Opinion

Felix Salmon

The positive mortgage settlement

By Felix Salmon
February 9, 2012

The long-awaited mortgage settlement is here! And it looks like a good one. The biggest worry was that the attorneys general would give away the shop in return for big headlines. While in fact they seem to have been quite successful at limiting the immunity that the five banks (Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial) are going to receive:

In the agreement’s expected final form, the releases are mostly limited to the foreclosure process, like the eviction of homeowners after only a cursory examination of documents, a practice known as robo-signing.

The prosecutors and regulators still have the right to investigate other elements that contributed to the housing bubble, like the assembly of risky mortgages into securities that were sold to investors and later soured, as well as insurance and tax fraud.

Officials will also be able to pursue any allegations of criminal wrongdoing. In addition, a lawsuit Mr. Schneiderman filed Friday against MERS, an electronic mortgage registry responsible for much of the robo-signing that has marred the foreclosure process nationwide, and three banks, Bank of America, JPMorgan Chase and Wells Fargo, will also go forward.

Along with how broad the releases would be, California’s attorney general, Kamala Harris, also pushed for her state to be able to use the state’s False Claims Act. That would enable state officials and huge pension funds like Calpers to collect sizable monetary damages from the banks if officials could prove mortgages were improperly packaged into securities that later dropped in value.

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. Were those likely to cost $25 billion if they had gone to court? It seems unlikely to me that they could have raised that much. Other big-money lawsuits over securitization can and almost certainly will still be brought — which means that the big banks all still have significant litigation risk hanging over their heads.

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.

Let’s say I lent you $350,000 to buy a house, and that house is now worth only $250,000. I’m holding that mortgage on my books at par, but if I sold it there’s no way I could get $350,000 for it, or even $250,000. I give you a principal reduction of $40,000, so that you now owe $310,000. That’s good for you — which is why the settlement is a welcome development. And it means that I have to take a $40,000 write-down on my balance sheet. But the mortgage is still being held on my books at $310,000, which is still more than I could have sold it for before the write-down.

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.

So think of this as that rarest of settlements, one which really is a win for all sides. The attorneys general get a big deal, homeowners who got foreclosed upon get $2,000 apiece, and the banks get to do the kind of principal reductions they probably have wanted to do for a while, but while getting significant immunity from prosecution at the same time.

Now, I guess, we just wait and see what happens with all the other possible prosecutions and lawsuits, especially in New York and California. And, of course, from the FHFA.

Comments
61 comments so far | RSS Comments RSS

Danny Black, as you like to repeat your opinion that this was the homeowners fault and refuse to open your eyes to see it isn’t just a tiny amount of foreclosures that were fraudulent and banks and servicers (and lawyers too)baited homeowners to refinance to sub prime, refinance to hide previous document fraud, made liar loans by adding zeroes to income, did not do their duty to other customers and committed consumer fraud, and robo signing was but one of the many breaches of the law.

That you affix blame on the homeowners means you sound like a stooge for the banks. (which is why I love to out you as the retired bankster from England who doesn’t have a clue, or care a whit about this subject)

The homeowners are pawns in the greed game, and regretfully even those who are bashing other homeowners will soon see their own house prices sink for some time and likely be underwater unless the criminal acts cease. And why would they when criminals go unpunished and mortgages have been so lucrative for so many?

I am going to repeat this:

Deny it all you wish, but the housing market will never stabilize nor become healthy, as long as past problems are not fixed, and mortgages are used as pawns to the detriment of all homeowners and the economy.

While in England and as a former banker, do you live in a flat or a home? Do you even have a mortgage? I know a favourite comment I get from my English friends is that ONLY bankers can afford a home in England. I suppose that may be where your distaste of anyone beneath you owning one might come from…

Yeah, lawyers signing the documents outta fix it:

http://www.palmbeachpost.com/money/forec losures/foreclosure-lawyer-probes-left-u p-to-florida-bar-2147322.html

Even David J. Stern,the foreclosure king of Florida, hasn’t been reprimanded.

Posted by youniquelikeme | Report as abusive
 

TFF, I don’t think we are really disagreeing.

However, for over a decade these companies existed in the same environment, very low level of defaults, most of the time property going up in price. Within the space of a few months all of those things were no longer true. To deal with the extra volume, they would need to completely change their IT systems – which takes time – hire and train new people – I suspect they hired people but didn’t properly train them before throwing them into the field – and develop new processes.

