Big Defection in Attorney General Mortgage Settlement: 12 States Having Parallel Talks

At least when Penelope was resisting her suitors, it was clear what her objectives were. She was holding out on her belief that her husband Odysseus would return. And the suitors come off like real boors, so maybe she had also decided the single life was a better option than marrying any of them.

By contrast, it seems as if the Obama administration has completely lost the plot in what was formerly called the 50 state attorney general negotiations, and that appears to have fed directly into the news today of meetings of a breakaway group interested in concrete results.

Remember that despite the successful effort of by the Feds to make the AG group the face of the effort, this drill is being quietly guided by the Administration (the DoJ, HUD, and other federal regulators are participating in the negotiations). A telling moment occurred when Iowa AG Tom Miller, the leader of the state AGs, practically fawned over then assistant Treasury secretary Michael Barr in Congressional hearings in late 2010.

When the talks started, it was clear that the Administration wanted to get the housing mess out of the headlines, based on the false premise that the use of enough cheap credit, regulatory forbearance (official speak for “extend and pretend”) plus some helpful-around-the-margins programs to distract the peasants, would allow the housing market to heal on its own. The evidence is overwhelmingly to the contrary. Housing credit is entirely dependent on government support, and there is not even a remote chance that this will change any time soon. The authorities are not only oblivious to the way servicers abuse investors, but New York Fed president William Dudley made it clear that he thinks it’s a great idea to reverse the creditor hierarchy and burn first mortgage investors to save second lien investors, who happen to be banks. And the supposedly helpful programs like HAMP turned out to be utter disasters.

But the most remarkable to see federal regulators do the equivalent of sticking fingers in their ears and yelling “Lalala” whenever the issue of servicer and foreclosure mill fraud comes up (they give servicing deficiencies plenty of lip service in testimony and speeches, but their actions convey a completely different message). As Michael Olenick discussed in a recent post, there is a massive overhang of shadow housing inventory. Buyers are reluctant to come into the market if they think (correctly in many locales) that prices have not bottomed. In states that for various reasons now have more teeth in foreclosure documentation requirements (New York, Nevada, and New Jersey), foreclosures have come to a near standstill. That’s a de facto admission that the parties representing creditors (almost always securities trusts) failed to live up to their promises to investors in the pooling & servicing agreements. It also raises the ugly likelihood that the borrower IOU, the note, never made it to the trust, but is in limbo earlier in the transfer chain.

So the Administration’s puppets, the cooperating attorneys general, have been engaged in truly bizarre negotiations. The banks know the real objective is to “reduce uncertainty” which is really “get possible sources of trouble neutralized”. AG suits can be very powerful, as Eliot Spitzer’s prosecutions of big corporate accounting abuses and dubious behavior by sell side analysts demonstrated. They change perceptions of what will be tolerated and also pave the way for private lawsuits. And as we’ve pointed out repeatedly, the banks keep asking for more and more at the negotiating table. That’s a bad faith bargaining strategy, one you pursue only if you are certain the other side is desperate to get a deal done. But the whole process has looked less and less plausible as the banks keep upping their demands and Tom Miller keeps saying, month after month, that a deal is mere weeks away.

But the pretense started to crack as important states exited the talks: New York, Delaware, Nevada, Massachusetts, and California. The Miller camp keeps mentioning that California may come back with no evidence to support that spin (non-developments or old news on the California front has been misrepresented more than once, a sign of desperation to keep a brave front up).

But today’s leak is a biggie. A little birdie had told me a bigger group was discussing an settlement in opposition to the AG format a couple of months ago, but this is apparently the first in person meeting of a group this large. The report by Loren Berlin at Huffington Post says as many as 15 states are participating, and Hawaii, New Hampshire, Missouri, Mississippi, Maryland, Kentucky and Minnesota joined the five states that had already abandoned the talks in pow-wow in Washington last Tuesday. So the known total of the possible breakaway group is 12, and we’ve heard past rumors of Colorado and Oregon as being not very keen with the Miller-led talks. Key extracts:

The meeting was prompted by the slow pace at which a national foreclosure settlement led by the Obama administration is progressing, and is likely to be the first in a series..

“The talks weren’t just about investigations,” said a source with knowledge of the discussions. “They were also about the attorneys general offices feeling uninvolved in a process by which their federal colleagues have been negotiating on their behalf.”

Hah, so we have confirmation of who is really driving this train.

