The well-intentioned but doomed mortgage settlement

By Felix Salmon
March 8, 2011
proposed settlement with mortgage servicers is proving to hard to write about: it's really hard to read. There might be a lot of Elizabeth Warren in its substance, but there's none of her in its style.

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No wonder the proposed settlement with mortgage servicers is proving too hard to write about: it’s really hard to read. There might be a lot of Elizabeth Warren in its substance, but there’s none of her in its style.

For those who can wade through it, however, it really is a code of best practices for servicers and it’s sorely needed. There’s much to love here, but it all basically comes down to the golden rule: treat your borrowers with honesty and humanity and common sense and you’ll be fine. Do servicers really need to be told that if they make more money from a loan mod than from a foreclosure, they should do the loan mod? Or that “sworn statements shall not contain information that is false”? Evidently, yes, they do.

I do have my doubts about whether all of this is feasible in the real world. Consider II.C.4:

Servicer shall create a Single Electronic Record for each account, the contents of which shall be accessible throughout the servicer, including to the Single Point of Contact, all mitigation staff, all foreclosure staff, and all bankruptcy staff.

Or II.F.1:


There’s even a bit later on (see page 19), where the servicer is asked to “consider”, whatever that means, partnering with Kinko’s or Wal-Mart to allow borrowers to scan and email documents for free.

All of this is reasonable, on one level — but at the same time it’s also setting the servicers up to fail, since few if any of them have the ability to implement all of these changes. Some of the settlement is easy: if you’re currently doing force-placed insurance, stop doing it. But the parts of it which involve massive IT overhauls will certainly break and go over budget and not play well with various legacy systems and generally be incredibly difficult to get working.

As a result, the big question here isn’t whether the settlement is reasonable — yes, it’s entirely reasonable. Instead, we should ask what the penalties for non-compliance are, since just about every servicer will be non-compliant for the foreseeable future.

Those penalties come at the end of the document and they’re extremely vague: there’s talk of “monetary penalties and additional remedial actions”, but there’s also talk of “failure to meet timelines”, which implies that much of this stuff could be pushed off far into the future and of “a special master or referee to resolve violations”, with no indication of how such a person might be chosen.

I’m reminded of the tale of the scorpion and the frog. In this case, the servicers are the scorpion and the frog is a legal settlement which can get them some kind of protection in law. The two will get, uncomfortably, halfway across the river and then the servicers, unable to go against their nature, will doom them both.

Ultimately I still feel the same way I did in November, when I said 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. The settlement’s heart is in the right place. But I have no faith in the ability of the servicers to implement it successfully.


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Well said Felix. This agreement does nothing to address the fact that the servicers are ‘rewarded’ for foreclosing. Not only to the homeowner’s harm, but to the investors harm and every home owner that still has a mortgage, even if they are current. Declining home prices will eventually encourage more strategic defaults and more opportunity for servicers to fast track foreclosures versus sensible modifications. I think there is a national consciousness of denial that control fraud has become so institutionalized and deeply embedded in the financial system that a much bigger examination and responses are needed. It almost seems to me that if Wiki leaks dumped their cache of financial documents, much of this embedded mortgage/foreclosure control fraud would come to light. I can testify first hand that the my servicer has behaved in incredibly bad faith. I only came to the realization last month that is because the servicer is rewarded for foreclosing far more than richly than modifying. HAMP became just another way to enrich their own pockets. The failure to enforce fines and monitor properly has lead to even more opportunity to make profits that have zero financial benefit to homeowner and investor alike. Socially, the servicers can not possibly defend their profits. Not only are banks not adding ANY social benefit what so ever, they are destroying millions of families by fraudulently foreclosing. They are not efficiently moving capital in the market to lead to innovations that benefit a majority. They are efficiently making themselves and a handful of people wealthy at a cost that cannot, on any level be justified.

PS:I’d really like to see an article by you that discusses the case between Bruce Rose’s Carrington Capital Management (CCM) and Wilbur Ross’s American Home Mortgage Servicing Inc. When I read a recent article in American Banker it made me openly wonder if Bruce Rose (Of CCM) figured out how to upset senior bond holder rights to junior bond holders rights it may be that this is an industry norm, not just a small time thing.

Posted by jyllyj | Report as abusive

This is more “extend and pretend” with some political posturing by state AGs as a sideshow.

