The foreclosure crisis just resulted in a very expensive mix-up for one Mississippi resident.
Terry Jordan was sold the wrong foreclosed home by her realtor and wasn’t informed until after she had spent thousands of dollars on renovations, WREG 3 reports. Her realtor then admitted she had actually been sold the house a few feet away, one half the size and full of mold.
Mississippi is far from one of the more dense foreclosure landscapes in the country. Only one in 4034 properties received a foreclosure filing in March, according to RealtyTrac. Yet the realty company told WREG 3 that they had been given the wrong information by the bank in charge of the foreclosed home anyway. Jordan planned to sell the home at a profit.
How many hoops do homeowners have to jump through to shake off a bad mortgage?
This question is at the heart of a growing area of law as judges across the country try to determine whether borrowers who took out loans at the height of the subprime bubble, under shady terms that they weren’t told about, can cancel their mortgage and walk away debt-free.
Under the federal Truth in Lending Act, homebuyers who aren’t properly informed of the terms of their mortgage have up to three years to cancel or “rescind” the loan. What’s unclear now is whether borrowers, to ensure the debt is canceled, also have to file a lawsuit within that three-year window against whoever owns the loan.
On Tuesday, the Consumer Financial Protection Bureau weighed in, filing a friend of the court brief in a …
The Principal – Agent Problem: Part I – RMBS Data Integrity
Back near the dawn of time when I was in business school, and the faculty was hard-pressed to find topics to fill up the curriculum, they introduced the Principal – Agent Problem. As future corporate managers and agents of the stockholders, I suppose they wanted to explain to us that our economic interests were not identical to those of the owners. This wasn’t exactly the most shocking news we had ever received, but that was all that was said about the issue, back then.
Of course, there is considerably more to this multi-faceted problem. According to Wikipedia, “The principal–agent problem arises when a principal compensates an agent for performing certain acts that are useful to the principal and costly to the agent, and where there are elements of the performance that are costly to observe,” primarily due to asymmetric information, uncertainty and risk.
Let’s look at the relationship between the RMBS bondholder…
Richard always finds a way to tie this all together, placing the Obama Administration front and center!
HuffPO-
“Investigate the Banks!” Today a coalition of progressive groups handed in a petition with more than 360,000 signatures that demanded exactly that. It calls on the Administration to stop pushing a cushy fraud settlement for bankers, to pursue a fair deal for shafted homeowners, and to let criminal investigations against Wall Street crooks proceed.
Yet White House officials are still aggressively pushing the very same cushy deal on foreclosure fraud that inspired the petition. And just this week the Justice Department declined to prosecute fraudulent bankers once again as it worked to settle another bank fraud case.
Thinking about this relentless pursuit of Wall Street settlements, suddenly the last line of The Great Gatsby — the one about “boats against the current” — came to mind. Bankers are today’s Jay Gatsbys. They’re shady figures who have adopted a veneer of respectability, yet remain relentlessly, ruthlessly, and sometimes illegally self-interested.
The housing collapse and subsequent foreclosure crisis has claimed the homes of millions of Americans. But that tragedy may only be matched by the absurdity of some of its tales.
As of February, lenders had foreclosed on 2.7 million homes out of the 42.2 million mortgages borrowers took out between 2004 and 2008, according to a recent report by the Center for Responsible Lending. Though many of the foreclosures have been routine, the sheer volume has resulted in some glaring errors and bizarre evictions.
But there is some indication that these ridiculous stories are indicative of a systematic pattern of wrongdoing on the part of the lenders. Massachusetts Attorney General Martha Coakley announced a lawsuit, earlier this week, against five of the biggest mortgage lenders, JPMorgan Chase, Bank of America, Wells Fargo, Citbank and Ally Financial Inc., alleging the lenders used fraudulent paper work to foreclose on “hundreds if not thousands” of Massachusetts homes, BusinessWeek reports.
Eric Schneiderman, New York attorney-general, has launched an investigation into possibly unlawful foreclosures on the mortgages of active-duty members of the US military.
Data released last week by a federal banking regulator suggested that 10 leading lenders may have seized the homes of about 5,000 service members in violation of the Servicemembers Civil Relief Act. The nearly-decade old law restricts foreclosures on the homes of members of the US armed forces while they are on active duty.
Even those people putting their lives on the line for their country may not be safe from the American foreclosure crisis.
