Elizabeth Warren tore into FHFA director Mel Watt over his failure to develop a program for Fannie and Freddie to provide principal modifications to underwater borrowers at risk of foreclosure. She also got in a dig for his failure to stop the agencies from pursuing deficiency judgments. That means going after former homeowners when the sale of the house they lost didn’t recoup enough to cover the mortgage balance. In the stone ages, when banks kept the mortgage loans they made, they never pursued deficiency judgements. They knew there was no point in trying to get blood from a turnip. Not surprisingly, the sadistic Fannie/Freddie policy has also proven to be spectacularly unproductive in financial terms. An FHFA inspector general study found that recoveries were less than 1/4 of 1% of the amount sought. Moreover, since those mortgage balances were often inflated by junk fees and other dubious costs, and mortgage servicers have done a poor job of maintain properties (they are too often stripped of copper and appliances, or get mold), any deficiency might be significantly or entirely the servicer’s fault.
Like most Warren performances, this one is worth watching, particularly when Mel Watt offers utterly unconvincing responses and Warren will have none of them. Here is a key part of the exchange:
Warren: The Treasury Department has found that principal reductions could save Fannie and Freddie nearly $4 billion and help half a million homeowners stay in their home. It has been six years since Congress created FHFA and in all that time your agency has never, not once permitted a family to reduce its principal mortgage through Fannie or Freddie.
I’ve asked about this repeatedly and you’ve said you’d look into allowing Fannie and Freddie to engage in principal reduction; you said it again today,. You’ve been in office for nearly a year now and you haven’t helped a single family, not even one, by agreeing to a principal reduction. So I want to know why this hasn’t been a priority for you. The data are there.
Watt: It’s probably an overstatement to say it’s not been a priority,” Watt stammered. “It’s just a very difficult issue. The reason it is difficult is because we are looking for exactly what you said – a win-win situation. We have to do this in a way that is responsible, otherwise we just reduce principal for everybody across the board…is not what anybody I think is advocating for, so then we have to decide what is a responsible way to do that…
Warren interrupted, and for good reason. “Responsible” is a dog-whistle word in mortgage policy debates. The phrase “responsible borrower” is the virtuous counterpoint of “deadbeat borrowers.” If you listened to Obama’s statements about assisting struggling homeowners, you’d regularly hear him talking about “responsible borrowers”. In practice, this turns out to be a Catch 22: if you are in trouble through no fault of your own, say because a major employer failed and tanked the local economy, which hurt your income and the market value of your home, you are nevertheless irresponsible, as clearly proven by the fact that you are in financial duress. When bank are hit by what they depicted as black swan events but they actually helped create, they get bailed out. But regular people who played no role in setting in motion the tractor trailer that ran over them? Fuggedaboutit. The “responsible way” is code for the Administration’s extreme reluctance about having the appearance of giving individuals a break in a country that is awash in welfare for the rich.
But what is telling here is that the reason that Ed DeMarco, the former head of the FHFA, was pilloried for years by Democrats before he was finally replaced was for the very issue that has put Mel Watt in Warren’s crosshairs: not offering principal modifications to borrowers. The very fact that Warren can cite CBO and Treasury studies on probable impact says there are already models out there for how to pick and choose among financially stressed homeowners; she referred to even more private studies. There’s no excuse for the FHFA not to have at least a pilot program underway, save it has no real intention of doing much.
This outcome should hardly be a surprise for the Obama Administration. We were against the Watt nomination and pointed out, as representative from
Bank of America Charlotte, he was a notably bank-friendly Democrat, and had opposed Audit the Fed, been missing in action during the London Whale hearings, and hosted soirees well populated by bank lobbyists. DeMarco was a convenient scapegoat. As we wrote in 2012:
But all of this noise about GSE principal mods is really a smokescreen. DeMarco has become the Administration’s favorite scapegoat as a way to divert attention from its refusal to get tough the banks in order to fix the housing market. Among the obstacles to a real estate recovery: a broken servicing model, in which servicers find it more profitable to foreclose than modify loans; second liens on bank books at inflated values; rampant chain of title issues; a huge overhang of foreclosures in progress.
