John Carney, head mouthpiece at CNBC, sure sounds confident that the banks will not have to face any consequences for systematically defrauding the mortgage market for the past decade.
But Bank of America’s recent decline—down almost 10% this week—is driven by fears that the bank could be hit with huge liabilities for faulty mortgage pools. And I’m pretty sure that is not going to happen.
Because the politicians will not let the financial stability of the largest bank in the nation be threatened by contractual rights. Not when there’s an easy fix available that won’t cost taxpayers a dime.
Here’s what is going to happen: Congress will pass a law called something like “The Financial Modernization and Stability Act of 2010” that will retroactively grant mortgage pools the rights in the underlying mortgages that people are worried about. All the screwed up paperwork, lost notes, unassigned security interests will be forgiven by a legislative act.
Here’s my favorite part: Carney says “there’s simply zero probability that the politicians in Washington are going to let Bank of America or Citigroup or JP Morgan Chase fail because of a legal issue.” Because why should trifling legal issues matter?
Now, you wouldn’t have lost a lot of money in recent years betting on the Masters of the Universe to escape unscathed. And given the attitude of the top bank regulators in the country, who still refuse to admit that anyone has been harmed by foreclosure fraud and continue to view it as a technical paperwork issue, it’s hard to argue with Carney’s speculation.
But I’m not so sure. [cont’d] In fact, I don’t think Carney’s so sure. After writing that story, he linked to this alert about mortgage-backed securities:
Mortgage-bond buyers are losing faith in the accuracy of remittance reports, and some say the apprehension could soon factor into their investment strategies.
Remittance reports, distributed monthly by securitization trustees, are supposed to provide routine snapshots of the cashflow-collection and distribution activities of servicers. However, investors say there has been a rash of recent instances in which the reported data differed considerably from what actually happened – making it impossible to determine values for their holdings […]
Why have the once-reliable reports been wrong? Investors point in part to increasing use this year of mortgage-modification programs that government agencies and lenders have implemented to aid troubled borrowers. They claim some servicers fail to verify when the changes take effect, resulting in mismatches between when a given loan’s cashflows actually shift and when those adjustments are reported.
Servicers argue the volume of recent modifications has become overwhelming in comparison to their staffing levels. They also have faced ongoing struggles in figuring out how to treat loans that are in the trial phases of modification programs. “It has made it nearly impossible for us to appropriately account for changes,” one servicing professional said.
The servicers are basically making changes to loans without recording them properly for the remittance reports. Neither the investors, nor the servicers, know how much money is tied up in these securities. Between this inability to judge the value of the securities (the core job of any banker – they can’t even count money anymore), and the clear instances of fraud in selling the securities, the entire market in these products could verge on collapse.
Then you have the existing-home purchasers. My mouth gaped open when I saw this headline in the New York Times today: “Avoid Foreclosure Market Until the Dust Settles.” Its first sentence: “Are you out of your mind to even consider buying a foreclosed property right now?” Incidentally it’s the most popular emailed story on the site currently.
The writer, Ron Lieber, chronicles yet another foreclosure fraud nightmare story – in this case, a couple who bought what they thought was a home at a foreclosure auction, which turned out to be a second mortgage on a home with a first mortgage. So they paid $137,000 cash for a house that still had a massive mortgage on it – and the second mortgage and the first mortgage came from the same bank.
Finally, we’re seeing a shift in how the media is covering the story, as you can see above. Yves Smith picks up on a Wall Street Journal story that actually cogently explains the nub of the crisis: how the incompetent servicing industry didn’t follow any legal standards, which calls the entire housing market into some question:
But the banks’ “reassurance is not reassuring,” says Susan Wachter, a professor of real estate at the University of Pennsylvania’s Wharton School, because it doesn’t deal with how easily they can prove ownership of the underlying mortgages…
Real-estate law requires the physical transfer of paperwork whenever mortgages trade hands, and analysts are raising questions about how often that happened during the housing boom. One concern is that banks may have lost, or didn’t ever have, mortgage certificates. If that happened, banks will have to pause foreclosures for months as they track down certificates and refile paperwork…
Under a far gloomier scenario, the problems created by using robo-signers may be irrelevant if, instead of being lost, mortgage documents weren’t ever properly transferred during each step of the securitization process, says Adam Levitin, a professor of law at Georgetown University. If that happens, “the whole system comes to a halt,” he says. Investors could argue in court that they never owned the mortgages backing their money-losing securities.
Even more interesting is the long piece in, of all places, The Daily Caller, an incredibly good summation of the issues that makes no bones about its conclusions:
Wells Fargo wanted to foreclose on a condo unit which had multiple mortgages attached to it. Wells Fargo also owned one of those second mortgages. So Wells Fargo spent money to hire a law firm and file suit against the irresponsible lenders at Wells Fargo. Then, Wells Fargo spent money to hire a different law firm in an understandable effort to defend Wells Fargo from the vicious legal attack coming from Wells Fargo. The second law firm even prepared a legal statement for Wells Fargo which called into question the dubious claims being made by Wells Fargo. Sadly, Wells Fargo won the case, crushing the hopes of Wells Fargo.
As business reporter Al Lewis wrote at the time, “You can’t expect a bank that is dumb enough to sue itself to know why it is suing itself.” So goes the unprecedented wave of foreclosures that has swept across the country since the housing bubble popped. Mortgages have been bought, sold, and repackaged so many times through such an opaque process that banks have no idea who owns what. When they foreclose, they simply guess, making up the documents and information necessary to do so.
I’m actually recommending a Daily Caller story. Read the whole thing. It’s a comprehensive piece of reporting.
None of this means that the banksters won’t get let off the hook here. But you have investors who want to leave the market and probably will sue the servicers on the way out. You have purchasers who won’t go near a foreclosed property until the errors are corrected. You have title insurance sellers unlikely to touch these properties as well. You have experts who understand that you cannot improve the economy or the fiscal position of the county without addressing the behavior of the banks. You have media on the left, middle and even the far right recognizing the severity of the fraud.
This doesn’t set up favorably for an industry that will need even more massive support to get out from under the mess they’ve caused.