I hate taking issue with Matt Taibbi. I’m a huge fan of his writing and think he has done more to cause the big bad banks discomfort than any single writer.
But even someone as skilled as Taibbi occasionally has the writing equivalent of a bad hair day. And his post, “A Victory for the Public on Foreclosures?” is an example. And his misreading matters precisely because he has so much cred with the public that is unhappy with Big Finance.
Taibbi has taken up cheerleading the Schneiderman involvement in a Federal investigation committee as major progress and also amplified the messaging that the current version of the release in the mortgage settlement deal (which by the way is still more of a mystery than it ought to be) is a good deal. As we will discuss in due course, even a narrow deal around robosigning is in fact NOT a good deal.
I need to get a bit granular since quite a few folks on what passes for the left have gone into hopey dopey liberal mode. This is EXACTLY what the Administration wanted. A mere gesture, appointing Schneiderman to a part time job co-chairing an under-staffed investigation, when the committee members who are likely not to be on the same page as him have the advantage of being in DC where the troops will be located and knowing their way around the relevant bureaucracies. The ONLY hope Schneiderman has of pulling this off is lots of very noisy, sustained pressure, NOT going all gooey-eyed at a blast of Administration PR.
We’ve become trained to look for the man behind the mask…
But I’m not sure there is a mask when it comes to Barack Obama…
I hear Obama tell audiences about his grandmother and her time working on a bomber assembly line during World War II. Intellectually I know it’s the same thing — but when you actually watch him in person, you get this crazy sense that these schlock ready-for-paperback patriotic tales really are a big part of his emotional makeup. You listen to him talking about his grandfather waving a little American flag on the Hawaiian beach as he watched the astronauts come in to shore, and you can almost see that these moments actually have some kind of poetic meaning for him, and that he views his own already-historic run as a continuation of that pat-but-inspirational childhood story — putting a man on the moon then, putting a black man in the White House now.
The beginning of Taibbi’s post excerpts a list in a Huffington Post story that was cribbed and somewhat edited from a post by Mike Lux on Daily Kos. But Lux regularly does messaging for the Administration. It would have been a good precaution to verify his account.
Now, alert NC readers, notice how effective this propaganda technique is from the original Lux post:
1. No release on any fair housing, fair lending, or civil rights claims.
2. No release on any Federal Housing Finance Agency or Government-Sponsored Enterprise claims.
3. No release on any Consumer Financial Protection Bureau claims (which would admittedly be modest, since the Bureau was only established in July 2011).
4. No release on tax liability claims.
5. No release on criminal liability claims.
6. No release on SEC claims.
7. No release on National Credit Union Association claims.
8. No release on FDIC claims.
9. No release on Federal Reserve claims.
10. No release on the “vast majority” of origination claims.
11. No release on the “vast majority” of securitization claims, including all claims of state pension funds.
12. No release on legal liability surrounding Mortgage Electronic Registration Systems (MERS).
Looks impressive, no? You’ve been three card Monte’ed. Nearly all of the items on the list are NOT what the worries about the release are over. Some examples: No one ever thought there would be a waiver on putbacks, which are claims being made now by the FHFA. The IRS has made it abundantly clear that that it is not going to go after REMICs (if they did, they’d cause big losses to every RMBS investor in the US, which in turn would set off an avalanche of litigation). It’s an extremely useful threat, but since no one in the Administration is interested in threatening the banks as a way to bring them to heel, there is no real need to provide a waiver. And SEC liability? Schneiderman was willing to trade that away because it is pretty meaningless on mortgage originations. The subprime party ended by June 2007, and the statute of limitations is effectively five years. The 2006 originations are free and clear (note there IS ongoing liability, as we have stressed, for annual trustee certifications, but no one seems very interested in that). And in earlier posts I’ve discussed how I never thought MERS was on the table (as in MERS liability sits with MERS).
Put it another way, if the list had read something like:
1. No release for selling purple cows to Martians
2. No release for operating a perpetual motion machine without a license
3. No release for jaywalking in Manhattan
4. No release for going back in time and killing Shakespeare
it might have been easier to catch the ones that no one thought were germane to the negotiations.
Now, let’s play “gotcha.” I have no idea what is in or not in the release (and as we will discuss shortly, the AGs themselves seem to be not so clear on this matter). But notice how FTC claims are not on the list. They are picked up only as of when they were transferred to the CFPB. Yet the FTC was THE central actor in busting the last outbreak of servicer bad behavior, by Fairbanks in 2003. As Tom Adams wrote:
Back in 2003, Fairbanks Capital billed itself as the largest servicer of subprime mortgages. It was also a stand alone servicer, in that it was not in the business of lending.
In a high profile case within the mortgage industry, the Federal Trade Commission brought an action against Fairbanks for violating the FTC Act, the Fair Debt Collection Practices Act, the Fair Credit Reporting Act, and the Real Estate Settlement Procedures Act (RESPA) . Fairbanks was accused of a host of improper servicing activities that will sound remarkably familiar to anyone following the foreclosure and servicing issues in today’s mortgage markets. Among the transgressions, Fairbanks was alleged to have:
-failed to post payments in a timely manner, resulting in additional late fees or interest,
-charging for forced place insurance,
-assessed improper fees, such as for attorneys, service, appraisals, FedEx,
-misrepresented the amounts owed by borrowers,
-submitted misleading or false information to credit reporting agencies,
-failed to report disputed charges to credit reporting agencies,
-failed to respond to borrowers written requests for information or investigation into charges, and
-failed to make timely payments of escrow funds for insurance and taxes.
