Just how bad is the mortgage mess right now?
Mike Konczal finds an Andy Kroll piece from January which shows just how unregulated mortgage servicing has been: the OCC, for instance, has never taken action against mortgage servicers. And it’s far from clear that it’s inclined to now:
The OCC, which regulates the nation’s largest banks, has initiated “examinations” of foreclosure and loss-mitigation procedures at big banks, “to be conducted over the next several weeks to confirm compliance and that banks have remedied any identified issues,” an OCC spokesman said.
The point here is that the decision to go after banks and loan servicers is ultimately a political one, and there doesn’t seem to be a huge amount of appetite in Washington to have another huge fight with the banks, so soon after the last one. The OCC could, at any minute, get very tough on the servicers. But will it? That’s very uncertain.
Meanwhile, the incredibly low rate of existing home sales looks like it’s going to plunge still further:
New buyers have stepped back from the market for distressed property, which now accounts for more than 30% of new transactions, according to RealtyTrac. New owners are worried they don’t have a legal right to their homes. Title insurers are worried about their exposure to faulty documents and unwilling to stand behind new purchases. Since title insurance is required for most mortgages, the market is essentially at a standstill.
In other words, the housing market, which was broken before, is even more broken now.
What’s this all going to cost? Nelson Schwartz is throwing around numbers less than $10 billion, which is decidedly manageable, but that’s just the cost to banks, and crucially it assumes that the problem is merely one of paperwork. Hire a few new people, be a bit more diligent, and things will be able to sort themselves out.
If you start looking at the mortgage market, the potential cost gets much, much higher:
An alarming report on Bank of America, compiled by Branch Hill Capital, a San Francisco hedge fund, circulated widely on Wall Street on Thursday. Branch Hill suggested that the bank, the nation’s largest, could be facing more than $70 billion in losses from mortgage securities that it may have to repurchase from Fannie Mae and Freddie Mac, as well as private investors.
“We think this is a very important issue, and the liability will be substantial,” said Manal Mehta, a partner at Branch Hill. “There has been pervasive bad behavior throughout the system.”
The problem is hardly confined to Bank of America, of course. All investment banks did this, which means they all have enormous potential liabilities.
And then the costs to the broader housing market are higher still. The longer that market fails to properly clear, and the longer that the overhang of unsold houses continues to grow, the less it makes sense to talk about what any given house is “worth” — and the more it makes sense for homeowners to default on their mortgages. They’re very unlikely to get thrown out of their homes for at least a year and possibly much longer, and there’s a pretty good chance, if they’re underwater, that at the end of this mess they’ll be able to negotiate some kind of principal reduction.
So what are the mortgage originators and investors doing about this huge problem? It looks as though they’re sticking their heads in the sand:
The Executive Director of the American Securitization Forum, Tom Deutsch, released the following statement regarding misinformation circulating within the financial markets that transfers of residential mortgage loans to securitization trusts were not valid.
“In the last few days, concerns have been raised as to whether the standard industry methods of transferring ownership of residential mortgage loans to securitization trusts are sufficient and appropriate. These concerns are without merit and our membership is confident that these methods of transfer are sound and based on a well-established body of law governing a multi-trillion dollar secondary mortgage market.”
Apparently the Forum is going to release a white paper “over the course of the next two weeks” designed to put our minds to rest. Needless to say, it won’t. Even if the narrow question of the transfer of ownership to the securitization trust is cleared up, there are still numerous enormous concerns surrounding mortgage bonds, including whether the banks misled investors, whether investors might be able to force the banks to buy the bonds back, and whether the bonds themselves are going to plunge in value as house prices fall, defaults rise, and the ability to foreclose on notes in default slowly evaporates.
And what happens if and when the homeowners who have already been foreclosed upon start filing class action suits against various parts of the financial-services industry, saying that the banks had no right to do that? If the verdicts of kangaroo courts start being overturned, things could start getting really messy.
What’s desperately needed here — and what isn’t going to happen — is someone to come in and take ownership of the whole mess, and cobble together a roadmap for getting out of it. But that would take more political will than seems to exist in the White House. So this is going to drag on, painfully, state by state, quite possibly for years. And while it’s doing so, the chances of any kind of robust economic recovery — at least outside the world of high-priced legal firms — seem slim indeed.