I initially thought I understood the concept of “extend and pretend” in early 2009 with Geithner’s stress tests giving the banks time to mend their balance sheets. However, their headlong rush to clean cash out of their coffers with continued gargantuan bonuses and increased dividends to shareholders tells me that “extend and pretend” is just another tool to continue the looting of the US taxpayer.

The proposed settlement is similar. The banks appear to have been doing incompetent and illegal actions related to mortgages in astounding quantities. Their shareholders may now have to cough up a tiny fraction of the banks’ bonuses over the past couple of years to make one of the most egregious periods of US financial history magically vanish from a legal standpoint. If the Feds and states won’t hit them hard when there is a massive documentation trail of bad behavior, why do they think that the banks will live up to the agreement and live by the rules that they should have been following all along? TBTF means that you are committed to keeping the institutions solvent and functioning but that should not prevent putting individuals in jail.

The real issues are still out there. State judges are likely to continue ruling against banks whenever somebody has the gumption to fight a foreclosure. MERS is collapsing, simple valid titles along with it. Investors are going to continue to take it on the chin with MBS’s that probably could be put back to the banks at par. My understanding is that investors are struggling to figure out how to get putbacks without taking out the financial system. All it will take will be one investor group who decides to go for it and we may find out that the banks really don’t have any clothes.

I think continued extend and pretend on the financial accounting of the banks and white-washing egregious and illegal behavior is going to end very, very badly for us all. 2008 may look like a picnic. I suspect that the timing of this settlement concurrent with the start of the Galleon trial is not coincidental. All of the MSM will be focused on the latest revelations of that trial while the banks quietly whitewash a trillion dollars of potential liabilities off of their books. When the true financial situation of the system becomes known a coupple of years from now, the fall will be all the harder because of the refusdal to address it earlier.

Posted by ErnieD | Report as abusive

BTW, the Direct to Borrower Loan Portal looks like it would have many parallels with the type of information that MERS has been responsible for tracking. We all know now how well the banks and servicers were able to execute that aspect of their business model. I suspect that their Loan Portal will be a massive fail.

Posted by ErnieD | Report as abusive

After reading it, it seems that the grievances they heard were listened to, written point by point, and now handed back with no thought to how those grievances can be made whole. What was done was against the law. The servicers were incompetent and broke laws and the banks do not care. There is nothing in the proposal that alleviates either problem.

Simply saying, here is what you did wrong, now fix it, to those who happily and greedily ignored or broke the system, isn’t going to work. Starting over is the only way or see more of the same.

That this is all 50 states could come up with in all this time is testament to the ignorance of Government to the plight of the homeowner. They should be embarrassed that the illegalities were allowed to fester under their watch until it became a crisis and even more so if they feel this proposal to fix it all has merit.

These are people who are near the pinnacle of upholding of the law! They should not be ‘proposing’ anything for consideration unless they are also in collusion. men of law should be acting!

Other then that, Ernie said it all…

Posted by hsvkitty | Report as abusive

I think this effort is spot on. It will serve to seperate bank mistakes from borrower mistakes.

“Customer- yes I did submit that document to you. I did it at 8:35 pm March 3rd and my confirmation number is 321547XC18.”

“Bank- oh… there it is thanks.”

If properly implemented it will highlight issue raised in Felix’s most commented story of all time. What percentage of forclosures are truely wrongful?

My estimate was 0.0% vs public perception of inept/evil banks kicking out millions of good borrowers because they were mishandling documents on a massive scale.

p.s. to jyllyj “Declining home prices will eventually encourage more strategic defaults and more opportunity for servicers to fast track foreclosures versus sensible modifications.”

There is no force on earth more powerful in encouraging strategic defaults than “sensible modifications.”

At a party you hear your friend’s sister’s hair dresser says “oh ya we bought our house in ’06 for like 325k and now you know it only worth like 260k.. so we were like ya our income is lower than what the broker put on the application… we were missled (tricked into lying) so we stopped payen et… we got our loan modified… now we’re paying 5% interest instead of 6.50 and they lowered our balance to 295k.”

What kind of incentive do you suppose that is to people who are paying as agreed on their 2006 homes, have execelent credit actually earn the income they put down on the app and still can’t re-fi because their values have dropped so much that they don’t have the required equity.

If you think it through there is no free lunch on this one.

