The Consumer Financial Protection Bureau’s Bogus Mortgage Settlement Math

A new article by Shahien Nasiripour of Huffington Post, “Big Banks Save Billions As Homeowners Suffer, Internal Federal Report By CFPB Finds,” includes a presentation from the Consumer Financial Protection Bureau dated February 14 prepared for Tom Miller, the Iowa Attorney who is leading the 50 state attorneys general foreclosure fraud settlement negotiations.

If I were a betting person, I’d wager this document was leaked to show that the Administration and the AGs did not just make up the $20 to $30 billion settlement figure that has been bandied about as their ask, but have a sound, reasoned basis for their demand.

Unfortunately, the document simply proves that they did make up the $20 to $30 billion figure. Not only is the analysis effectively fabricated, it’s the wrong analysis. But I have to say, having been at McKinsey, it’s impressive how the use of McKinsey firm format makes a story look much more credible than it really is.

CFPB Settlement Presentation

The critical part comes on the third page, “Calibrating the Size of Potential Penalties”. You’ll note it assumes that the cost of special servicing of delinquent loans would have cost 75 basis points a year more than actual costs incurred. That drives the entire analysis.

The rest is based on delinquencies at various major servicers from 2007 to the third quarter of 2010; presumably the CFPB has been able to get reasonably accurate data on that front.

Now….is this “75 basis points a year” a knowable figure, ex doing a lot of real nitty gritty work, which certainly has not taken place? We can debate whether this is the right figure, and whether the CFPB has also captured the actual costs correctly. Servicers are already losing boatloads of money; the economic model was never designed for a high level of delinquencies. Our Tom Adams has estimated that servicing now costs 125 basis points versus the banks’ typical fees of 50 basis points, plus another 30 to 50 basis points in late and junk fees.

If you take this analysis at face value, the biggest question is what standard of servicing is implied by “effective special servicing of delinquent loans”? If they mean loan modification, that’s the same as a new underwriting of a mortgage. That cannot be done through the current platform and would require new staff with different skill sets and software/systems support. So any estimates are at best finger in the air exercises. And given that some servicers are far more abusive with junk fees than others, Tom Adam’s comment above suggests that a one-size-fits-all estimate is misleading too.

But arguing over a pretty much made-up figure misses the critical point: the money the servicers saved is not even remotely the right basis for thinking about the appropriate settlement level. Settlements are based on potential liability. For instance, in 1998 the tobacco settlement, the tobacco companies agreed to pay a minimum of $206 billion over 25 years to be released from liability on Medicare lawsuits on health care costs plus private tort liability.

The saved costs bear no relationship to the banks’ legal liability for servicer-driven foreclosures, nor to the damage they have done to homeowners or broader society through their actions. It’s like basing the penalties in a robbery on the unpaid parking fees and rental costs of the car used to make the heist.

This resorting to completely irrelevant metrics results from the problem we have harped on from the onset of the settlement talks: the lack of investigations. You can’t settle what you haven’t investigated. The fact that Tom Miller has suddenly mentioned to an obscure mortgage industry rag that state banking regulators probed Ally is unpersuasive. First, Miller has a record for being less than truthful; he promised criminal investigations in no uncertain terms and has been walking that back ever since. Second, his own staff and various state attorneys general have effectively said there has been no investigation (as in they’ve at most gotten voluminous but undigested responses to subpoenas). You’d think state AGs would be aware of what their own state banking regulators were up to on a hot topic like foreclosure fraud. Third, I guarantee whatever thin “investigation” has taken place has overlooked the most important issue, and one that lay at the heart of the 2003 FTC/HUD examination of and settlement with rogue servicer Fairbanks: junk fees and misapplication of payments that push borrowers who’d otherwise be viable into foreclosure.

There’s more not to like in this document. For instance, on the second page, “Mortgage Servicing Settlement in Context,” under the column “Align Servicer Incentives,” we see the statement “Create a new trust structure outside existing RMBS which “traps cash” to align servicer and investor incentives.

Earth to base, this is a new variant on HAMP, which is pay the servicers to do mods. The only new wrinkle: taking the money from servicers and giving them the opportunity to earn it back. But as we saw with HAMP, the puny incentives provided by payments are dwarfed by the need to preserve the fictive value of over $400 billion of home equity loans and second mortgages, held by banks affiliated with the five biggest servicers. That, sports fans, means only shallow mods, when investors would prefer to take the hit of deep mods to viable borrowers, because the costs of foreclosure are even higher.

And we see the perverse program design on page 6, “Calibrating Breadth And Depth”. To be presented as some sort of success, the program needs to be able to tout large numbers of mods. Yet it is only clawing back a relatively small amount of money relative to the US negative equity hole (for starters, $480 billion on homes 50% or more underwater). So it’s going to focus on those only a little bit in negative equity land, which means it’s going to concentrate its efforts on those least in need of help. What is that going to do for the ground zeros of the housing crisis, such as Florida, Nevada, California, and Arizona? And what is it going to do to stem the losses investors are facing on foreclosures on deep negative equity homes, which from their perspective are the ones where mods make most sense? Apparently nothing.

This document looks to be rooted in Jean Baptiste Colbert’s saying: “The art of taxation consists in so plucking the goose as to get the most feathers with the least hissing”. Any number that was within hailing distance of the real damage done by foreclosure (which father of securitization Lew Ranieri was astonished to learn in 2008 was standard practice), rather than by doing mods for viable borrowers, would be a multiple of the levels under discussion here; and the servicer-driven foreclosure aspect pushes the figure higher still. This document bears the hallmarks of looking to rationalize a figure that would sound big enough to impress the public as being punitive, yet not hurt the banks at all (as page 4 demonstrates). But having a settlement designed around not damaging predators is certain to perpetuate their destructive conduct.

