The national mortgage settlement finally happened yesterday, over a month after it was triumphantly announced by the Obama administration. The documentation for the deal is long and confusing, so analysis is coming out slowly, but early indications are that the deal is just as bad as it looked like it would be and potentially quite worse.
David Dayen pulls out the long lists of crimes and abuses the servicers have committed. The list is so full of failures that it forces Dayen to ask:
You might ask why any industry with this kind of performance record would be allowed to stay in business. It would be a good question.
Dayen also flags a passage which seems to suggest that the servicers can force any homeowner who takes a modification or compensation for relief to waive their due process rights. Not only do we have to trust the banks to handle things correctly, despite having a record of being completely incapable or unwilling to follow the law, this settlement will empower them to make needed aid — aid that is coming to buy a release from liability! — contingent on further insulating themselves from liability from individuals pursuing legal action against them. To put it differently, one of the things the AGs and the Obama administration long promised is that any settlement wouldn’t forestall individuals from bringing their own suits. This seems to suggest exactly the opposite.
Isaac Gradman of The Subprime Shakeout has one of the more comprehensive analyses I’ve seen. There’s a lot to go through but a few passages merit promotion.
On the tiny size of the settlement’s aid to underwater homeowners:
The first problem is that, as the Wall Street Journal recently noted, the actual amount of loan forgiveness isn’t large relative to the problem of underwater debt. The WSJ attributes to Ted Gayer, co-director of economic studies at the Brookings Institution, the estimate that the settlement’s complex set of requirements mean that about 500,000 borrowers, or 5% of those who are underwater, may be eligible for help. Let me repeat that so it sinks in – if you are one of this nation’s 10 million underwater borrowers, you have only a 1 in 20 chance of getting any semblance of relief.
For a very long time, the public was promised that a release for bank liability would be narrow. Now that we see the deal, that turns out to not be true.
We now have the language of the actual release, which the banks have been given in return for the penalties and reforms discussed above. As expected, the release is fairly broad in the arena of servicing activities, releasing essentially any claim that any regulator may have based on mortgage servicing, loss mitigation, collection or accounting of borrower payments, or foreclosure or bankruptcy practices. In other words, this is the last we’ll see of any government agency digging into the who, what, where, when and how of robosigning and forged affidavits.
That is, this goes well beyond mere robosigning, even if claims related to origination and securitization are not released. Gradman goes on to note, “But here’s the rub. In the face of the litany of charges brought against them, the banks are not forced to admit to any wrongdoing.” This practice, which is very common with the federal government’s regulation of Wall Street, has recently come under scrutiny and will likely be under even more scrutiny in this deal. After all, why should a judge sign off on a $25 billion settlement when the people paying the money aren’t admitting any wrongdoing? How could a judge possibly determine if this is a fair deal?
Yves Smith has a fairly deep dive into how the settlement will almost certainly screw investors in mortgage backed securities – making it so it is more likely that public pensions, union pensions, and 401ks pay for the settlement than the banks who are ostensibly being punished.
And since the banks are held to a total dollar target, and can use mods of other people’s mortgages to meet this target, they are using other people’s money to pay off their misdeeds. There is no two ways about it.
Remember, the investor beef is not that they are anti-mod per se, but they want the seconds wiped out before the first mortgages are touched. The second lien investors knew they were second in line and got a higher interest rate as a result. Moreover, had investors had a seat at the table, you can be sure there are other servicing abuses they would have insisted be corrected, so railroading them benefits the banks in other ways too.
There’s a big problem here. It just doesn’t seem possible that trustees can agree to changing the rules of the road regarding first and second liens and magically allow modifications to the firsts while not totally wiping out the seconds first. It’s not clear at all that investors have approved these dealings and it’s not clear at all that the trustees have the power to make such a deal without approval from the investors. That is, at least according to most of the PSAs governing these trusts.
There will presumably be lots more analysis and investigation coming out of the foreclosure and economic blogosphere. But one high level perspective that’s worth flagging is by Matt Stoller at New Deal 2.0:
Beyond that, there is no coherent organizing principle behind the deal. It’s not like you can explain this as “we’re going to write down debts for people who can’t pay them and foreclose on those that can’t pay anything,” or “we’re going to foreclose on people who aren’t paying their debts, period,” or “we’re going to force the banks to stop using accounting fraud.” It’s a mish-mash of claims and releases, some of which seem to contradict each other. Some of the signature lines are left blank. If this doesn’t become a “catalytic” event, and banks don’t write down debts after the credits run out, oh well. Get ready for a policy and legal mess on top of a housing market that is in and of itself a policy and legal mess. There is precedent for a deal like this: the alphabet soup of housing programs from the Bush and Obama administrations.
Given what we’re seeing so far, this seems to be right. It’s not surprising, given what we’ve seen over the last three years, but it certainly isn’t encouraging either. It doesn’t inspire confidence that even this weak tea will be served properly and what little aid has been secured will be delivered in a timely and fair fashion to homeowners in need.