Bill Clinton’s favorite attack dog, James Carville, once said of Paula Jones: “Drag $100 bills through trailer parks, there’s no telling what you’ll find.”
Add a few zeros, and you can get the cooperation of much bigger players.
The noted financial services industry analyst Bill Clinton weighed in on the proposed $8.5 billion Bank of America mortgage settlement. Per Bloomberg:
Former President Bill Clinton said Bank of America Corp. (BAC)’s accord with mortgage-bond investors may give more “underwater” borrowers a chance to cut the amount owed on their home loans.
“You’d relieve the anxiety of countless Americans who would know they could hold onto their homes,” Clinton, 64, said in an interview yesterday with Bloomberg Television’s Al Hunt….
There is “enormous potential” to reduce the drag of U.S. housing on the economy if aspects of the Bank of America settlement are applied to the entire industry, Clinton said. The government could give an incentive to have that happen, he said….
By unclogging the housing market, “you lift not only an economic, but a psychological burden off of the homeowners and the banks,” Clinton said. “And we’re free to start lending again, we’re free to engage in normal economic activity.”
Since the Bloomberg clip of the interview did not include this section, I can’t tell whether Hunt brought up this topic or whether Clinton did. But as we’ll discuss shortly, this is not at all what the settlement (if it goes forward) is intended or likely to achieve. Yet Bloomberg reporter Hugh Son spun the story awfully hard to try to bolster this conclusion.
We must note that it seems rather peculiar that a former President would give a such a ringing endorsement to a deal. His approval was based on a feature that heretofore has not attracted much comment: that that Charlotte bank would be required to turn the servicing of delinquent loans over to special sub servicers. The argument is that special servicers can do a better job of giving principal mods.
Note the key word is “can,” not “will”. We’ll return to that, but let’s consider the matter of incentives, starting with Clinton.
Bank of America is participant in the Clinton Global Initiative meeting which is underway in Chicago. I assume that requires a financial commitment of some sort, although not at the level of a sponsor. The The mayor of Charlotte, North Carolina, which is where BofA is headquartered, was a “featured participant”. The CGI website lists only a sampling of “Notable Members: Private Sector” and they include Lloyd Blankfein, Jamie Dimon, Jeff Immelt, and Warren Buffett. His CEO is a former Goldman partner.
In addition, while we do favor mods, the idea that they will promote lending is questionable. First, banks have tons of reserves sitting at the Fed and could be lending if they cared to. The big constraint on lending now is not bank capacity, but the lack of willing and able borrowers, The head of M&T Bank, which is respected for its savvy in middle market lending, says he can’t find businesses that are strong enough to be good borrowing candidates. Consumers are for the most part in retrenchment mode, trying to pay down debt. The missing part of this equation is not credit, it’s lower unemployment and a real economic recovery.
And even if you took the Clinton theory at face value, it does not hold water. If banks (or those magical special servicers) do mods, that will force the biggest four retail banks (BofA, Citi, JP Morgan, and Wells) to take losses on their home equity portfolios, which total roughly $400 billion among them. Meaningful writedowns on these holdings would result in a major hit to their equity, and these banks are also expected to take losses on commercial real estate soon (certain accounting practices that have allowed for valuation gamesmanship will no longer be permitted after the third quarter of this year). Lower equity capital levels mean less, not more, lending. The top four banks don’t want to recognize the losses of the magnitude that any sort of market clearing event will achieve. The strategy has been extend and pretend: use regulatory forebearance to keep from showing how sick the banks are, and let them earn easy yield curve profits while the Fed keeps short term rates low. The hope is the banks will earn their way back to health. It might help if the banks would play along with this strategy and quit using these government gimmies to fund big bonuses.
Let’s now turn to how the Bloomberg reporter spun the story. He cited the highly respected analyst Laurie Goodman to support the “BofA deal will lead sub servicers to provide principal mods” thesis:
So-called sub-servicers “are often very effective at effecting principal-reduction modifications,” said Laurie Goodman, an analyst at Amherst Securities Group LP, which specializes in fixed-income assets such as mortgage bonds, in a note yesterday.
I have her report here. This is not merely cherry-picked but taken out of context in a way that renders it misleading. It is also important to note that Goodman is quite cool on the deal and thinks there may be enough pushback by certain investors that it will not get done.
Goodman’s comment came in a parenthetical in a section titled “Implications for the State Attorneys’ General Settlement”. She says the BofA deal will make it harder to get the state attorneys’ general deal done and expresses doubt that it will happen at all (we and others deem it to be a non-starter, given that New York attorney general Eric Schneiderman has said he is out, and some other state AGs are almost certain to be non-participants (six to ten Republicans who signed on only to sign off later, plus at least the AGs of Arizona and Nevada, who have filed litigation of their own and are reported to have no intention of dropping it). Here is the entire section:
Since this settlement contains both sizeable monetary penalties and mandates to
improve servicing practices by the largest servicer in the nation, we believe it will be harder to obtain consensus on the Attorneys’ General settlement. We have a hard time seeing a settlement with fines in the $20-$25 billion range, as originally discussed. We think that it will have much lower penalties than originally proposed, if it happens at all.