Ten lenders are reviewing close to 5,000 foreclosures of homes belonging to active-duty service members in an attempt to discover if they were carried out improperly, according to data from the Office of the Comptroller of the Currency, cited by the Financial Times. The OCC’s report is based on projections prepared by the lenders and and their consultants. Bank of America said it is reviewing 2,400 foreclosures of homes belonging to active-duty service members and Wells Fargo said it’s looking at nearly 900 cases. Citigroup is reviewing 700 foreclosures, the bank said.
This isn’t the first and afraid not going to be the last
HuffPO-
How could a home be repossessed when it’s no longer in the homeowner’s possession? One family in Utah asked itself the same question.
Shantell Curtis and her family were threatened with foreclosure months after they had sold their Vernal, Utah house. What’s more, the problem revolved around a single dollar, Connect2Utah.com reports (h/t The Consumerist). Months after the Curtises sold and moved out of the home in August of last year, their lender, Bank of America, reportedly sent them a foreclosure notice.
Bank of America claimed the family owed months of missed mortgage payments, before realizing a $1 coding error had held up the Curtises’ title transfer. While BofA has taken months to resolving the issue, the Curtises’ credit report has taken a beating since then.
Absolutely do not miss this piece from Abigail Field – So head over and please absorb the information.
Abigail C. Field-
If you want to cut through some of the nonsense the banks have managed to sell as information about the housing situation, robosigning, mortgage modifications, check out this very accessible interview of attorney Talcott Franklin by Martin Andelman.
Tal represents the majority of investors hosed once by Wall Streeers selling AAA-rated mortgage backed junk, and constantly being hosed again by the big bank servicers of those mortgages. Interestingly, his perspective sounds very much like homeowners’. Yes, a couple of times it gets a little too legalistic, but only for about 5 minutes of the slightly longer than the hour chat—when you hit the overview of the contracts structuring securitization, or any other topic that is more in the weeds than you want to go, take a deep breath and keep going. Most of the interview is in a rhythm and a language that creates clarity I’ve not seen or heard elsewhere.
Please find some time today or over the weekend to listen to this excellent podcast of Martin Andelman’s interview with Attorney Talcott Franklin, who represents more than half of all the investors in mortgage-backed securities on the planet. Tal’s the co-author of the “Mortgage and Asset-backed Securities Litigation Handbook,” and he’s a very experienced and highly sophisticated litigator. You will learn a whole lot and many thanks to Martin for this super interview.
The podcast is available in two versions… MP4 and MP3. The MP4 version includes a couple of slides that show diagrams of the basic securitization process, but the MP4 format may not play on some computers. The MP3 version is audio only, and should play on most any computer. Most listeners will have no trouble following along either way.
So, turn up the volume on your speakers, and click the MP4 or MP3 version. I loved recoding this podcast. If you want to know more about the foreclosure crisis, you’re about to learn from an expert on the other side of the foreclosures, the investor side… it doesn’t get any better than this!
WASHINGTON — Federal bank regulators are scrutinizing more than 150 home loan-related lawsuits directed at lenders and mortgage companies, a top official at the Federal Deposit Insurance Corporation plans to say Thursday, underscoring the threat the largest U.S. banks face from faulty and improper mortgage and foreclosure practices.
The revelation will likely add to large banks’ woes, as the five biggest servicers — Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial — currently face up to $30 billion in penalties from state attorneys general and federal agencies for wrongful foreclosures and other mortgage-related misdeeds.
When banks were caught improperly signing off on foreclosure documents last fall, consumer advocates and property rights experts hoped the public outcry would force the companies to change their foreclosure processing systems to ensure that meaningful document reviews were conducted and wrongful foreclosures were prevented.
But in at least one county in North Carolina, banks have responded by exploiting a filing loophole that has allowed them to continue signing off on key documents en masse, according to a local official.
WASHINGTON — Two of the nation’s largest mortgage firms illegally foreclosed on the homes of “almost 50” active-duty military service members, according to a Thursday report by the Government Accountability Office.
The report does not identify the two mortgage companies. GAO investigators attributed the finding to federal bank regulators, who recently completed a three-month probe into allegations of improper foreclosures carried out by the nation’s 14 largest home loan servicers.
HSBC North America Holdings, the nation’s ninth-largest bank by assets, warned investors Monday of impending fines after receiving notice from federal bank regulators admonishing the lender for improper foreclosure practices.
