Mortgage Settlement Term Sheet: Bailout as Reward for Institutionalized Fraud

American Banker posted the 27 page term sheet presented by the 50 state attorneys general and Federal banking regulators to banks with major servicing operations.

Whether they recognize it or not, this deal is a suicide pact for the attorneys general in states that are suffering serious economic damage as a result of the foreclosure crisis. Tom Miller, the Iowa attorney who is serving as lead negotiator for this travesty, is in a state whose unemployment was a mere 6.2% last December. In addition he is reportedly jockeying to become the first head of the Consumer Financial Protection Bureau. So the AGs who are in the firing line and need a tough deal have a leader whose interests are not aligned with theirs.

Moreover, Miller’s refusal to discuss even general parameters of a deal goes well beyond what is necessary. He knows that well warranted public demands that a deal be tough will complicate his job, but it also does the AGs whose citizens have been most damaged a huge disservice. Pressure on the banks from the public at large is a negotiating lever they need that Miller has chosen not to use.

The argument defenders of the deal make are twofold: this really is a good deal (hello?) and it’s as far as the Obama Administration is willing to push the banks, so we have to put a lot of lipstick on this pig and resign ourselves to political necessities. And the reason the Obama camp is trying to declare victory and go home is that it is afraid that any serious effort to deal with the mortgage mess will reveal the insolvency of the banks.

Team Obama has put on a full court press since March 2009 to present the banks as fundamentally sound, and to the extent they needed more dough, the stress tests and resulting capital raising took care of any remaining problems. Timothy Geithner was even doing victory laps last month in Europe. To reverse course now and expose the fact that writedowns on second mortgages held by the four biggest banks and plus the true cost of legal liabilities from the mortgage crisis (putbacks, servicer fraud, chain of title issues) would blow a big hole in the banks’ balance sheets and fatally undermine whatever credibility the officialdom still has.

But the fallacy of their thinking is that addressing and cleaning up this rot would lead to a financial crisis, therefore anything other than cosmetics and making life inconvenient for the banks around the margin is to be avoided at all costs. But these losses exist already. The fallacy lies in the authorities’ delusion that they are avoiding creating losses, when we are in fact talking about who should bear costs that already exist.

The example of Japan, confirmed by an IMF study of 124 banking crisis, shows that leaving a banking system full of overvalued dud assets ultimately costs more than the painful exercise of writedowns and renegotiation. And we may be well on our way to producing worse than Japan outcomes. Using super cheap credit to shore up prices of dud assets is producing all sorts of levered financial speculation. We know this movie ends always ends badly, and with the authorities already using all their firepower to keep asset prices aloft, they will have nothing left in reserve when things eventually unravel.

There is a an extremely aggressive push underway to get a deal inked. And it appears that the Federal banking regulators who are all co-opted by the industry (the only difference among them is how badly) have in turn succeeded in leashing and collaring the attorney generals’ effort. As we have discussed at length in previous posts (see here and here), the timetable guarantees that no meaningful investigations were done, particularly of what is called servicer driven fraud, meaning servicer impermissible charges and fee pyramiding. That leads a late payment or two to escalate into thousands of dollars of charges. Consider an example we discussed earlier, of a Michigan couple highlighted in Huffington Post:

The Garwoods had missed one payment, but this apparently was not unsalvageable; the husband’s roofing business was seasonal. Their servicer, JP Morgan Chase, contacted them and encouraged them to enroll in HAMP.

The HAMP trial mod, which was supposed to last three months, instead ran nine months and lowered their payments by about $500 a month. When they were ultimately refused a permanent mod (despite hearing encouraging noises from the servicer in the meantime), they were presented with a bill for the reversal of the reduction, plus fees, of $12,000.

Stop a second and do the math. Let’s be unduly uncharitable to JP Morgan and assume “about $500″ means $540. $540 x 9 is $4,860. That means the fees and charges were $7,140, or nearly $800 a month.

How can charges like that be legitimate? Answer: they almost assuredly aren’t. The payments were reduced as a result of a trial mod, so any late fees would be improper. Thus the only legitimate charges would be additional interest, perhaps at a penalty rate. So tell me how you have interest charges of nearly 400% on an annualized basis on the overdue amount and call them permissible? I guarantee there is not a shred of paperwork anywhere that can support this level of interest charge, either with the investor or with the borrower.

We have since learned of one way they could have been charged $800 for one of those months. When borrowers miss two payments, many servicing agreements require that the servicer get what is called a broker price opinion, which usually means the broker drives by the house and then provides an estimate of its sales price. The usual price of a BPO is $50 and it is supposed to be charged to the investors. Not only do servicers often double dip and charge the borrower too, but they greatly mark up the charge. Lisa Epstein told us of a borrower in Florida that was charged $800 for a single BPO. We’ve heard of $250 before, but apparently the sky is the limit if a fee is impermissible anyhow.

Similarly, consider what happens if your payment is late (whether it was actually late or whether check was held to make it late). The contracts and Federal law require that payments be applied first to principal and interest. But when the bank charges a late fee of $75, it deducts it from the borrower’s payments in its payment record for the borrower. And because the payment is now short, rather than applying, say, $925 out of the borrower’s $1000 check to principal and interest, it instead puts it in a “suspension account.” So the borrower is now $1000 behind on his mortgage, and is charged interest on that $1000 shortfall. And the borrower has not been informed by the bank that he is behind, so his next month payment will have the additional fees charged to it, making it below the $1000, which will again allow the bank to add this $1000 less the interest and any other fees to the suspense account, and charge the borrower interest as if he were $2000 behind on his payments.

