The Congressional Oversight Panel, which Elizabeth Warren used to run but which will now be chaired by folk-hero Sen. Ted Kaufman, held a hearing on TARP foreclosure mitigation programs, basically HAMP and its counterparts, yesterday. You can see all the statements from everyone on the panel and the witnesses at the link.
I could write a story about any part of this very interesting hearing, but I want to focus in on Damon Silvers. He’s the director of policy and Special Counsel for the AFL-CIO, and a member of the panel. And his performance yesterday was remarkable. First, the opening statement. I want to excerpt this because nobody in our bloodless government seems to understand it:
As I have said at every hearing on this subject, foreclosing on a family’s home is not a mere financial transaction. It marks a profound financial loss and often devastating emotional defeat for the homeowner, psychological trauma and social dislocation for the homeowners’ children, falling property values and destabilized communities for the homeowners’ neighbors. Mass foreclosures are a sure sign of a failing economy and a society that has been unable to provide basic economic security to its citizens. Mass foreclosures should no more be encouraged by our government than should contagious diseases or catastrophic floods.
Every time you hear that we have to “get foreclosures moving again,” think of this paragraph.
Silvers turns to HAMP, and says correctly that mortgage servicers “simply did not restructure the loans.” And compounding this is what we have learned about foreclosure fraud. Silvers totally gets it:
And now we have learned that the foreclosure process itself, and our system of property law itself is cracking under the strain of the bubble and the bust. There appears to be strong evidence that servicer banks have improperly executed and filed with the courts a large number of affidavits in the pursuit of foreclosures. Worse yet, since the affidavit revelations, evidence has mounted that there are substantive problems with the liens that support significant numbers of securitized mortgages.
Silvers asks why NACA, with their budget of less than $20 million, can get 20,000 mortgage modifications done in one week in one city, but the government can’t get more than 20,000 modifications a month made permanent, with a $50 billion dollar budget. Great question. Then he asks if HAMP knowingly gave money to servicers who foreclosed on homes where they did not have a valid lien. Then he drops a stink bomb in the room.
Finally, I would like to know what plans the Treasury Department and the OCC have for dealing with the possibility that either the major servicer banks will be held liable for their failures to properly service $7 trillion in mortgages, or that the collateral for significant amounts of mortgage loans will turn out to be invalid. These possibilities would appear to present systemic risks of the type that TARP was enacted to address, and in particular, would appear to have grave consequences for the very institutions that TARP initially capitalized, and who were allowed to exit TARP on the theory they were now healthy.
This is all great, and the questions everyone needs to ask. But it gets even better during the questioning. The Treasury Department’s representative, Phyllis Caldwell, seemed more concerned about getting foreclosures secured than anything else. She talked about how uncertainty could lead to lower home prices and a delayed recovery. (Keep in mind that Treasury has said HAMP helped the housing market by delaying repossessions. So some days it’s one, the next day it’s the other.) However, she insisted that the risks to the banking system were “slim.”
While banks and mortgage servicers are bracing for a wave of lawsuits over flawed paperwork, Ms. Caldwell said the government believed the overall risks to the financial system were slim.
“We’re very closely monitoring any litigation risk to see if there is any systemic threat, but at this point, there’s no indication that there is,” she testified.
This is where Silvers took direct aim. Shahien has the exchange. Silvers used the $47 billion repurchase claim against Bank of America by, among others, the Federal Reserve Bank of New York, as his lead example.
“I’m concerned about Treasury making representations categorically that you don’t see a systemic risk,” Silvers told Treasury’s chief homeownership officer. “And let me walk you through exactly why.”
“That letter asks for $47 billion of mortgages — of mortgage- backed securities to be repurchased at par,” Silvers went on. “Do you know what those mortgages are currently carried at … the market value of those bonds today?”
Caldwell declined to comment.
“OK, fine. Let me tell you what the Fed says they’re worth. The Fed tells us they’re worth 50 cents on the dollar. So if the Fed’s request to Bank of America is honored, right, Bank of America, assuming they are carrying these bonds, assuming when they buy them back they mark them to market, Bank of America will take a $23 billion loss.
“The Federal Reserve further informs us that there is nothing particularly unique about that particular set of mortgage-backed securities — meaning they have not been chosen…because they’re particularly bad. They believe they are of a common quality with the rest of Bank of America’s underwritten mortgage-backed securities. There are $2 trillion [worth] of Bank of America’s underwritten mortgage-backed securities.
“Five such deals — five such requests, if honored to Bank of America…will amount to more than the current market capitalization of Bank of America, which is $115 billion.
“Now do you wish to retract your statement that there is no systemic risk in this situation? And the word is ‘risk’ — not ‘certainty’ — but ‘risk’? And I would urge you to do so, because these things can be embarrassing later.”
Caldwell replied that the review was ongoing and in the early stages, but Silvers was incredulous. He asked, reiterating his scenario above, “Is Bank of America not systemically significant?” After Caldwell continued that there was some risk, but no evidence of a major systemic risk, Silvers concluded, “I hope that … if the Treasury comes back to us and is discussing whether or not we need to deploy further public funds to rescue Bank of America, or such other institutions as might be affected by these events, that we get a similar kind of indifference to their fate after it’s too late.”
The other panel members, even the Republicans, were pretty good as well, but Silvers struck to the heart of it. Treasury’s head is completely in the sand on this one. And yet, we can expect that, if the worst is realized, they’ll come back with a “hoocoodanode” and a request for some money in a satchel. Katherine Porter of the University of Iowa was completely comfortable in saying that “perhaps virtually all” securitized loans made at the height of the housing bubble were seriously flawed, either in improper mortgage note assignment, improper underwriting standards or improper servicing. Perhaps virtually all.
This is an illegal process right now, and without making it legal, you’re not going to ever see movement in the housing market.
“We are faced with a choice here,” Silvers closed. “We can either have a rational resolution to the foreclosure crisis or we can preserve the capital structure of the banks. We can’t do both.”