If the Administration wanted serious principal reductions, they could have used the hundreds of billions of dollars available to them under TARP to do so. That was under its power and required no Congressional action. Instead of owning up to disasters like HAMP and FHA-Short Refi, they whine about DeMarco, Republicans in Congress, reckless homeowners, and once in a while, for show, they’ll say a few bad words about the banks that they continue to coddle. Just look at the conflicting messages: the banks are in such bad shape that they can’t be asked to write off second liens in full in the Administration’s mortgage settlement, yet they are deemed to be healthy by the Fed and are allowed to pay dividends rather than rebuild their balance sheets.
Dave Dayen similarly saw the demonization of DeMarco and the touting of Mel Watt as some sort of savior as a headfake:
Watt, a longtime friend of the financial industry, might make a terrible FHFA director, and he might make a fine one….The real story here is how the Obama administration has used the FHFA director position as a convenient distraction from their disastrous housing policies….
Too many liberals, in no small part egged on by the White House, have built up this single FHFA position as the sole impediment to justice and relief for millions of troubled homeowners. For years, Ed DeMarco has been a cartoon villain in this rendering, a former Bush appointee fiendishly destroying the American dream all by himself. (I’m hardly being hyperbolic; one site terms him the biggest roadblock to our economic recovery.)…
So why the liberal crusade against DeMarco?….By offloading the entire responsibility for the nation’s housing woes to one regulator, the White House has used DeMarco as a foil, averting their own shameful responsibility in designing the failed HAMP program and letting banks off with sweetheart settlement deals for systematic crimes committed against homeowners. DeMarco turns out to be very useful to the White House, absorbing all the scorn of liberal housing groups while the Administration floats along without blame.
The Administration has slow-walked replacing DeMarco in a manner that can only suggest they’re not all that perturbed with having him remain in place.
In fact, the trigger for the Administration to rouse itself and finally push DeMarco out the door may well have been his filing of 17 putback lawsuits against mortgage servicers seeking a total of $200 billion in damages. And the Administration looks to have managed to have its cake and eat it. The recent spate of bank settlements were largely mortgage securitization settlements with a series of misbehaviors all bundled into one big deal to make the headline numbers seem better. And the biggest item in these deals, far and away, were the DeMarco putback suits, which suddenly became Administration accomplishments. For instance, of the $9 billion in cash (the number to watch) in the recent JP Morgan mortgage settlement, $4 billion came from the FHFA component.
Let’s look at the long list of prominent Vichy Left types that sung from the “Fire DeMarco” hymnal and either implicitly or explicitly backed Mel Watt:
New York attorney general and mortgage fraud task force co-chairman Eric Schneiderman, who had eight state attorneys generals as allies: “Kamala Harris, Martha Coakley, Beau Biden,
In addition to New York, Massachusetts, California and Delaware, other attorneys general participating in the effort are Lisa Madigan of Illinois, Douglas F. Gansler of Maryland, Catherine Cortez Masto of Nevada, Ellen Rosenblum of Oregon and Bob Ferguson of Washington”
Coalition for a Fair Settlement:
Americans for Financial Reform:
New Bottom Line, PICO National Network, Alliance for a Just Society, National People’s Action, and Right to the City
As much as Warren also supported the Mel Watt nomination, she deserves credit for calling him out when he’s proven, as we anticipated, to be as loath to provide tangible relief to homeowners as his much-pilloried predecessor.
But will we see anyone on the list above to start demanding that the Administration fire Watt if, say in another six months, Watt is again on the hot seat before Warren with another round of “this is really hard” lame responses? The answer is no, because these soi-disant progressives can’t say in public that the Administration is the real reason borrowers continue to be used to foam the runway for banks.
The dirty litle secret. Watt could be confirmed by Republicans, whether that actually happened or not. Candidates would would succeed at fixing this could not, in part because o f bank-friendly Democrats like Hagan. There are lots of moving parts in the creation of this failed policy. Starting with who the President listens to. That is the President’s first failing. The more serious one is failing to change who he listens to when the policies demonstrably fail.