And the investor gets ripped off in this process too. Servicers are required to advance principal and interest to investors until the debt appears to be unrecoverable from the borrower. They are also not permitted to charge investors interest on these advances. You would think that would mean servicers would have some parameters for when they stopped making advances, since they are not required to beyond a certain point. But in the scenario above, they’d treat the $2000 payment as an advance, even though the bank has, say, $1800 in the suspension account. Since the borrower caught in servicer pyramiding fee hell is pretty certain never to emerge, those extra interest payments the bank is charging the borrower on his now $2000 shortfall will be deducted from the sale proceeds when the house is foreclosed upon and eventually sold.

If you think these practices are rare, consider: Fairbanks, a stand-alone servicer that focused on troubled mortgages, EMC/Bear Stearns, and Countrywide have all been found guilty of pyramiding. We don’t know who else might be engaged in these practices because the deliberate rush to enter into a deal means no investigation has been made. And since a single firm, Lender Processor Services, provides the servicing backbone to the entire industry, it seems highly unlikely that other large servicers do not engage in similar practices.

What about the claim made by John Walsh, that the Federal regulators, led by the OCC, investigated 2800 severely delinquent mortgages and found only a small number of servicing errors? Guess what, they could not possibly have looked into this issue. To verify what happened, they would have had to do a real forensic examination of the detailed payment records, including comparing it against the borrower’s payment records and the provisions of the pooling and servicing agreement. Attorney fighting foreclosures seldom go this route because it is such a tortuous exercise; the servicer records are cryptic and often have numerous adjustments; it almost without exception requires a forensic accountant to get to the bottom of things. Given an eight week timetable that included Thanksgiving and Christmas, it is a certainty that no borrower verification was made; in keeping, nothing in testimony by Walsh about the servicer examswould lead one to think that the records review probed the validity of the charges made to borrower accounts.

Now do you see why servicers consistently report than when homeowners miss a payment or two, they proceed pretty much in a straight line to default? Once they miss a payment or start racking up extra charges that you are unaware of, borrowers descend into a designed-by-the-servicer escalating fee black hole, never to emerge.

To the specifics of the plan. If you didn’t know any better, you might be fooled into thinking the terms were tough. It provides for more reporting by servicers to borrowers of where they stand, ends dual track (in which servicers negotiate mortgage mods while still moving ahead with foreclosures), provides for a single point of contact for borrowers who enter into mod discussion, and has an “affirmative obligation” for servicers to offer mods, including principal mods “in appropriate circumstances”.

Even if these measures were tough-minded and vigorously enforced (two irrelevant “ifs”), they are still deficient. We don’t even know the extent of servicer abuses, since we are conveniently moving very quickly to avoid any serious probe, but there is considerable evidence that suggests that a lot of foreclosures were servicer driven. So merely fixing practices going forward, is necessary but far from sufficient. What are the remedies for people who suffered in the past? Of course, it’s horrifically difficult for individuals to prove their case, which is why having state AGs act on their behalf is the best remedy we have. And if that is going to be waived, the trade needs to be that the public gets something punitive, not just prescriptive.

It seems far more sensible to go in the direction of having servicers bear the cost of a real mod program, which is what investors would much prefer to have happen. Or as Adam Levitin suggested, have the banks pay $20 billion to fund legal aid attorneys.

And if you are familiar with the sorry history of the servicing industry, you recognize these things: that much of the verbiage in this “settlement” merely recaps the existing obligations of servicers under the law and their contracts, along with commitments they’ve made previously to investors and regulators and failed to adhere to. For instance, on page two: “Affidavits and sworn statements shall not contain info that is false or unsubstantiated.” Um, we have to have a settlement agreement to get the banks to agree obey the law? Similarly,”Servicer shall not impose its own mark ups on any third party charges.” Servicers were never “allowed” to charge excess fees, which are ultimately borne by investors. Stephanie at FedUpUSA, who looks to be a MBS investor, began a detailed shred of the agreement with this overview:

The entire document is a rehash of what servicers had a legal mandate to do right up front. Accurately apply payments. Respond to inquiries. Operate in good faith. Use a NPV test for HAMP (was in the HAMP program originally.) Document the assignment chain before foreclosing.

There’s exactly one substantive change, in that HAMP did not prohibit “dual-track” (that is, foreclosure while attempting modification.)

Essentially every other item in this 27 pages is something that Servicers already had a legal duty to do, either as a fiduciary to the investor or just through the ordinary covenant of operating in good faith (You know, the original standards that all businesses are held to that aren’t actually racketeering outfits and gangsters? Yes, that.)

There is actually one other new requirement which is single point of contact, meaning that one individual will be responsible for handling the loss mitigation process. This is something borrowers have wanted due to the utter incompetence of banks in handling borrower inquiries (see this not at all unusual horror story from Dana Milbank).

But the only place in banking you get that level of service, one person tasked to your needs, in retail banking is in private banking or near-private banking high net worth product groups. Trying to remedy lousy servicer record-keeping in a call center environment, which suffers from chronic high turnover, is simply unworkable.

There is an elephant in the room that this wrongheaded program fails to acknowledge: servicing large numbers of distressed borrowers is a huge money loser for any servicer. As a result, they have huge economic incentives to find some way to offset those expenses, i.e., cheat. This proposed settlement ignores the fact that the servicers do not generate enough income from their normal fees to pay for decent quality servicing, let alone the some arguably enhanced settlement imposes (more papering up of processes for third party review; providing a single point of contact for borrowers, which is not all that easy to implement in a call center environment).