Similarly, I see no mention on this widely-touted list of where consumer fraud claims stand. HAMP fraud was widespread and Attorney General Catherine Cortez Masto is including HAMP consumer fraud in her expanded lawsuit against Countrywide for violations of its consent decree.
I sincerely doubt that consumer fraud claims and FTC claims are being included in the proposed waiver. I’m just using that to illustrate you can’t take that list at face value.
And that’s before we get to the issue that we still don’t know what “vast majority” of origination and securitization claims mean. As anyone who has worked on contracts can tell you, seemingly innocuous language can often be very powerful.
Far more important, even if you accept this messaging at face value, the deal is NOT a good deal. Taibbi acts as if the BANKS will be paying the $25 billion bandied about as a settlement number. Earth to base, this is yet another three card Monte trick. The number to keep your eye on is the cash portion. That’s a moving target, but it is clearly under $5 billion.
In fact, what everyone keeps skipping over is that the bulk of the value of the deal is in principal mods, and the deal is set up so that mods on mortgages that the banks don’t own will count at a 50% rate. Guess what, other people’s money is ALWAYS preferable to your own money, so the only mods the banks will do on their own mortgages are ones they would have done anyhow.
So the effect of this deal is:
1. To have MBS bondholders (pensions funds, 401 (k)s, insurers) pay for liability that belongs to the banks
2. To transfer from those investors to banks as second lien holders. The big four banks still have hundreds of billions of dollars of second liens, mainly home equity loans. If you write down the first lien, it makes the second lien more valuable.
Let’s look at how this might work in practice. Say you have a borrower that has a first lien that is now worth 120% of his house at current market prices and a second lien worth and additional 15%. He gets his first lien written down to 105% of his home value. Guess what, he is still seriously underwater but he now has more cash to pay his bank-held second. How much has he been helped, really? If he can afford the hit to his credit score, he really ought to ditch the house. The mod only serves to make that a tougher call.
Now a letter by Nevada AG Masto raising questions about the deal, and it appears second liens are being addressed to a degree, but I don’t find the bits I see very encouraging. For instance, she mentions that banks get a credit for extinguishing a second lien that is over 180 days delinquent. She isn’t sure what that means. And more important, this is not as big a concession as it might sound. Banks historically have not pursued deficiency judgments on primary mortgages, let alone seconds. They have started of late, but even that probably means less than their PR would have you believe. The US has had very lax enforcement of debt collection laws, but that is being tightened up both via the CFPB starting up and some new Administration initiatives. I suspect what we will see is a year or two of efforts and scary stories (meant to deter those thinking of defaulting). It’s a good bet that the banks will go back to their former practice of rarely going after these borrowers because you seldom get much from people who are under financial stress, and it costs real money to pursue them.
In addition, the consensus view among the boosters is that robosigining is not such a big deal, so we ought to be happy to waive that in isolation. But look at how Catherine Cortez Masto is using that abuse to go in a very systematic manner up the servicing ladder, from managers of robosigners that she is prosecuting criminally to Lender Processing Services. As we have argued repeatedly, LPS served as a liability shield for the major servicers. If Masto gets to discovery on LPS, the odds are high that she will be able to establish that servicers were well aware of the abuses that LPS was engaged in as their agent and the banks were effectively colluding with LPS.
In other words, clear cut, institutionalized abuses are a great way to engage in the classic mob prosecution strategy of targeting the foot soldiers to get them to give you the dirt on the entire network. Why would you give up such a valuable chip when you don’t know the extent of the abuses? But ex Masto, there is a remarkable lack of willingness among attorneys general and regulators to dig hard into what the banks are doing and see where that leads. For instance, Richard Cordray, newly appointed head of the CFPB, said that he is not going to pursue bank violations of the Servicemembers Civil Relief Act because it looked like mistakes and the banks said they had stopped doing that. Huh? How do you know it was a mistake unless you investigate? The fact that Jamie Dimon was so eager to make this problem go away quickly suggests otherwise.
The other bizarre element of this cheerleading is that the current deal stinks for any state ex maybe California. Why should ANY state participate when they have no idea how much they will be getting, and $15 billion of $25 billion earmarked for California? The fact that Republican Pam Bondi of Florida, a state hit even worse by the aftermath of the bubble than California, is hectoring California’s Kamala Harris to sign on says clearly that Bondi is more concerned about protecting the banks than about her state’s citizens. That can be the ONLY conclusion you can reach for any state that joins this lopsided pact.
If the Administration had really changed its stance on bank misdeeds, you’d see it putting the settlement on hold until the investigations led by Schneiderman had been concluded. The fact that the mortgage settlement is proceeding on schedule says this Administration is, as before, trying to cover up its bank-favoring actions with better propaganda.