The bank is the latest in a string of large financial companies that have used recent securities filings to prep investors for fines and a significant increase in costs associated with processing mortgages and repossessing homes, after being cited by regulators for deficient and sometimes illegal operations. On Friday, Ally Financial, Wells Fargo & Co., and SunTrust Banks — three of the nation’s 10 largest handlers of home mortgages — said in regulatory documents that they expect to be sanctioned by the U.S. government for their foreclosure practices.
The penalties follow months-long criminal and civil probes by federal and state regulators into lenders’ mortgage practices. Officials said they found significant shortcomings and violations of various state laws. A “small number” of foreclosures should not have occurred, John Walsh, the interim head of the Office of the Comptroller of the Currency, the federal regulator of national banks, told a Senate committee earlier this month after his agency surveyed less than 3,000 out of millions of loan files.
First Posted: 12-14-10 04:23 PM | Updated: 12-14-10 04:32 PM
The leader of a nationwide investigation of foreclosure fraud told homeowners Tuesday that the probe will have some serious consequences for bankers.
“We will put people in jail,” Iowa Attorney General Tom Miller said, according to homeowner advocates present at the meeting in Des Moines.
Miller said the 50 attorneys general participating in the investigation want criminal prosecutions as part of a big settlement with home-loan providers. The probe launched this fall in the wake of news that the foreclosure processes at many large banks are as bogus as the lending practices that fed the housing bubble in the first place, as banks granted loans indiscriminately to feed derivatives-market speculation and failed to track original mortgage documents after packaging the loans and selling them to investors.
Several banks temporarily halted foreclosures shortly after some of the more egregious practices were revealed, but resumed seizing homes as the scandal fell off the front pages.
Other components of the proposed settlement would require banks to modify home loans and reduce debt burdens for customers whose homes are worth less than their mortgages.
“One of the main tools needs to be principal reductions, just like in the farm crisis in the 1980s,” Miller told the assembled homeowners, adding that he also supported restitution for victims of wrongful foreclosure. “There should be some kind of compensation system for people who have been harmed.”
This Article examines in detail the disappointing first year of the Obama Administration’s foreclosure mitigation effort, the Home Affordable Modification Program (HAMP), including its premises, mechanics, slow start, and ultimately modest results. The Administration committed $75 billion to try to help three to four million struggling homeowners avoid foreclosure and reduce the spillover effects of the foreclosure crisis on the economy as a whole. After a year of operations, ending in March 2010, only about 230,000 borrowers had entered into permanent HAMP modifications, and even these were not necessarily truly permanent. Government agencies predicted a redefault rate of 40% or more because HAMP borrowers were typically left owing more on their homes than their value and with high and difficult-to-sustain debt burdens overall. HAMP is a compelling illustration that prevention is easier than cure; the challenges of getting relief to millions in a short period of time proved daunting. A partial front-end regulatory fix was adopted, applicable to future subprime home loans, but if policymakers and regulators are ever tempted again to ease up constraints on high-risk financial products such as subprime mortgages, they should remember the cautionary tale of HAMP.
This is the second installment of a two-part series. Read the first here.
We have explained in prior posts and interviews that there are two foreclosure-related crises. Our first two–part post called on the U.S. to begin “foreclosing on the foreclosure fraudsters.” We concentrated on how the underlying epidemic of mortgage fraud by lenders inevitably produced endemic foreclosure fraud. We wrote to urge government policymakers to get Bank of America and other lenders and servicers to clean up the massive fraud. We obviously cannot on rely solely on Bank of America assessing its own culpability.
Note also that while we have supported a moratorium on foreclosures, this is only to stop the foreclosure frauds — the illegal seizure of homes by fraudulent means. We do not suppose that financial institutions can afford to maintain toxic assets on their books. The experience of the thrift crisis of the 1980s demonstrates the inherent problems created by forbearance in the case of institutions that are run as control frauds. All of the incentives of a control fraud bank are worsened with forbearance. Our posts on the Prompt Corrective Action (PCA) law (which mandates that the regulators place insolvent banks in receivership) have focused on the banks’ failure to foreclose as a deliberate strategy to avoid recognizing their massive losses in order to escape receivership and to allow their managers to further loot the banks through huge bonuses based on fictional income (which ignores real losses). We have previously noted the massive rise in the “shadow inventory” of loans that have received no payments for years, yet have not led to foreclosure:
After a quick review of its procedures, Bank of America this week announced that it will resume its foreclosures in 23 lucky states next Monday. While the evidence is overwhelming that the entire foreclosure process is riddled with fraud, President Obama refuses to support a national moratorium. Indeed, his spokesmen on the issue told reporters three key things. As the Los Angeles Times reported:
A government review of botched foreclosure paperwork so far has found that the problems do not pose a “systemic” threat to the financial system, a top Obama administration official said Wednesday.
