Banks Pushing Back Hard on Inadequate Mortgage “Settlement” Trial Balloon

No sooner have the preliminary outlines of an inadequate settlement of mortgage servicing abuses been leaked, but the banking industry is engaged in a full court press to stop it.

The astonishing part is that the banking industry continues to maintain that it really didn’t do anything wrong, all it did was make some technical errors. That so grossly understates the degree of its recklessness and malfeasance as to be beyond relief.

It’s no surprise that the so-called Foreclosure Task Force which spent a mere eight weeks reviewing servicer activities and didn’t find much. The timeframe of its exam assured that it would not verify servicer records and accounts against borrower experience and records. It is almost certain that they also did not look at how servicer software credited payments and charges, when there is widespread evidence of violations of agreements with borrowers and RESPA.

And to the extent they looked at “improprieties” in foreclosure documents, it’s a given that they did not go beyond robosigning, when that is arguably the least significant form of malfeasance. There is ample evidence of fraud to cover for the failure to convey notes to securitization trusts, ranging from the misuse of lost note affidavits to document fabrication (bogus allonges being the most common fix).

In addition, pooling and servicing agreements also have specific provisions as to level and procedures for charging certain fees. Yet studies have determined that a specific servicer will apply the same charges across all borrowers and investors, irrespective of the requirements of particular securitizations. So it’s blindingly obvious that this exam was cursory, looking at one or two points of failure in a slapdash fashion and completely ignoring other issues that are at least as important.

And the most important issue that was and continues to be ignored is: why are servicers counterfeiting transfer documents in the first place? It’s pretty obvious why all the authorities are trying to ignore the worst form of chicanery. But it is not clear why the parties most directly harmed, the investors, are doing nothing, at least so far.

As an attorney and former Congressional staffer pointed out by e-mail, the problem with the failure to convey assets into the trust as stipulated in the pooling and servicing agreement is not breach of contract issue. It is a contract formation failure issue and the remedy is restitution. And if you argue that the contract was never formed, that would seem to surmount a restriction in pooling and servicing agreement that 25% of the investors need to band together to sue the trustee to then enforce the contract.

RMBS investors thus have a nuclear weapon in their hands. If they want deep principal mods, and we are told in no uncertain terms that they do, a credible threat of litigation on this front ought to bring recalcitrant banks and trustees to heel, quickly. The last thing the mortgage industrial complex wants is litigation on an issue that would both call into question the validity of RMBS and if successful, would leave the banks with massive damages. And you don’t need to do this publicly and rattle the markets; some investors with the right legal top guns could spell out the consequences if the banks failed to get off their duffs and enter into serious negotiations.

Now perhaps these very conversations are underway now, but I strongly suspect not. The continued arrogance of the banksters is a big tell. And you therefore have to wonder why nothing of the kind is happening. A sad but obvious reason is fixed income investors don’t have any incentives to rattle the cage. Their job is just to beat the index by a little bit and call it a victory. We are also told that some investors are afraid of rattling their relationship with their banks, since they depend on them for information (hate to tell you, but if you think your bank is your friend, I have a bridge I’d like to sell you). But there are some investors, such as the major public pensions fund like Calpers, who take a more aggressive stance.

But there is a second, more ugly, possibility. I’m not a fan of conspiracy theories, but it would not be a stretch to imagine that if the Fed or the Treasury were to get wind of any such contemplated litigation, they’d use every avenue at their disposal to discourage it. China is already worried about the wind-down of Fannie and Freddie. What would the reaction be if the US media were to start discussing, as Adam Levitin put it in Congressional testimony, that RMBS are not mortgage backed securities?

Now contrast this magnitude of mess with the banking industry howls over comparatively meager punishments, per the Wall Street Journal:

The nation’s largest banks haven’t yet seen a proposal that is designed to help resolve mortgage-servicing errors that affected troubled borrowers. But industry executives are bristling at the administration’s new approach, disagreeing that principal reductions will help borrowers and, in turn, the broader housing market….

The proposal “would bring with it enormous costs that would far outweigh any potential benefits,” Chris Flanagan, a Bank of America Corp. mortgage strategist, said in a research note Thursday.

Even an amount of $20 billion “would accomplish little” in addressing borrowers who currently owe $744 billion more on their mortgages than their homes are worth, Mr. Flanagan added.