Notice that this group includes only Democrats (Colorado is Republican but not confirmed as on the outs). However, even a group of 12 Democratic AGs is significant. First, it is a direct repudiation to the Obamap-led effort to sweep the mortgage mess under the rug. Second, 12 or more departures would undermine the status of the settlement. Per Dave Dayen in an earlier post:

The master settlement agreement with the tobacco industry in 1998 eventually got the agreement of 46 AGs, with the other four coming aboard later. That would be similar to the necessary outcome here; to become the official position of the National Association of Attorneys General, at least 38-41 of the AGs would have to sign on. And even that has no binding force to supersede state law.

In addition, despite the effort of Tom Miller to pretend that there is unanimity among the AG group, he not only has dissenters on the left but also on the right. Four Republican attorneys general said in a letter last April that they were firmly opposed to any principal reductions of mortgages as part of the deal, and that IS now part of the deal. So in the unlikely event the Miller talks get closer to resolution, these AGs are also likely to bolt.

So perhaps there is some Penelope-like logic behind the neverending negotiations. Bringing them to a close would reveal, finally, what we said all along: that there is no deal to be had among the participants. Since the objective is reducing uncertainty, Mr. Market will be happier with his fantasy that a settlement deal may finally take place than the recognition that attorneys general no longer have pretend negotiations keeping them from doing their job of pursuing mortgage miscreants.

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  1. psychohistorian

    Thanks for the posting.

    This is giving science fiction a run for its money. Over half the state AGs are supporting the crooks, right?

    I thought the state AGs were suppose to be on OUR side? Our side, unfortunately, was redefined to be the inherited rich and their corporations given the rights of We the people in the 1950s.

    1. Nathanael

      Correction: the cadre of inherited rich who are *also* thieves by nature. It’s really an astoundingly small group of psychopaths who are causing most of the trouble.

    2. Mark C

      “Over half the state AGs are supporting the crooks, right?”

      “Over half the state AGs AND BARRY AND HIS BUDDIES are supporting the crooks, right?”

      There, fixed for ya. Maybe CitiLew will be Barry’s knight in shining armor and extort, er I mean cajole the wayward AGs with an offer they can’t refuse.

  2. London Banker

    Great coverage of this mess, as usual.

    You suggest that there is an “ugly likelihood that the borrower IOU, the note, never made it to the trust, but is in limbo earlier in the transfer chain.” I have wondered about this before. What if a larger crime associated with the poor servicing process is the multiple hypothecation of loans notes during the securitisation frenzy? That would explain the reluctance of AGs and the desperation of the Geithner/Obama team to prevent any actual investigation of the servicers and the actual processes followed before a settlement is signed. It might also explain the recent Fed hints that the next round of QE3 would target RMBS as a way of getting impaired, possibly fraudulent, securities out of the system – while still paying higher than market prices to those banks holding them.

    Am I being more a conspiracy theorist than the facts allow? I suppose I should be satisfied with the mammoth scope of fraud and market abuse already revealed, but somehow I sense there is more that is still hidden.

    1. Yves Smith Post author

      No, the idea that loans went into more than one trust is very much exaggerated as a concern. Only one originator seems to have done this, and it wasn’t one of the biggies (I can’t recall the name now….). And even then, I suspect it was driven more by their mortgage brokers (the low-life firms did not have their own origination but used third parties) than an attempt by the originator to defraud (will check with my sources on this and may add another comment later). In the later stages of the bubble, you’d have, no joke, former pizza delivery guys becoming brokers. Some of them figured out they could make as much money selling the same loan 2-2 times as finding 2-3 borrowers for far less work.

      The reason is that mortgage notes are actual documents, wet ink signatures, exempt from Federal digital signature law. The whole point of a securitization is to structure the cash flows. You can’t magically multiply the cash flows to have the actual cash go in multiple securitizations.

      1. Skippy

        Yeah, but, they knew the backwater scum ( ex – slave labor ) were unlawfully grabbing for the brass ring, and ran with it. Short term gaming…eh.

        Skippy… I know its so paradoxical, but, where to pin the tail on the donkey, the shrubs or the landscaper?

      2. Attitude_Check

        There is a difference between multiple securitizations of a mortgage, and re-hypothication multiple times. The MBS retained by the banks have almost certainly been re-hypothicated many times. Since these are long-term securities, the possibilitiy af MANY generations of re-hypothication is very high.

        1. Frank Speaking

          not a problem…everybody gets a percentage of properties square footage…let the banks negotiate against one another for a week.

          Then let Solomon’s sword decide.

        2. Yves Smith Post author

          The LOANS were not rehypothecated. That is what London Banker was asking about.

          LOANS are not used as collateral for securities lending.