Yes, that’s right. HUD reviewed the “paperwork” problem to see whether it threatened the banks — not the homeowners who were the victims of foreclosure fraud. But it got worse, for the second point was how the government would respond to the epidemic of foreclosure fraud.
The Justice Department is leading an investigation of possible crimes involving mortgage fraud.
That language was carefully chosen to sound reassuring. But the fact is that despite our pleas the FBI has continued its “partnership” with the Mortgage Bankers Association (MBA). The MBA is the trade association of the “perps.” It created a ridiculous on its face definition of “mortgage fraud.” Under that definition the lenders — who led the mortgage frauds — are the victims. The FBI still parrots this long discredited “definition.” That is one of the primary reasons why — in complete contrast to prior financial crises — the Justice Department has not convicted a single senior officer of the large nonprime lenders who directed, committed, and profited enormously from the frauds.
Note that the Justice Department is not investigating foreclosure fraud. HUD Secretary Donovan’s statement shows why:
“We will not tolerate business as usual in the mortgage market,” he said. “Where there have been mistakes made or errors, we will hold those entities, those institutions, accountable to stop those processes, review them and fix them as quickly as possible.”
Note the language: “mistakes”, “errors”, “processes” (following the initial use of “paperwork”). No mention of “fraud”, “felony”, “criminal investigations”, or “prosecutions” for the tens of thousands of felonies that representatives of the entities foreclosing on homes have admitted that they committed. Note that Donovan does not even demand that the felons remedy the harm caused by their past fraudulent foreclosures. Donovan wants them to “fix” “processes” — not repair the harm their frauds caused to their victims.
The fraudulent CEOs looted with impunity, were left in power, and were granted their fondest wish when Congress, at the behest of the Chamber of Commerce, Chairman Bernanke, and the bankers’ trade associations, successfully extorted the professional Financial Accounting Standards Board (FASB) to turn the accounting rules into a farce. The FASB’s new rules allowed the banks (and the Fed, which has taken over a trillion dollars in toxic mortgages as wholly inadequate collateral) to refuse to recognize hundreds of billions of dollars of losses. This accounting scam produces enormous fictional “income” and “capital” at the banks. The fictional income produces real bonuses to the CEOs that make them even wealthier. The fictional bank capital allows the regulators to evade their statutory duties under the Prompt Corrective Action (PCA) law to close the insolvent and failing banks.
There’s been plenty of recent media attention to the prospect of investor lawsuits over fraudulent mortgages and mortgage securities. But investor lawsuits against mortgage servicers could be even more damaging than these other lines of legal inquiry. The four largest banks hold nearly half a trillion dollars worth of second-lien mortgages on their books—loans that could be decimated if investors successfully target improper mortgage servicing operations. The result would be major trouble for the financial system. The result would be major trouble for too-big-to-fail behemoths.
Mortgage servicers are the banking industry’s debt collectors. They accept payments and forward them along to investors who own mortgage securities– servicers themselves don’t actually own the mortgages they handle. This is a recipe for trouble for a variety of reasons, but one of the biggest problems is the fact that the nation’s four largest banks also operate the four largest mortgage servicers. Bank of America, Wells Fargo, JPMorgan Chase and Citigroup service about half of all mortgages in the United States. They also have multi-trillion-dollar businesses whose interests often conflict with those of mortgage security investors.
“JPMorgan CHASE is in the foreclosure business, not the modification business’.” That, according to Jerad Bausch, who until quite recently was an employee of CHASE’s mortgage servicing division working in the foreclosure department in Rancho Bernardo, California.
I was recently introduced to Jerad and he agreed to an interview. (Christmas came early this year.) His answers to my questions provided me with a window into how servicers think and operate. And some of the things he said confirmed my fears about mortgage servicers… their interests and ours are anything but aligned.