Yves here. You have to love the contradictions: principal mods won’t work (funny, private investors Chris Flowers and Wilbur Ross beg to differ) but we won’t offer a solution of our own. And even if mods did work, it would take a much bigger number, but we can’t have that because even a paltry number is way way too much. Note we have this posture co-existing with Timothy Geithner doing a “Mission Accomplished” tour in Europe.
The Journal did provide more details as to how a program might work. It at least has a few teeth in it:

Any settlement that includes loan write-downs would require banks such as Bank of America Corp., Wells Fargo & Co. and J.P. Morgan Chase & Co. to complete modifications within one year from the settlement’s date, said people familiar with the matter. Banks could face additional fines if they don’t comply with the terms of the settlement, and they would have to hire independent auditors to provide monthly updates on their progress and compliance with the terms.

Penalties could be assessed depending on the volume of loans that are 90 days or more delinquent in each bank’s servicing portfolio, and by the extent of any deficiencies uncovered by bank examiners, these people said.

Any settlement that includes loan write-downs would require banks such as Bank of America, Wells Fargo and J.P. Morgan Chase to complete modifications within one year from the settlement’s date, said people familiar with the matter.

Elizabeth Warren of the Consumer Financial Protection Bureau has floated a figure of about $25 billion for a unified settlement, according to people familiar with the situation.

The push for write-downs likely would focus on loans that banks service on behalf of other parties, and not for loans that they hold on their books. The settlement would require servicers to comply with existing investor contracts, and some of those contracts could complicate efforts because they give investors authority to reject reductions of loan balances.

The requirement to comply with contracts is bizarre; a settlement like this presumably could not override third party agreements (but it could acknowledge that fees would be waived in the event program compliance conflicted with the requirements of an agreement). Foreclosure defense attorneys did not like the idea of the servicers running these programs and wanted to see an independent party in charge.

An American Banker article by Cheyanne Hopkins on the same topic is pure industry stenography. Some extracts:

Are servicers being hit with a $20 billion fine?
No. Regulators have not agreed on a dollar figure, and $20 billion is in the words of one source involved in the negotiations “a crazy figure.”

Some banking regulators are arguing against an amount that high; it seems the big force behind a huge number is the Consumer Financial Protection Bureau and the state attorney generals.

A monetary penalty will no doubt be levied, but government officials disagree over what the fine should cover. Bank regulators see it as a penalty for being sloppy while other officials see the money as a way to repay wronged borrowers. On Thursday, regulators on both sides said an agreement has not been met.

Keep in mind, too, that in order for this to be a global settlement, all of the government entities involved would have to agree, as would the banks. While banks acknowledge their servicing systems need improvement, they continue to argue that the vast majority of foreclosures were justified.

So notice all the drive by shootings in one little section. The settlement leak is deemed to be “huge” and “crazy” when it is by any objective standard (except the banks’ intolerance for pain) way too low. The people pushing for the settlement are the evil CFPB and the state AGs (who said they were doing this in tandem? The AGs might decide to join forces, but tactically that is a foolish and unnecessary move. Regulatory violations are a completely different kettle of fish than state law violations. If the state AGs did join, it would fit the fact pattern of Tom Miller, the Iowa AG heading the effort, saving face while engaging in a sell out). And the writer perpetuates the fiction that the banks have the right to negotiate with the authorities on a equal footing. Sadly, regulators have become so craven and complicit that that has become their default posture, but the government has the ability to make life very painful for the banks (let’s just start with REMIC violations) but chooses not to use its considerable leverage.

Now get this part later on:

I read the settlement will include principal reductions. Is that true?

Not yet. While it’s true that some agencies want to force the banks to cut principal on troubled loans, that issue is one of several that’s unsettled. It is clear that any settlement will include some kind of enhanced modification program. The Federal Deposit Insurance Corp., for example, has been pushing a program that would streamline modifications in return for a clearer path to foreclosure if the borrower redefaults.

But the banks are adamantly opposed to forced principal reductions, and it’s unclear if regulators can make them, especially since the agencies don’t even agree. The CFPB and Department of Housing and Urban Development want a strong principal reduction program, but the OCC wants to instead focus on fixing safety and soundness problems.