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  1. Siggy

    The document is a dog pile of propaganda intended to support a bogus $20 billion settlement fund.

    If the banks are allowed to settle for $20 billion, what will be state of the clouded title mortgages that remain?

    This settlement will not cure the clouded title problem.

    The banks don’t want to clear the clouded title problem because it would mean absorbing losses well in excess of the $20 billion chump change figure that someone dreamed up.

    Whether anyone realizes it or not we are headed for a major banking industry failure.

    1. Dr. Pitchfork

      Is the CFPB signing on to the notion that this was all just a paperwork problem due to servicers having cut corners by not hiring enough staff? Seriously? They’ve certainly given their tacit approval to that notion and the settlement being proposed on that basis.

      Moreover, you almost have to wonder if this wasn’t a setup — why would you ask the nascent CFPB to come up with a settlement figure and why would you ask them to do it on their own letterhead? Well, I suppose you would do that if you wanted to get the WSJ all buzzed up about E Warren the “rogue bureaucrat”. If only!

      1. sgt_doom

        Either Elizabeth Warren was the biggest stooge in creation, to sign on with the CFPB when it was put under the criminal front office, the Fed, or she’s the typical fraudster from Harvard, Princeton and Yale.

        Either way, any organization within the fold of the Fed has to be truly bent.

  2. lambert strether

    The whole CFPB project is flawed. What’s the point of more readable contracts when (as the MERS fiasco shows) contract law doesn’t apply, and the banks are beyond the rule of law anyhow? I like Warren, she’s a nice person, but “nice” doesn’t cut it when you’re dealing with a totally out of control kleptocracy.

  3. Bravo

    Yves has been on the right side of this issue from day one…..kudos to her….I hope the AG’s are listening. Time for the AG’s to show the country what a little backbone is all about, pull out of these negotiations altogether, and come up with a meaningful litigation strategy on behalf of the lowly consumers who have been left holding the bag in this still brewing disaster.

  4. chris

    It’s just more “what’s good for the big banks, must good for the consumer”.

    speaking of banking you should check out the Fed’s new mortgage loan officer compensation rules. They all seemed to be designed to drive more business to the banks. Yves should do a story on that! The Fed is basing their regulations on a study that interviewed a total of 35 people!

  5. Hugh

    Of course, the number is made up. This is all about legitimizing the looting and putting one over on the rubes. There is no reason to assume good faith here, indeed every reason not to.

    This reminds me of the $700 billion for the TARP. That too was portrayed as the amount needed to do the job. Only later did those involve admit that the only reason why $700 billion was chosen was that they wanted a “really big” number.

    Re Warren, I wrote elsewhere yesterday about what I call my Mukasey Rule. Michael Mukasey was the retired conservative judge who was supposed to bring independence, professionalism, and respect for the rule of law back to Bush’s heavily politicized Justice Department. What actually happened was that he continued and even expanded on the bad practices going on. That he was bad news was clear even from the time of his confirmation hearings. Some may remember the role of Democrat Chuck Schumer in shepherding this nomination through the Senate. In any case, my Mukasey rule is very simple. It is that no one with a shred of integrity would work for an Administration as corrupt, incompetent, and criminal as the Bush Administration. Seeing as the Obama Administration is just a continuation and expansion of the Bush Administration, the rule stills applies. The day Warren became an employee of the Obama Administration, the question was not if she would betray us but only where and when. With her participation in the mortgage settlement, those questions have been answered.

  6. Francois T

    Since Tom Miller is playing a central role in this whole charlie-fox, will any journalist/media person directly and bluntly ask Tom Miller:

    1) Why he is lying through his teeth, ie. backtracking from his unequivocal premise that criminal investigations would take place no matter what?

    2) How much or what did the Administration promised him for being nice to the banksters? Is it Geithner or Obama who proposed a deal?

    Niceties and false politeness be damned: This bad joke has lasted long enough.

  7. jcb

    “The saved costs bear no relationship to the banks’ legal liability for servicer-driven foreclosures, nor to the damage they have done to homeowners or broader society through their actions. It’s like basing the penalties in a robbery on the unpaid parking fees and rental costs of the car used to make the heist.”

    Ha! You’re the best thing since Tanta.

  8. dejavuagain

    What about the costs of repairing the damage to the quality of title??

    Anyway, I just say provide triple damages for junk fees plus attorneys fees, with no requirement for intent. Absolute liability. If in Bankruptcy, damages are not part of bk estate.

    If intent or gross negligence shown, then consider criminal bankruptcy fraud if done in a bankruptcy.

    Things will clean up quickly.

    1. beowulf

      Did you ever watch The Wire? The one time the “the head shot” (bank fraud) is the appropriate criminal charge and DOJ does nothing. Bill Black’s made the point that iduringthe S&L scandal, the Feds sent 1,000 execs to prison, which is, oh, about 1000 more than the present scandal.
      “Freamon explains the “head shot” to State’s Attorney Rupert Bond and A.S.A. Rhonda Pearlman. Since Clay Davis paid back the $80k his mother-in-law gave him for the down payment on his property, it falsifies the loan application (by making the gift a loan). Under federal law, the penalty is thirty years and a million dollar fine.”

      Whoever makes any false entry in any book, report, or statement of such bank, company, branch, agency, or organization with intent to injure or defraud such bank, company, branch, agency, or organization, or any other company, body politic or corporate, or any individual person, or to deceive any officer of such bank, company, branch, agency, or organization, or the Comptroller of the Currency, or the Federal Deposit Insurance Corporation, or any agent or examiner appointed to examine the affairs of such bank, company, branch, agency, or organization, or the Board of Governors of the Federal Reserve System…
      Shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both.—-000-.html

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