Thursday, February 9, 2012

Special Comment on Bank Bailout II

I don’t usually comment (directly at least) on news of this nature, but I’ll make an exception here…

Why has strategically defaulting and living payment free in your home become the new cool trend, like flipping condos in Las Vegas back in 2006? The simple answer is that banks are not foreclosing, and the reason they don’t foreclose is that it would force them to sell the home for less than the mortgage value. If they did this, they’d have to write off that amount on their balance sheet, which determines whether they have enough capital to be in operation (and in the case of the so-called Too-Big-To-Fail banks that own the Federal Reserve, how much money they can create from thin air to lend out at profit). According to ftimes, of the 52 million homes that have a mortgage, over 10 million are currently underwater (worth less than the outstanding mortgage), four million homes are delinquent, and two million have entered the foreclosure process (on top of the four million foreclosed upon since 2008).

That means that of the underwater homes, at the very least about six million are ready to enter the delinquency stage and begin living payment free.

Bear that statistic in mind when reading about today’s foreclosure fraud settlement between the five banks that originated over 60% of U.S. mortgages and the federal government, which has already rescued all five banks from annihilation. The settlement releases the four too-big-to-fail banks (Wells Fargo, Citi, JPMorgan Chase and Bank of America, along with the old GMAC – now Ally Bank) from liability for widespread and documented abuses in the servicing of loans and the foreclosure process over the past decade. The abuse came about because mortgages were repackaged and resold into investment pools with so little regard for longstanding rules on land recording that they lost track of the true owner on millions of homes. To cover up for the lack of proper title and liens when foreclosing, banks and their servicing units routinely forged, back-dated and fabricated documents at county recorder offices and state courts across the country. Furthermore, they employed “robo-signers,” who illegally signed hundreds of thousands (if not millions) of documents and affidavits without any knowledge of the underlying mortgages.

In addition, investigations uncovered massive servicing abuses, including charging borrowers with illegal fees, putting them into foreclosure while working out loan modifications, failing to honor previous modification settlements, foreclosing without just cause, and servicer-driven foreclosures, where illegal late fees and payments pushed the homeowner into foreclosure.

In return for absolving the banks of liability on the mortgage fraud issues, the settlement creates a $25 billion fund to address the problem of foreclosed, delinquent and underwater borrowers (this figure represents 3.5% of the $700 billion in negative equity in the country). Of the $25 billion, however, only $5 billion is coming from the banks themselves. The remainder is in the form of mortgage principal writedowns, the cost of which is paid by mortgage security investors, which after the government takeover of Freddie Mac and Fannie Mae is U.S. taxpayers. The settlement is divided three ways: $5 billion in actual cash, distributed to the states for “legal aid services” to help the 750,000 individual mortgage borrowers illegally foreclosed upon gain access to between $1,800 and $2,000 per family (roughly 1% of the average foreclosed mortgage value of $180,000); $3 billion to go toward refinancing of underwater borrowers; and the remaining $17 billion to go, at the banks discretion, to principal reduction credits for troubled borrowers.

This settlement folds numerous fraud actions at the state and federal level into it, most notably the $8.2 billion suit by Nevada and Arizona against Countrywide (now BoA) to compel compliance with court-ordered consent decrees of that amount in consumer fraud violations. The settlement also stops or at least forestalls most but not all ongoing state investigations, which in the preliminary stages had found evidence of widespread abuses, such as 60% of all mortgage documents examined at random having title errors.

Although an independent mediator has been appointed, enforcement of this decree is left to the banks themselves, based on quarterly self-assessments. Unlike most large consent decrees, this deal will not be monitored and enforced by a court-appointed master under the continuing, active, supervision of a federal court.

