Mortgage Modification Dealings

Last week I took a guess and wrote “meaningful principle modifications could run $800-900 billion plus.” That was a shot in the dark, but recent reporting by Shahien Nasiripour at Huffington Post shows that I was likely a good ways off the mark, at least in so far as how the CFPB has estimated the number of underwater homeowners and what it will take to get them to a reasonable level of equity in their homes.

The proposed settlement, as envisioned by the consumer agency, could reduce loan balances for up to three million homeowners. If mortgage firms targeted their efforts at reducing mortgage debt for three million homeowners who owe as much as their homes are worth or have less than 5 percent equity, the total cost would be $41.8 billion, according to estimates cited in the presentation.

If firms lowered total mortgage debt for three million homeowners who are underwater by as much as 15 percent and brought them to 5 percent equity, that would cost more than $135 billion, according to the presentation. That would include reducing second mortgages and home equity lines of credit.

The CFPB estimates that there are about 12 million U.S. homeowners underwater, most of whom are not delinquent, according to its presentation. Of those, nine million would be eligible for this new principal-reduction scheme born from the foreclosure deal. The new initiative would then “mandate” three million permanent modifications.

Getting to 5% equity for 3 million homeowners would be $135 billion, but getting to 5% equity for all 12 million underwater homeowners would be $540 billion. That’s a ways off from what I’d suggested, but it’s still many times bigger than any number that’s actually being discussed for a settlement.

Yves Smith is skeptical about the validity of the numbers being put out being justified.

But arguing over a pretty much made-up figure misses the critical point: the money the servicers saved is not even remotely the right basis for thinking about the appropriate settlement level. Settlements are based on potential liability. For instance, in 1998 the tobacco settlement, the tobacco companies agreed to pay a minimum of $206 billion over 25 years to be released from liability on Medicare lawsuits on health care costs plus private tort liability.

The saved costs bear no relationship to the banks’ legal liability for servicer-driven foreclosures, nor to the damage they have done to homeowners or broader society through their actions. It’s like basing the penalties in a robbery on the unpaid parking fees and rental costs of the car used to make the heist.

This resorting to completely irrelevant metrics results from the problem we have harped on from the onset of the settlement talks: the lack of investigations. You can’t settle what you haven’t investigated.

What’s most troubling is Smith’s conclusions:

This document looks to be rooted in Jean Baptiste Colbert’s saying: “The art of taxation consists in so plucking the goose as to get the most feathers with the least hissing”. Any number that was within hailing distance of the real damage done by foreclosure (which father of securitization Lew Ranieri was astonished to learn in 2008 was standard practice), rather than by doing mods for viable borrowers, would be a multiple of the levels under discussion here; and the servicer-driven foreclosure aspect pushes the figure higher still. This document bears the hallmarks of looking to rationalize a figure that would sound big enough to impress the public as being punitive, yet not hurt the banks at all (as page 4 demonstrates). But having a settlement designed around not damaging predators is certain to perpetuate their destructive conduct.

I actually don’t think that’s right. Already this number of $20-30billion has been under massive attack from the banks’ representatives in Washington: the Republican Party. They’re pitching a fit and will be certain to continue to do that. The political fight is a way for banks to ensure that even a number like this is viewed as too big and too putative. They are rejecting the opening bid and they’re able to do this knowing the number will be reduced. But yes, whatever comes from this, I don’t see it deterring banks from continuing “their destructive conduct.”

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