Aha! So it isn’t just the evil CFPB and the state AGs who want principal mods, as the writer suggested earlier; HUD wants them too. And it appears the only agency that isn’t keen is, predictably, the banking industry toadies at the OCC.

No matter where the regulators really stand, it serves the industry to promote the image that the two sides are far apart and the regulators are not at all unified, regardless of where the facts actually lie. But the fact that such a meager amount is likely to be walked back is testament yet again to the fact that we now have rule by banks, with occasional gestures to disguise that fact, rather than rule of law.

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  1. Yearning to Learn

    how do seconds figure into all of this?

    my guess is that the banks are howling because any principal modification would necessarily have to wipe out or severely reduce valuation of the second loan, or am I wrong?

    the banks can’t afford to write down their seconds to realistic valuations. Principal mod= possible nail in coffin.

    1. Knighttwice

      Bingo. RMBS investors want mods with principal reductions but not if the 2nds are still in place after the deal. Since the top 4 banks have $400 billion or so in 2nds, that is where the conversation stops….and Obama won’t press the issue because he let the banks out of TARP prematurely so that the banks could pay bonuses, he could claim a political “victory” and he could go on TV and claim that “all is well”. If TARP were still available, Treasury could force the write-off, replenish the capital, and let the market and the banks begin the road to recovery. Instead, TARP is no more and the only option left is a backdoor bailout of banks through Ben’s inflationary destruction of the dollar and the middle class.

      1. Yves Smith Post author

        The RMBS investors do not care about the seconds. The seconds are on bank balance sheets (for the most part, hardly any were securitized) and not their problem.

        The banks who are servicing the loans do, the biggest servicers also hold the biggest portfolios of seconds. Writedowns on firsts make it hard for them not to write down seconds, which is a direct hit to their capital. Of course, the valuation of the seconds is phony, but they want and need to keep the fiction going.

        1. knighttwice

          But if RMBS has the first on the house and the bank has the 2nd on its balance sheet, why would the RMBS investor take a loss on the 1st if the 2nd is preserved?

          1. Paul Repstock

            Because with the second in place, the first is already worthless. This give the banks a huge armlock on the hapless ‘investor’ (sucker) I wonder how many of the seconds were lent after the notes were packaged into ‘investments’, and also how many were conveniently overlooked and not disclosed?? I doubt any note with a second mortgage attached could ever be included legally into a ‘AAA’ investment bundle.

          2. Yves Smith Post author


            You have this backwards.

            Banks are refusing to do principal mods on firsts to avoid writedowns on seconds.

            The seconds have no value in a foreclosure, they get wiped out. But in the case of a mod, holders of seconds (the banks) have been refusing to give mods on firsts (their consent is required) even though the economic value of a second is zero.

            Here we’ve bailed out the banks and are continuing to give them breaks via reg forebearance, and they turn around and screw the public by obstructing mods.

  2. toxymoron

    But it is not clear why the parties most directly harmed, the investors, are doing nothing, at least so far

    Yves, could it be possible there are no longer such “investors” out there, but that they dumped all their toxic stuff at the Fed? Do we have an idea what the Fed bought exactly for all the trillions they spent?


    1. Yves Smith Post author

      No I know people who are in direct contact with investors who own RMBS. Although a lot of folks used the Fed’s special facilities, it was mainly banks and leveraged investors like certain hedgies, my understanding is not too much institutional investors.

  3. psychohistorian

    RMBS are not mortgage backed securities?

    The emperor has no clothes.

    If none are in jail then the perps are forcing those that are calling them on their perfidy to resolve their differences through other than legal means. And since America is now a banana republic with nukes under the control of these sociopaths how does this all work out?

    I can hear the sociopaths rant now,
    We don’t need no stinkin rule of law. Why, we got the Rapture comming and extend and pretend will work until then…..look, quick, over there….Animal spirits…..keep the faith baby!!!!

  4. John Merryman

    The real problem is that this goes to the very heart and soul of capitalism; the creation of capital. You cannot have supply without demand and since the real economy has a very finite need for capital, at least that which it can productively afford to service, it is up to the banks to create enormous amounts of synthetic demand. It’s not so much the bankers who are falling down on the job, but the economists, who do not point out this fundamental lack of equilibrium and the need to maintain healthy demand for capital, ie. treating borrowers with sufficient respect, as they determine the level of notational wealth the economy can sustain.

