Treasury’s plan to fix the mortgage mess

By Felix Salmon
November 23, 2010
Michael Barr's departure is a serious loss for Treasury. I spoke to him on Friday; he was in Ann Arbor, where he's returning to law school, and he wanted to take serious exception to my three monkeys post, where I accused Treasury of willfully ignoring the banks' culpability in the mortgage crisis.

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Michael Barr’s departure is a serious loss for Treasury. I spoke to him on Friday; he was in Ann Arbor, where he’s returning to law school, and he wanted to take serious exception to my three monkeys post, where I accused Treasury of willfully ignoring the banks’ culpability in the mortgage crisis.

Barr rattled off a laundry list of reviews which are being done by various arms of the government, including what he described as an “11-agency, 8-week review of servicer practices, with hundreds of investigators crawling all over the banks”. That information is finding its way to the state attorneys general, in their review. Meanwhile, said Barr, an alphabet soup of regulators (OTS, OCC, FDIC) is looking at various financial services companies (MERS, along with lots of different servicers, trustees, and banks); HUD is holding everybody to FHA and HAMP guidelines; and the FTC is looking at non-bank lenders. And keeping everything coordinated is the new Financial Fraud Enforcement Task Force which has been put together under the leadership of Justice’s Tom Perrelli.

“Why are we investing these resources and including Tom Perelli in the discussions?” asked Barr. “We’re holding the banks accountable to fix it.” I asked him whether he thought that was even possible. “Their conduct suggests they can’t,” he said, adding that “they can be held accountable for not following the law. HUD can assess significant fines on them.”

Barr was clear about what he expected to happen in 2011. Specifically, he said, “if there are legal violations found, banks are responsible for fixing them and for addressing the problems.” And more generally, the government’s actions “will increase the chance that when foreclosures happen, they will happen according to established law.”

The timetable for all this? The reviews should be largely completed this year, with the full scope of the problems being apparent by the end of January. By the end of the first quarter, the banks should be in serious discussions about how they’re going to fix what’s broken. And then it gets necessarily hazier: “Institutions are resistant to change and have difficulty implementing,” said Barr, but “you’ll see flow improvement over the course of the next year.”

Could I hold Treasury to that? Sort of: “You should hold us to whether things get better or worse. If a year from now nothing has changed, that would be a reasonable criticism.”

I have two fundamental reasons to be skeptical of this approach. Firstly, it won’t work: the banks and the servicers simply aren’t set up to magically make their processes perfect, and the threat of lawsuits isn’t going to change that. And secondly, insofar as the problems are systemic and threaten the solvency of the banks, Treasury is going to blink first. As we just saw in Ireland, today’s governments are constitutionally incapable of forcing real pain onto banks.

But at the same time, there’s zero chance of getting any kind of resolution to the mortgage-mess problems if the government doesn’t have a firm grasp of exactly what they are. Barr told me that they’re doing file reviews which take between five and eight hours to go through a single loan file: this is hard, detailed work, and at the end of it all there will be a real understanding of what needs to be done—something necessary, if not sufficient, to finally resolve this mess.

Barr is a very honorable man, and a very hard worker, and I give him a lot of credit for the (mostly) excellent CDCI project. (I have quibbles about it, but can’t go into detail about what they are because most of what I know I learned as a board member of LESPFCU.) I think that Treasury is entering into this whole mortgage investigation in good faith, and will do what they can to push the banks to fix what’s fixable.

But I’m also pessimistic about their prospects: I suspect that only a radical restructuring of the entire securitization architecture—and especially the broken relationships between investors and trustees, and between trustees and servicers—has any chance of actually working. That is clearly not going to happen. But if you believe in the power of legal action to effect change, then maybe Treasury’s approach might work.


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Felix, it is very tempting to demand that the government resolve all problems. But please, let’s avoid that temptation.

The government has the obligation to assure that all laws are followed. The Treasury review is targeted towards that. It is NOT designed to repair the relationship between investor and trustee, or between trustee and servicer. Those relationships should be negotiated between the affected individuals, not dictated by regulators.

A common response to that is, “Look at the mess they created when left to their own means!” But I would suggest you are closing the gate after the horse has already scampered. The caution of MBS investors over the coming decade will exceed the degree of willful ignorance that they displayed over the LAST decade. There will be further banking crises, but the next will assuredly take a different form than this one. We are not in any danger of a repeat of this mortgage mess for at least another generation.

Posted by TFF | Report as abusive

I am so confused TFF.

We (I can say we, you had/have an effect the world and this crisis affected me, my mortgage and my pension/RSP funds very much) are not in any danger of a repeat of this mortgage mess for at least another generation? You and the rest of the world will not even be OUT of the mortgage mess in the next generation. And there is still a very good chance of a real crash, because believe it or not the stooges who said it was all over were wrong. And who will resolve it? the banks???

Had all that money from the Treasury/Fed been put into the hands of those who really needed it to get the economy working, the crisis would have been over long ago! yet it was put into the hands of those who helped fuel the problems in the first place… people know that TFF and they will be claculating once the shock is over. And they won’t be happy…

Treasury is going to have to sweat because at some point, the people will understand that at the root was bad Government policy, fiscal mismanagement, lack of regulation and disregard for the taxpayer and mostly, disregard for the law. (and that was begun by Bush but Obama’s watch is also ineffectual)

The Governemnt has intervened already in favour of the banks. They want it all to go away. But in doing so it is at the expense of pensioners and homeowners and those who were actually hurt by the crisis. Governments and banks are sitting pretty saying there is no crisis just a little misunderstanding with some paperwork. That was intervening to placate via the press.