PS You will notice the tendency to treat all “banksters” as basically interchangeable, it is like treating IT people as more or less the same but I suspect that a systems programmer would not be terribly happy being equated with first-line hardware support. On the other hand it does mean that journalists can quote the equivalent of Microsoft toilet cleaners as “financial professionals”…

youniquelikeme, seriously… feel free to say something intelligent.

Posted by Danny_Black | Report as abusive
 

“To deal with the extra volume, they would need to completely change their IT systems – which takes time – hire and train new people – I suspect they hired people but didn’t properly train them before throwing them into the field – and develop new processes.”

Well put. This is exactly what they needed to do, and what they didn’t manage successfully. Note that this was really the first test of the “too big to fail” banks since repeated waves of consolidation created these monsters. Perhaps they are not only TBTF but also too big to manage?

Posted by TFF | Report as abusive
 

TFF, well you had a near overnight change from a mass-production type model to custom work. I doubt Foxconn – picking a mass-production company name at random – could retool over a period of less than a year to making custom watches in a period of extreme stress to it’s industry.

Posted by Danny_Black | Report as abusive
 

This settlement reduces one of the unknown liability elements for lenders regarding the mortgage mess and provides some modest benefits to the States and some borrowers…period.

The bigger question is how can we rebuild a viable mortgage industry to serve American homeowners. Ongoing mortgage financing is at huge risk in America. Cash and carry is going to mean very very few homeowners. Pushing through the current foreclosures in limbo is one of the impediments to a viable real estate market. The huge unresolved question in this little corner of the bigger problem is the legal authority of MERS. If we assume their ownership of mortgages and deeds of trust is not legal, how do we unwind all of the millions of mortgage transactions which have passed through their hands ???? Many of the players (mortgage bankers and other lenders)no longer exist, and can’t provide corrected assignements, reconveyances, etc. Millions of quiet title law suits ??? Are we going to change the laws in all 50 States, plus the Counties to make MERS legal and deprive those municipalities of that income stream ???? Meanwhile property values will continue to plummet and lending will continue to constrict. Even a cash buyer should be refusing to accept a deed with a MERS history.

Posted by RPD3 | Report as abusive
 

“TFF, well you had a near overnight change from a mass-production type model to custom work”

This is exaggerated. The volume of foreclosures may have increased 5x to 7x, but the business model for processing them didn’t change (or shouldn’t have changed). Foreclosure processing has never been a “mass-production type” business.

Are you telling me that the banks made a real effort to ramp up their foreclosure processing operations by a factor of 5 or more between 2005 and 2010? My guess is that they tried to “make do” for the first 3-4 years, then grudgingly hired some temporary staff without bothering to provide training.

Moreover, once the mortgage business took a downturn, they could have hired/retrained those people. Is much the same skill set, just a new list of procedures.

Plenty of companies have successfully managed this kind of growth. It isn’t easy, and it takes investment, but it isn’t impossible either. The banks simply didn’t try.

Posted by TFF | Report as abusive
 

To remind you all what robo-signing was all about. It wasn’t some banks and servicers gone awry because they couldn’t keep up. It was duplicity and fraud designed to make the system opaque, with no regard for the law.

Here is a deposition on MERS and the “actual” process, not the process Danny Black and the other banker would like you to believe:

“Do you know specifically what you’re authorized to do for MERS?”
*Just sign the documents.*
“Do you know specifically what you’re authorized to do for City Residential Lending?”
“Just sign the documents.”
“Why did you sign this document indicating that your address was in California if that in fact was not your address?”
“Because my name was on the document.”
“So it was presented to you to sign and you signed it.”
“Yes.”

“In addition to notarizing assignments of mortgage, do you ever sign assignments as a vice president of a company?”
“Yes.”
“For which companies have you signed as vice president?”
“I couldn’t list all.”
“Could you give me some examples?”
*Chase Morgan. Wells Fargo. I’m on pretty much every corporate resolution.*
“Would it be accurate to say that there are maybe an excess of 20 companies or banks that you sign as vice president?”
*That would be fair to say.*

“What did you study [in the one year of college]?”
“Nothin’. It was just the basic.”
“General courses?”
“Yeah.”
“Do you have any other additional training or education in banking or finance?”
“No.”
“Real estate?”
“No.”
“Law?”
“No.”

