Because of process issues, foreclosures slowed to their lowest point in four years, at the still-high rate of 804,000 repossessions for 2011. One out of every 69 homes in America received a foreclosure filing last year.
Self-proclaimed experts claim that the worst of the foreclosure process issues have been dealt with, and that repossessions will surge this year. And I don’t buy it. A ruling in Massachusetts, which the state Supreme Court is being very delicate about, would reaffirm the Ibanez ruling and make foreclosures on almost all securitized mortgages invalid. In states where lawyers have to make personal guarantees on the accuracy of the documents, or where foreclosure fraud has become otherwise criminalized, foreclosure actions have plummeted. It’s possible that mortgage servicers will just plow through these issues, but with newly aggressive Attorneys General investigating, and a new Occupy Our Homes movement raising awareness of the crimes, I think that the prediction of a resolution to processing problems will be just as shortsighted as ever.
Even if the issues got worked out, nobody expects the lawsuits to abate. And that means that banks will still have major liabilities cutting into their profits. JPMorgan Chase just announced a 23% reduction in profit in the last quarter, mainly because they had to “set aside a large sum to fight lawsuits related to poorly-written mortgages during the real estate boom.”
At Bank of America, the situation is far more dire. We’ve been expecting a possible crackup of the big bank, which made some of the worst purchases in business history in acquiring Countrywide and Merrill Lynch. Now, Yves Smith notes that BofA may have to pull out of key areas of the country in order to survive:
No one should cry at the prospect that Bank of America might have to shrink to if it continues to be in financial and litigation hot water. Those of you who have been in the financial services industry will recall that it was built out of mergers of large regional banks: NCNB (North Carolina National Bank, later Nationsbank) ate First Union, Bank of America, Fleet, and of course, Countrywide and Merrill.
The Wall Street Journal has gotten some details about “emergency moves” the Charlotte bank would take if it condition worsens. This is not its Dodd Frank mandated “living will” but apparently a set of plans prepared at the request of the Fed. Bank of America is on a short leash known as a memorandum of understanding, which is accompanied by more intrusive oversight.
What is striking is that it did not contemplate a sale or spinoff of Merrill Lynch, which is the operation which makes it most difficult to resolve. Instead, it would issue a tracking stock as a way to raise money.
In other words, even for a bank developing scenarios on how to cope with serious financial trouble, the priority is to raise dough quickly rather than reconfigure the business into something tidier. Even if still not TBTF, it would be less costly to rescue. But, predictably, the priorities of management and their enablers, the regulators, is to prefer quick fixes to badly needed surgery.
BofA is in serious trouble, which is why they are desperately trying to get small enough to fail. Their earnings report comes out later this month and I don’t expect it to be pretty. And with the Countrywide legacy, their biggest problem is also bad mortgage assets and the accompanying lawsuits. We’re certainly going to see if resolution authority can work, or more to the point, if the Fed can scramble to keep a big bank out of that resolution authority.