For the financial sector, there is a lot of false prosperity going on that will come back and bite them. Not sure what the public will do in another demand for bailouts. Bankers are playing with the individual constinuents of nitroglyerin. If those all come together with a bump, there are still more guns than people in this country that is being manipulated by the media toward civl war.
Glad for Warren calling out Watt. Hope someone can restore prudence to the powers-that-be however. They are getting their Nero-fiddles out and tuning out.
While it is clear that FHFA is uninterested in modifying mortgages to reduce principal in order to keep distressed folks in their homes, it is unclear to me why. Cui bono? Is it because these mortgages have been securitized and the holders of those securities would face a haircut – or is it services who love those fees from foreclosures?
I suspect it’s because servicers have to do the work and servicers are incompetent (except at cheating) and don’t want to do work for which they don’t get paid. So Watt does not want to deal with the fact that servicing is broken. In fact, Fannie and Freddie have huge muscle and could do a ton to force servicers to shape up, but he does not appear to see that as part of the FHFA’s mission.
Not to mention the fear that any demonstration of successful modifications anywhere, would set a precedent that Wall$treet is deathly afraid might spread like a virus, leading to demands for mods from all lenders.
The continued confiscation of property through foreclosure relies in large part on the inability of home owners to achieve fair modifications to what most understand are preditory contracts.
It’s hard not to think that the housing bubble was in effect a grand conspiracy to steal property through the age-old technique of leverage.
I agree. The more i’ve learned the more everything neatly seems to fall in to place. I mean it was just so convenient that the bankruptcy law was changed just before everything went to shit. Not to mention the lobbying for all other kinds of laws that came before, glass stegal and so forth. It all seems like a plan to me.
they don’t even have to be competent at cheating, because the regulators are looking out for their interests.
I can’t offer direct evidence to support Yves’ theory above, but I do personally know of a proxy (by inversion).
Here in the UK, the government is sitting on a lot of risk via it’s “Help to Buy” scheme (the details are not the complicated but I won’t go into them here; https://www.gov.uk/affordable-home-ownership-schemes/help-to-buy-mortgage-guarantees contains the details for those interested).
The TBTF which I’m acquainted with has been
told under fear of death i.e. senior execs losing their bonuses“encouraged” to drastically improve its servicing (and the servicing must be retained in-house and there’s very, very limited scope allowed for outsourcing) with a major focus on managing distressed debt in general and competent, reliable decisioning for doing mods in particular. There’s also been fines for servicing screw-ups (slap-on-the-wrist level stuff e.g. http://www.bbc.co.uk/news/business-24282800 and http://www.bbc.co.uk/news/business-19995766 but behind the scenes responsible senior mangers have been forced out via nod-and-a-wink nudging from the regulator and that has the effect of concentrating minds). The government (and so the UK taxpayer) is on the hook for the consequences of rubbish servicing, so, crikey, who would have thought it, high-calibre servicing is demanded of the TBTF.
Stunningly, it has been discovered by the TBTF that a) well thought-out mods work (subsequent losses are well within expected tolerances) and b) they don’t actually require that much in the way of complex systems. A fairly straightforward set of rules and — crucially — well trained and experienced staff to follow them are all that is required. It takes a good 6 months minimum and more like a year for the team members to get the hang of it. So they can’t be treated like crap. The team has a target and performance bonus set on the %age who successfully exit delinquency — so they’re incentivised to pick winners and then keep them winning, while not wasting time and resources on the hopelessly underwater for whom a bankruptcy is, alas, by far and away their best option.
Why Fannie and Freddie don’t take the same approach as the BoE (their situations sound remarkably similar) is beyond my feeble brain. Perhaps here in England we’re slightly less emotionally tied to “free market” solutions at all costs and when a market is “broken” we’ll get over ourselves, ‘fess up to it and get on with finding some sort of solution. Not that I’ll ever agree that government subsidies to the mortgage market is an entirely a good idea, but that’s another tale for another time.
