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By Lorraine Woellert and Robert Schmidt Feb. 24 (Bloomberg) -- U.S. regulators probing flawed and illegal mortgage-foreclosure practices may try to extract $20 billion of penalties in a settlement with banks that serviced the loans, according to two people briefed on the talks. Terms of the potential accord, from regulators led by the Treasury Department and Department of Housing and Urban Development, havent been formally presented to banks, according to the people, who spoke on condition of anonymity because the discussions arent public. Lenders embroiled in the investigation include Bank of America Corp., JPMorgan Chase & Co. and Wells Fargo & Co. The government originally floated a $25 billion penalty, which banks rejected, one person said. Banks are resisting a large settlement because while regulators have found widespread flaws and violations in documents and procedures, the federal agencies said they so far have uncovered few examples of wrongful foreclosures. Regulators are weighing whether the settlement should require servicers to write down mortgage principal that would lower home-loan payments for distressed borrowers, the person briefed on the talks said. Details of the settlement talks were reported earlier in the Wall Street Journal. Mortgage servicers drew scrutiny from federal bank and housing regulators and state attorneys general after evidence emerged in court cases that banks and their contractors submitted flawed or illegal paperwork in hundreds of thousands of foreclosure cases. The so-called robo-signing scandal has slowed foreclosure and bankruptcy cases, clogged state courts and prompted a review of major financial companies. Fines Announced Soon Officials from HUD and the Office of the Comptroller of the Currency have said publicly that regulators may announce fines against servicers in the coming weeks. The discussions between financial industry lawyers and regulators remain fluid and no formal offer has been presented, according to the people. In addition, the state attorneys general are proceeding with their own negotiations with the servicers, and would likely be part of any global settlement. Spokesmen from the Treasury, HUD and other federal agencies declined to comment. Bank of America spokesman Dan Frahm, JPMorgan spokesman Tom Kelly, Wells Fargo spokeswoman Teri Schrettenbrunner, Citigroup spokesman Sean Kevelighan and Ally Financial Group spokeswoman Gina Proia declined to comment. John Walsh, acting Comptroller of the Currency, said last week that his agencys investigation had uncovered violations of state and local law but few wrongful foreclosures. The loan samples in our exams identified a small number of foreclosure sales that should not have proceeded because of an intervening event or condition, Walsh told the House Financial Services Committee on Feb. 17. Federal Housing Administration Commissioner David Stevens said the same day that any settlement could include mortgage modifications and civil fines paid to the Treasury. --With Carter Dougherty in Washington. Editors: Lawrence Roberts, Gregory Mott To contact the reporter on this story: Lorraine Woellert in Washington at lwoellert@bloomberg.net. To contact the editor responsible for this story: Lawrence Roberts at lroberts13@bloomberg.net.
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program? In fact, I suspect that this settlement is basically seen as a HAMP substitute. The House Financial Services Committeepassed a bill yesterday to end HAMP and other foreclosure relief programs. The House will probably take it up next week. While the Senate may not follow suit, they surely know that HAMP is indefensible. And so this settlement steps into the breach created by a crippled program without the support of Congress or the general public, who through word of mouth have slowed the new modification take-ups to a crawl. In addition, this code of conduct proposal has been split from the monetary fine, which is quite unusual. The only reason for such a split is to help the banks in their naked PR effort to minimize their exposure as much as possible. Witness this incredible line in todays Politico Morning Money, which explains that the banks would have to sign off on this settlement: Morning Money spoke with a number of bank executives about the concept of a $20 billion global settlement of state and federal mortgage servicer abuse probes. The executives view the idea as a naked shakedown by regulators, especially at the CFPB. There is little enthusiasm for signing on to it. They also view it as a direct contradiction of the administrations attempt to take a pro-business stance. How can they be business- friendly and sign-off on something like this? one executive said, noting that he did not believe the OCC was in favor of the deal. Is that the most insane thing youve ever heard? These clowns, who broke the global economy, think that accountability for crimes, even minimal accountability like this, is anti-business. Actually, its pro-business in the sense that it favors businesses that play by the rules and dont screw over their customers. Notice also how OCC is held out, as the banks try to play the regulators off each other. Ive often said that the worst thing that can happen to the foreclosure fraud situation is if Congress or the White House got involved in it. As it is, the banks are struggling with courts that arent buying their nonsense anymore, and state legislatures who are stopping all foreclosures without full title histories. This could and probably will spur the investors to act on the inability of trustees to properly convey notes to the securitization