  5. attempter

    But it is not clear why the parties most directly harmed, the investors, are doing nothing, at least so far.

    Isn’t it because they too don’t really want to find out how insolvent the banks are? Once it’s proven for all to see that the MBS are not just toxic but nonexistent, the answer will be worse beyond even what the skeptics used to think.

    The last thing the mortgage industrial complex wants is litigation on an issue that would both call into question the validity of RMBS and if successful, would leave the banks with massive damages.

    So maybe everyone else within the system feels they have no choice but to take one for the banks here. After all, these coopted institutional investors are also part of the mortgage industrial complex. (One of the worst co-optations of the middle class against its own interests, as we see all the time nowadays.)

    Behind-the-scenes strongarming of anyone who does get uppity also sounds plausible.

    1. ScottS

      “Investors” don’t care because it’s OPM to them. Institutional investors will probably get an all expenses paid retreat courtesy of the Koch brothers if they actually manage to destroy the pensions they “manage.”

      Seriously, though, it’s not hard to imagine they got small kickbacks from banks for buying the RMBSs.

      If I accepted a kickback for buying something that was obviously garbage, I would not be running to the cops.

      Or even more mundanely, they are just embarrassed at what a bad job they’ve done and don’t want the attention.

      No matter what, it’s OPM, therefore SEP.

  6. jake chase

    “Elizabeth Warren of the Consumer Financial Protection Bureau has floated a figure of about $25 billion for a unified settlement, according to people familiar with the situation.”

    Gosh, it looks like Liz is now inside the tent pissing out. I am shocked, shocked.

    1. Paul Repstock

      Two things John;
      The AG’s also don’t want the party to end??
      And people are starting to understand that the ‘bag’ however visually impresive, is empty…:(

  7. rc whalen

    This settlement was never real. Implies insolvency for the TBTF banks. Of greater interest is the Bachus legislation to end HAMP. Now THAT is bad news for the banks because modification is a key part of the “hide the DQs” game presently underway.

    1. Richard

      Yves, thanks for finally discussing in a very clear way the ‘nuclear’ option. While the Bachus legislation is directionally correct, the nuclear option gets us to where we need to be to clean up the mess much faster.

      Solving the problem has always required eliminating all the conflicts of interest inherent in the RMBS. Fortunately, with restitution under contract formation failure, the conflicts go away. As a benefit, so too do the TBTF.

      My question since you began documenting the contract formation failure over the last year has been, why have investors or the firm’s they hired to manage their money sued on this issue?

      The lack of lawsuits appears to be a serious breach of trust on the part of the major money management firms. When you invest through a major mutual fund company, you trust that they will take steps to get your money back where there are contract formation failures. [It might not be a breach of fiduciary duty, because these firms might not owe a fiduciary duty to their clients].

  8. wild bill

    The AGs need to handle their own settlements away from Big Brother……..there is some interstate fraud but most of the fraud was on a state/local level. Each state handles property law differently and it should be kept that way.

    As soon as the AGs fall into the Feds scare tactics of a mutual settlement the AGs will loose credibility locally and not come home with any $$ for trampled state coffers.

  9. Goin' South

    Since we’re talking about how investors are being defrauded, I’d thought I’d raise this point that’s become apparent to me over the past few months.

    In my judicial foreclosure jurisdiction, servicers and their attorneys are dragging out the foreclosure sale process to an absurd degree, presumably to up their fees at the investors’ expense, as well as destroying what value these foreclosed properties might still have. One property I was watching has had its sale postponed four times over 10 months by the servicer. Twice it’s been to work things out with the owner, who’s a slumlord who doesn’t occupy the house and has other foreclosure actions against him. Not a good bet for a mod. Twice it’s been to get a re-appraisal. Each time, those have come back the same. The courts costs alone now exceed the house appraisal.

    And this property is not unusual. It was one of twenty-two scheduled for sale this week in our part of town. Of those, fourteen had been withdrawn by the time of the sale. Only two of those were because the defendant had gone into bankruptcy. All the rest were at the request of the plaintiff/servicer.

    This is part of the ongoing scam as far I as I can see.