It is worse than that with the GSEs. Repeatedly, in Uniform Law Commission committee meetings, the lawyers for Fannie and Freddie have asserted (while maintaining a straight face) that their servicers are independent contractors and that it is important to the GSEs to maintain that status so as to protect themselves from liability for their servicers’ rampant misconduct. Thus, they argue that they cannot supervise the servicers too closely lest the GSEs lose that (nonexistent) protection of the independent contractor defense. The GSEs exhibit astonishing failure to understand the law as to what it means to be a independent contractor, and their ostrich like approach to ignoring their servicers abuses is something that I hope Warren will throw at Watt the next time that he appears before her committee.
Perhaps this has nothing at all to do with this, but is there any possibility that the whole issue of clouded titles might emerge if the modification of mortgages were to proceed. Perhaps it might not be a direct issue, but if in the process of securitization, titles were made murky, then if there were anguished cries from holders of these dodgy financial instruments, could this issue emerge and really ruin somebody’s day?
Terrific post. Warren at her best. I distrust her campaigns via Moveon just because they come from Moveon. Love the “Vichy left” callout list at the bottom! Question: What is the Neighborhood Stabilization Initiative Watt mentions in the last minute? Is that smoke and mirrors? Tiny effect?
Just wanted to agree, “vichy left” is a great term.
Good to see the term “responsible borrower” get called out as a dog-whistle.
There’s another dog-whistle term – “job creators” – used to defend the banks.
For your Vichy left list:
National Urban League
According to Watt’s Wikipedia bio he was a member of the “progressive” caucus in Congress. Such is America these days: the country is so far slanted that even those who ultimately care little about the masses and fairness are classified as “progressive”.
In the MSM, and in the popular mind, progressive is another word for Political Correctness. That divide-and-conquer smokescreen keeps people raging so that economics, the meat-and-potatoes of the Left for two hundred years, is just never mentioned. Whatever else, economics is political and politics is about economics, and throwing tantrums based on identity politics leaves no one better off.
Sen Warren stands out by questioning the neoliberal consensus in the domestic financial business. As such, she’s a throwback to better days, ahead of the pack for the realignment that has to happen, and pretty much all by herself.
This bit of the bio is juicy too and very telling in light of this article, especially the last couple of paragraphs:
As they say: “he who pays the piper picks the tune”…
My memory is a little sketchy here, but as I recall it, DeMarco, a right winger and so no friend of the Obama administration, had done a pretty decent job of pulling Fannie and Freddie back from the edge of the cliff, and wanted to get into principal writedowns as a further order of business. It was at that point that Geithner showed up and insisted that in order to do so, DeMarco would first have to let Geithner’s banking buddies dump a huge pile of completely worthless toxic paper onto Fannie and Freddie, essentially re-tanking the Fannie and Freddie that DeMarco had just cleaned up. DeMarco refused to let Geithner do this, and Geithner, as he did at every opportunity he had, blocked the principal writedowns DeMarco had been planning.
It is interesting now to see Elizabeth Warren tear into Mel Watt over his failure to get into principal writedowns, and while it’s easy to praise her aggressiveness, what she really needs to be doing is calling out Barack Obama, who took principal writedowns off the table before he was even sworn into office, and has no intention of ever letting them back on. Mel Watt is merely Obama’s newest water boy in his ever on-going effort to please his masters.
So is this going to hurt Watt’s ‘s feelings?
Look to most people Fannie and Freddie are just the federal government and giving borrowers write downs is giving them money. And they are right really. So the idea of doing this has a lot of headwind from people who are going to demand theirs too. And they would be right to.
Oh Warren is a whore like any of them.
Warren wants to open the borders to hundreds of millions of third-world refugees so that wages can be reduced to sub-poverty levels and the rich can get even richer. ‘Immigration reform’ – cheap labor uber alles.
Why do you think that Obama likes her? Why does the mainstream media froth over her? Because ultimately she’s a whore like all the other corporate-sponsored whores and she’ll tell you what you want to hear and then break her promises just like Obama did when he ‘promised’ to renegotiate NAFTA…
Mel Watt is no different to the blacks who sold their own into slavery IMO.