          But the MBS are not “long term securities.” Duration is about 5 years.

          This rehypotehcation is a new meme in a really bad way. Give people a new concept and suddenly it is the explanation for everything.

          1. London Banker

            Sorry for the confusion. I know very well the difference between hypothecation of loan notes to an SIV/trust for RMBS and rehypothecation of collateral received against proprietary liabilities. Perhaps I shouldn’t have used hypothecation in this context as really the loan note should be transferred to the SIV/trust for RMBS – at least until maturity of the RMBS, as Yves notes above.

          2. LeonovaBalletRusse

            YVES, consider this: I know for a FACT that a bank who provided the mortgage for ca. 30% of the total price of a house and grounds certain, sold the mortgage “to a bank in Ohio” BEFORE the Act of Sale took place.

            YVES, does this alter your perspective on what has been possible in banking since 2006, when it comes to “mortgages”? Years later, I read that the bank in question was taken over by FDIC and sold to another. This was an “elite” bank for over a century, with an “impeccable reputation” so they said.

      3. Tad Ghostal

        Yves–Can you clarify what entity you are referring to when you say “mortgage broker?” By your description of the pizza guy-cum-broker, I assume your intent is to describe retail brokers.

        If so, then it would be very helpful to describe the mechanism by which a broker would ever come into possession of a loan, or when a broker would ever be in a position to sell a loan once, let alone twice.

        Brokers submit applications and clear conditions. That’s it. They never fund loans. They never draft loan documents. They are paid out of the loan proceeds directly by escrow as a service provider, along with the real estate agents, appraiser, title policies and escrow agents, etc. They literally have nothing to sell.

        It might be theoretically possible for a “correspondent” originator, which is considered to be a mongrel version of a mortgage banker, would be in a position to sell a single loan several times–but man, that business is so simple and straightforward that executing a fraud, particularly one that would have sufficient duration for a loan to ever make it *to* the securitization stage is just not a very credible possibility.

  3. jake chase

    The “housing problem” is several problems: prices which defy gravity and affordability for those who did not participate in the bubble, negative equity for those who did participate, many of whom cannot service the bubble debt from income which has become at best unreliable and at worst shrinking or non existent, titles which may be unmarketable as a consequence of servicer recording abuses, mortgage backed securities backed by nothing but an unwillingness to recognize that the emperor (MERS) has no clothes. Even if the authorities are determined to avoid punishing those conspicuously responsible, in many cases criminally responsible, nothing can revive the housing market unless it promotes new construction, eliminates title defects, permits potential buyers to find affordable homes offering reasonable appreciation prospects, repairs the investor black hole. Most of the agitation on this subject seems addressed to the “abuse” of current owners who paid too much for a house. A large number of these were speculators buying with intent to flip. It seems more reasonable and responsible to issue currency pro rata to the entire population, and thus eliminate the effect of excessive debt, as opposed to cramming down principal modifications in favor of a select class of ‘victims’ all of whom, when you get down to it, knew what they were doing or certainly should have.

    Such a universal bailout would eliminate the toxic mortgages, because anyone having mortgage debt up to the bailout amount could be compelled to pay it off. It would eliminate losses to mortgage investors. There would then be no reason to support housing prices, no problems with titles. Those who behaved prudently would receive a windfall with which some of them could even purchase a house.

    1. Susan the other

      There will still be title problems. It’s a misconception that the title is clouded only due to illegal foreclosure. The title is clouded from the minute the mortgage is assigned to MERS while the note is sold off, sometimes multiple times to other holders. The chain of title cannot be insured because it has been broken by the splitting of mortgage and note. This is what the NYFed was trying to get around with its white paper misadvising local judges. There must be a universal quiet title mechanism to legally address this disaster. Possibly a new kind of insurance.

      1. LeonovaBalletRusse

        Susan, you are dead right. This is the crux of the problem, the very reason that the grifters are insisting on immunity from prosecution–to the extent that they will not even be investigated, whereby indictments are impossible.

    2. F. Beard

      It seems more reasonable and responsible to issue currency pro rata to the entire population, Jake Chase

      I agree there should be “restitution checks” but the distribution should be equal, not pro rata. That way, unjust wealth inequality is decreased and not by making the rich poorer but by making the poor richer. And if further credit creation was forbidden, the “restitution checks” could be metered to keep the total money supply constant and thus avoid price inflation risk.

      1. jake chase

        Do you suggest a family with 16 children should get nine times as much as a family with no children? I think you might make the distribution so much to each “established household”, but we can cross that bridge when others recognize that only a bailout of some kind will prevent a continual meltdown and sooner or later a depression.