It may take some time, but at some point, a group with a great lawyer is going to successfully enforce the buyback clauses of the AAA securities. Pensioners who lost 1/3 or more of their pensions will be looking for help. The houses that are being robo forclosed upon are sitting and more are homeless. There are no new jobs and the the Fed/treasury will keep churning out money to add to the debt. People are running out of hope and the Government will have no choice but to intervene.

The Government was part and parcel of the mess… and they should be concerned about trusts, securitization and the law.

Michael Barr was a Govenment spokeperson in this matter. Why is it OK to make promises to placate the complainers, when you have no plans on even staying to see it through?

And lastly TFF, unchecked greed and the Capitalist need for speedy money will ensure there are TEN more ways to rip off the the ‘willfully ignorant.’ It’s happening right now as the SEC simply can’t keep up and will those who helped make the new regs be hired as consultants so they can be skirted and loopholes found? Of course. Why would anyone stick around to actually see it through when it won’t do what it was set out to do…

Posted by hsvkitty | Report as abusive

hsvkitty, I fully realize we are not out of this mess yet. However the behaviors that CREATED the mess are not continuing. MBS securitization has essentially halted, except through Fannie and Freddie, and underwriting standards once again have some semblance of sanity.

I don’t know what you mean by “all that money from the Treasury/Fed”. The government has been running a trillion-plus deficit, putting the majority of that money into the hands of the middle class through the Bush tax cuts, unemployment benefits, Social Security/Medicare/Medicaid, and similar programs. The “bank bailout” money has mostly been repaid.

Moreover, the biggest reason we are not out of the woods yet is that the stimulus actions have prevented us from hitting bottom. That is trading a sharp crash (admittedly one that could have been truly devastating) for a prolonged malaise. Look at the unemployment rate, housing prices, and the oversupply of housing, and you see an imbalance that will take several years to play out. There is no hope of a quick recovery from this, there has never been such a hope.

I realize that blaming it all on the banks is popular, but the general public played its part. Nobody forced people to overextend themselves on credit. Nobody forced them to overpay for houses, borrowing 5x their annual income and more. Nobody forced them to play the fool. Do I sound unsympathetic? Maybe, but so what? Does it really matter whether I’m sympathetic or not? THERE IS NOTHING ANYBODY CAN DO AT THIS POINT BUT SURVIVE WHILE THE SITUATION SLOWLY REBOUNDS.

I fully agree that Wall Street will find new ways to exploit the ignorant, new ways to ruin our economy. However it will play out DIFFERENTLY from the last cycle, as it always does. It isn’t the danger that we see coming that ruins us, it is the danger that everybody has forgotten about. And that is why THIS danger isn’t going to be a problem for another 30 years (or longer). People will remember for at least that long.

Posted by TFF | Report as abusive

The bailout money has mostly been repaid? Really? GM still owes how much? AIG still owes how much? How much crap did the Fed take off the TBTF’s balance sheets?

Posted by PhilPerspective | Report as abusive

What a missed opportunity! You could have asked him based on their research how many of the foreclosures are failing title questions vs procedural issues.

Posted by Danny_Black | Report as abusive

End the Kosher Nostra in Government and the FED

Posted by AwakenedGoy | Report as abusive

AwakenedGoy, you can’t end it. Otherwise in the next World dominance meeting they will get their puppet China to take you out…. Now you have dared to say the truth you better hope they are too busy bleeding Christian babies to made Matzeh and spreading the Black Death to focus on one brave truth-sayer!

/sarcasm off

Posted by Danny_Black | Report as abusive

Phil, why don’t you tell me? How much do GM and AIG still owe? What portion of the $700B TARP program is still pending?

It has mostly been repaid. Fannie and Freddie will be very costly, but then they weren’t exactly bailed out — they were practically nationalized.

So when you add up the net cost of all those bailouts, how does that compare to the ongoing cost of the Bush middle class tax cuts? The whole mess has been very expensive, but it is silly to pretend that the government has ignored the middle class while lavishing trillions of dollars on the banks. If anything, the reverse is true.

Posted by TFF | Report as abusive

TFF, to be fair it really depends on what you mean by “bailout”. One could argue that QE is a “bailout” for banks, but in terms of just TARP money the true losses are due to homeowner “help” and Frannie.

Posted by Danny_Black | Report as abusive

This whole mess reminds me of the old game of pick-up-sticks, but among those sticks are some related to just poor technical (as in ‘detailed’, not computer techy) practices. Risky loans, with no increase in reserves, paperwork practices that simply didn’t exist.

There are healthy banks out there, especially outside of New York. They are doing pretty well given the magnitude of the mess. They are financing new tractors, covering the inventory ’til the end of the month, depositing my receipts and giving me cash when I ask for it. My local banker is still the best analyst I know on conditions in the local market, and what I need to do next in my business.

Contrast that to Wells Fargo and BofA where they admit that they had people do mass signatures of critical legal documents because the management couldn’t be bothered to spend the time doing it right. Forcing these guys to go back and jump through every hoop, pay every fine, and absorb the losses will be instructive to them and beneficial to the country.

Posted by ARJTurgot2 | Report as abusive