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Mortgage Settlement Pisses Into the Wind

Posted by Larry Doyle on February 12, 2012 5:34 PM |

In a nation now all too familiar with a “too big to fail” banking system, a heavily manipulated and high frequency dominated equity market, and an incestuous financial regulatory system, we should not be surprised with a mortgage settlement that does little more than ‘piss into the wind’.

Pardon my cynicism, but one does not need to look too deeply into the recently announced mortgage settlement to understand there is little in the way of meaningful justice embedded in this contrivance. Has America become so numb to the news emanating from both Wall Street and Washington that we expect so little and receive less than that when it comes to real justice? I believe we have.

If the mortgage settlement were derived from shoddy mortgage servicing practices at the five institutions (Ally Financial, Bank of America, JP Morgan Chase, Citigroup, Wells Fargo), then how is it and why is it that the executives running those business units are not singled out in this settlement and handled accordingly?

I believe it defies logic to think that the mortgage servicing units within these institutions were not fully aware of the practices (robo-signing of documents and the like) ongoing at each bank and perhaps jointly shared information. Would that sharing of information be considered a conspiracy and ultimately a form of racketeering?  Did these institutions actually violate the Racketeering Act? I posed that question during 2011, but we see nary a whisper of that sort in this settlement.

What do we see? Very little actually.

As the American Banker highlights, Missing Settlement Documents Raise Doubts About $25B Deal:

More than a day after the announcement of a mammoth national mortgage servicing settlement, the actual terms of the deal still aren’t public. The website created for the national settlement lists the document as “coming soon.”

That’s because a fully authorized, legally binding deal has not been inked yet. The implication of this is hard to say. Spokespersons for both the Iowa attorney general’s office and the Department of Justice both told American Banker that the actual settlement will not be made public until it is submitted to a court. A representative for the North Carolina attorney general downplayed the significance of the document’s non-final status, saying that the terms were already fixed.

“Once the documents are finalized, they’ll be posted to,” the representative said in an email toAmerican Banker. Other sources who spoke with American Banker raised doubts that everything is yet in place.

A person familiar with the mortgage servicing pact says that a settlement term sheet does not yet exist.

Does this sound like “declare victory, take a ceremonious lap, and rely upon an uninformed American public to buy a bill of goods”? You bet. Do not think for a second that the funds involved in this settlement will provide meaningful relief for the housing market. The settlement funds represent mere pennies on the dollar in terms of the overall negative equity within American homes.

Additionally, do not discount that homeowners who receive some of these funds will spur other current homeowners to forestall making their own mortgage payments. More unintended consequences and subsequent foreclosures in the process. Why is it that mortgage investors who will suffer from principal reduction programs also bear some of the costs of this settlement? The cost of this component will be borne immediately by investors and ultimately by higher mortgage rates for all.

When you add all of these shortcomings, misfirings, and injustices together, the simple fact is this mortgage settlement is at best justice deflected, more accurately justice neglected, and in summation justice denied.

As American Banker concludes:

“Even once we get to the final terms, the servicers we’re told are going to be allowed to develop their own plans,” says NCLC’s Thompson. “They’re going to have three months to develop those from when the settlement is approved by the court. We are a long way in lots of ways from being able to kick the tires.”

Why does this happen? Two reasons:

One, our Washington political establishment is currently more driven in its pursuit of any and all funds that might be injected into the economy than anything else.

Two, can’t you just picture the heads of the banking institutions involved in this settlement chuckling about this settlement knowing that “these regulators and pols really work for us.”

Pissing into the wind in America 2012. How pathetic!

Navigate accordingly!!

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets, our economy, and our political realm so that meaningful investor confidence and investor protection can be achieved.

  • coe

    LD – I think you again are hitting the nail on the head…while I believe the confluence of financial excesses contributing to the 2007 crisis and the last several years of global uncertainties and myriad challenges, there can be no doubt that a great deal of the trauma starts right in the backyard of the US residential mortgage market…I think that the 25B fines levied on the big five originators/servicers is a slap on the wrist – the folks that paid and continue to pay the price will see very little relief…yes, the currencies of these sifi banks have been battered – but I don’t see any clawback of the executives’ pay packages – nor does it seem they will be fired , no less serve jail time…and, by the way, the practices that set this process up go on to this day – my unemployed 20-something daughter gets 10 credit card solicitations a month given her great FICO scores…the CEO of a local bank solicits customers to refi into a low cost Arm – but the devil is in the details and the details are very sketchy…too big to fail – indeed …how about too unethical to care for customers! just pay the money and sweep everything under the rug…the banks won’t look back – but the damage done on a personal level is too big to cure!

  • fred


    A housing related comment.