        1. F. Beard

          I would make it “per adult”. The state has no business recognizing marriage or the lack thereof.

    3. chris

      There already has been a massive bailout for the bankers. The flipping of property had little to do with the meltdown and to consider those who got lucky there was a global financial meltdown that now provides cover for their low tolerance for normal risk is just plain ridiculous. Few people knew what was going on with mortgages and on wall street and still few people understand the origin of the meltdown. It was not a few borrowers defaulting. It was much greater systemic issues where defaulting borrowers are used as scapegoats for criminal activity on wall street. Those who didn’t buy a property in the past 10 or 12 years and look smart now just got plain lucky. Any other time in history, other than prior do the great depression, buying a home was an intelligent and reasonable safe way to invest money. It is tiring to still hear people point the finger at home buyers as if they should have predicted financial collapse with no information while those on Wall street with all the information at their fingertips still got caught with their hand in the cookie jar. The self righteous that claim foresight now that was just fear of participating or taking any risk need to dig deeper to find the real answers to what has and is happening to the housing market. The real causes are found light years away from the final borrower.

    4. different clue

      House prices should not appreciate. It was the price appreciation bubble which preceded the price depreciation correction to begin with. Once house prices are hammered all the way back down to the affordable level from which they should never have been allowed to rise in the first place, house prices should never be allowed to rise ever again.

      A house should be viewed as a place to live, not as an appreciation-vehicle or some kind of live-in retirement fund. I am waiting for a $50,000 house to cost $50,000 again. I hope to see the $200,000 yuppie surcharge add-on to the price evaporate completely. Only then will I be able to afford a house.

  4. Ian

    London Banker- the only proof that the notes made it into the respective trusts would be a combination of; 1. The mortgage loan schedule within the PSA,along with signed receipts 2. the servicers’ remittance ledgers, showing payments going to the trusts’ trustee 3. records of payments made to investors in the trust.
    1.Currently,move mortgage loan schedules have been removed from SEC filings or other available docs.(“these pages have been intentionally removed”)
    2. there has been not one court proceeding in the US where a servicer has provided their remittance ledger,even when ordered to do so by the court.
    3. Records of payments to investors- generally inconclusive.
    Are the notes in the trusts? I don’t think so.

    1. London Banker

      What you say matches pretty well with what I suspect. Absent a ledger showing specific loan notes were assigned and transferred to specific SPVs/trusts, there is no way to determine that loans were only used for one securitisation rather than several. As you say, payment flows are not evidence of assignment of the note. They may be synthetic, and provided to cover up a multiple hypothecation. A Ponzi can run for quite some time from payment flows being remitted to the investors from the funds they give up when they buy into the securities/scheme.

    2. Yves Smith Post author

      No no no no no!

      We have written about this a ZILLION TIMES. None of the things you are citing is germane.

      The trusts are almost entirely New York trusts. The PSA specifies how the transfers into the trust were to be made. New York trusts can operate ONLY AS SPECIFIED, they can’t deviate, meaning they cannot accept assets any way other than as stipulated. Over 100 years of precedents on this.

      As we have discussed, the pooling and servicing agreement, which governs who does what when in a mortgage securitization, requires the note (the borrower IOU) to be endorsed (just like a check, signed by one party over to the next), showing the full chain of title. The minimum conveyance chain in recent vintage transactions is A (originator) => B (sponsor) => C (depositor) => D (trust). Some PSAs allowed for endorsement in blank (just endorse the note) by each party, others required it be endorsed over to the next party. Although PSAs typically required only that the note be endorsed at the last stage to the trustee, New York law requires that it be endorsed specifically over to the trust.

      In addition, the PSA stipulated that all this be done by a date certain, typically 90 days after closing.

      Looking at whether this happened or not is what determines whether a loan got to the trust. None of the things you cited is relevant. We have decisions all over the map because a lot of foreclosure defense attorneys aren’t up to making this argument (they might use pieces of it).

      Please don’t make up stuff after we have written SO much on this topic. You confuse readers and undermine our work.

      1. Fiver

        A hundred years of precedent may not mean much with the fine example set by the Supreme Court re Corporate Souls.

  5. Jim A.

    Wait. I thought that the banksters just (forgot to file/lost/what you talking about Willis?) the (mortgage/DoT) Are you saying that they screwed up the note too?