Today, Jerad Bausch is 25 years old, but with a wife and two young children, he communicates like someone ten years older. He had been selling cars for about three and a half years and was just 22 years old when he applied for a job at JPMorgan CHASE. He ended up working in the mega-bank’s mortgage servicing area… the foreclosure department, to be precise. He had absolutely no prior experience with mortgages or in real estate, but then… why would that be important?
“The car business is great in terms of bring home a good size paycheck, but to make the money you have to work all the time, 60-70 hours a week. When our second child arrived, that schedule just wasn’t going to work. I thought CHASE would be kind of a cushy office job that would offer some stability,” Jerad explained.
That didn’t exactly turn out to be the case. Eighteen months after CHASE hired Jared, with numerous investors having filed for bankruptcy protection as a result of the housing meltdown, he was laid off. The “investors” in this case are the entities that own the loans that Chase services. When an investor files bankruptcy the loan files go to CHASE’S bankruptcy department, presumably to be liquidated by the trustee in order to satisfy the claims of creditors.
The interview process included a “panel” of CHASE executives asking Jared a variety of questions primarily in two areas. They asked if he was the type of person that could handle working with people that were emotional and in foreclosure, and if his computer skills were up to snuff. They asked him nothing about real estate or mortgages, or car sales for that matter.
The training program at CHASE turned out to be almost exclusively about the critical importance of documenting the files that he would be pushing through the foreclosure process and ultimately to the REO department, where they would be put back on the market and hopefully sold. Documenting the files with everything that transpired was the single most important aspect of Jared’s job at CHASE, in fact, it was what his bonus was based on, along with the pace at which the foreclosures he processed were completed.
“A perfect foreclosure was supposed to take 120 days,” Jared explains, “and the closer you came to that benchmark, the better your numbers looked and higher your bonus would be.”
CHASE started Jared at an annual salary of $30,000, but he very quickly became a “Tier One” employee, so he earned a monthly bonus of $1,000 because he documented everything accurately and because he always processed foreclosures at as close to a “perfect” pace as possible.
“Bonuses were based on accurate and complete documentation, and on how quickly you were able to foreclosure on someone,” Jerad says. “They rate you as Tier One, Two or Three… and if you’re Tier One, which is the top tier, then you’d get a thousand dollars a month bonus. So, from $30,000 you went to $42,000. Of course, if your documentation was off, or you took too long to foreclose, you wouldn’t get the bonus.”
Day-to-day, Jerad’s job was primarily to contact paralegals at the law firms used by CHASE to file foreclosures, publish sale dates, and myriad other tasks required to effectuate a foreclosure in a given state.
“It was our responsibility to stay on top of and when necessary push the lawyers to make sure things done in a timely fashion, so that foreclosures would move along in compliance with Fannie’s guidelines,” Jerad explained. “And we documented what went on with each file so that if the investor came in to audit the files, everything would be accurate in terms of what had transpired and in what time frame. It was all about being able to show that foreclosures were being processed as efficiently as possible.”
When a homeowner applies for a loan modification, Jerad would receive an email from the modification team telling him to put a file on hold awaiting decision on modification. This wouldn’t count against his bonus, because Fannie Mae guidelines allow for modifications to be considered, but investors would see what was done as related to the modification, so everything had to be thoroughly documented.
“Seemed like more than 95% of the time, the instruction came back ‘proceed with foreclosure,’ according to Jerad. “Files would be on hold pending modification, but still accruing fees and interest. Any time a servicer does anything to a file, they’re charging people for it,” Jerad says.
I was fascinated to learn that investors do actually visit servicers and audit files to make sure things are being handled properly and homes are being foreclosed on efficiently, or modified, should that be in their best interest. As Jerad explained, “Investors know that Polling & Servicing Agreements (“PSAs”) don’t protect them, they protect servicers, so they want to come in and audit files themselves.”
“Foreclosures are a no lose proposition for a servicer,” Jerad told me during the interview. “The servicer gets paid more to service a delinquent loan, but they also get to tack on a whole bunch of extra fees and charges. If the borrower reinstates the loan, which is rare, then the borrower pays those extra fees. If the borrower loses the house, then the investor pays them. Either way, the servicer gets their money.”
Jerad went on to say: “Our attitude at CHASE was to process everything as quickly as possible, so we can foreclose and take the house to sale. That’s how we made our money.”
“Servicers want to show investors that they did their due diligence on a loan modification, but that in the end they just couldn’t find a way to modify. They’re whole focus is to foreclose, not to modify. They put the borrower through every hoop and obstacle they can, so that when something fails to get done on time, or whatever, they can deny it and proceed with the foreclosure. Like, ‘Hey we tried, but the borrower didn’t get this one document in on time.’ That sure is what it seemed like to me, anyway.”