The poster child of this conundrum was Fairbanks, a servicer which had acquired portfolios with high levels of delinquent loans and was soon sued for a whole range of abusive servicing practices. Both HUD and the FTC opened investigations which led to a settlement that included replacing the management team. Tom Adams was on the buy side at the time. His comments:

We also had heightened sensitivity to “predatory servicing” following the FTC settlement and these issues were an important part of our servicer diligence. Following the settlement servicers took great pains to highlight how their practices were distinguished from Fairbanks. Of particular importance was the economic distinction – Fairbanks was a stand alone servicer of distressed loans. They needed to grow their portfolio in order to break even (it was a variation on a Ponzi scheme, because as the portfolio aged it became more expensive to service). Other servicers had better economics because they could subsidize their subprime loans with low servicing cost prime loans or because they invested in the deal residuals (which would be worth more if the servicer was successful in reducing losses). Some servicers, such as Litton, pointed out that servicing was not a profitable business on a stand alone basis.

Now all servicers are in the position Fairbanks was in – large distressed portfolios which aren’t profitable just from the servicing fees, which pushes them to seek junk fees. Following the Fairbanks settlement, the economy appeared to be in good shape, servicers gave the illusion of being profitable, or sufficiently subsidized. Large servicers such as Countrywide or Wells Fargo, bragged about gaining significant efficiencies from having large portfolios, which helped them reduce servicing costs. All of that went away when large numbers of borrowers became delinquent. Servicing delinquent and distressed loans is vastly more expensive than servicing a current portfolio, but the fee remains the same for both, typically.

The problem is that the servicers, who ironically like to portray delinquent borrowers as deadbeats, are themselves deadbeats. Their expenses are chronically higher than their incomes, even with providing service that falls well short of their legal and contractual obligations. Unlike most strained homeowners, however, they have a way to fill the gap: large scale, institutionalized theft from both borrowers and investors (this post has focused on borrower abuses, but there is plenty of litigation on the investor side against servicers for improper fees and charges). So if this settlement does result in even a modest improvement in servicer standards on the borrower side, they’ll simply have to get more creative in how they rip off investors.

Josh Rosner, in an analysis for clients (no online source), argues that if a private sector attorney negotiated a deal like this, he’d be at risk of being sued for malpractice (emphasis his):

This “term sheet” may well tie the hands of states from bringing actions against prior improper servicing and back-end/foreclosure practices AS WELL AS improper front-end
or assignment practices….If a private-sector lawyer, representing any harmed party, settled for damages without an investigation of actual damages they would likely be exposing themselves to malpractice, why would that not be the case here?

In other words, this is simply another example of how the too big to fail banks are chipping away at the rule of law. The banks have over time have fought successfully to reduce the influence of state laws and regulations on their business while increasingly bending the Federal regulatory apparatus to their will. But the state AGs are still enough of a force to be reckoned with that the Federal bank regulators are now applying considerable to pressure them into abandoning initiatives that could help homeowners in their states. Hopefully at least a few of these AGs will wake up and have the self-preservation instincts to realize that this settlement is not in their or their constituents’ best interests.

And since the state attorneys general are under a lot of pressure to do the wrong thing, I strongly urge readers to call their state AG and say that you oppose this bailout in disguise. Demand real investigations, including servicing software audits, as a necessary step before any settlement. You can find their phone numbers here.

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  1. Richard

    No surprise that the Obama Administration is going to try to get the AGs to grant the TBTF absolution. I guess that Sheila Bair will not get to try out her new resolution authority.

    I think the most important observation you made in this post is that the losses have already been incurred and the discussion should be on who absorbs these losses.

    This administration is never going to do that. Instead, they will actively misrepresent what is going on and hope that the losses do not resurface.

    Unfortunately, they do not understand that kicking the can down the road and betting on redemption has costs. These costs include the Fed’s zero interest rate policy, ie the tax on the prudent.

    Ultimately, it is these costs that are doing more damage to the US economy than the losses on the books.

    One question that I have is “why don’t they put the losses back on the TBTF books?” Since they are already TBTF, they are not going to be closed down!

  2. skippy

    Jubilee for the TBTF from the rancid debtor lowlifes, that caused this tragic episode, in the Greatest Empire the cosmos has ever seen…barf.

  3. knighttwice

    Richard….they can’t put the losses back onto the TBTF banks’ books because that would expose the fiction that “all is well” with the banks. BO is claiming a political victory in the management of TARP and everything is sacrificed at that altar.

    No discussion of MERS….no writeoff of HELOCs….imagine putting out a proposal that would endorse a “proportional” forgiveness of principal between 1st and 2nd lien holders.

    Agree with Yves….this is about as bad an outcome as any citizen could have hoped for. Sadly, the sheeple have no idea….

    1. Richard

      As Yves so nicely says about the TBTF, they are already insolvent.

      The addition of $1 trillion in losses is not going to change the fact.

      Given that Team Obama led by Tim Geithner wants to say this is not true is a) their choice and b) does not change the fact.

      Team Obama can continue on with their campaign with no interruption.

      At the same time, the economy can start to mend as the problem can actually be addressed.

  4. profoudlogic

    Excellent post Yves!

    Everyone should be contacting their state AG to get the message out. AG’s need to do their job, and if they opt instead to throw constituents under the bus, the world should know about it.

  5. Sungam

    In for a penny, in for a pound.

    By this point they have invested so much in keeping the system and the banks “stable” that a change of course becomes very difficult to consider.

  6. Richard D.

    I thought that the AG’s might just do what was right. When Richard Coudray was put in charge of this investigation, I wrote him twice to try and see if some of the bankers who have destroyed millions of lives in this country, might just wind up in jail for having raped these people, but instead they have joined in the party. Well, enough is enough. Time to fight back and take no prisoners. People, take out your pens, picket, do what ever you can without violence. They are afraid that one day you will learn the truth. Well, it’s coming and it will topple the dragon.