  6. 1whoknu

    I don’t hold out much hope for the Colorado AG except for if he see’s some political advantage. Maybe the prod is to thumb his nose at the Obama administration. But generally, (in the past) Colorado Republican’s tend to be more reasonable and willing to work on a bipartisan basis.

  7. LarryTOregon

    I have been forwarding these NC posts and comments about the AG Negotiation to a contact in the Oregon Ag’s office who is supposedly working directly under the attorney(s) involved in this negotiation. Still no idea where John Kroger stands.

  8. Frank Speaking

    “…Obamap-led [sic] effort to sweep the mortgage mess under the rug…”

    at the risk of being knee-jerked as a rabid Obama supporter I would argue that this characterization is just plain wrong.

    Call ’em indicisive, disengenious…even a politician (heaven forefend) but Obama is not stupid and he more than any other one person in the world knows just how big the mountain of economic shit left behind by Cheney/Bush/Greenspan/Paulson truly is AND that it is not possible to sweep a problem that large (and some would say growning) under anything.

    The world has been whistling passed the economic grave yard for three and a half years and we have probably another decade to go. There is no play book for this; no historic event to suggest remedy.

    We are in uncharted territory.

    Keep you powder dry—we have not seen the worse of it by a long shot.

    1. b.

      “Obama is not stupid ”

      That’s kind of the reverse Incompetence Dodge aka Has Secret Knowledge We Trust:

      “He can’t possibly be that dumb, so he must have some good reason to do something that flies in the face of reason and decency.”

      I don’t know that the observable facts validate this theory. We already know he is dishonest and vain, why not incompetent and stupid as well?

      “it is not possible to sweep a problem that large (and some would say growning) under anything.”

      If he was that smart, he would consider the possibility it cannot be kept under the rug for the remainder of 2012, let alone through 2016. He nurtured – with tender loving handouts and care to disenforce the law – to its new record size the monster that Clinton and Bush created. If he truly understood the magnitude of the shitpile created by that triplet of the most corrupt presidents ever, he would not want to risk being in charge when it blows up. But then, he wouldn’t have nursed the monster in the first place. It is tedious apologism to pretend that not only Whocouldanoode but also Whatcouldadone applies.

      1. Frank Speaking

        saying he isn’t “stupid” doens’t in anyway suggest “he has a good reason to do something or not do something rather that he has several bad choices and has to pick one that seems to be the least onerous.

        “We already know he is dishonest and vain, why not incompetent and stupid as well?”…he is the President of the United States which makes saying he is “dishonest and vain” redundant, ALL Presidents of the US—all politicians—are dishonest and vain—not all are incompetent and stupid (though haters will disagree).

        the only thing that can be deduced from events to date is that for now we have avoided utter disaster and that is the best anyone could expect.

        1. Fiver

          He’s not stupid by what measure? He has in every way exacerbated the problems by casting his lot with the Great American Worst, and not just the Mobsters who run Wall Street and Androids at the Pentagon.

          It was his obligation to act decisively in the public interest, or get the frig out of the way. He hasn’t even begun to stop feeding his New Best Buds whole other countries to chow down. He’s the sort of not stupid that is so taken by the delightful thought of his own not stupidness to half-believe the bullshit even he didn’t know he was capable of generating.

    2. nowhereman

      Frank, Frank, Frank, my god man open your eyes. You need look no further than Obama’s appointments to regulators and his cabinet positions to know that this weasel is up to his neck in it.
      He is not the solution, he is the problem.

      Pray for Obama; Psalm 109:8

      1. Westcoastliberal

        Absolutely right regarding Obama. He’s up to his ass in this mess. According to Ron Susskind’s recent book “Confidence Men” when Obama has the 5 CEO’s of the TBTF’s by the short hairs, we demurred to let them off the hook with HAMP, which was never intended to solve the problem; it was a PR trick at best. Guess he thought the problem would just fade away. And his staff was amazed that Obama thought the unemployment problem was just the result of “increased productivity” and was “natural”; nothing much government could do about that either.
        Finally, look at who his biggest donors were last election cycle, and look at who he brought in as his advisers. As one Dem Senator counseled Obama “You hired the wrong people”.

        1. different clue

          Perhaps he hired the right people to help him do what he actually wanted to do all along, right from the start.

    3. propertius

      No, he probably isn’t stupid – but he has received more funding from the FIRE sector than any politician in the history of the republic.

      He’s just serving his real constituency, which certainly ain’t the likes of me and thee.

      1. Frank Speaking

        “He told big donors in 2008…”

        before or after that fatefull White House meeting on Sept. 25th 2008 when Paulson gave everyone the lay of the land and McCain was speechless (first time in his military or political career according to those who know him well) and after which he was a manifestally changed candidate.

