February 9th, 2012
Econintersect: A mortgage fraud settlement deal has been reached between the Attorney generals of 49 states, the U.S. government and five large banks involved in about 60% of U.S. mortgages. The deal does not involve the other two large mortgage banks, Fannie Mae and Freddie Mac which are owned by the federal government. The deal involves at least $26 billion and may ultimately increase to as much as $40 billion according to the Financial Times. However, only a small part of the settlement (about $5 billion) is actually hard money for the banks. The rest amounts to money that will ultimately be paid for by taxpayers, pension funds and investors. The deal has produced both caution and outright criticism from critics, which will be discussed later in this article.
Here is a break-out of highlights of the settlement:
- $17 billion will be used to reduce principal for borrowers who are behind on payments and owe far more than their homes are worth.
- $3 billion will go toward refinancing mortgages of borrowers who are current on payments but not able to refinance at current low rates for reasons such as market value of house being less than the mortgage balance.
- $5 billion will go directly to the states, which will provide compensation to homeowners ($1,500 to $2,000 each) who have already lost homes through foreclosure. States will also provide support to legal aid and homeowner advocacy groups.
- $1 billion will be paid to the FHA (Federal Housing Authority) to settle charges that its subsidiary, Countrywide Financial, defrauded the housing agency.
The $17 billion is estimated to average about $20,000 per affected borrower, which means that approximately 850,000 will receive relief. Fire Dog Lake gives an estimate of $35-$40 billion as the ultimate relief for underwater home owners when further write downs by the banks are implemented, which is more than double the nominal $17 billion in the settlement. Thus compares to about $700 billion in negative equity that still exists today. This nearly 95% of negative equity will be unaffected.
The New York Times estimated that about 750,000 will receive compensation for those already foreclosed. This means up to 80-90% of the 7 million (+/-) who have lost their homes to foreclosure will receive nothing.
Further Litigation Possibilities
In an unusual feature, the settlement does not absolve anyone from exposure to criminal prosecution. From The New York Times:
The prosecutors and regulators still have the right to investigate other elements that contributed to the housing bubble, like the assembly of risky mortgages into securities that were sold to investors and later soured, as well as insurance and tax fraud.
Officials will also be able to pursue any allegations of criminal wrongdoing. In addition, a lawsuit Mr. Schneiderman filed Friday against MERS, an electronic mortgage registry responsible for much of the robo-signing that has marred the foreclosure process nationwide, and three banks, Bank of America, JPMorgan Chase and Wells Fargo, will also go forward.
And California will be able to pursue banks for compensation for large pension funds such as CalPERS who lost money due to improperly packaged and represented MBS (mortgage backed securities), according to The New York Times.
However a quote from the Financial Times indicates that some future litigation may be limited:
At the same time, a release from further legal claims enables the banks to minimise their mortgage-related liabilities, fears of which drove investors to sell off bank stocks last year.
There seems to be some confusion about what exposures banks still have for further legal action. On the criminal side, the statute of limitations for many of the criminal acts that might be pursued is five years so anything before 2007 is no longer subject to criminal prosecution. The bulk of the securitization boom occurred in 2006 and earlier.
Editor’s note: It appears that when the economy is murdered the statute of limitations protects the assassin.
The Federal Reserve has also announced today a settlement with the same five banks with monetary settlements totaling $765.5 million. The Fed said the settlement was coordinated with the multi-state AG settlement. The following table from the press release summarizes the settlement:
Further actions against other financial institutions are anticipated, as well as follow-on activities with the five banks named today. From the Fed press release:
In 2011, enforcement actions were also issued against another six institutions supervised by the Federal Reserve for unsafe and unsound processes and practices in residential mortgage loan servicing and foreclosure processing. Although the Federal Reserve is not issuing monetary sanctions against those six institutions at this time or against the two thrift holding companies now under the Federal Reserve's jurisdiction that control mortgage servicing subsidiaries, the Federal Reserve believes that monetary sanctions in those cases are appropriate and plans to announce monetary penalties against them.