trusts. If its loan modifications you want, this will spur them faster than anything, to keep the investors at bay. Yves says its already happening. Thus you could expect the banks to start offering mods if they had the sort of pressure on them that this legislation would provide, and indeed that might be happening. A reader in comments said Bank of America had suddenly gotten religion about offering mods. And having banks offer mods quietly, on a case by case basis, is less likely to produce resentment by other homeowners than a highly visible program. Of course that assumes the banks become competent at doing mods. Theyve had every reason to be bad at them, since saying they cant possibly work operates to their advantage. Heck, Id roll the dice on Federal Trade Commission investigations into servicer practices over this seemingly compromised global settlement. Next week, the state AGs are meeting in Washington, and presumably this settlement will be one of the major topics under discussion. Groups like BanksterUSA and the National Peoples Action network will be there, kicking off an action on Monday with 600 homeowners, demanding a legitimate settlement. With respect to the AG investigation, all thats left for pressure is people power. 20 Comments
Matthews has returned to the home, where hes still trying to obtain a permanent loan modification. Hes also still trying to get his possessions back. His lawyer, Anthony DePastina, called the phone number made available to inquire about his belongings, but nobody ever answered. The servicer, in ransacking the house, also damaged it. They broke the hot water heater and cracked a drain pipe. They stuck Matthews with all the water bills, and he also wound up with a citation for overgrown weeds on the property. In Maryland, if a citation is not remedied, it becomes a misdemeanor, Matthews explained. But how can I cut the grass, they stole my lawn mower! Now, why do I bring up this particular servicer horror story? Mainly because this was a VA loan. And therefore, a great many of the elements of the settlement term sheet are similar to how the servicer is required to deal with a VA loan. The VA Home Loan Program spells out specifically how their products are to be treated. And still, in this case, the servicer violated the guidelines. Not only that, but they stole everything in the borrowers home to boot. Additionally, in this case the legal system actually worked. Matthews got his home back because of faulty affidavits. But that has not helped him get back everything he owned. The main point is this: you can make all the guidelines you want, and basically, the 27-page term sheet has most of them. You can demand a single point of contact for borrowers, an end to the dual track process of the servicer pursuing modifications and foreclosures simultaneously, specific mandates for modifications and all the rest. You can even set stricter guidelines for dealing with military families. All of those are in the term sheet, and many of those kinds of guidelines are in the VA Home Loan that Sgt. Kevin Matthews received. It didnt matter. Neither did all the promises servicers have made to reform their systems going back to 2003. Servicers pretty much dont follow the law. Thats why they were under investigation. A document that tells them to comply with the law, in language the banks are already using, doesnt seem like itll make much of a difference. Two more things. Without rigorous enforcement, the guidelines are approximately meaningless. State AGs and the Consumer Financial Protection Bureau would serve as the enforcement monitors under the terms of the agreement. And CFPB adds a new wrinkle to this. However, if servicers have been abusing their customers for this long, and the term sheet mostly reinforces the same laws that they broke all this time (with a couple additional strictures), whos to say that they wont simply treat the Kevin Matthewses of the world the same way again? The final issue is this. The term sheet sets the basic standards for conduct in the servicing industry that servicers should have followed all along. But this is supposed to be a sanction, for violations of law. So now the penalty for failing to follow the law is having to sign an agreement saying youll really follow the law this time? We dont know what monetary penalties or quotas for principal mods will come along with this yet. But we do know this. Kevin Matthews had all his possessions stolen from him, and nobody under this agreement will go to jail for that theft. TAGS: FORECLOSURES, FORECLOSURE FRAUD, MORTGAGES, CFPB, IRAQ, STATE AG INVESTIGATION, GLOBAL SETTLEMENT, MARYLAND, VETERANS ADMINISTRATION, KEVIN MATTHEWS
4closureFraud
ADAM LEVITIN | FORECLOSURE FRAUD SETTLEMENT: THE EMPIRE STRIKES BACK (OR WHY ARE REPUBLICANS SO OBSESSED WITH BACKDOOR CRAMDOWN?) Posted by Foreclosure Fraud on March 10, 2011 I dont know what these people are complaining about. The 27 page term sheet is mostly made up of existing laws that the servicers are asked to adhere to with no or else clauses. As for the monetary penalties, 20 or 30 billion is NOTHING compared to the TRILLIONS that they stole. How bout we apply the money to fund an army of legal aid attorneys to defend the deadbeats against these predators. If they have the legal ability to foreclose, and did everything THE WAY IT SHOULD HAVE BEEN DONE IN THE FIRST PLACE, then there shouldnt be a problem getting the house repossessed, right? But that may be to much to ask since they have already polluted our courts beyond belief FORECLOSURE FRAUD SETTLEMENT: THE EMPIRE STRIKES BACK (OR WHY ARE REPUBLICANS SO OBSESSED WITH BACKDOOR CRAMDOWN?) posted by Adam Levitin