  10. Ian

    It seems as though Elizabeth Warren has been roped in with the rest of them. 20bn? What happened to the servicers’ investigation? Where’s the nonmortgage-backed securities investigation ala Kemp v. Countrywide? Connect that dot to Judge Grossman’s MERS admonishment. What about a national investigation into notarial fraud- an improperly notarized document renders everything following it void. How about a ruling on that? Why are all assignments of mortgage recorded years and years after the cutoff date for inclusion in the trust,rendereing them void as well? What about these defaulted loans being assigned to a trust in violation of trust law? What about loan identification numbers changing while the loan has not, thus signifying that the trust was never informed by the servicer of payments to the servicer? What about the disappearance of loan level data from SEC filings? What about people getting HAMPED out of their homes with the full blessing of the FRB,Treasury,HUD,Fannie and Freddie? What about other parallel foreclosures,formerly known as manufactured defaults? What about junk fees piled on in Fed BK court, the average being $6,700.00 per borrower? Who are these legislators and regulators getting their orders from, Daffy Duck?

    1. Yves Smith Post author

      We had that servicers’ investigation. Eight weeks, including Thanksgiving and Christmas, The only “finding” made visible was the OCC declaring that they’d reviewed 2800 foreclosures and found only a very few to be not justified. Of course, given that time frame, they clearly did not talk to borrowers to hear their side, and in particular, they could not have looked at improper servicer charges and fee compounding. We’ve written how these exams were a whitewash.

  11. MattJ

    I see why RMBS investors would support deep modifications when their only source of recovery was from the home owner. However, as you wrote above, the remedy for the servicer failure under discussion is restitution; in other words, the investors are made whole and the servicer takes the loss. In this case, the servicer is the source of recovery, and there is no incentive whatsoever for the RMBS investor to agree to take a loss from loan modification.

  12. EMichael

    If a bank holds a second mortgage on a property and there is a refinance on the first, that bank moves up to first place.

    Attempting a modification(principal reduction or not) of the first mortgage without the approval of the bank holding the second cannot and will not happen.

    No bank holding a first is going to agree to move to second place. And no bank holding the second is going to agree to subordinate their loan again without something in return.

    1. Art Vandeley


      I’m told the big 4 second mortgage holders turned unsecured creditors (Citi, BofA, JPM, & Wells) already have a program in place where they’ve agreed to re-subordinate their second mortgages if one of the other banks would rate and term refinance an existing first mortgage.

      I have a client who was called out of the blue by Wells Fargo (1st mtg), offering a Rate/Term refinance (not a mod), going from 5.875% 30 yr fixed to 4.00% 15 yr fixed. My client has a $45,000 HELOC with BofA. The Wells guy told him the Big 4 had an agreement to re-subordinate their second mortgages which BofA complied with. Everything has been finalized.

      If Wells had instead called offering a principal reduction MOD, I don’t believe they would have needed any permission from BofA since the first mortgage wasn’t going to be paid off. The 1st mtg balance would have been written down, documents signed, and the modification would be recorded on Title. A

  13. Leviathan

    This is like having the surgeon and the insurance company fighting about who will pay for the operation while the patient is dying on the table.

    You all act as if any of this will have meaning. It won’t. People who owe 200K on a house that is worth 100K will be offered a principal reduction of 10K. Will that “save” them? No.

    The banks are saying, effectively: you can make us go along with this charade, but we can make sure that the deals offered to borrowers suck (and they WILL suck). And in a year’s time, when underwater homeowners all start committing suicide, we will all blame you, the government, for not having a clue as to how to “fix” the problem.

    1. Paul Repstock

      I truly hope that there occurs ‘an Egyptian Moment +’, before underwater homeowners start commiting suicide. That would be the ultimate transference of guilt from the criminals to the victims. Also those who are not in a bind will be guilty of selfishness for not supporting the oppressed.

  14. profoundlogic

    Just for fun, call up your state attorney general. Ask them what they are doing to prosecute this mess. You’ll probably receive the same response…”The investigation is ongoing”.
    These “ongoing” investigations are nothing more than teasers designed to quell the public’s rage for what is becoming increasingly overwhelming evidence of collusion, corruption and fraud.
    Governor Walker’s taped conversation speaks to the agenda of the corporate elite. It’s no longer a democracy, but rather a corporatocracy seeking to siphon off as much wealth as possible.
    Taibbi correctly points out that only when the wealthy are robbed of their riches (i.e. Madoff), are there any meaningful prosecutions.
    Sadly, it appears we will need more pain and suffering before we see more outrage and protests which are necessary to correct the gross injustice and imbalances in this country.