The actions issued in April required the banking organizations that have servicing entities regulated by the Federal Reserve to, among other things, submit plans acceptable to the Federal Reserve to correct the many deficiencies in residential mortgage loan servicing and foreclosure processing. Those plans must, among other things, strengthen the coordination of communications with borrowers by providing borrowers the name of the person at the service who is their primary point of contact, establish limits on foreclosures where loan modifications have been approved, establish robust third party vendor controls, strengthen compliance programs, and provide appropriate remediation to borrowers who suffered financial injury as a result of errors by the servicers. In addition, the enforcement actions issued in April required the parent holding companies to submit plans acceptable to the Federal Reserve to improve holding company oversight of residential mortgage loan servicing and foreclosure processing conducted by bank and nonbank subsidiaries. Those plans must, among other things, strengthen board of directors' oversight over residential mortgage servicing activities, and enhance enterprise-wide risk management, compliance, and internal audit programs.
The corrective plans must be acceptable to the Federal Reserve. We expect to publish the action plans shortly. The Federal Reserve will continue to closely monitor the conduct of the foreclosure review and the institutions' implementation of the plans, and will take additional enforcement actions as needed.
There are Critics
Here is a sampling of critics of the deal:
- Yves Smith offers “the top twelve reasons why you should hate the mortgage settlement” at Naked Capitalism.
- Bank analyst Dick Bove said (CNBC) that homeowners who kept up on their payments would lose while those who fell behind would win.
- “I wouldn’t say it’s a panacea for the housing industry but it is good for the banks to get this behind them,” said Jason Goldberg, an analyst with Barclays. (The New York Times)
- The success could depend in part on how effectively the program is carried out because earlier efforts by Washington aimed at troubled borrowers helped far fewer than had been expected. (The New York Times)
- “It’s not new money. It’s all soft dollars to the banks,” said Paul Miller, a bank analyst at FBR Capital Markets. (The Wall Street Journal)
- It’s a great deal for the banks because no one is at any of the servicers going to jail for forgery and the banks have set the upper bound ($2,000 per mortgage) of the cost of riding roughshod over 300 years of real estate law. (Naked Capitalsim)
- The mortgage principal write downs are guaranteed to come almost entirely from securitized loans, which means from investors, which in turn means taxpayers via Fannie and Freddie, pension funds, insurers, and 401 (k)s. Refis of performing loans also reduce income to those very same investors. (Naked Capitalism)
- If the new Federal task force were intended to be serious, this deal would have not have been settled. You never settle before investigating. It’s a bad idea to settle obvious, widespread wrongdoing on the cheap. (Naked Capitalism)
- "There is no ability for local people to do anything to enforce the banks to abide by the spirit and letter of this agreement," said Charles Shafer, a consumer law professor at the University of Baltimore Law School. (Baltimore Sun)
- -- will not help former homeowners get back properties they lost to foreclosure, even if there was wrongdoing by loan servicers in the foreclosure process. (Chicago Tribune)
- --there's a hell of a lot more that needs to be done," said Ira Rheingold, executive director of the National Association of Consumer Advocates. (Reuters)
- "We believe any initial euphoria over the deal will quickly fade as investors realize the flood of additional mortgage-related litigation that the major banks face," said Guggenheim Partners analyst Jaret Seiberg. (Reuters)
The following video is from the Chicago Tribune:
- States Negotiate $26 Billion Agreement for Homeowners (Nelson D. Schwartz and Shaila Dewan, The New York Times, 9 February 2012)
- What the foreclosure settlement means for you (CNN Money, 9 February 2012)
- US banks reach $40 bn housing deal (Shahien Nashipour and Kara Scannell, Financial Times, 9 February 2012)
- 49-State Foreclosure Fraud Settlement Will Be Finalized Thursday (David Dryden, Fire Dog Lake, 9 February 2012)
- The Top Twelve Reasons Why You Should Hate the Mortgage Settlement (Yves Smith, Naked Capitalism, 9 February 2012)
- ’Mortgage Deal from Hell’ Hurst Responsible Borrowers: Bove (Jeff Cox, CNBC, 9 February 2012)
- U.S., Banks Agree on Foreclosure Pact (Nick Timiraos, Dan Fitzpatrick and Ruth Simon, The Wall Street Journal, 9 February 2012)
- Maryland joins nationwide mortgage settlement (Hanah Cho, The Baltimore Sun, 9 February 2012)
- U.S. seals mortgage settlement with top banks (Mary Ellen Podmolik, Chicago Tribune, 9 February 2012)
- U.S. banks agree to $25 bln mortgage settlement (Aruna Viswanatha, Reuters, 9 February 2012)
News stories on the mortgage settlement can be found at the Econintersect Americas newspaper page.