Its not surprising to see the banks and their supporters on the Hill pushing back on the proposed Foreclosure Fraud settlement term sheet. (See here and here and here). There seem to be three major lines coming out of the banks: (1) Its backdoor cramdown, and the agencies shouldnt be pursuing a policy rejected by Congress. Thus, House Republicans wrote to Treasury Secretary Geithner that The settlement agreement not only legislates new standards and practices for the servicing industry, it also resuscitates programs and policies [namely bankruptcy cramdown] that have not worked or that Congress has explicitly rejected. These House Republicans want to know: What specific legal authority grants federal and state regulators and agencies the power to require mortgage principal reductions when the House and Senate have voted down such proposals? . Similarly a coterie of bank-friendly pundits chimed in calling this sub rosa cramdown. (2) CFPB has no business being involved given that it doesnt have a director. This has to be read between the lines as a thinly veiled Elizabeth Warren witch hunt. At least one commentator was upfront about that in the American Banker. (3) The settlement could negatively affect the safety and soundness of the banks. Let me address all of these points. Theres a lot of willful confusion about this term sheet and what it is. Check out his response here House Republican Letter below Filed under bankruptcy, cdo, cds, Corruption, Fannie Mae, foreclosure, Foreclosure Fraud, Foreclosuregate,freddie mac, MERS, mortgage electronic registration system, Mortgage Fraud, securities fraud Where is the OUTRAGE? Fed Report Finds No Wrongful Foreclosures By Banks BUT JPMorgan Disagrees Full Affidavit of Jose Portillo of Shapiro & Burson | Over 1,000 Deeds Were Recorded with False Signatures
ECONOMY
banks off too easy is simply one more indicator that Republican lawmakers in Congress are fundamentally uninterested in grappling with the foreclosure crisis.
It's not surprising to see the banks and their supporters on the Hill pushing back on the proposed Foreclosure Fraud settlement term sheet. (See here and here and here). There seem to be three major lines coming out of the banks: (1) It's "backdoor cramdown," and the agencies shouldn't be pursuing a policy rejected by Congress. Thus, House Republicans wrote to Treasury Secretary Geithner that "The settlement agreement not only legislates new standards and practices for the servicing industry, it also resuscitates programs and policies [namely bankruptcy cramdown] that have not worked or that Congress has explicitly rejected." These House Republicans want to know: "What specific legal authority grants federal and state regulators and agencies the power to require mortgage principal reductions when the House and Senate have voted down such proposals?" . Similarly a coterie of bank-friendly pundits chimed in calling this sub rosa cramdown. (2) CFPB has no business being involved given that it doesn't have a director. This has to be read between the lines as a thinly veiled Elizabeth Warren witch hunt. At least one commentator was upfront about that in the American Banker. (3) The settlement could negatively affect the safety and soundness of the banks. Let me address all of these points. There's a lot of willful confusion about this term sheet and what it is. (1) Backdoor Cramdown? Hardly. This is the term sheet for a settlement. A settlement is a contract--it is a voluntary agreement between two parties to settle litigation. If a party doesn't like the terms offered, it is free to reject the offer and litigate. Put differently, the banks have to decide if they would prefer to buy peace with the AGs or litigate. That's the banks' choice. And that means that claims that this is sub rosaregulation are ridiculous. Government agencies have always advanced policy agendas through settlements, as well as rule-making, but when they choose to move via settlement, it always means that there's a possibility of litigation. In this sense, the proposed term sheet couldn't be more different than bankruptcy cramdown. Bankruptcy cramdown would make mortgage modification involuntary. If the homeowner filed for bankruptcy and qualified, the bank would have no choice about a loan modification. Here, the banks have a choice. There's nothing, absolutely nothing, in the term sheet requiring principal write-downs. So how on earth is this cramdown? The term sheet would require banks to include principal reductions as part of a modification "waterfall", but even so, the modification would have to be (1) NPV positive, as determined by the servicer according to its own proprietary NPV formula and inputs, and (2) would not have principal reductions as the first part of the waterfall. Requiring servicers maximize NPV is just making explicit what is stated in most PSAs--that the servicer will manage the loan as if for its own account. That means maximizing NPV. Any corporation that isn't
maximizing the NPV of its assets is committing waste. Business judgment rule means that there's a lot of leeway in determining what maximizes the value of a firm's assets, but the principle is inherent. If anything, we should be pushing much harder for principal reductions. At this point, it seems that every financial-related market has cleared except for housing. Read more: http://www.creditslips.org/creditslips/2011/03/foreclosure-fraud-settlement-the-empirestrikes-back-or-why-are-republicans-so-obsessed-with-backdoo.html