    1. CaitlinO

      Richard –

      I was naive enough to hope initially that the AGs would belly up to the bar on this, too, until the guy in Iowa started watering down his statements.

      Where does this leave the judges? It at long last appears that some of the judges are beginning to understand, identify and strike back at the fraud that has been rampantly occurring in their courtrooms.

      Can the AGs influence or impact judges’ decisions? It’s sad to think that the last hope average America citizens have for any justice at all is in the county courts of the more enlightened judges but it would be even sadder to think that that last possible avenue is closed.

  7. Bravo

    So a borrower is the beneficiary of a prospective principal mod only if his loan is delinquent? What is the recourse for those who have met their end of the bargain thus far, despite being underwater on their house? Are they not entitled to quiet title to their property should they discover that the trustee’s depositor has compromised title to their property by failing to properly document the chain of title in its debt instrument? If a borrower misses payments, he is and should be at risk of a non-fraudulent foreclosure action (unfortunately far and few between these days). But when the lender’s foreclosure agent cannot provide clear chain of title for the borrower, the lender should not be immune to the very same consequences that a borrower has been exposed to for failure to make payments…….……loss of any claim to the collateral. Let borrower and lender work then out a deal that reflects lender failure to meet its obligations. As fervently argued here, the law should not be allowed to have a double standard… for the big banks, and one for the credit and non-credit-worthy homeowners the banks have already so abused. And that problem is going to require far more than $20 billion to cure if the defects in chain of title are anywhere near what they are universally believed to be. Adam Levitin’s suggestion of $20 billion+ to fund legal aid may be the most practical solution I’ve heard. A one size fits all solution is going to be hard to craft.

  8. Eric Feiler

    The quote attributed to Stephanie at FedupUSA is actually a post from today (3/8/11) by Karl Denninger at the Market Ticker.

  9. MERS Executive

    “What is the recourse for those who have met their end of the bargain thus far, despite being underwater on their house?”

    Seriously, what do they have to do with someone who is unable to pay? Nothing, nothing at all. We’ve been over this 1000s of times, when S. Bair got her jumbo from BofA (blatant conflict of interest and so on) this “covenience” was not the same as millions who were set up to fail. “Fairness” was argued during the crafting of the English poor laws. Anything resembling fairness would destroy the Banks and 1000s would be sent through the wringer of Justice. Your appeal to fairness is bullshit. Formulaic and and distributed all over blogs, tweets and corporate news.

  10. Eugene Villarreal

    Is there a legal process whereby citizens, homeowners, foreclosure adviocates can STOP this 50-State AGs agreement from being implemented ?

  11. Tom Crowl

    I’ve just received a notice for eviction from the granny-unit I built over the garage of what used to be my home. I understand I only have days to respond. The bank handling this is Wells Fargo. It’s was an illegal foreclosure which I will argue in the message below. Moreover it was a stupid foreclosure from a business perspective which I will also briefly suggest. But there are millions of these stupid actions after all.

    This could never be considered good business in a sane society, unless, of course, that perspective has been corrupted by distorted incentives, poor leadership and a collapsing and gamed legal system.

    My story isn’t special. And there are hundreds of thousands more. Each unique and with its own merits and faults. This is only a snapshot of a complicated set of circumstances.

    An Open Letter to John Stumpf, Wells Fargo CEO:

    Dear Mr. Stumpf,

    Your bank is currently attempting eviction after an illegal foreclosure. I doubt that mine is the only case but I only refer to my own situation.

    This is not the place for a long dissertation. This is only an opening summary… so I’ll cut to the key points:

    1. Purchased home in 1991.
    2. In early 2000’s, approaching my senior years, I built a legal granny-unit so I could rent out the house and have low-overhead (Giving time for development of an actually useful ‘financial service’ btw which is now patented and gaining considerable attention.
    See Finding Roots in a Shifting Landscape: Facebook and the Future of Social Networks)

    3. I was all set to launch with my little demo ( in the Fall of ’08 when the crunch hit and I lost both the HELOC needed for launch as well as my tenants who also defaulted on their rent at the same time!

    4. Your bank would offer no forebearance at all. And would not accept even a one-month late payment unless I could catch up fully. (similar situations are discussed in the piece above)… It seems like you guys got quite a bit of forebearance from your pals in law and government… so much for ‘equal protection’ eh?

    5. Though with a chance to get good renters full payments could have resumed… no such opportunity was available since a house now in default is difficult to rent.

    6. However,since my overall goal was simply to stay in the Granny unit I built with low overhead… and I wasn’t looking for a ‘free house’… I was ready to go with a short-sale to investors who would allow me to stay on as a renter in the granny-unit.

    Frankly I believe that’s a very wise and reasonable solution. However apparently not good enough for Wells. I suspect they consider me a “moral hazard”…

    7. This short-sale negotiation was on-going at the time house was suddenly taken by Wells.

    8. Further… and I believe you should pay attention to this… I haven’t wanted to make a stink, I have other things to do and am not into playing the ‘victim’ game. During the short sale negotiation I received a call from someone claiming a connection within the Wells short-sale department, and that for a sum of money that short-sale would be concluded under ‘favorable terms’. This was reported to the attorney acting for Wells in this matter: Kenneth A. Freedman several months ago but I’ve heard nothing more of it. In fact when we spoke shortly after the surprise foreclosure he suggested I could stay here for the time being while things were sorted out and that he would call and let me know of any changes.

    However no ‘heads-up’ has been given despite repeated efforts at contact and resolution and eviction papers were served on Sunday morning (served to a 12 year old… I didn’t receive a copy till last night).