        The pictures that came from the photo op before the meeting began captured a look on McCain’s face that suggested he was about to be told he was being sent back to the Hanoi Hilton for another stay.

        From that day there was only one candidate for President. Recall McCain’s chief economic advisor Phill Gramm said, “I look at subprime loans and see the American Dream.”

      1. Frank Speaking

        “He told big donors in 2008…”

        before or after that fatefull White House meeting on Sept. 25th 2008 when Paulson gave everyone the lay of the land and McCain was speechless (first time in his military or political career according to those who know him well) and after which he was a manifestally changed candidate.

        The pictures that came from the photo op before the meeting began captured a look on McCain’s face that suggested he was about to be told he was being sent back to the Hanoi Hilton for another stay.

        From that day there was only one candidate for President. Recall McCain’s chief economic advisor Phill Gramm said, “I look at subprime loans and see the American Dream.”

      2. LeonovaBalletRusse

        It’s not even as simple as dishonesty, is it? By now, he’s in so deep that the very best he can do is to string things out like Bushie did, praying: “Apres moi le deluge,” or he is enthralled to organized crime so much that he will take the fall (as co-conspirator with Bushie et al.) after he is *re-elected*. Or something like that, because if he can’t hold this thing together, or if dares to let the beans be spilled, it’s like HE is going to hang for it.

        At least, that’s the way it would work out in Louisiana. At any rate, there is a terrible truth being hidden here. It’s as if NASA had *certain* knowledge that the comet headed this way and will not be diverted by any means. Would they tell us this? Like that.

      3. securecare

        What you people STILL fail to acknowledge is that all the hocus pocus you are going on about is justified (in the minds of TPTB) due to National Economic Security grounds.

        National Economic Security is the foundation for National Security.

        The banking system is the foundation of National Economic Security.

        Do you “get it” yet ?

        1. bhikshuni

          Too bad the policies appear destined to elicit less security for the nation than more than or equal to that before! …but perhaps a few drops of security here and there for a few gated communities in Caymans etc will be eked out.

          Obama looks like he is walking around with a bloody knife in his back from his bankster cronies. I would have had more respect for him if he hadn’t prostrated himself in order to willingly take it and parade around with it.

          As the old Tibetan saying goes, “when the poop touches the glove, the poop doesn’t take on the smell of the glove.”

  9. Frank Speaking

    as a tactic wouldn’t the banks prefer to be negotiating with individual states’ attorney than US AG?

      1. Frank Speaking

        I think you could make the case that the one big bribe has already been made and the States’Attorneys General didn’t get their taste.

        The office of State Attorney General is historically—I don’t think it is an exaggeration to say—filled by unapollogetic political climbers always on the lookout for the next rung up.

        How this plays out in achieving any sense of justice in this ongoing fiasco is beyond me.

        1. LeonovaBalletRusse

          Frank, they must have tried to bribe them all, don’t you think? Considering that what you say about AGs is more likely true than not, do you think the bribes were not high enough? Are the AG’s holding out for more?

          By *more*, I mean *the turn of the wheel of Fortuna* in the really grand scheme of things. Do you hear the groan of the cosmic wheel? Are AG’s placing their bets to be on *the right side of history*? Will they be Witnesses for the Prosecution at a devastating time certain? Are they poised for the “Fall” greater than that of the Berlin Wall?

          Since 2005, I have seen through a glass darkly: “It’s BIG.”

          Frank, no kidding, just for fun read: “BABYLON’S BANKSTERS: The Alchemy of Deep Physics, High Finance and Ancient Religion” by Joseph P. Farrell. It’s just fantastic enough to shift perspective on our current opaque deadlock, which might actually be a “game of chicken.”

          1. Frank Speaking

            the glass has been darkly since the days of Milken and Keating 5 read Bertram Gross’s “Friendly Fascism” 1980.

            more than anything else what is in dispute are disparate interests within the one percent.

            it isn’t personal, it’s business and nothing is more personal than business and why Lehman Brothers was left hanging (by the neck) in the wind and Soros lost more than 120 million on a promise reneged on.

            $120 million is real money even to a billionaire but mostly it was the promise reneged on.

    1. menomina

      Why expend 50 times the effort (and win some, lose some) when you can do it well once and win it all?

    2. Yves Smith Post author

      We’ve said again and again: no one with an operating brain cell (well, no one who is honest who has an operating brain cell) negotiates without investigating.

      And there should be prosecutions, not negotiations.