    1. Doug Johnson

      Here’s a quotation from the response I got from the Washington AG’s office when I requested that they pursue fraud by the banks:

      “The Attorney General’s Office and the Department of Financial Institutions have joined the National Association of Attorneys General and banking regulators in forming a multistate group to investigate whether mortgage servicers have improperly submitted affidavits or other documents related to foreclosures in their states.”

      In other words, ”The investigation is ongoing”. The most amusing (?) part to me was that one of the goals of the group is to “Evaluate potential remedies for past practices and to deter future improper practices.” I have always been under the impression that, for massive criminal fraud, jail time was the widely agreed upon remedy that deters future improper practices and that no committee was needed for further evaluation.

      One other interesting factoid from the AG’s office:
      “Many consumers want a settlement that imposes criminal penalties. To be clear, the Washington Attorney General’s Office does not have the legal authority to initiate a criminal investigation or prosecution.”

      At least they are aware that “consumers” (aka people, citizens, non-corporate entities) are upset!

      1. Nathanael

        The Washington AG is almost certainly lying. As far as I can tell, every state AG has the authority to initiate criminal prosecutions under the state fraud laws. Perhaps in Washington it can only be done by local DAs (in which case, they’d better get started….).

        In NY it can be done by the state AG *or* local DAs.

  15. armand g eddon

    I don’t want gov money from any source, including fines, to pay down other people’s mortgages – it should go into the treasury instead. And under no circumstance should anyone who took took cash out of their home be rewarded because now they are under water. Let them lose their home, let investors take the loss, let someone else more responsible buy it.

  16. frank

    Obama’s new Chief of Staff William Daley was a Senior VP for JP MorganChaase. He was in charge of their lobbying.

    He will single handily kill the $20 billion figure. This is a complete sham.

    1. Cedric Regula

      I’d only believe that if one believes William Daley will still take calls from his old boss, Jamie Dimon.

      On the other hand, if we still got ’em, we need to believe Jamie would stop calling his old employee, Timmay “Rich Kid” Geithner and call the new guy instead.

      And Lord Blankfien catches all the flack for the United Sachs of Amerika. sheesh.

  17. GeneH3

    “But there is a second, more ugly, possibility. I’m not a fan of conspiracy theories, but it would not be a stretch to imagine that if the Fed or the Treasury were to get wind of any such contemplated litigation, they’d use every avenue at their disposal to discourage it.”

    Read Ken Lewis’s deposition again.

  18. Paul Repstock

    They are counting on people’s inability to comprehend the scale of this disaster.
    I have had trouble with it at times. In the beginning I suggested that they should just cancel all mortgages, rather than bail out the banks. Now I suspect that their main concern is not that this would bankrupt the TBTF, but rather that it would bankrupt the country.

    Therefore the powers decided that it would be better to continue the orgy as long as the ‘coke’ machine will take slugs. “Recovery” or no recovery (a figment of political imagination at the best), this ship is going down!

    In perspective the $20 billion they are waving to the gulible, equals only 5% of the seconds and even worse 1/3% of the mortgages,,,(.0035%)??? They have stolen so much that such a small fraction is not available??? Never mind the question of where the money went. No wonder they had to destroy all the paper work.

    HufPo can still provide numbers, but they obviously are not allowed analysis.

    I fear there is nolonger any point for anyone to make payments. Whatever is paid now will not be enough to save the ship.

    1. Yves Smith Post author

      We’ve discussed putback suits at length. They are not at all the same as what we are discussing. We have pointed out they are really not very likely to lead to large settlements, and they do not probe the issue of the validity of the transfer of the mortgage to the trust.


      for a couple of examples.

      Notice that the particular threat seems to have died on the vine.

      1. Cedric Regula

        Pimco, Blackcrock and the NYFRB promised their investors they are performing their fiduciary duty and are requesting more loan info and will report to the investors and other curious parties the results in 60 days. Or announce a lawsuit if the trustees or wherever one looks for this stuff does not respond in 60 days.

        I think that deadline passed and I haven’t seen any news.