    Mr. Stumpf… you could have been getting your money all this time if you actually had systems for talking to your ‘clients’ and working out pragmatic solutions. (On this note I suspect there are many now evicted who would have welcomed a chance to stay on as renters but neither pragmatism nor creativity seem to be part of our legal or governmental response-kit.)

    I had perfect credit, never missed a payment… and didn’t do “Hummers and trips and fancy restaurants”… I’m a pragmatist and planned for the future.

    What ‘social contract’ do you serve? Is this maximizing the value of an asset? Or part of strategies really only serving management and the accounting machinations it utilizes (with extensive government co-operation)?

    P.S. Regarding my little invention:

    Patent #7,870,067 granted by USPTO 01/11/’11

    The Commons-dedicated Account & Network
    (A For profit enterprise in the Charity/Campaign Services Sector)

    A neutral network of accounts for political, charitable and speech related monetary participation… which in order to properly network and scale individual capability must allow a viable, one-button, secure and financially unburdened micro-transaction. Such a network ideally should maintain its own cloud and bank. Accounts may be created and/or maintained with zero balances and/or only momentary balances during a pass-through transfer (monetization model requires no burden on the actual transaction.)

    From user’s perspective it’s similar to Facebook credits or X-box points except for Commons-oriented functions instead of games, etc. …and critically not adding to or drawing from transaction costs since monetization arises from other sources (advertising, charity/campaign services)

    Demo and FAQ


    Civilization Systems Blog

    “…[campaign contribution] could become much easier if campaigns can figure out how to allow people to donate by making the process easier through one click pay methods and a short form for the additional FEC information required.” – Katie Harbath, chief digital strategist at the National Republican Senatorial Committee… now with Facebook


    Capability ENABLES Responsibility

    The financial services sector has become cancerous. Are you part of the problem or the solution? Please let me know, Mr. Stumpf. Do you believe your bank’s actions serve shareholders? The public good? Justice? Do they build communities and trust? Let’s cut the crap Mr. Stumpf! We’re talking survival now. And that gets very personal. Please give me someone to talk to about rational solutions. And oh yeah… look into your short-sale department.

    Message to State Attorneys General:

    Don’t make an ass of the law. People are wising up and I believe there is technology that will very soon greatly amplify their voices.

    P.S. I’m gratified to have very good patent attorneys but I need a biz/personal attorney and am currently broke. However I could be a promising prospect with shares to offer and most certainly am at least an interesting client. Please contact me if you’re an attorney in these areas and would like to talk about possibilities!

    1. Tom Crowl

      A bit of Good News! Just got a call from Congressman Brad Sherman’s Office that they’ve sent a request to Wells Fargo’s Corporate Office of the President that my little dilemma be looked into.

      I’ll hope for the best. But have learned to never count on sanity from behemoth organizations with no accountability or common-sense.


      BTW, I’m workin’ on it… and believe I can help.

  12. Expat

    I won’t argue that America is not a great country with great freedoms, etc. Nor will I deny that many other places are better, including such nasty socialist regimes as Sweden, Norway, and France. I won’t attack the myths of American Righteouness or the American Bastion of Democracy. Those myths may remain sacrosanct for now.

    But, DAMN, we are a bunch of blood-sucking sociopaths! The American Way involves raping and pillaging the economy and getting lauded on magazine covers for having done it. Stealing hundreds of billions from taxpayers, investors, and clients is God’s work (fuck you, Blankfein). Our elected politicians whore themselves to the highest bidders and pocket millions.

    And the worst part? We watch Fox News and believe this is GOOD and RIGHT. That only pinkos and blacks are getting screwed over by BOA or Citi. Who cares, right?

    We are a bunch of sick twists who believe in Horatio Alger and gleefully drop cluster bombs on children because they might otherwise grow up to hate our freedoms.

    Holy shit, America. At least you used to pretend to be good.

  13. financial matters

    In the interest of a personal investigation (ahem) I took out an online refinance with American Finance (mpls office). Upon completion they immediately sold my loan to bb&t…

    I’m getting my own personal taste of servicer abuse. In my recent home refinance bb&t took on paying my home insurance and taxes from an escrow acct. They didn’t pay the home insurance and so I got a note from my insurer that they were going to cancel me if I didn’t pay them. I sent them a check for $900 and they sent me a renewed yearly contract. Passing in the mail without missing a beat I got a letter from bb&t that they haven’t received my home insurance policy renewal (what?) and if I didn’t send them a copy they would find their own insurance at my expense to protect their investment… yikes! and they said it would probably be more expensive and not include liability and that they would be due a commission (read kickback)

    1. financial matters

      BB&T claimed they didn’t get the paperwork from closing so didn’t know who to send the insurance payment to.. Interesting, you’d think their first step would be to try and find that paperwork…

  14. David

    An important step to solving the crisis is to have the banks write down their bad loans.

    Let’s look at it this way. If a loan with a face value of 500K and the underlying home is worth only 400K, the bank doesn’t want to make a deal to reduce the debt to a more realistic 400K so the borrower will stay in the house because that means taking a loss of 100K. If the regulator forces the bank to write down the loan to 400K, then the bank will be much more willing to negotiate with its customers.

    These clowns are going to hide the losses as long as they can. The regulators need to force them to stop playing games.

    1. Eric

      I don’t get the point of this. The borrower in this case has complete freedom to tell the lender that either they cut the principal down to $400,000 or he/she is going to stop paying and send them the keys. You don’t need the AGs of 50 states or Obama or Geithner to do this.

  15. dejavuagain


    Very good post. How do you find the time to do this?

    The important point you make is the servicer abuse in pyramiding and mis-applying payments and excessive charges and late payment charges.

    These practices are basically theft from the borrower or the investor as you describe.

