I read a rough transcript of this C-SPAN interview with HUD Secretary Shaun Donovan, and there isn’t a whole lot there that’s all that different from the PR pronouncements he’s made in the past. So this won’t be extensive. I just have a few comments:
• Donovan continues to push for principal reductions at the GSEs, and we’re going to see an answer on that this month in all likelihood. 75% of GSE loans are current, and for those borrowers, principal reduction will probably not get offered. HARP 2.0, the refinance program, would be the alternative. Donovan claims a surge in applications in recent weeks:
Look, and I will say, there’s been a lot of focus on this principal reduction issue. But we have worked very well with FHFA. We have made millions more families who are current on their mortgages and underwater eligible for refinancing. We’ve made those changes available over the last few months. We already have over 400,000 applications for refinancing for underwater borrowers just among five lenders. We’re very encouraged by those early results.
What we have learned is that those HARP applicants will find that they cannot go to any outside lenders for their refi other than the one they already work with, which will artificially increase their interest rate over what they could get if they were allowed to use the competition of the market. That substantially reduces the benefit from the refi. And “applications” does not equal the actual secured refinances: most of the big servicers have said they won’t go beyond 120-125% LTV, which is a small increase from the current standard. Any borrowers more underwater than that but current will be out of luck.
• On the foreclosure fraud settlement, the interviewer asked a very good question that hasn’t been put to Donovan or other Administration officials. Basically he said that so much of the settlement has pissed off investors, “Do you worry that this settlement, by mistreating investors, makes it harder to bring back private capital?” This is a point that ultimately affects borrowers, since if there’s no private market for capital, there will simply be less lending ability for mortgages, and a lot of people will find themselves locked out of the market.
Donovan didn’t answer the question. First he claims that the market problems were due to “uncertainty,” for which he gets slapped down:
DONOVAN: We had a situation where there was the potential for 50 different state attorneys general to bring separate cases against these servicers, to end up with effectively 50 different systems of servicing these mortgages and of foreclosing that could have been a disaster in terms of getting private capital back into the market. Many of these markets, many of the foreclosure processes in these markets have been frozen essentially because of a huge uncertainty about what’s going to happen, and a real uncertainty about servicing—what the standards are going to be for servicing loans—that has kept lenders from making new loans or making them at a much higher cost…
Q: But hasn’t it been frozen simply because banks didn’t follow the law?
DONOVAN: I agree. I’m not saying, I’m not talking about what the cause was. I’m talking about the fact that that was true.
This is the entire point. Banks broke the law, and they had major legal exposure. So they stopped foreclosing. Investors weren’t wary because of different systems for foreclosures that would have emerged in the event of different lawsuits. They were wary because they were being ripped off. And the settlement allows banks to meet their obligations, in part, by continuing to rip investors off.
The servicing standards, meanwhile, have not emerged, as seen by the fact that horror stories continue to happen without much abatement. The only real difference in the industry since the settlement is that the banks feel like their exposure has lessened, so they’re filing all kinds of foreclosure actions with the same bogus documents. I don’t know who this “helps” or why investors will see this as a chance to re-enter a broken marketplace. Donovan makes the case, but he’s kidding himself. There was one private label deal in all of last year, and I’d be surprised if that gets duplicated at all. Yves is worth reading on this.
• As for the specific provisions, Donovan spouts the same rhetoric:
You’re asking about some specific provisions that we’ve heard concerns about. We worked hard to make sure that the interest of investors was protected in the settlement. We made it very clear that nothing in the settlement contradicts the requirements that a servicer when they’re modifying a loan it has to be in the interest of the investors. It has to be a positive economic impact for the investors. And we also worked hard to make sure that when a first lien is being written down that a second lien would also be reduced as well. Now I understand from an investors point of view it’s not perfect. We are having conversations with them, and we can certainly to look to make changes in the future or to improve from their perspective the way this works.
How exactly are changes going to be made? The settlement was quietly approved by a judge on Thursday. And again, just reducing the second lien without wiping it out before touching the firsts enriches the banks. That’s just a factual statement.
Then there was this non sequitur (it’s a paraphrase):
[Q: Why are banks allowed to get credit in this settlement for things they’re already doing anyway?
DONOVAN: They’re not writing down principal….]
Um, OK. I guess Donovan REALLY doesn’t want to talk about how 1/4 of the bank’s penalty can come from those routine actions.
• Finally, there was the moment where Donovan was asked to be penitent:
Q: (Paraphrased) It is January 2009. You’re coming into office as the HUD secretary. Knowing everything you’ve now learned from the past three years, what are two or three things that you would do differently?
DONOVAN: Maybe the most important thing that we’ve learned is how difficult it is to get the servicers, and not just the servicers but all the various players in our housing market to move to helping homeowners.
Q: (Paraphrased) So would you have required them to do certain things?
DONOVAN: That leads to a couple of things. One is we would have put more requirements and that’s where the settlement is so important and where the president and I realized we had a real opportunity is through this enforcement action we could force servicers to do something. We could force them to begin to write down principal and other things that we had provided incentives for them before.
Nobody said untangling this housing mess is easy, and I’m all for the learning process. But it seems to me that THREE YEARS is a bit of a strong learning curve. Especially when, after all the violations of program guidelines in HAMP, the Treasury Department just up and handed out the incentive payments to servicers without sanctions. Not to mention all the inequities in the settlement and in HARP and the like which keep rebounding to the benefit of the banks.