In keeping with the Obama administration’s consistent focus on reliquifying the insolvent too-big-to-fail banks at taxpayer (and future taxpayer) expense, the settlement clearly satisfies its primary objective of insulating banks from lawsuit costs by capping liability for fraud, and removing more mortgage liability off of banks balance sheets. The total amount of the settlement represents about 1% of loan balances in the country, less than the price of the title insurance banks illegally failed to get when they transferred the loans to a trust for securitization, and a fraction of the cost they would ordinarily have to pay to defend foreclosure challenges. If the banks were actually held liable through normal prosecutions at the state level, the liability would be between $700-$800 billion. In this settlement, by contrast, no new assets need to be committed by the banks at all, since they’ve long had reserves for such contingencies.

While one might argue a settlement is appropriate to forestall the endless rounds of litigation that will probably in the end be paid for on both sides by taxpayers, such a settlement should not actually help the banks’ bottom lines. Consider the principal reduction credits in the settlement, as one example, which socks mortgage investors (taxpayers) with the cost of paying off the 1st lien mortgage, thus allowing banks with 2nd lien position mortgages (from people treating their home equity as a piggy bank) to press home owners to stay current on those payments. This creates income, removes liability they would otherwise have had to write off, and allows the banks in turn to increase their balance sheets (i.e. print money that they can then lend out for profit).

The financial benefit to banks is so great, the fact they don’t have to face criminal prosecution for what everyone acknowledges are deliberate, systematic and endemic felonies seems like an added benefit!

As clear as the results for the banks are, the consequences for people who had their homes illegally stolen is far from transparent: who’s maintaining the fund? How do they get to it? Who decides what mortgage holder does or does not gain access to the funds? Yet the foggy bureaucratese that addresses these questions is crystal clear compared to the legal issues this settlement raises. Do banks no longer have to prove in court they are in fact the title owners? Will a document that is obviously forged/robosigned be accepted by courts going forward? And what about all the other mortgage lenders, the community banks, state banks, credit unions and thousands of small and mid-sized commercial banks that don’t receive a get out of jail free card? How does this affect the approximately 80% of houses where the chain of title is now clouded? And what recourse do investors in mortgage-backed securities have for over 300 years of real estate contract law requiring property conveyance rights being voided?

More pointedly, why have the law enforcement arms of the federal and state governments in this case surrendered any duty of office to prosecute violations of law or to defend the citizenry from crimes against their property? With such a deliberate and comprehensive violation of laws by the mortgage servicers, one has to ask why should anyone honor a contract or obey a financial statute? No one higher up the food chain thinks ‘following the law’ is in any way desirable or mandatory, so why should ordinary people think so?

In particular, shouldn’t the bulk of the underwater citizenry simply default? And there you have the end game. With the charade of home values coming back up and the dream of home ownership snuffed in a sea of red ink and tape, we have a battle between, on the one hand, banks given more of a free hand to foreclose, illegally and without consequence, and on the other, homeowners who begin to believe that one is foolish for following rules.

The brutal suppression of the Occupy movement is a clear signal of which side will be allowed to win. It is simply not allowed to complain about losing your home and life savings through the fraudulent manipulations of others, because those others must continue to reap new profits with fresh victims using the same criminal methods. To claim the victimhood of the powerless is simply un-American, for the purpose of our justice system is to provide protection for those who steal from the innocent. Those who dare point this out will be forced to confess in shame at show trials while the .001% will boast that they have been unfairly maligned, utterly free of shame. And while the mortgage foreclosure fraud is small potatoes compared to the MERS violations and the securitization frauds that are still theoretically being investigated, the indifference of the public to the bald whitewash lying of the political class and media on this makes the abstract and quaint concept of justice seem further and further away.

I know that’s the way it’s been at least since Plato’s Republic, but I feel I should say something about it while I still have the freedom to speak.

Naked Capitalism
zero hedge


David Haggith said...

I sure agree. You've made some excellent points about how banks benefit from this. I just posted an article myself that I've been feverishly writing all day. ( ) I think this settlement is one of the biggest travesties of justice this country has ever seen. It's not payoff by the banks. It's a payoff TO the banks.

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