    Maybe the reason housing numbers are improving isn’t because a bottom is in place, maybe it is because cities and towns are approving more building permits so new housing revenues will offset losses due to housing price declines. Builders are taking advantage of lower cap rates thanks to ZIRP and increased financing availability.

    Sales(property tax receipts) = Units X Price

    The theory being pursued, what’s lost in price is made up in units.

    The problem, the only way cities and towns have been able to avoid municipal(Meridith Whitney) bond defaults has been by neglecting routine maintenance and deferring capital spending projects, thereby reducing new financing needs.

    On the one hand we have an increasing need for muni financing due to new housing supply and on the other hand we have all the deferred spending and maintenance needs that don’t go away but will only become more critical and expensive.

    Something has to give! Let’s hope it’s not the overburdened and antiquated water main or electic grid.

    What we need is well thought out fiscal managerial leadership, what we continue to get instead are politicians and gov’t officials unable and/or unwilling to do what’s necessary.

  • LD

    Tom Brown, a well regarded banking analyst had the following to say about this mortgage settlement,

    This mortgage settlement is an abomination. It provides a windfall to many people who don’t deserve one and is a slap in the face to those who’ve worked hard and acted prudently. The deal turns the very concepts of fairness and common sense on their heads. It is bad, bad, bad.

    Here are the gruesome details of this madness: First, $17 billion of the settlement will go toward debt forgiveness and other forms of loan modification for borrowers who are delinquent on their loans. Another $1.5 billion will be for cash payments to borrowers who lost their homes to foreclosure “with no requirement to prove financial harm.” Three billion will go to guaranteed refinancing of borrowers who are current but upside-down on their loans.

    But why should any of these people get anything? For five years now, we’ve heard how banks blew up the economy by pushing tricked-up mortgages on subprime borrowers who never should have gotten the loans in the first place. Well, guess what? Many of those people never should have gotten the loans in the first place! It makes no sense to reward them now for their folly. Others defaulted because they lost their jobs. They have my sympathy. But why shouldn’t they live up to the terms of the deal that they signed?

    As it is, delinquent borrowers have already received a massive windfall. Something like 4 million mortgage borrowers in the U.S. are behind on their loans by 90 days or more. Their average delinquency is 20 months, we estimate. (Some of these delinquent borrowers even have the gall to rent their properties out!) That means these people have been living rent-free for two years and have received something like $70 billion in foregone mortgage interest expense! And now some of them are going to get another $17 billion?

    That’s not just nonsensical–it’s unfair. What about the people who scrimped and saved for the standard 20% down payment, and who’ve stayed current on their loans despite the economy’s ups and downs? How is it that the people who played by the rules get nothing, while the ones who gamed the system get the big payout? And what do you think the people who did play by the rules will do the next time they apply for a loan?

    Meanwhile, the idea of cash payouts to people who’ve already been foreclosed on is truly insane. No one disputes that those people had defaulted on their loans. No one disputes the lenders’ basic right to take their houses back. The controversy surrounding those foreclosures had to do with paperwork-related issues such as robo-signing (issues that have been corrected, by the way). The foreclosed borrowers suffered no harm whatsoever. They defaulted—and don’t deserve a dime.

    And please, spare me your sob stories about how so many of these borrowers are hapless victims. A lot of them aren’t. A recent study by the New York Fed shows that fully one third of mortgages written in 2006 likely went to borrowers who bought their properties as a speculation. In the most bubble-intensive markets like Arizona, California, Florida, and Nevada, that number was closer to 50%. A lot of these people probably committed fraud to get their loans in the first place. They took a gamble and lost. They deserve nothing–either from the lenders or the government. Sure, plenty of other borrowers are honest and hardworking, and have been victims of the bad economy or just plain bad luck. They’ve fallen behind despite their own best efforts. That’s unfortunate. But crisis or not, it’s the kind of thing that happens in life.

    Meanwhile, the worst part of this mess is the corrosive effect it has on one of the key pillars of American prosperity: the notion of the sanctity of contract law. The parties to these mortgages—these contracts—were adults who freely entered into the agreements. They knew (or should have known) exactly what they were getting into. Obligations were spelled out on both sides. It shouldn’t be too much to expect that both sides of a contract live up to its terms. The government has no business—no business, in a very fundamental way—swooping in to demand that terms be altered to favor one side of the deal over another. At the very least, this kind of meddling will make credit more expensive in the future and harder to get. At its worst, it undercuts the idea, uniquely American, that free people can be relied upon to make their own decisions and be responsible for the consequences of their actions without relying on help from Big Brother.

    There is nothing good to say about this deal. It’s unfair to the banks and it’s unfair to the vast majority of mortgage borrowers. In a profoundly basic, way it’s un-American, too.

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