According to Jerad, JPMorgan CHASE in Rancho Bernardo, services foreclosures in all 50 states. During the 18 months that he worked there, his foreclosure department of 15 people would receive 30-40 borrower files a day just from California, so each person would get two to three foreclosure a day to process just from California alone. He also said that in Rancho Bernardo, there were no more than 5-7 people in the loan modification department, but in loss mitigation there were 30 people who processed forbearances, short sales, and other alternatives to foreclosure. The REO department was made up of fewer than five people.
Jerad often took a smoke break with some of the guys handing loan modifications. “They were always complaining that their supervisors weren’t approving modifications,” Jerad said. “There was always something else they wanted that prevented the modification from being approved. They got their bonus based on modifying loans, along with accurate documentation just like us, but it seemed like the supervisors got penalized for modifying loans, because they were all about finding a way to turn them down.”
“There’s no question about it,” Jerad said in closing, “CHASE is in the foreclosure business, not the modification business.”
Well, now… that certainly was satisfying for me. Was it good for you too? I mean, since, as a taxpayer who bailed out CHASE and so many others, to know that they couldn’t care less about what it says in the HAMP guidelines, or what the President of the United States has said, or about our nation’s economy, or our communities… … or… well, about anything but “the perfect foreclosure,” I feel like I’ve been royally screwed, so it seemed like the appropriate question to ask.
Now I understand why servicers want foreclosures. It’s the extra fees they can charge either the borrower or the investor related to foreclosure… it’s sort of license to steal, isn’t it? I mean, no one questions those fees and charges, so I’m sure they’re not designed to be low margin fees and charges. They’re certainly not subject to the forces of competition. I wonder if they’re even regulated in any way… in fact, I’d bet they’re not.
And I also now understand why so many times it seems like they’re trying to come up with a reason to NOT modify, as opposed to modify and therefore stop a foreclosure. In fact, many of the modifications I’ve heard from homeowners about have requirements that sound like they’re straight off of “The Amazing Race” reality television show.
“You have exactly 11 hours to sign this form, have it notarized, and then deliver three copies of the document by hand to this address in one of three major U.S. cities. The catch is you can’t drive or take a cab to get there… you must arrive by elephant. When you arrive a small Asian man wearing one red shoe will give you your next clue. You have exactly $265 to complete this leg of THE AMAZING CHASE!”
And, now we know why. They’re not trying to figure out how to modify, they’re looking for a reason to foreclose and sell the house.
But, although I’m just learning how all this works, Treasury Secretary Geithner had to have known in advance what would go on inside a mortgage servicer. And so must FDIC Chair Sheila Bair have known. And so must a whole lot of others in Washington D.C. too, right? After all, Jerad is a bright young man, to be sure, but if he came to understand how things worked inside a servicver in just 18 months, then I have to believe that many thousands of others know these things as well.
So, why do so many of our elected representatives continue to stand around looking surprised and even dumbfounded at HAMP not working as it was supposed to… as the president said it would?
Oh, wait a minute… that’s right… they don’t actually do that, do they? In fact, our elected representatives don’t look surprised at all, come to think of it. They’re not surprised because they knew about the problems. It’s not often “in the news,” because it’s not “news” to them.
I think I’ve uncovered something, but really they already know, and they’re just having a little laugh at our collective expense… is that about right? Is this funny to someone in Washington, or anyone anywhere for that matter?
Well, at least we found out before the elections in November. There’s still time to send more than a few incumbents home for at least the next couple of years.
I’m not kidding about that. Someone needs to be punished for this. We need to send a message.
The Treasury Dept.’s mortgage relief program isn’t just failing, it’s actively funneling money from homeowners to bankers, and Treasury likes it that way.
The Treasury Department’s plan to help struggling homeowners has been failing miserably for months. The program is poorly designed, has been poorly implemented and only a tiny percentage of borrowers eligible for help have actually received any meaningful assistance. The initiative lowers monthly payments for borrowers, but fails to reduce their overall debt burden, often increasing that burden, funneling money to banks that borrowers could have saved by simply renting a different home. But according to recent startling admissions from top Treasury officials, the mortgage plan was actually not really about helping borrowers at all. Instead, it was simply one element of a broader effort to pump money into big banks and shield them from losses on bad loans. That’s right: Treasury openly admitted that its only serious program purporting to help ordinary citizens was actually a cynical move to help Wall Street megabanks.