The current plan sucks but it’s the only one going… we’re going to steal the money we need from our grand parents by paying them .5% on their savings and 2% on a 5-year CD and just wait for paydowns and inflation to slowly cure those currently underwater… like I said the plan sucks but were 5 years into it now and it’s actually starting to work.

Posted by y2kurtus | Report as abusive

y2kurtus, I am not sure what you are trying to say, but it hurt my head. (you lost me at the servicer or bank actually admitting they had received a document… let alone answering a call…. )

Is the trailer trash talk representative of what you think someone underwater might say? Are you lumping everyone in the same bucket whilst giving banks a free pass again? Who is taking a free lunch on what one? And what plan has started to work?

Naked capitalism has 2 posts that DO make sense. (and are a little scary frankly)

Posted by hsvkitty | Report as abusive

Here is an interesting article on how simple prosecuting mortgage-backed securities fraud could be: l-work-to-indict-for-securities-fraud-in -rmbs/

It also sounds like we may be running out of time to prosecute some of these crimes as the statute of limitations time hourglass is running. That is probably one of the primary goals of extend and pretend – buy enough time so that nobody can be prosecuted even if everything does blow up again.

Posted by ErnieD | Report as abusive

Aww Ernie, why be such a pessimist? Here is one line that sums up how serious the AG’s are with compliance…

“…failure to meet these performance measures shall result in monetary penalties and additional remedial actions, including possible revisions to this Agreement.”

They are threatening to revise!! O M G!

Sadly Ernie you are right. This is obviously a whitewash meant to look as though they are doing something, with a proposal that, if anything, says hurry up and steal all you can and find loopholes before it becomes implemented.

The banks will do this in their favour and continue to not care. There are 11 million homeowners who need help. There is not enough money to help them all. Who will be cherry-picked to help I wonder? They know nothing about the homeowner! They don’t care if the homeowner has cancer or is elderly, or if they are needier then another.

Servicers were already coercing homeowners who did not want mods or need them to get them so they could get hamp money and keep their numbers high. If people live in an are where houses aren’t selling, and someone lives in an area that is still doing well, which one will be foreclosed upon????

There is still no investigation into collusion between servicers, banks and mortgage brokers to inflate home prices, use inside information in regard to liar/ninja loans, CDO stuffing to short deals, etc. This could be used to clear titles/notes/hide evidence, rather then help homeowners.

Banks and servicers were willing to commit fraudulent acts to get around the law and yet this piece of (whitewashed) paper reminding them of the law is the answer? As my son loves to say, “I think not!”

Homeowners are left out to dry just as the taxpayers and unemployed. BUT you all have a voice. Why are people not calling their AGs to ask them to prosecute. I am from Canada and I WOULD call if I could!

PHONE numbers for AG offices and click the name of your AG to go to their website so you can email as well: ateattorneygenerallist.php

Posted by hsvkitty | Report as abusive

are=area where houses aren’t selling

Posted by hsvkitty | Report as abusive

“y2kurtus, I am not sure what you are trying to say, but it hurt my head”

Allow me to try and clarify hsvkitty:

#1 mass loan modification programs which include principal write downs won’t happen because they can’t happen. 20 million mortgages x 50k average write down = a TRILLION dollars… as in bigger than TARP (which will return a profit to taxpayers)

#2 the current plan is to deliver the banking system windfall profits via zero interest rate policy which they can use to pay off all the non-performing loans they made. When most banks have most of the crappy loans charged off than the Fed will presumably rase rates removing the windfall profit driver and returning balance to the system.

#3 there is no free lunch because zero interest rates help some people and hurt others. Lots of middle class seniors use to rely on a few hundred bucks a month from CD interest those people have been eating principal or not eating at all the last few years.

Posted by y2kurtus | Report as abusive

“Lots of middle class seniors use to rely on a few hundred bucks a month from CD interest those people have been eating principal or not eating at all the last few years.”

That’s what they get for investing in such risky assets…

I’m being sarcastic, of course, but the conventional view of “risk” is seriously lacking. There are many forms of risk, and CDs are not immune to all of them.

There is also an artificial distinction between “eating your interest” and “eating principal”. Back in 2006-2008 we were seeing CD interest rates between 4% and 4.5%, but inflation around 3%. Now we have CD interest rates around 2% and (over the last two years) inflation under 1%. The spread of CD interest to inflation hasn’t changed THAT much. I suspect the value of their principal was getting chewed away even with the higher rates.

Posted by TFF | Report as abusive