Can you tell me on any given day how many assignments or other documents you sign?”
“Are you looking for a ballpark average?”
“Ballpark. I certainly don’t expect you to remember exactly.”
*I’d say 5,000.*
“Would that be an average day for you?”
“That would be average.”
*Would it be fair to say that during your tenure at NTC you’ve probably signed an excess of 50 or 60 thousand documents?*
*Yes.*
“Could be higher than that?”
“Yes.”

“When you say ‘financial’ are you referring to matters relating to banking?”
*No. We don’t do mortgages in my country. … I don’t have any idea about mortgages when I started here.*

Bait and Switch:

“A few weeks after he started working at Ameriquest Mortgage, Mark Glover looked up from his cubicle and saw a coworker do something odd. The guy stood at his desk on the twenty-third floor of downtown Los Angeles’s Union Bank Building. He placed two sheets of paper against the window. Then he used the light streaming through the window to trace something from one piece of paper to another. Somebody’s signature.”

http://www.investorsinsight.com/blogs/jo hn_mauldins_outside_the_box/archive/2010  /10/25/how-a-gang-of-predatory-lenders- and-wall-street-bankers-fleeced-america- and-spawned-a-global-crisis.aspx

How to turn a fixed rate loan into an adjustable loan:

“What if a customer insisted he wanted a fixed-rate loan, but you could make more money by selling him an adjustable-rate one? No problem. Many Ameriquest salespeople learned to position a few fixed-rate loan documents at the top of the stack of paperwork to be signed by the borrower.

They buried the real documents, the ones indicating the loan had an adjustable rate that would rocket upward in two or three years, near the bottom of the pile. Then, after the borrower had flipped from signature line to signature line, scribbling his consent across the entire stack, and gone home, it was easy enough to peel the fixed-rate documents off the top and throw them in the trash.”

Posted by youniquelikeme | Report as abusive
 

Ah, I should add that Nationwide Title Clearing has changed a little since those depositions. Well in their statements on the websites anyway. And indeed they have grown. But they also refuse that they were involved in anything illgal, being “their” robo signers were the names on the documents. (Oh who cares if it said they were bank Presidents and VPS!!)

“Nationwide Title Clearing, Inc. partners with mortgage industry lenders, servicers and investors by strategically building custom processes to meet any budget and service level. We lend our expertise in back office document processes to give our clients the advantage of focusing on their core competencies.

Our service offering has continually grown to meet the needs of the mortgage industry and our clients.”

That wording has been changed since:
http://www.nwtc.com/

NTC on robo-signing. (8.3 seconds would be the average amount of time the signer used to prepare the documents, given the number of documents set before them)

http://www.nwtc.com/about/FAQ_A1.html

Posted by youniquelikeme | Report as abusive
 

“illegal” nit illgal

Posted by youniquelikeme | Report as abusive
 

A while I commented on the links people like youniquelikeme, who is either hsvkitty or her mentally retarded twin:

“The links always seemed to be some foreclosure lawyer or consultancy or some “asset manager” who would look after you against “Wall Street Lies” and frankly I consider these people to be scum of the earth.”

and from the link:

“John Mauldin is president of Millennium Wave Advisors, LLC, a registered investment advisor.”

Posted by Danny_Black | Report as abusive
 

Danny-Black, you name-calling bank apologist you!

The first link was added as it contained the quote I included, which is an excerpt from book “The Monster” by Michael W. Hudson.

The other links were to the Nationwide title clearing house to show it is still in business and likely doing exactly what its ‘employees’ were doing before and during the crisis… pretending to have authority to sign as bank presidents and other officials and signing that they read and understood documents before signing.

Because the employees were using their own names, NWTC thinks it was quite innocent! That is why I added there page on robo-siging, being they are claiming they were doing no such thing.

Having read the depositons, how can anyone think signing that you are bank official, when you are not, is anything but fraudulent action??? You have disregarded my last message by proclaiming my sources are questionable. Being this is a very real deposition… and these are the answers that the emplyees gave.. that is what really matters and what you should be addressing.

But as usual you resort to name calling rather than addressing the issue, in this case… robo-signing. Now the banks will now have this AG whitewash as their get out of jail free card… when AG’s should have charged them with fraud!

Posted by youniquelikeme | Report as abusive
 

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