February 9, 2012

Mortgage settlement: Better than it might have been but still terrible

The devil is in the details, but at first look the foreclosure settlement is not as bad as it could have been, and does not exclude future action in many areas. But it is miles from the salvation being claimed.

As Ezra Klein notes, the settlement is only about 7% the size of the big tobacco settlement and only 3.7% of the total size of underwater mortgages. The battle continues.

Ezra Klein, Washington Post
- In September 2010, Ally Financial halted foreclosures in 23 states after discovering flaws in the way the eviction paperwork was processed….. It soon became clear that this so-called robo-signing issue and other types of forgeries and shortcuts were widespread problems throughout the mortgage industry. Soon, other banks were joining Ally in freezing foreclosures. Less than two weeks later, J.P. Morgan Chase and Bank of America both announced that they would temporarily stop foreclosures in some states due to concerns over improperly prepared documents.

Meanwhile, attorneys general from Iowa, Maryland, North Carolina, Delaware, Texas, and other states were calling for broader foreclosure moratoriums in their states until the banks ironed out the mess. On Oct. 13, 2010, attorneys general from all 50 states announced that they were joining together to launch a probe into the fraudulent or mishandled documents.

About 1 million households will have the size of their home loan reduced. An additional 750,000 families or individuals who lost their homes to foreclosure will receive checks for about $2,000 each. Those who receive these restitution payouts do not give up their right to participate in future lawsuits….

So are [the banks] off the hook entirely? No. One reason the deal is relatively small is that it doesn’t fully end the banks’ legal liability. New York AG Eric Schneiderman, for instance, is able to move forward with his lawsuit.

The effects of this deal are likely to be rather modest. In terms of direct help for consumers, the aggregate impact will be quite minor.

Felix Salmon, Reuters - If you’re a bank shareholder breathing a sigh of relief, then, don’t. The only thing you’re protected against, now, is lawsuits over robosigning….

So why did they do this deal? Well, for one thing, it’s not nearly as expensive as it might look at first glance. It’s not like they’re paying out $25 billion and getting nothing but a bit of immunity in return. A huge chunk of the money will go towards principal reductions on underwater mortgages — which means that it’s not really a cash outlay at all…

In other words, what’s happening here is that the mortgage settlement is at heart largely just encouraging banks to bring their balance sheets closer to reality — which is something they’d have to do sooner or later in any case. Indeed, insofar as principal reductions can increase the value of a mortgage, this deal is actually making banks money, over the long term.

Matthew Yglesias, Slate
- Rather than settling the whole thing, the banks have settled some large piece of the thing. The best news for them, legally speaking, is that this cuts off some further lines of investigation. Typically when you see this much smoke, you naturally wonder if there's fire, but a settlement will make it difficult to ever fully know the facts….. |

Naked Capitalism - We’ve now set a price for forgeries and fabricating documents. It’s $2000 per loan. This is a rounding error compared to the chain of title problem these systematic practices were designed to circumvent. The cost is also trivial in comparison to the average loan, which is roughly $180k, so the settlement represents about 1% of loan balances. It is less than the price of the title insurance that banks failed to get when they transferred the loans to the trust. It is a fraction of the cost of the legal expenses when foreclosures are challenged…

The enforcement is a joke. The first layer of supervision is the banks reporting on themselves…

The past history of servicer consent decrees shows the servicers all fail to comply. Why? Servicer records and systems are terrible in the best of times, and their systems and fee structures aren’t set up to handle much in the way of delinquencies…

If the new Federal task force were intended to be serious, this deal would have not have been settled. You never settle before investigating. It’s a bad idea to settle obvious, widespread wrongdoing on the cheap. You use the stuff that is easy to prove to gather information and secure cooperation on the stuff that is harder to prove. In Missouri and Nevada, the robosigning investigation led to criminal charges against agents of the servicers. But even though these companies were acting at the express direction and approval of the services, no individuals or entities higher up the food chain will face any sort of meaningful charges. ….

While no serious probe was undertaken, even the limited or peripheral investigations show massive failures (60% of documents had errors in AGs/Fed’s pathetically small sample). Similarly, the US Trustee’s office found widespread evidence of significant servicer errors in bankruptcy-related filings, such as inflated and bogus fees, and even substantial, completely made up charges. Yet the services and banks will suffer no real consequences for these abuses….

We’ll now have to listen to banks and their sycophant defenders declaring victory despite being wrong on the law and the facts. They will proceed to marginalize and write off criticisms of the servicing practices that hurt homeowners and investors and are devastating communities. But the problems will fester and the housing market will continue to suffer.


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Tom Henry said...

In other words, what’s happening here is that the mortgage settlement is at heart largely just encouraging banks to bring their balance sheets closer to reality.