    But theft in this manner by creditors has become normalized.

    Anyway, such an agreement will not prevent investors from suing or bankruptcy judges from recommending fraud charges for fraudulent costs claimed by creditors or damage claims by borrowers pyramided into foreclosure.

    1. Yves Smith Post author

      It’s a very costly and time consuming exercise to get the records from the bank (the bank fight even with attorneys on the case) and then engage a forensic accountant to do the analysis. Much easier to fight on standing. But then the banks and the servicers get to portray them as deadbeats abusing technicalities rather than people with substantive objections who can’t afford to fight on those grounds.

  16. McMike

    The worst damage to democracy is done in the details.

    While we argue about death panels or gay marriage, the real action is in the details, and the stuff no one talks about.

    Through arcane provisions of administrative policies, terms of legal settlements, footnotes on page #1,253 of legislation, appeals court decisions …. It shows up in the use vague or broad language in laws, the enforcement and non-enforcement of regulations, the final amount of penalties (and tax deductibility thereof)….

    As someone who has followed this mechanism since the deconstruction of civil rights after 9/11 (and before), then the merging of corporate and state in the explosion of privatization and government contracting and implementation of the national security state, then the $20 trillion bailout of the FIRE sector, and now the massive nullification of securities and title law: a single theme is persistent – even as the government seems to be writing millions of lines of laws and regulations, they are simultaneously blowing gigantic holes in the laws and regulations in favor of the elite.

    Behold Oz: There is a vast and terrible mechanism of the state that hisses and belches steam, whistles while it abuses its citizens and kills poor brown people with sirens of delight, yet behind the curtain it protects a growing bubble of nothingness.

    The trend got its footing with the Bush administration who discovered it could void any law it felt like, and get away with it. The imperial edicts came out fast and furious and over time astoundingly boldfaced and outrageous. Yet about half the people in this nation fiercely endorsed the Bush administration’s mandate to do just that: deconstruct the law – with a strident and outspoken vengeance that bordered on glee.

    If you don’t see a connection between this and the Bush administration’s lies about Iraq, its war crimes, its election tampering, its crony government contract fraud, its misuse of the Attorney General office.. then you are not paying attention. The criminality now arcs into Wisconsin, and other states, where the government seeks to void its contracts and delegitimize its own employees while giving away public assets without review or recourse, while the corporate sector enjoys an expansive future of legal nihilism.

    We are left with a system with so many laws and power granted to the state that the full range and extent of the law is unknowable, and even the most modest action can be deemed somehow illegal by an arbitrary government. Yet at the same time, the elite enjoy the impunity of perfect lawlessness, complete with get-out-of jail blanket immunities and retroactive official forbearance.

    If a corporation does it; it’s legal” – Richard Nixon (updated)

    “Laws are for little people” – Leona Helmsley (updated)

    “L’etat, c’est moi” – Lloyd Blankfein (rough translation)

  17. Dirk77

    What I find fascinating in a macbre type of way is: 1) As this fraud and corruption continues, slowly everyone will become corrupted because eventually everyone will find that they can’t survive every other way; 2) These banksters and their political lackeys have deluded themselves into thinking they are the only toughs on the block. They think the downward spiral stops with them. That is not so. There is always someone willing to take things further than you, waiting for things to slide a little further down to the point where their “skills” can shine. Today the three piece suited banksters, tomorrow rule by violent gangs with the first people being targeted are the banksters themselves. Hasn’t this always been the way?

    1. McMike

      Look no further than Russia. What started out as systematic looting by privatizers ended up as open mafia war.

    2. Mark P.

      Bingo. You are correct, sir. Along these lines, if we continue along the current course, in about a decade I expect prominent American FIRE oligarchs to be doing what they’ve been threatening to do, which will be taking their ‘talents’ overseas.

      Russia, as you say, provides an example — specifically, the Putin regime’s behavior. In the future, those financiers who leave the U.S. may find out that the surgical strike black-ops capabilities the U.S. developed for the GWOT to take out/extract Islamist targets can be used on their homegrown kind of ‘economic terrorists’ by whatever regime then controls Washington. Recall, too, that Putin began as the theoretical tool of the Russian oligarchs, before he turned the tables.

      Not a pretty picture, overall.

    3. Dan The Man

      Your exactly right, all bets are off now.
      Conspiracy has become reality.
      Or as Dostoevsky said “if God is dead everything is permissable”.

  18. steelhead23

    Clearly, the Obama administration wants this to be a drive-by: “Nothing to see here folks, move along.” Even if this is inked and absolution granted by all 50 states’ AGs, this is NOT over for the banks. OK, so they would be able to foreclose more readily. BFD. They will only further drive down prices and realize those losses. The MBS investors will still be able to sue for breach of contract – the mortgage quality was not as specified in the contracts – period. As I see it, this settlement would help clear the table, but the dishes are still dirty – someone still has to eat those losses. Unless the gov. wants to declare Force Majeur on those PSAs, I don’t think this solves the bank’s problems. Am I missing something?

  19. Geo

    The Obama administration can’t challenge the financial industry right now. The campaign for the presidents re-election is counting on Wall Street and the banksters to supply them with the funds that they will not get from the liberal constituency that has been alienated since the victory in 2008. It’s actually a pretty simple and, to some, obvious necessity. Too bad for us that Obama and his people didn’t fight for the original constituency.

    1. Doug Terpstra

      Thanks, Karl. Yours is an excellent shredding of 27 pages of fluff, feathers and shrapnel everywhere!