Luis Alvarez/Associated Press Tom Miller, attorney general of Iowa. Lurking in a proposed mortgage fraud settlement with the state attorneys general is a clause that could be worth billions for the big banks. Yes, I mean the settlement that might extract the supposedly large sum of $20 billion from the banks to settle foreclosure fraud. The one denounced as a shakedown by Senator Richard Shelby of Alabama. Despite such rhetoric, the settlement might let the banks avoid tens of billions of write-downs, thanks to a clause with a biblical flavor: the last shall be first. The proposed agreement which is preliminary and subject to intense negotiations being led by Tom Miller, the attorney general of Iowa would allow banks to treat second mortgages, like home equity lines of credit, just like the first mortgages. Under the proposal, when a bank writes the principal down on the first mortgage, the second should be written down at least proportionately to the first. Suddenly, the banks would be given license to subvert the rules of payment hierarchy, as Gretchen Morgenson pointed out in The New York Times on Sunday. Yes, the clause says the other alternative is to wipe out the seconds value entirely, but given a choice, the banks would be extremely unlikely to do that. So how is this a gift? Because when the principal on the first mortgage is reduced, the second lien is typically wiped out. The first lien holder has the first right to any money recovered, and the second lien holder has to wait its turn. The proposal seems astonishingly generous to the second-lien holders, said Arthur Wilmarth, a law professor at George Washington University. And who are those? Of course, they are the big mortgage servicers. And who owns the big mortgage servicers? The biggest banks. Throughout the financial crisis, we have heard plenty of intoning about the sanctity of contracts. But this suggests that the banks, with the authorities tacit approval, think contracts are for thee and not for me. The price to get the banks to do the right thing contractually with mortgage modifications and foreclosure is to allow them to not do the right thing elsewhere. To understand the significance of this issue, cast your mind back to the height of the housing bubble. People used their homes as A.T.M.s, withdrawing billions from their equity to finance motorboats and meals at Applebees. The top four banks now have about $408 billion worth of second liens on their balance sheets, according to Portales Partners, an independent research firm specializing in financial companies. Wells Fargo, for instance, has more money in second liens than it has tangible common equity, or the most solid form of capital. If banks had to write these loans down substantially, acknowledging the true extent of their losses, they would have to raise capital and might even teeter on the brink of insolvency. The performance of second liens is among the biggest puzzles in banking today: why are they doing better than the firsts? When Wells Fargo disclosed its earnings, for instance, it classified 5.3 percent of its first
mortgages as nonperforming, but put only 2.4 percent of its second liens in that category. That seems very odd because its much easier to lose your home if you dont pay your mortgage than if you dont pay your home equity line. Investors are deeply skeptical about the value in these loans, bidding about 50 cents on the dollar for them these days. Even allowing that banks probably hawk the least attractive loans and that investors bid low to generate a high return for the risk, many of these loans are still probably not worth 100 cents on the dollar. Yet banks have taken relatively few write-downs on second loans so far. In fact, even when the first clearly is in trouble, sometimes the banks appear to resist writing loans down. Bill Frey, who runs Greenwich Financial Services, has instigated lawsuits to try to recoup the value of mortgage securities by getting the banks to buy back faulty mortgages that were in the pools he examined. He analyzed mortgage securities made up of loans by Countrywide Financial, which is now owned by Bank of America, looking for instances when the second lien was still extant, even though the first lien attached to the same property had been modified. Such a situation would suggest that a bank was not marking down a second lien even when the underlying, more senior first lien was impaired. He says he found multiple instances in every one of the 200 pools he examined. Mr. Frey argues that the banks should charge off those seconds. Thats the concept of subordination, he said. Its been around since the Magna Carta. Maybe we should get on the bandwagon. This is not simply a fight between hedge funds, which own the securities that contain the first liens, and banks that house the seconds. Many mortgage securities are held by small banks, life insurance companies and pension funds. I can see little reason why a pensioner should take the loss instead of Bank of America, when its Bank of Americas bad loan, Mr. Frey said. A Bank of America spokesman said that it charges off second loans when borrowers havent made payments for 180 days. The bank doesnt, nor is it required to, charge them off just because the first lien has been modified, he says. But if a first mortgage is modified, the bank will increase its reserve because its more likely that the second will sour. Since the fall, the Office of the Comptroller of the Currency has been examining how banks across the industry are treating their second liens, according to two people familiar with the review. The O.C.C. declined to comment. But so far, the agency has evinced a rather blas attitude about the potential problem on banks balance sheet. Dont expect forceful action any time soon. In this case, making the last first may mean that weak banks continue to inherit the earth.
