In November 2010, on what was pretty much his last day working for Treasury, I spoke to Michael Barr, an assistant secretary; he was upset about a post of mine which said that Treasury was going to do absolutely nothing with respect to holding banks accountable for the various mortgage scandals.
Not true, he said: in fact, the government was doing a lot of things targeting banks and holding them responsible for their actions.
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.”
Well, here we are, a year later, and so it’s time to check in and see what has been achieved. I asked Treasury, and they sent me the November Housing Scorecard, which is mainly notable for the fact that JP Morgan Chase “was found to be in need of substantial improvement under the program” and will no longer get servicer incentives from Treasury. They also sent me written testimony from October about how HAMP is coming along. (Slowly.)
What they didn’t point me to — because it doesn’t exist — was any kind of settlement between the attorneys general and the banks. This time last year, it looked almost certain that such a settlement was going to happen; now, with Massachusetts going its own way and California proving unwilling to give in very much, the chances of seeing any settlement at all are diminishing by the day. Realistically, if we don’t see something in the next few weeks, the chances of getting a big settlement will be very small indeed.
So the one big thing which everybody expected to have seen by now hasn’t happened. And because it hasn’t happened, the banks haven’t paid any fines; they haven’t detailed how they’re going to compensate the people who they mistreated in various foreclosure processes; they haven’t substantially improved their servicing operations; and they certainly haven’t embraced principal reductions as a tool for getting the housing market back onto a healthy footing. In fact, they haven’t really done anything at all, since it behooves them to keep any improvements they might be able to make as a bargaining chip they can use in negotiations with the government.
Going forwards, it’s still likely that the banks will end up paying some kind of fine, and promising that they’ll clean up their act in future. But the fine won’t hurt — it’ll be a cost of doing business. And the promise will be worthless, as such promises always are — I’ve never seen an agreement with real teeth, where penalties actually get enacted. In other words, the servicing system will continue to be broken, the banks will continue to make things worse rather than better, and the government will have failed in its self-imposed task of getting a grip on this problem and doing something meaningful about it.
I do think that there are people in government who have tried. But I also think that — as I said last year — they’re doomed, ultimately, to failure. Treasury said that we would have seen real progress by now; we haven’t. And there’s very little chance of getting anything substantive done between now and the election — in fact, things seem to be moving in exactly the wrong direction. Which makes me think that in the battle of Treasury vs the banks, the banks — predictably — have won.