        1. Cedric Regula

          Let’s see, I just figured out we are talking about the same action. I heard the CNBC soundbite version straight from Larry Fink’s lips (Blackrock CEO for readers that haven’t learned all the players names yet). And I remember reading your blog post as well, of course.

          But this got me curious enough to do a google, and the last info I could find was this 11/9 bit about an angry letter from BofA-Countrywide telling everyone to go pound salt.

          Larry Fink had characterized this as a “request for info”, which is the first procedural step as I understand it (not well). He then promised if they got stonewalled (they did) then legal action would be taken.

          So it’s very possible the lawyers are still working on it. Or they are just going thru the motions to prove fiduciary responsibilty is taken seriously at these places.

  19. Bravo

    Captured regulators, a banking lobbyist in the White House, an banking industry unwilling to meaningfully participate in a solution now that they’re off taxpayer life support, a servicing system that is dysfunctional, mortgage backed securities that are not backed by mortgages, and now an industry contrived PR campaign striving to ultimately convince the public that a drop in the bucket $20 billion fine is going to make a hill of beans difference. Why would any rational investor ever particpate in this market again? This ship is going down unless the investor community steps up and leads the fight in a class action suit seeking restitution that includes principal mods. The alternative will be a flood of strategic defaults as housing prices fail to stabilize/improve and servicers rake more fees off of ultimate investor recovery in the foreclosure process. And yes if those efforts fail, history will likely tell us that the most fatal mistake of all was letting the banks out of TARP in the first place, thereby giving away the best Obama Administration leverage to forge a real solution.

    1. Paul Repstock

      Sorry Bravo. You are wrong! The ship is going down no matter what you do. The investors can launch enough class action suits to employe every lawyer in the country, it won’t matter. QE/ QE /II and anything else they dream up, is nothing more than a flim flammer’s ‘flash roll’.

      The Real currency of the nation is gone. I refer to the trust (based on integrity), which allows financial systems to function.

      The oligarchs here like those in Egypt were too stupid and too greedy to realize that once they sucked up even peoples hopes and dreams, those who had previously kept their heads faithfully in the sand, would give up. Killing the Home Ownership dream of the American People was the stupidest move they ever made. When even those who have completely paid for their homes realized that they were not secure, that was the end.

  20. John A Hansen

    The “serious” litigation by the buyers of the certificates has already started.
    See: Dexia Holding Inc. vs Countryside et al
    Filed: New York Supreme Court
    Index: 650185/2011
    Title complaints and misrepresentation (SEC ?)
    Para 146 -147 171 etc
    Page 62, 80 & 104

    1. Yves Smith Post author

      No, these are rep and warranty suits. They are a different beast. They do not address the fact that the deal originators committed to transferring the loans under a very well defined set of steps, then had trustees making multiple certifications that these steps had been taken, when it had in fact not happened.

      And as we discussed in numerous posts last fall, there are no good retroactive fixes. Why do you think servivcers are engaging in such widespread fraud?

  21. dcblogger

    It is as if the TARP babies had picked the French Aristocracy of the 18th century as their role models. After all, had the French Aristocrats agreed to let themselves be taxed at the same rate as peasants, the financial crisis would have been solved. However, they refused and lost their heads, literally. With any luck we will be able to break up the TARP babies, from a corporate point of view.

  22. steelhead23

    If the prisoner screams at the lash, keelhaul him!

    The logic of the banks eludes me. If they could escape this mess by putting up a mere $20 B, they should pop the Kristal. I agree with Yves, the banks are screaming, not because this is a bad deal for them, but because they believe that they can do better. Billionaires tend to be a tad arrogant. Here’s a hardball play for Liz. Put a term sheet in front of them with a $30B payout. Have Holder beside you and allow him to detail their liabilities – personal criminal liabilities. Tell them they have 72-hours before the deal comes off the table and Holder impanels a grand jury. Then leave. Remember boys and girls, if the big banks are made to pony up big bucks, it comes out of reserves and equity, not the hides of the banksters. Criminal indictments are another story. Wanna roll those dice, Jamie, Brian? Make my day!

    Crazy? No doubt, but it plays well in my imagination.