Jesse Eisinger is a reporter for ProPublica, an independent, nonprofit newsroom that produces investigative journalism in the public interest. Email: jesse@propublica.org. Follow him on Twitter (@Eisingerj). Related Articles: - 10-lies-we-live-by-and-should-stop-believing-if-we-want-this-to-stop - taking-justice-off-the-table-2-cent-settlement Via Living Lies
Denise Thomas, a former LPS worker who admitted to notarizing as many as 1,000 sworn affidavits daily often without witnessing the signature. Thomas said despite raised eyebrows her supervisors never used the word forge and repeatedly told workers the practice of signing someone else name on a sworn affidavit was legal. Thomas detailed the companys foreclosure document processing practices during a deposition in an Orange county foreclosure case on March 23. They didnt say forge the name. They just said this is legal, Thomas said. This person is going to be this persons surrogate signer because this person has a lot to do. More on this from Yves Smith. This is illegal, incidentally. And the revelations will not stop. Neither will the lawsuits. Bank of America is facing one from their own shareholders, for damages relating to their shoddy foreclosure processing. New Jersey now has a foreclosure overseer appointed by the court to crack down on fraud and abuse. There are investor lawsuits seeking putbacks. 60 Minutes will have a feature on foreclosure fraud this weekend, which could be a must-see event. None of this is going away, and unless some astounding pre-emption in the settlement takes place, individuals and even investors will be able to sue the banks for their fraudulent practices. Jamie Dimon and his colleagues may have a smile on their face. But they have reason to fear everyone outside of that settlement room, if not the ones inside.
TAGS: FORECLOSURES, FORECLOSURE FRAUD, JUDICIAL BRANCH, LOAN MODIFICATIONS, JPMORGAN CHASE, PRINCIPAL REDUCTIONS, GLOBAL SETTLEMENT, TOM MILLER, LPS, JAMIE DIMON, NEW JERSEY
Rortybomb
Five Points on that New Anti-Foreclosure Fraud Settlement Paper by Calomiris, Higgins and Mason.
Cheyenne Hopkins got her hands on a financial industry funded paper from Charlie Calomiris, Eric Higgins, and Joseph Mason, The Economics of the Proposed Mortgage Servicer Settlement (hence CHM) attacking proposed settlement surrounding servicing requirement. I imagine a lot of people will see this paper in the next few days, so lets create a readers guide to it. Theres two parts to the proposed settlement a push for principal reduction in cases of duress, and guidelines for new servicing best practices, and both parts come under fire, with the settlement cost[ing] $7 billion to $10 billion a year. First, readers will find a certain schizophrenia driving the argument. The first thing to know is that foreclosures are good for the economy delay of foreclosures, would harm the broader economy. If thats the case, then strategic defaults should be no big deal, because theyll help clear to market prices. But the entire first half of the paper is worry about strategic defaulters. Maybe servicers, the middlemen between borrowers and lenders, have conflicts of interest causing unnecessary foreclosures? Foreclosures usually hit lenders pretty hard. Nope, servicer incentives are perfectly lined up. Homeowners are dangerous, foreclosures are a great thing and the largest banks have no conflicts with and arent screwing up their servicing jobs as middlemen between borrowers and lenders. These are the talking points of the major servicing banks, not investors, not borrowers and certainly not communities. CHM ignore the well-documented conflicts, assume all modifications are created equal, dont mention the best cure for moral hazard, emphasize lowering the cost of capital at all costs, and frankly come up with small numbers anyway. In order: Conflicts Theres been a pretty well-established critique that says that servicers have different priorities than lenders. For instance, see National Consumer Law Centers Why Servicers Foreclose When They Should Modify and Other Puzzles of Servicer Behavior, (pdf) by Diane E. Thompson, which has this useful chart:
The settlement is designed to solve this conflict. How does CHM know that there isnt a problem with these conflicts? Heres their evidence: As such, NPV calculations are already used by servicers, exercising their fiduciary duty to maximize the value of payouts to investors. Servicers have a fiduciary responsibility to investors to make sure they maximize the payouts to investors. No conflict possible. The large number of foreclosures and the huge loss-given-default are economically efficient because, at the end of the day, servicers have a fiduciary responsibility to investors. Except that there isnt any fiduciary responsibility. Heres Adam Levitin previously explaining the issue:
The critical thing to realize about servicers is that they are not subject to any oversight. Investors lack the information to evaluate servicer decisions, while securitization trustees are paid far too little to want to stick out their necks and supervise servicers (with whom they often have cozy business relationships). A securitization trustee is not a general purpose fiduciary; it is a corporate trustee with very narrow duties defined by contract, and entitled to rely on information supplied by the servicer. So weve got a case of feral financial institutions, a sort of servicers run wild, with both homeowners and MBS investors bearing the costs of unnecessary foreclosures, all because servicers misjudged the housing market and didnt charge enough to cover the costs of properly performing their contractual duties. Lets be clear. Any type of fiduciary is with the trustee, not with the servicer, which is a separate contract. Even that isnt a fiduciary like they mean it. Their evidence for a lack of problems isnt true. Theres no fiduciary responsibility between the investors and the servicers. And the servicers arent subject to meaningful market competition. Homeowners dont choose their servicers, and investors dont have the tools to enact meaningful oversight. Is the idea reputational effects will be sufficient regulation? What Kind of Modification? They quote some studies from 2009 for evidence of modifications failing, perhaps not realizing that the literature has moved on extensively in the past year. Heres Sumit Agarwal, Gene Amromin, Itzhak Ben-David, Souphala Chomsisengphet and Douglas Evanoff on Market-Based Loss Mitigation Practices for Troubled Mortgages Following the Financial Crisis (October 2010), which finds [c]onsistent with the idea that securitization induces agency conflicts, we confirm that the likelihood of modification of securitized loans is up to 70% lower relative to portfolio loans. That research also reported this crucial chart:
Check out the low rates of redefaults on principal reduction. CHM say that modifications fail because look at all these failed interest rate reduction modifications. Again, servicers love modification that increase principal and reduce interest rates because they are paid as a percent of the principal. Investors hate them, because the loss-given-default (what they are left with in a foreclosure) is so high in this recession. But this conflict isnt in the paper. Moral Hazards So they spend the paper with the priorities backwards: they assume the big servicing banks, presumably the ones paying the bills for the paper, have no problems whatsoever while strategic defaulters are going to appear in waves, when well-documented theorectical and empirical evidence shows the servicing banks to be a cesspool of a failed business model and no evidence whatsoever for strategic defaulters. (Federal Reserve Board: The fact that many borrowers continue paying a substantial premium over market rents to keep their homes challenges traditional models of hyper-informed borrowers.) The paper is very concerned with moral hazard, the idea that people will default to take advantage of a modification who could otherwise pay. As the October 2009 COP report said we can design any settlement to remove moral hazard by putting pressure on borrowers: Third, program eligibility rules are designed to prevent borrowers who do not have genuine financial difficulties from obtaining any loan concessions. In other words, borrowers are screened to minimize moral hazard. Applicants for modifications must document their income, in order to prove that they cannot afford their full contract payment without modification. Borrowers who can already afford their mortgage will not receive a modification. The documentation requirements have been demanded by investors precisely to prevent moral
hazard issues from arising. They can create difficulties for homeowners with a genuine need, but the extra transaction cost is justified on the basis that it will minimize moral hazard for undeserving borrowers. If this is a concern we can amplify the filtering mechanism. Remember if we really want to eliminate moral hazard, make sure that creditors are acting in a collective manner, make sure that those who see the upside first absorb most of the downside as well as put the correct emphasis on the ongoing value of keeping someone in their homes we have this amazing technology called the bankruptcy code. As others have pointed out to me, CHM should be all about mortgage cramdown if they are this worried about moral hazard. Lower the Cost of Lending at All Costs! Heres a peek into the conservative worldview. Felix Salmon has a particularly brutual take on this paper, and he catches this argument: As for the authors attempts to quantify the costs of the settlement, they use numbers in the CFPB report uncovered by Shahien Nasiripour which says that effective special servicing of delinquent loans would have cost 75 bps/yr more than the actual costs incurred except the way they put it is very different: The CFPB recently estimated that five servicers avoided $24 billion in costs between 2007 and 2010, yielding a 75 basis-point reduction in interest rates. Er no, the CFPB nowhere says or even hints that there was any kind of reduction in interest rates as a result of the banks broken servicing operations. (And it wasnt five servicers, it was nine.) Ouch. But actually think this through: What the CFPB is estimating there is the estimated costs of the servicers actually doing their job. If they hired enough people, paid them well, put the infrastructure in place, and actually kept track of who owned what in line with the strictest interpretation of trust law. They didnt do this, and even the biggest bank supporter must think the banks probably could have been more careful with how they kept track of their documents. The entirely of their existence, from securitization law to REMIC tax code, depended on it, and they failed. Instead of something regrettable, CHM celebrate it! By cutting all those corners with actually keeping track of documentation, etc. think of the savings that were passed onto consumers. They also assume it was all passed onto consumers, but leave that aside for a second. By being incredibly irresponsible, by shoving the risks into the tail, the banks were able to lower the mortgage rate. Awesome except for the ravaged economy. For what it is worth, the best empirical evidence tells us that cramdown wouldnt raise the cost of capital because we are talking about something that is going to be in default, and take a huge hit, anyway. Numbers Also, last point. Given how hard they go into this paper, given that all their assumptions (We use a 25 percent increase in strategic defaults for illustrative purposes onlyFor simplicity, we assume all strategic defaults result in foreclosure) are very favorable to their results, is anyone else kind of disappointed that they highest number they massaged is a cost of $10 billion? Because the costs to the economy of unnecessary foreclosures add up quite quickly. Marcus Stanley from Americans for Financial Reform and myself came up with the following in two emails. Two million modifications (see their footnote #43). 30% cure rate, 50% redefault rate of those leftover (see pages 3, 9) both very conservative numbers leaves us with 700,000 modification. Lets grab a number from Mortgage Loan Modification: Promises and Pitfalls, Joseph Mason (same guy) The cost of a typical foreclosure has been estimated to be about $60,000, or about 20-25 percent of the loan balance (legal fees alone can cost $4,000), and those costs are expected to be higher in times of home price depreciation. So $60K times 700 K is $42 billion in costs to investors, which is a far worse prospect than the $10 billion they find in costs. Meanwhile the costs to homeowners, local governments and neighbors are estimated around $30,000 per foreclosure. So thats $21 billion in costs to communities!