  20. Susan Truxes

    Yves, The banks/servicers have claimed that it is too expensive to do mods and it all winds up in foreclosure anyway. But isn’t foreclosure the ONLY way the bank/trust can quiet title? After the foreclosure they do the required paperwork for quiet title and obviously no one comes forward because the servicer/bank/trust combine has also prevented the investors from seeing what notes are actually in their investment bundle. Foreclosure is happening to cover up the massive fraud of notes sold multiple times. The exposure of this fraud is being delayed with things like the AG settlement proposal – which merely puts the banks on notice that they have to do something quick about their court documents or they will be exposed. Is this what is actually happening? An underground railroad for investment bankers.

    1. AR

      Isn’t this what Ibanez was all about? It seemed to me that BAC was trying to quiet title the Ibanez property after the foreclosure, to clean up the title for sale to the next sucker?

  21. Bravo

    MERS Exec:

    I didn’t mean to infer that those who are unable to pay and were the victims of predatory lending shouldn’t be afforded their own form of legal recourse, a far different defense than those who have thus far continued paying, despite Wall Street’s manipulation of the housing market to benefit the few. I am only saying that those two classes of borrowers come from different negotiating positions, hence the one size fits all approach to a proposed settlement does not work very well. Unfortunately, the only way these servicers will negotiate modifications in good faith is with a gun to their head. The government’s role should therefore be to provide we common folk the legal means by which to do so from the pockets of the perpetrators. But I won’t hold my breath.

    1. Fred Graso

      Cramdown is available to the wealthy, and it was the solution that was killed quickly, lest it be utilized by the undeserving proles.

  22. CaitlinO

    Today’s news is that there were 11.1 million underwater homeowners in Q4. Let’s say that the average purchase price of those homes was only $180,000, that the average amount underwater is just 10% and that there are no second mortgages. So each underwater homeowner would need on average a write-down of $18,000 to get back to break-even on their loans.

    The proposed ‘settlement’ (sell-out) price to the mega-banks is $20 billion, or $1802 per underwater homeowner, a pittance that won’t impact on-going foreclosures a fig.

    And that doesn’t even begin to cover the millions owed to county and city property record divisions for the fees banks have neglected to pay over the last decade.

    And that does’t even touch compensation to courts for filing counterfeit, fraudulent and perjured documentation as part of foreclosure fraud.

    And we haven’t even gotten started on compensation to homeowners who have had their property taken from them fraudulently.

    And that’s before we even begin to compensate legal-aid and pro-bono providers for the untold hours they have donated trying to protect homeowners from extra-legal seizure of their property.

    This is a joke. It would be laughable if it weren’t so freakin’ tragic.

  23. Larry in Trenton

    Dear Ms. Smith:

    My understanding, perhaps erroneous, is that a significant portion of the foreclosure crisis stems from bad record-keeping with MERS and elsewhere leading to substantial confusion as to who owns the mortgage — that is, as to whom the homeowner is contractually obligated to pay by virtue of the assignment of her of his note (and mortgage) to third parties, including investment trusts. Neither your excellent piece nor the 27-page term sheet clarifies to my satisfaction how that confusion is to be resolved — although, admittedly, my need for clarification may stem simply from my substantial ignorance on the subject. Could you supply additional clarification? (Perhaps you could do so in a supplemental piece entitled “Clarification for Dummies.”)

    And could you also address the following question? Should any modification program include a “hold harmless” provision contractually obligating the putative third-party assignees who agree to the modification to hold the homeowner harmless in the event that another party appears who did not agree to the modification and who claims to be entitled to the payments. (And should a fund be established to cover the situation in which the putative third-party assignees who agreed to the modification are no longer present or able to satisfy the hold-harmless provision?) I suspect that, even in the absence of a “hold harmless” provision, a homeowner would not be completely without redress. For example, a lawyer representing the homeowner against whom foreclosure is sought by the new party would seek joinder as third-party defendants of the putative third-party assignees who agreed to the modification. But a “hold harmless” provision would provide substantial additional relief and would, among other matters, obviate jurisdictional problems and problems potentially arising if the jurisdiction’s limitations period for unjust enrichment were shorter than the limitations period for breach of contract.

    And in completely similar vein, should any modification program include a provision requiring the third-party assignees who agree to the modification to hold harmless the homeowner and subsequent purchasers from harm resulting from clouds on the title that might arise from the bad record-keeping? Surely the homeowner should not be obligated to file an in rem suit to quiet title simply because of bad record-keeping for which she or he is not responsible.

    Thanks for any insight that you can supply on these questions.

  24. ECON

    As an outsider, USA is in an irreversible condition of fatal corruption and fraud awaiting the next financial depression that was never engaged upon other than to make the taxpayer pay heavily for inertia. “Banana republic” is demeaning to the term given the breadth and depth of the cancer eating on the rule of law.

    1. hermanas

      The District of Columbia may blithley go they’re way, but out here in the country the foundation is crumbling.

  25. Michel Delving

    Josh Rosner also said something in 2007 that may well explain servicer malevolence.

    “The real question is, Are there appropriate firewalls between trading desks and captive servicing businesses,” said Josh Rosner, a managing director at Graham Fisher & Co., an investment research firm in New York. “If there are not, it would appear to pose real ethical and possibly legal risks in pitting the fiduciary responsibilities of those banks against those investors they have an obligation to.”

    To date relationship between subprime shorts and servicers has not be adequately investigated for insider trading, though recently there has been a glimmer of hope.

    CDO, CDS Fraud Probes to Be 2011 Priority, Prosecutor Says

  26. Doug Terpstra

    You nailed it again, Yves, but “travesty” is putting it mildly. This “settlement” is insulting and blatant malpractice by attorneys-general. Even a layman with a passable knowledge of contracts knows this is full of nothing but weasel clauses and paper teeth. It has neither sound nor fury, while signifying nothing, just another whitewash of criminal looting by a racket that scoffs at good faith as a virtue for suckers. Once again, no justice from the Ministry of Justice only ensures harsh street justice down the road.

