I’m going to agree with Yves Smith that yesterday’s Senate Banking Committee hearing on foreclosure fraud went really badly for the banks. Now, it’s a Senate hearing, and it’ll soon be filed away with all the other Senate hearings, never to threaten a banker again. But we’ve gone from a point where this issue was basically just a backwater on blogs to an issue where the chair of the Senate Banking Committee is calling it a crisis and begging the Financial Stability Oversight Council to get involved, because it represents an extreme systemic risk.
That’s not nothing. And if it doesn’t mean anything in terms of Senate legislation, it certainly pricks up the ears of investors, who probably saw dollar signs lighting up in their eyes when they watched this hearing. The exposure of the banks is so clear, the violations of the pooling and servicing agreements so multi-faceted, that their prospects of putting back bad mortgages on the banks just went up. You can read my Twitter colloquy with some other bloggers, preserved by Kevin Drum, on this issue. I would add that the mortgage-backed securities market is so big – $7.6 trillion dollars – that you would only need 8% of them to be put back to wipe out the capital of every major bank. And as soon as one – just one – of these put-back suits is successful, you will see an avalanche of filings.
The bankers were flat-out lying, and what’s more they were called on their lies. From Yves:
The financial services industry members offered not merely tired bromides, but repeated flat out lies: we always try to save borrowers; we don’t foreclose on people who aren’t delinquent; we don’t make money from foreclosing (no joke, the Chase guy said that); we never consider out second liens in our foreclosure decisions (huh? only true on a case by case basis, utter bunk at the institutional level); we don’t have any conflicts (double huh, every business has to make tradeoffs); yes, we make mistakes, but we correct them as soon as we learn about them (yeah, right). And this palaver did elicit reactions. Early on, when Lowman claimed that Chase was committed to working with homeowners, he was called a lair by a member of the audience from the audience. The session had to be halted while the offending truth-teller was removed. And the other witnesses often felt compelled to take the floor after a particularly egregious bank remark, as Levitin did on the claim that banks don’t make money from foreclosing, and offered evidence to the contrary.
Pro Publica had a great piece showing Bank of America’s Desoer completely lying when she said that the investors were holding them back from making more loan modifications. In fact, investors really have no say in the matter and almost never block a loan mod by their servicers, who they pay to get the best deal for them.
And as I said, the other members of the panel would call out these lies to the faces of the bankster apologists. Adam Levitin of Georgetown read from a Countrywide earnings report where the servicer said outright that they expected to make up their losses on loans on increasing fees. Levitin had several great moments, and right here could be the best. Michael Bennet was wondering why we’re not seeing modifications if practically every interest ought to be aligned on delivering them. Modifications, after all, are a win-win-win, and foreclosures are a loss-loss-loss. Levitin explains perfectly.
To paraphrase, the servicers chase short-term profits that make more sense for them to foreclose. It may be a “stupid” short-term strategy, as Sen. Robert Bennett called it, but that’s pretty clear. As Levitin said, “foreclosure is either less costly or more profitable” than modification for the servicers. But then he got into the other side of this, and that’s loans not serviced by a third party, but the ones on the bank’s books (this is about 40% of the mortgages in the country). They don’t want to take losses on them. If the bank modifies the loan, they have to realize the loss immediately. This would reveal the banks as insolvent. They don’t want to eat Big Shitpile. So they foreclose, keep the property off the market, and stretch out the loss, extending and pretending, until later.
This is a serious problem with second liens, which are almost all on bank’s books, which are almost all worthless, but which read as positive items on the balance sheet. The $400 billion in second liens, if marked to zero, would wipe out all their market capitalization.
This problem becomes worse when you realize that the major third-party servicers… are also owned by the same big banks that own the second liens!! Don’t tell me there’s no collusion there. The failure to modify and the rush to foreclose is a giant protection scheme for the big banks.
Levitin follows up on this with this piece, where he explains that these are losses and somebody has to realize them, and right now the wrong people are getting stuck with the bill:
Levitin says that there’s no possibility for these losses to go away. Right now, investors and homeowners are footing the bill. That’s outrageous. Homeowners are being abused and investors were just lied to. And the homeowners that live next door are taking a hit in terms of their property values.
Earlier, Levitin explained that the law was fine, the banks just failed to comply with it. They failed to convey the mortgage and the note properly, and they failed to honor the pooling and servicing agreements as well, which is the governing agreement here.
What I noticed the most is that the Senators understood the worst of the issue because their constituents told them. Every single one of them had a series of stories to tell about homeowners being victimized by their servicers. This is dangerous territory for the banks and they know it. Reports are that they’ve been scurrying to prevent legislative fixes and basically lobby their friendlies in the Congress. The other day, a Treasury spokesman called the behavior of the servicers “simply unacceptable, and servicers who have failed to follow the law must be held accountable.”
The issue is starting to hit some critical mass, and that’s important.