Treasury Secretary Timothy Geithner has long made it clear his financial repair plan was based on allowing large banks to “earn” their way back to health. By creating conditions where banks could make easy profits, Getithner and top officials at the Federal Reserve hoped to limit the amount of money taxpayers would have to directly inject into the banks. This was never the best strategy for fixing the financial sector, but it wasn’t outright predation, either. But now the Treasury Department is making explicit that it was—and remains—willing to let those so-called “earnings” come directly at the expense of people hit hardest by the recession: struggling borrowers trying to stay in their homes.
This account comes secondhand from a cadre of bloggers who were invited to speak on “deep background” with a handful of Treasury officials—meaning that bloggers would get to speak frankly with top-level folks, but not quote them directly, or attribute views to specific people. But the accounts are all generally distressing, particularly this one from economics whiz Steve Waldman:
The program was successful in the sense that it kept the patient alive until it had begun to heal. And the patient of this metaphor was not a struggling homeowner, but the financial system, a.k.a. the banks. Policymakers openly judged HAMP to be a qualified success because it helped banks muddle through what might have been a fatal shock. I believe these policymakers conflate, in full sincerity, incumbent financial institutions with “the system,” “the economy,” and “ordinary Americans.”
Here’s how Geithner’s Home Affordability Modification Program (HAMP) works, or rather, doesn’t work. Troubled borrowers can apply to their banks for relief on monthly mortgage payments. Banks who agree to participate in HAMP also agree to do a bunch of things to reduce the monthly payments for borrowers, from lowering interest rates to extending the term of the loan. This is good for the bank, because they get to keep accepting payments from borrowers without taking a big loss on the loan.
But the deal is not so good for homeowners. Banks don’t actually have to reduce how much borrowers actually owe them—only how much they have to pay out every month. For borrowers who owe tens of thousands of dollars more than their home is worth, the deal just means that they’ll be pissing away their money to the bank more slowly than they were before. If a homeowner spends $3,000 a month on her mortgage, HAMP might help her get that payment down to $2,500. But if she still owes $50,000 more than her house is worth, the plan hasn’t actually helped her. Even if the borrower gets through HAMP’s three-month trial period, the plan has done nothing but convince her to funnel another $7,500 to a bank that doesn’t deserve it.
Most borrowers go into the program expecting real relief. After the trial period, most realize that it doesn’t actually help them, and end up walking away from the mortgage anyway. These borrowers would have been much better off simply finding a new place to rent without going through the HAMP rigamarole. This example is a good case, one where the bank doesn’t jack up the borrower’s long-term debt burden in exchange for lowering monthly payments
But the benefit to banks goes much deeper. On any given mortgage, it’s almost always in a bank’s best interest to cut a deal with borrowers. Losses from foreclosure are very high, and if a bank agrees to reduce a borrower’s debt burden, it will take an upfront hit, but one much lower than what it would ultimately take from foreclosure.
That logic changes dramatically when millions of loans are defaulting at once. Under those circumstances, bank balance sheets are so fragile they literally cannot afford to absorb lots of losses all at once. But if those foreclosures unravel slowly, over time, the bank can still stay afloat, even if it has to bear greater costs further down the line. As former Deutsche Bank executive Raj Date told me all the way back in July 2009:
If management is only seeking to maximize value for their existing shareholders, it’s possible that maybe they’re doing the right thing. If you’re able to let things bleed out slowly over time but still generate some earnings, if it bleeds slow enough, it doesn’t matter how long it takes, because you never have to issue more stock and dilute your shareholders. You could make an argument from the point of view of any bank management team that not taking a day-one hit is actually a smart idea.
Date, it should be emphasized, does not condone this strategy. He now heads the Cambridge Winter Center for Financial Institutions Policy, and is a staunch advocate of financial reform.
If, say, Wells Fargo had taken a $20 billion hit on its mortgage book in February 2009, it very well could have failed. But losing a few billion dollars here and there over the course of three or four years means that Wells Fargo can stay in business and keep paying out bonuses, even if it ultimately sees losses of $25 or $30 billion on its bad loans.