      1. Siggy

        Here Here! There is ample evidence of fraud. There is ample justification to bring prosecutions. The fact that we have not seen any and the fact that the President himself asserts that although the banksters were egregious, they were not criminal tells all.

        There may be questions about the conveyance of mortgage/deed of trust instruments; is it a matter for a state court or a federal court. Nonetheless, a proper chain of conveyance was not recorded and their are a lot of REO’s for which a proper deed of conveyance cannot be rendered. There’s the monumental crime that’s not being discussed. There’s the impediment to the beginnings of a resolution of the housing bubble.

      2. LeonovaBalletRusse

        But Yves, *prosecutions* is the one thing that BObama WILL not consider.

        He, personally, is in too deep. He followed the advice of his *betters* and now he’s trapped.

        1. LeonovaBalletRusse

          I mean, YVES, can you imagine what might lead to an investigation of the Harvard Endowment under the aegis of Larry Summers?

          Do you think that the High and Mighty would permit this to take place?

  10. Frank Speaking

    “The authorities are not only oblivious to the way servicers abuse investors, but New York Fed president William Dudley made it clear that he thinks it’s a great idea to reverse the creditor hierarchy and burn first mortgage investors to save second lien investors, who happen to be banks.”

    and who are the “first mortgage investors”?

    is this internecine warfare amongst the one percent?

    1. Tim

      “Who are the first mortgage investors?”
      Class time:
      First Mortgage: aka when somebody gets a mortgage paying 20% down payment there is one mortgage, that is the first mortgage, which is typically sold off to fannie and freddie or bundled up and sold as a security to investors (RMBS).

      When somebody puts down less than 20% but doesn’t want to pay mortgage insurance they get a second loan to cover the difference, which are typically loaned and retained by the banks.

      Legally the first mortgage have the 1st right to the collateral for whatever it’s worth in instance of a default. If there isn’t any left over for the second mortgage they get nothing on their defaulted loan. Hence this is a huge problem for big Banks if all the seconds they have are only worth 10% of full value because 90% are worthless with all the underwater property values then they are bankrupt behind their phone mark to market accounting.

      The exception to the second getting nothing is in the case of an underwater short sale where the seller has to get approval from the lender of the 1st and 2nd to be able to sell the house. This give the second mortgager leverage to rob, I mean extract some value from the first mortgager, since the forclosure would cost the first mortgage more than the short sale + the second payoff.

      1. Frank Speaking

        “First Mortgage: aka when somebody gets a mortgage paying 20% down payment there is one mortgage, that is the first mortgage…”

        aahhh…right tim…that would be the home buyer NOT an investor!

        thanks anyway for the class

    2. LeonovaBalletRusse

      “William Dudley” — YVES, is this Dudley DNA shared by BPs Dudley DNA?

      If so, isn’t that situation the *tell* of our predicament? Who is calling the shots?

  11. taunger


    I wonder about statements like this one: “Buyers are reluctant to come into the market if they think (correctly in many locales) that prices have not bottomed.”

    I am wary of the value of buyers right now. It seems the Feds have realized the only buyers that could have an effect are institutional/investors, and have gone that direction. Otherwise, I think the majority of the population is too indebted and poor to think about buying at just about any price. 30% of $150K is still a lot of money, and little of the population lives anywhere that you can actually buy a livable property for $150K.

    1. Tim

      Additionally there is more snowballing to go in the housing market as it continues to drop.

      I bought a 500k house with 20% down in June 2010 in Rancho Bernardo CA which is known to be a pretty mature/stable market and my home is now almost underwater if I have to pay seller fees. I had the opportunity to throw more money into it and refi to take $400 a month off my payment, but didn’t.

      One of the deciding factors is I want to retain my ability to make a strategic default if my house value drops much more. (In Cal refi’s are recourse loans)

      That’s additional “shadow inventory” that will be realized if prices continue to drop is continued strategic defaults.

    2. ebear

      >>>I wonder about statements like this one: “Buyers are reluctant to come into the market if they think (correctly in many locales) that prices have not bottomed.”

      I am wary of the value of buyers right now. It seems the Feds have realized the only buyers that could have an effect are institutional/investors, and have gone that direction. Otherwise, I think the majority of the population is too indebted and poor to think about buying at just about any price. 30% of $150K is still a lot of money, and little of the population lives anywhere that you can actually buy a livable property for $150K.<<<

      taunger is hinting at the greater problem that follows from the MBS debacle, i.e. destruction of the intergenerational transfer of wealth. In the old Happy Days model new families formed, homes were purchased, and the income from those investments went to support pensions and other fixed income that retired people used to live on. In short, the savings accumulated over one generation were recycled to the next, either through inheritance or via lending to purchase a home. That link is now broken.