Moreover, we believe it will be harder to gain consensus on some of the more heavily contested servicing reforms. However, the transfer of high risk loans to subservicers was not in the original AG settlement, and the Bank of America settlement opens the door to placing it in the next version. (From our point of view, subservicers are often very effective at effecting principal reduction modifications. So even if the mandatory principal reduction language were eliminated, emphasis on sub-servicers for high risk loans would achieve much the same effect.)
Yet if you read her much longer discussion of sub servicers in the section on the pending BofA deal, she stresses the difficulty of moving servicing over to a sub servicer and getting incentives right. There are at least five types of “high risk” loans that are to be transferred:
(i)Mortgage loans that are 45+ days past due without right party contact (i.e. the Master Servicer has not succeeded in speaking with the borrower about resolution of a delinquency);
(ii) Mortgage loans that are 60+ past due and that have been delinquent more than once in any rolling twelve (12) month period;
(iii) Mortgage loans that are 90+ days past due and have not been in the foreclosure process for more than 90 days and that are not actively performing on trial
modification or in the underwriting process of modification;
(iv) Mortgage loans in the foreclosure process that do not yet have a scheduled sales date; and
(v) Mortgage loans where the borrower has declared bankruptcy regardless of days past due.
If a borrower is current for a full year, he gets transferred back to BofA. However, Goodman also indicates that some borrowers will fail before the program kicks in and queries whether the capacity is there. And this will take a lot of tuning to work well for borrowers (and servicers have incentives to be bad at this as a way to earn more fees):
We applaud this idea, but implementation of the transfer will take time. Bank of America is going to have to put into place systems to monitor the sub-servicers. In particular, the sub-servicers must make sure they are reporting to the Master Servicer consistently for the purposes of the remit reports. In addition, there must be some way to monitor the incentive fees from the sub-servicers, to make sure they are being charged appropriately. It is hard to verify if a contact (incentive fee $100) has been made if it does not result in action. Finally, Bank of America is going to have to fine tune some of the incentive fees. If a borrower is 87 days delinquent, there is an incentive to wait until the borrower is 91 days delinquent to make the contact (fee of $124 per month rather than $60 per month).
She also notes (emphasis ours):
The agreement also requires improvement in the mortgage servicing by the Master Servicer but not in sub-servicing. For first liens, the Master Servicer is required to benchmark its timelines from delinquency to foreclosure and from foreclosure to liquidation performance against industry standards. If these timelines are not met, there is an agreed upon series of fees that will be paid from the Master Servicer to the Covered Trusts.
In other words, Bank of America is expected to meet “industry standards” in the speed of its foreclosure process. As we’ve indicated in other posts, robosigning and other abuses were the direct result of pressure on foreclosure mills to meet strict time deadlines set by Lender Processing Services (which in some cases may indeed have come from the servicer; Fannie and Freddie are strict, but we suspect LPS may have encouraged the use of rigid timetables in other cases in an effort to prove its value to clients). And my recollection (and I’ve found some evidence to support it) is that Countrywide loans were slower to move through foreclosure than other loans, including those originated by Bank of America.
We’ve also heard of some very dubious fixes which suggest that documentation/chain of title issues may have been the source of the slower process, such as BofA claiming to be the noteholder on Countrywide originated loans, when Countrywide’s own SEC filings said it securitized 96% of the loans it originated (so the noteholder would have to be a trust, not Bank of America. This sort of finesse appeared to happen on what appeared to be all foreclosures on Countrywide originated mortgages in certain parts of the county and thus was implausible that so many loans could be in that 4% that Countrywide retained.
The bottom line of this discussion of timeframes is that this requirement in the settlement is certain to lead to faster foreclosures, perhaps considerably faster foreclosures. Having to maintain fixed timetables to foreclosure is ANTI, not pro, mortgage mods. Indeed, the settlement effectively imposes penalties if BofA or its subservicers were to end dual track (the widely criticized process by which the foreclosure process is kept in motion while a bank considers a mod). The problem is that banks have never built the infrastructure to coordinate the two processes well. The usual result is the foreclosure crosses the finish line first. And that is probably a feature rather than a bug, since it is more profitable for banks to foreclose rather than do a loan modification.
So the Ministry of Truth, with one of the biggest brand names as mouthpiece, has spoken. A settlement that if it were implemented, is certain to lead to fewer mortgage modifications, is spun as the reverse. But what do you expect when so much of the officialdom is directly or indirectly on the banking industry meal ticket?