So HAMP is doing a great job if all you care about is the solvency of Wall Street banks. But if borrowers know from the get-go they’re not going to get a decent deal, they have no incentive to keep paying their mortgage. Instead of tapping out their savings and hitting up relatives for help with monthly payments, borrowers could have saved their money, walked away from the mortgage and found more sensible rental housing. The administration’s plan has effectively helped funnel more money to Wall Street at the expense of homeowners. And now the Treasury Department is going around and telling bloggers this is actually a positive feature of the program, since it meant that big banks didn’t go out of business.
There were always other options for dealing with the banks and preventing foreclosures. Putting big, faltering banks into receivership—also known as “nationalization”—has been a powerful policy tool used by every administration from Franklin Delano Roosevelt to Ronald Reagan. When the government takes over a bank, it forces it to take those big losses upfront, wiping out shareholders in the process. Investors lose a lot of money (and they should, since they made a lousy investment), but the bank is cleaned up quickly and can start lending again. No silly games with borrowers, and no funky accounting gimmicks.
Most of the blame for the refusal to nationalize failing Wall Street titans lies with the Bush administration, although Obama had the opportunity to make a move early in his tenure, and Obama’s Treasury Secretary, Geithner, was a major bailout decision-maker on the Bush team as president of the New York Fed.
But Bush cannot be blamed for the HAMP nightmare, and plenty of other options were available for coping with foreclosure when Obama took office. One of the best solutions was just endorsed by the Cleveland Federal Reserve, in the face of prolonged and fervent opposition from the bank lobby. Unlike every other form of consumer debt, mortgages are immune from renegotiation in bankruptcy. If you file for bankruptcy, a judge literally cannot reduce how much you owe on your mortgage. The only way out of the debt is foreclosure, giving banks tremendous power in negotiations with borrowers.
This exemption is arbitrary and unfair, but the bank lobby contends it keeps mortgage rates lower. It’s just not true, as a new paper by Cleveland Fed economists Thomas J. Fitzpatrick IV and James B. Thomson makes clear. Family farms were exempted from bankruptcy until 1986, and bankers bloviated about the same imminent risk of unaffordable farm loans when Congress considered ending that status to prevent farm foreclosures.
When Congress did repeal the exemption, farm loans didn’t get any more expensive, and bankruptcy filings didn’t even increase very much. Instead, a flood of farmers entered into negotiations with banks to have their debt burden reduced. Banks took losses, but foreclosures were avoided. Society was better off, even if bank investors had to take a hit.
But instead, Treasury is actively encouraging troubled homeowners to subsidize giant banks. What’s worse, as Mike Konczal notes, they’re hoping to expand the program significantly.
There is a flip-side to the current HAMP nightmare, one that borrowers faced with mortgage problems should attend to closely and discuss with financial planners. In many cases, banks don’t actually want to foreclose quickly, because doing so entails taking losses right away, and most of them would rather drag those losses out over time. The accounting rules are so loose that banks can actually book phantom “income” on monthly payments that borrowers do not actually make. Some borrowers have been able to benefit from this situation by simply refusing to pay their mortgages. Since banks often want to delay repossessing the house in order to benefit from tricky accounting, borrowers can live rent-free in their homes for a year or more before the bank finally has to lower the hatchet. Of course, you won’t hear Treasury encouraging people to stop paying their mortgages. If too many people just stop paying, then banks are out a lot of money fast, sparking big, quick losses for banks — the exact situation HAMP is trying to avoid.
Borrowers who choose not to pay their mortgages don’t even have to feel guilty about it. Refusing to pay is actually modestly good for the economy, since instead of wasting their money on bank payments, borrowers have more cash to spend at other businesses, creating demand and encouraging job growth. By contrast, top-level Treasury officials who have enriched bankers on the backs of troubled borrowers should be looking for other lines of work.
Zach Carter is AlterNet’s economics editor. He is a fellow at Campaign for America’s Future, writes a weekly blog on the economy for the Media Consortium and is a frequent contributor to The Nation magazine.
Any News Media Outlet…do you think maybe getting an interview with Sen Bernie Sanders to tell the truth the whole truth and nothing but the TRUTH?
He GETS IT!
Sen. Bernie Sanders (I-VT) discusses greed and the foreclosure crisis, and calls for a “new Wall Street” during a recent conversation at Brave New Studios in Culver City, CA. Produced by Brave New Foundation. We must put a human face on the foreclosure crisis affecting millions of families. Go to
FightingForOurHomes.com
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