  23. Ray L Phenicie

    —As an attorney and former Congressional staffer pointed out by e-mail, the problem with the failure to convey assets into the trust as stipulated in the pooling and servicing agreement is not breach of contract issue. It is a contract formation failure issue and the remedy is restitution. And if you argue that the contract was never formed, that would seem to surmount a restriction in pooling and servicing agreement that 25% of the investors need to band together to sue the trustee to then enforce the contract —

    I have emphasized the text I would like someone to tease out a lot more for me. Please, someone talk to me about securitization-if the trusts never had any assets in them, then what for Lordy’s sake are those doggone things anyway? Empty boxes? Bunches of returnable bottles? Piles of dust? Worthless? All of the above? So what do the investors in the trust have in the way of anything to show for their money?
    Is this whole securitization fiasco just a facade done up like a kind of product but is really nothing?

    1. Bill

      Ray, the investors own unenforceable debt at this point. The investors have no idea what loans they own, how they are performing or wether or not the notes even made it to the trust. The investors are not allowed to review the loan files that may or may not be included in the trust.

      The investors in the good tranches are still getting paid their monthly allotment, but they understand that the value of the assets they purchased are worth alot less than what they paid. Best case for them is suing the banks to take back the loans and get paid full value for their now worthless investment. This will never happen.

      1. Cedric Regula

        I think RMBS investors are a little rattled that, if backed, the collateral only nets out 20%. I doubt the quants used that figure either in the “house prices only go up, default rate is only 2%” stat models.

        1. ScottS

          I doubt any quants had the long side of RMBSs.

          I have nothing to do with finance, don’t consider myself remotely smart, but even I saw the housing crash coming. Anyone who didn’t see it coming wasn’t looking. More to the point, they were paid to look away.

          As I said elsewhere, institutional investors are playing with OPM. If they lose, no biggie.

          1. Cedric Regula

            The quants were surely shorting New Century and buying gold hand over fist. Wish I new enough about what was making South Central Los Angeles real estate hit $400K. I woulda done that too.

          2. ScottS

            Haha, well it wasn’t exactly South Central, but I was shopping for a condo in Lake Forest, CA a few years before Great Depression II: Electric Boogaloo.

            The first open house I looked at was being run by a mortgage broker (not a realtor — first clue).

            The asking price for a cramped, old, 2-bed condo >$600k.

            I asked the mortgage broker what it would cost. He said an interest-only loan would have been around $2400/mo. I told him that was nearly all of my paycheck. He told me, in the most blaze tone imaginable:
            “Oh yeah, no problem. Happens all the time.”

            I ran out of that place and pulled everything I could out of the stocks.

            None of what Yves has uncovered has surprised me after that encounter. The entire real estate market is just fraud fraud fraud.

            I won’t buy a house until we have actual property law for non-millionaires in this country, and it will only be for cash with a spotless title. If even then.

  24. jpe

    ” It is a contract formation failure issue and the remedy is restitution.”

    No it’s not. The contract was formed by dint of the promises made in the contract. To the extent some promised performance fails, we’ve got breach. That’s contracts 101.

  25. Marc

    Now I am finally beginning to see exactly why I would receive so many telemarketers calling my home after work hawking slimy home equity loans. I distinctly remember one female caller incredulously complaining that “I didn’t want a free vacation”!

  26. mortgages

    Its so like these banks to try and pass the buck. They are at the root of the whole mortgage meltdown and I have yet to see any of them step up and take some responsibility.

    1. Bill

      The servicers have milked the hamp program for all its worth. Now they are “refinancing” (not thru hamp) three familys I know personally. These folks are in default, have no money and have gone through bankruptcy ( one family has done bankruptcy three times.)

      One family tried for a loan mod,failed to qualify and is two months behind on the mortgage. The servicer sent them a letter stating they will refinance them at 4.25 percent fixed, 22 year loan provided they can catch up on the current loan in the next ten days.

      I’m wondering if the banks are trying to get these folks into loans they can foreclose on.

      1. Art Vandeley

        If they’ve filed BK 3 times, their loan has probably been sold off at $0.30/$1.00 to a distressed debt firm. These firms are refinancing, for a profit, the mortgages at much lower principal balances, attempting to navigate FHA guidelines. Easiest route to do a deep principal reduction refi is with local credit unions and community banks, where the borrower has prior banking relationships.

        As Yves stated in the comments above, the big banks aren’t more efficient. The small banks and credit unions with the long-term relationships with their customers provide more benefit.

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