Bank of America Corp. (BAC) and JPMorgan Chase & Co. (JPM), along with three other U.S. mortgage servicers, proposed paying $5 billion to settle a probe of their foreclosure practices by state and federal officials, two people familiar with the matter said. The proposal made by banks yesterday during settlement talks in Washington came after state attorneys general and federal officials offered revised settlement terms and a proposal for banks to fund principal writedowns for homeowners. The probe by all 50 states was triggered by claims of faulty foreclosure practices after the housing collapse, which state officials said may violate their laws. The original settlement proposal offered by states and federal agencies drew criticism from banks and Republican attorneys general opposed to a deal that would reduce principal amounts for borrowers. In a new proposal, officials called for a fund, administered by state and federal officials, that would in part pay for principal writedowns,
said Geoff Greenwood, a spokesman for Iowa Attorney General Tom Miller. Miller, a Democrat, is leading negotiations for the states. Attorneys general havent made a proposal for a payment by banks, Greenwood said. The $5 billion payment proposed by the banks was reported earlier by the Wall Street Journal. An amount in that range would be viewed as a positive for the banks, given larger numbers have been referenced previously, Brian Foran, an analyst with Nomura Securities International Inc. in New York, wrote in a report today. Regulators had previously suggested a $20 billion penalty.
spokesman for New York-based Citigroup, declined to comment. The fund for principal reductions could pay for restitution to borrowers whose homes were improperly foreclosed on, Greenwood said.
Loans, Foreclosures
State and federal officials yesterday also revised provisions of their original March term sheet offered to mortgage servicers. That term sheet included requirements for how banks service loans and conduct home foreclosures. The changes arent substantially different from the original proposal and incorporate negotiations with the banks, Greenwood said. Those talks continue in Washington this week, he said. Republican attorneys general criticized the original settlement proposal, saying the plan for principal reductions would encourage borrowers to default on loans to reduce payments. Some of those attorneys general met yesterday in Atlanta to discuss the issue, said Adam Temple of the Republican State Leadership Committee. Bob Davis, an executive vice president with the American Bankers Association, spoke to the group in Atlanta, telling them principal reductions dont work, he said in an interview. Loan balances must be reduced so much for borrowers struggling to make payments that its a better deal for lenders to foreclose instead, he said.
Principal reductions dont substantially improve the cash-flow problem, Davis said. You cant lower principal enough to make it an attractive tool.
Encouraging Defaults
During a conference call between state officials and the banks, some lenders said they opposed any settlement terms that would reduce loan balances, according to one of the people familiar with the talks. The banks argued a writedown plan would encourage homeowners to default, a notion some attorneys general on the call disputed, the person said. Bank representatives said they were open to other types of loan modifications, including changing interest payments, said the person. Mortgage servicers have reached agreements with U.S. banking regulators to improve procedures for modifying loans and seizing homes. Oklahoma Attorney General Scott Pruitt, a Republican, said last month that he may negotiate an alternative accord with the banks if the national settlement turns out to be inconsistent with our conviction.
Some Changes
Pruitt said in a letter to Miller in March that forcing lenders to reduce mortgage balances would take away incentives for banks to
loan money and destroy an already devastated housing market. Diane Clay, Pruitts spokeswoman, said in an interview that the latest settlement proposal incorporates some of the changes sought by the attorney general. She said she hadnt seen the new terms. General Pruitts letter certainly helped move the negotiations along, said Clay, who previously said several industry representatives had contacted with her office. Other state attorneys general who have criticized the proposal to reduce principal balances include those from Florida, Texas, South Carolina, Virginia, Alabama, Nebraska and Georgia. Attorneys general for Florida, Georgia and Alabama were among the officials meeting in Atlanta yesterday, Temple said. Lauren Kane, a spokeswoman for Georgia Attorney General Sam Olens, has said a bank, which she declined to identify, discussed with her office the federal regulator settlement. Adam Piper, a spokesman for South Carolina Attorney General Alan Wilson, said last month that two banking representatives shared research with his office and pointed out some concerns with certain provisions of the original proposal. Jennifer Meale, a spokeswoman for Florida Attorney General Pam Bondi, said last month that her office has had general discussions with banks about how the matter might be resolved.
