On March 13, I read the foreclosure fraud settlement documents and noticed that the banks would be eligible to get credit for their penalty for performing routine actions, like waiving deficiency judgments, bulldozing or donating homes. These are the sorts of things banks do all the time, and yet they could comprise up to one-quarter of the total credits.
Two full weeks later, the New York Times got around to reading the documents and noticing the same thing.
In February, JPMorgan Chase donated a home to an Iraq war veteran in Bucoda, Wash., and Bank of America waived the $140,000 debt that a Florida man still owed after the sale of his foreclosed home. Over the last year, Wells Fargo has demolished about a dozen houses in Cleveland.
Banks do things like this — real estate transactions that do nothing to prevent foreclosure — all the time. But beginning this month, they can count such activities as part of their new commitment to help people stay in their homes [...]
For example, the banks can wipe out more than $2 billion of their obligation by donating or demolishing abandoned houses. Almost $1 billion can be used to help families that have already defaulted move out.
“The $17 billion is supposed to be the teeth of this settlement,” said Neil M. Barofsky, the former inspector general for the Treasury’s bank bailout fund known as the Troubled Asset Relief Program. “And yet they are getting all this credit for practices that they do every day.”
The paper of record, just 15 days behind schedule.
But who am I to complain? This is all true. Under the guise of a penalty, the banks can continue normal operations and finish off their obligations.
The Times had to go to the principals and ask how this could be legitimate. And they got some marvelously entertaining answers. Patrick Madigan, Tom Miller’s Man Friday, claimed that the settlement “was meant not just to prevent foreclosure,” and that just because the banks perform these activities in the normal course of business doesn’t mean they’re performing them enough. Nice try. And Miller has the gaul to say he’s just as tough on the banks as anyone.
But Mark Zandi really takes the cake here:
The government officials who brokered the agreement estimated that a million borrowers would receive relief under the $10 billion-plus for debt reduction and another $3 billion to help borrowers who are current on their mortgages refinance at lower interest rates. Mark Zandi, the chief economist at Moodys.com, estimates that the total will be closer to 700,000 borrowers — 250,000 for refinancing, and 450,000 for principal reduction. That is partly because there are homeowners who owe so much more than their homes are worth that even the deal’s average aid of $30,000 or so of principal reduction will not make them less likely to default.
“After looking at the data in detail, I’m beginning to wonder if you’re going to find enough homeowners where principal reduction works in a meaningful way,” Mr. Zandi said.
For that reason, he said, it was necessary to give banks credits for other types of activities.
So because the settlement is so small and pathetic, they had to use it on small and pathetic things. That’s basically the argument. We have $700 billion of negative equity in this country, and the average home in negative equity is $54,000 underwater. The idea that you can’t find enough homeowners for principal reduction is absurd. You only can’t find enough because the settlement didn’t include a decent monetary penalty.
And then there’s Shaun Donovan, still peddling his “once you pop, you can’t stop” argument, claiming that the banks will get a taste of principal reduction and love it so much that they’ll just start writing down everybody’s loans.
Madigan points out that “Many of the options on the menu were initially suggested by the states or by the Housing and Urban Development Department.” Not helping! And anyway, he didn’t have to tell us that. In this excellent interview with former FDIC head Sheila Bair for National Journal, she explains that she tried time and again to get the Administration to deal with housing in a serious way, and they just wouldn’t devote the resources.
NJ: You have been critical of the administration’s efforts to address the housing crisis. What’s wrong with its approach?
Bair: They had academics and theoretical economists designing it who may have been well-intentioned, but didn’t have any practical understanding of the market or servicers or operationally what would make sense. Everything the administration has done has only helped at the margin. The timidity and incrementalism have been real problems. They just don’t want to spend money on it. They are conflicted.
NJ: You warned against the incentives for industry that the administration created around the Home Affordable Modification Program, which provides payments to lenders and investors over time for successfully modified loans. Why?
Bair: You get what you pay for. Trying to do this on the cheap just didn’t work and the complexity of the program, if anything just compounded the problem. The bottom line is the financial incentives were not enough. The program was too complicated and the sense of urgency we saw, and I think that frankly the president saw, I don’t think translated into a program that could be operationalized. They were relying on a voluntary program with weak economic incentives and the big servicers were not putting the resources that were needed into these big servicing operations.
So it’s no surprise that even in the case of a penalty, when the banks have massive civil and criminal liability, this group couldn’t design anything with teeth.
…I should add that the NYT editorial board had a very strong opinion opposing the settlement on March 18, but it didn’t address this specific issue.