    It seems Tom Miller is accepting (or extorting) a bribe with a dubious post at the CFPB. In betraying the people for the criminal elite, like BO, Miller can probably write his own ticket—who knows, maybe even a Koch-funded governorship.

    As you suggest, it may well be fear, a close relative of greed, that best explains the politicos’ hasty reversals from tough talk. The realization that US/international banking is a hollow Ponzi shell game causes panicked retreat as they try to delay financial Armageddon and grab what they can before detonation.

    I especially ‘love’ the last sketchy section VII.C “[Non]-Penalties for Non-Compliance”, with vague “procedures” but no specific penalties at all. The toughest:

    “… a failure to meet these performance measures shall result in monetary penalties and additional remedial actions, including possible revisions to this Agreement.”

    Oh no! A two-dolla’ fine … or worse “revisions to this Agreement”! Oh Lord, give us the guillotine instead!

    How apropos for a banana republic. As Woody Allen, dictator in Bananas, declared, “It’s a travesty of a mockery of a sham of a mockery of a travesty of two mockeries of a sham.”

  27. David

    If the banks created instruments (collateralized debt obligations) that make it difficult for them to foreclose under state law (in some states) because of the issue of ownership of the mortgage, why make this the government’s problem? The banks knew what the state laws were. If the banks suffer losses as a result because they can’t foreclose, they can cut bonuses.

  28. ChrisPacific

    So, what’s the best way to fight this? If AGs in the worst hit states go along with this it ought to cost them their careers, and I think it will if people fully understand what’s going on. The question is, how to get the word out?

    People respond to personal stories. Maybe human interest pieces on people from the worst hit states who are experiencing the fee black hole Yves mentioned, along with their reaction to the settlement? If done well I think it could be a compelling story. There is an opportunity here for a journalist willing to take it.

    1. Doug Terpstra

      Follow the link Yves provides on the last line of the post. Call your AG and ask them to please oppose the settlement, that it’s a bailout and a whitewash with no teeth for compliance. Tell them you want investigations and prosecutions for violations of current law.

      This would be quite useless at the national level, but as Chris Hedges says, citizens have some leverage at the local level where there is still some semblance of democracy.

  29. Archie1954

    This article makes me wonder what happened to ethics and morals in America. Is this really what has become common operations in the US banking industry? If so we now have the smoking gun directly relating to the destruction of the US real estate business. The regulators in other countries would not stand for these kinds of fraudulent practices in their area of jurisdiction. Has the US just simply given up even the pretence of honest dealing?

  30. Random Blowhard

    This point has been hammered over and over again, but it bares repeating – You cannot have a first world economy with third world “Rule Of Whim”. In the end the United States is faced with 2 terrible alternatives, end TBTF and kiss Wall Street goodbye or become the United States of Argentina and collapse into permanent third world status.

  31. Greg

    This kind of behavior by the Financial Sector is to be expected. It is simply too big to support itself with legitimate enterprise.

    The government is a part of this, because the government feels that it cannot allow the Financial Sector to fail. Effective regulation of the banks, and a fair resolution of the mortgage crisis, would work to the Financial Sector’s ruin, cutting into the now exorbitant profits the banks need to sustain themselves.

    On the contrary, for all its efforts, the government, cannot sustain the Financial Sector, which must contract or fail. Indeed, even the real economy can no longer support the Financial Sector, which now works to the ruin of that economy. The government, our elected officials, are captive to the Financial Sector, and work counter to the interests of the rest of the nation, which is why I will no longer vote for any of them, no matter how much they raise for their election. As long as they think the tainted money of the banksters is more important than my vote, fine, they can keep the money.

    The system is over constrained, and as currently configured has no real solution to its problems. For one instance, even were the banks to succeed in their efforts at foreclosure and nullification, this would merely destroy the value of their remaining assets, driving ever more homeowners underwater.

  32. Sundog

    Cheers Yves. Would like to see you and Chris Whalen get together and hammer upon this topic in a public forum. If it were a weekly event for a month or six, we might get somewhere.

  33. Chicago conservative

    Disappointing development, but not quite surprising. So long as there is regulatory capture or shall I say governmental capture, you can do whatever you want. No one is going to kill the goose that lays the golden eggs in campaigns and provides cover for the naked king of our political system.
    A job well done, and all we have left is rant and rave about the philosophical battles we have won.
    At some point, people will start thinking socialism is better. In China government is afraid of its citizenry lest they rebel due to poverty and social unrest. Since our mighty citizenry has the 401K and pensions tied up in the future of Wall Street, the show goes on until the last man standing.

  34. Armistead

    Quoting your article:
    “But the fallacy of their thinking is that addressing and cleaning up this rot would lead to a financial crisis, therefore anything other than cosmetics and making life inconvenient for the banks around the margin is to be avoided at all costs. But these losses exist already. The fallacy lies in the authorities’ delusion that they are avoiding creating losses, when we are in fact talking about who should bear costs that already exist.”

    What is really happening is that the larger banks are given the green light from the government via Fannie Mae to avoid short sales and move toward foreclosure, then selling the loan to Fannie Mae at loan value or very near original loan value. Fannie Mae then tries to sell to owner occupants at a ~ 15% discount to their purchase value. So the US public ends up footing the bill to make the banks solvent again and clear up their bad debts and poor business decisions. Once this is completed to the point where the large, well-connected banks can withstand the removal of Fannie Mae, the govt will pull the plug on Fannie Mae and release it back to the public domain, having unloaded the bad debts onto the American public. These are my observations and opinions.

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