beginning to recognize that foreclosures are problematic in the context of implementing monetary policy, since housing finance is an important channel for economic regulation. But how we get from there to reestablishing some form of liberal legal framework that protects property rights and enforces the law on a reasonably equitable footing isn’t obvious.