      The destruction isn't entirely attributable to the housing bubble, there are multiple underlying causes here, but the upshot is that the major mechanism for transfer of wealth between generations is severely damaged, and that has implications far beyond any resolution of the immediate crisis. That bumper sticker you see on Winnebagos across the land -"We are spending our kid's inheritance"- never rang more true than it does today.

  12. steelhead23

    Here and elsewhere I have read that in some instances servicers were avoiding foreclosures and the day of reckoning by paying the coupon on the CDOs out of pocket and booking the costs against the trust, with recovery at eventual foreclosure. Have I got that right? How pervasive is this? Doesn’t such action risk suit by the bondholders that the servicers are not protecting the value of the trust? That is, couldn’t such suits go forward even if the bondholders haven’t suffered immediate losses?

  13. Smellslikechapter11

    As I have said here before, the source of this problem is the provisions of chapter 11 & 13 that prevent a cram down of a home loan on one’s principle residence. Without this there is no pressure to force the banks to write down principal. If we did this alone IMHO it would allow the market to clear a big chunk of inventory even if borrowers don’t file for bk because lenders will do as they did before 2005 — write loans down to their market value because they know they will be forced to do that in a bk

  14. LarryTOregon

    Curious background on Obama: His grandmother, Madelyn Dunham, a banker in the 60s and 70s and “… first female VP Bank of Hawaii.” I bet he learned a lot about banking as a kid!!!! Didn’t he claim to be very close to his grandma????

    1. Tim

      Can you back that up with the evidence?

      That’s holy sh*% quality right there as that would be a strong motive for Obama being sentimentally if not blindly biased towards helping out banks.

      Maybe he really is just naive and foolish as opposed to being premeditatively evil.

      1. Frank Speaking

        President Obama’s grandmother was a banker in Hawaii and therefore…what exactly!!!????

        you all are making Birchers seem rational, reasonable and you know…living in the real world

  15. Fiver

    When you consider how incredibly wreckless it was from any sort of legal/audit/official records perspective to set up MERS and just let everyone have at it you have to ask yourself whether it was deliberate – I can’t imagine any honest IT firm or law firm or consultancy or whatever that wouldn’t have advised making absolutely sure that this system and its administration were both legal and capable to ensure ALL functional requirements re the paperwork before signing off and handing over the keys. It is just astounding that something that should’ve been immediately evident to any number of people in the overall process (what was happening or not happening with the paper) could balloon to this size. Makes you wonder what other processes moved from paper to electronic have been completely buggered in some as yet unseen way.

    1. ambrit

      Dear Fiver;
      That’s the beauty of “..gone to electronic..” Everything is literally “unseen” now, and must be, as in every religion, taken on Faith. And when you have Faith, you often get Taken.

  16. LarryTOregon

    To: Frank Speaking

    Its just more data that leads one to conclude that Obama is NOT a banking neophyte. He may not know the details of risk management but he surely knows the culture, the attitudes and expectations. Now, if you are one who does not believe in coincidence then there’s plenty of grist for the mill…….either way the irony is never ending…..

    1. Frank Speaking

      cleary we have different standards for what constitutes “data”

      sure wish you all would make up your minds about Obama—is he stupid, ignorant and incompetent or is he a finacial genius schooled at his grandmothers knee on the intricacies of synthetic collateralized debt obligation—oh wait CDOs didn’t fucking exist at the time not to mention that banking at that time has absolutely no realtion to banking in the 21st century.

  17. zeev



  18. LarryTOregon

    To Frank Speaking:

    1. “Data” was the wrong word. Replace with “information.”

    2. I’m talking about temperament. If Obama’s grandmother-banker, with whom he was very close, had instead been a playwright, a ballet dancer or even a venture capitalist perhaps he’d be a little LESS calculating, cautious and risk averse. Maybe he’d be more interested in different viewpoints. He’s not required to know the mechanics of CDOs or CDS’ but he damn well should have command of the arguments. Do you think he’s read Econned? Do you think he’s heard of Michael Hudson or Steve Keen? Even if you got the sense that he reads Krugman or Stiglitz that’d be something. But nothing. NADA. What we have now is a very capable technocrat surrounded and commanded by the “Captains” of Wall Street. And the 50 State Settlement is indicative this dysfunction.

    If this was happening in Mexico, Los Tigres del Norte would be writing songs about it.

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