To contact the reporters on this story: David McLaughlin in New York at dmclaughlin9@bloomberg.net; Dakin Campbell in San Francisco at dcampbell27@bloomberg.net To contact the editors responsible for this story: Michael Hytha at mhytha@bloomberg.net; David Scheer at dscheer@bloomberg.net
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Since last fall when news of illegal foreclosure practices by the top mortgage servicers (JP Morgan, Bank Of America, Wells Fargo, Citibank to name a few) a global settlement has been in the process with the fifty State Attorneys General working together to reach a settlement. The proposed settlement would create a fund to compensate those illegally foreclosed while providing transitional assistance for others. Original discussions also included principal write down for underwater homeowners. A negotiation is currently underway regarding the size of this fund. Initially $20 billion was proposed to which the banks countered with $5 billion. Today the Attorneys General came back with $17 billion as outlined in a Wall Street Journal story. State attorneys general told five of the nations largest banks on Tuesday they face a potential liability of at least $17 billion in civil lawsuits if a settlement isnt reached to address improper foreclosure practices, according to people familiar with the matter. The figure doesnt cover additional billions of dollars in potential claims from federal agencies such as the Department of Housing and Urban Development and the Justice Department. State and federal officials havent proposed a specific comprehensive settlement figure, but Tuesdays discussions represented the first effort to formally quantify potential liability. In the end the amount will probably be closer to $10 billion. Yet another liability the banks can ill afford and another reason to have a short position within the financial sector.
View Photo Gallery During the housing boom, millions of homeowners got easy access to mortgages. Now, some mortgage lenders have taken action after discovering that many mortgage documents were mishandled.
As state attorneys general continue their months-long settlement negotiations with the nations largest banks over widespread problems in foreclosure practices, they have yet to resolve differences within their own group on key issues. Even within the 14-member executive committee of attorneys general who are leading the 50state coalition, some have very different visions of what exactly a settlement should look like. More On This Story Foreclosure settlement divides state attorneys general After mistake, couple threatens bank with ... foreclosure Lenders, sellers shortchanges in short-sale scam Economic prices hit lowest level since 2009
View all Items in this Story Floridas Pam Bondi, for instance, has joined a handful of other Republican attorneys general in arguing against forcing banks to lower loan balances for troubled homeowners, a controversial practice known as principal reduction. New Yorks Democratic attorney general, Eric Schneiderman, meanwhile, has joined other states in pushing for stiff penalties for the firms involved, which include Bank of America and Wells Fargo. He also has insisted that any settlement should not let banks off the hook from the threat of future lawsuits. The disparate views from some of the countrys largest, most influential and most foreclosureplagued states means that Iowa Attorney General Tom Miller, a Democrat leading the
negotiations alongside federal officials, must walk a delicate line if he hopes to arrive at a settlement that his peers can support, that banks cans live with and that struggling homeowners (and voters) view as meaningful. Im still confident. I think theres a settlement there that everybody can agree to, Miller said in an interview Tuesday, though he added: There are still some major obstacles between here and there. Something like this can always get off track, but I still think we can come to a resolution. Nine months after widespread problems with foreclosures caused a national uproar, that hasnt proved easy or fast. A handful of crucial states, including California, Illinois and New York, have undertaken their own investigations into mortgage industry practices, subpoenaing information about business practices and seeking meetings with executives about such things as securitization to faulty court affidavits. Other officials, such as in Oklahoma, have threatened to pursue their own settlements with mortgage servicers. Miller knows and numerous banking industry officials agree that failing to get the biggest and most influential states on board could undermine the legitimacy of any settlement, particularly because those are the states with the resources to undertake their own inquiries and where the banks could suffer the largest liabilities. The big states and the states that are heavily impacted are more important than some of the rest of us. We arent all equal in that regard, Miller acknowledged, adding that the banks want most or all of the large states included, because if they dont sign on to an agreement, the legal battle would continue and be a significant battle. In fact, state and federal officials at a recent negotiating session in Washington tried to impress upon bank representatives just how uncertain the future could be if they refuse to settle, noting that the firms faced potential liabilities of at least $17 billion, based on the misconduct uncovered by investigators so far.