The $25 billion mortgage settlement negotiated on Feb. 9 by the administration and 49 state attorneys general with five big banks has been greeted with considerable political suspicion. Conservatives see a shakedown and liberals dismiss it as too little. The biggest loser is the rule of law.
True. If we had the rule of law then there would be 100,000+ felony counts working their way through the courts on the admitted acts of perjury, and hundreds of thousands more for various acts of fraud along the way from origination to alleged "conveyances" that never happened to banks making credit bids at property auctions when they are not the real party at interest, which is flatly illegal (you can't bid an interest you don't have -- check your state laws on this.)
But in this case the attorneys general do not seem to have done any meaningful investigation. Instead of interviewing witnesses and reviewing documents, they treated the case as an opportunity for photo-ops and high-level negotiations. The settlement terms have little to do with the allegations.
Really? You did read the report out of California, right? 80+% of the foreclosures have indications of fraud and nearly half of the so-called resales of homes (where title changes hands) appears to have had a grantor that didn't have an interest in the title itself (read: the transfer was in fact a transfer of nothing, as the seller had no interest to convey!)
Only a small number of the robo-signed documents seem to have involved borrowers capable of paying their mortgages. The vast majority of the money changing hands has nothing to do with robo-signing or unnecessary fees.
Immaterial. The Rule of Law is first and foremost all about due process. The reason criminal laws, including perjury laws, result in charges of "The People v. Scumbag" (and not "Joe v. Jane" as with a lawsuit) is because it is The Rule of Law and thus the people who are damaged when a crime is committed.
We therefore prosecute in the name of the people, not in the name of the aggrieved. If you're aggrieved personally you sue. But when society is aggrieved by a breach of the peace, which is what forgery and perjury ("robosigning") is, you're supposed to wind up with a prosecution out of it -- not a lawsuit.
The biggest problem with the so-called "mortgage settlement" is that most of it won't come from the parties who did the harm at all -- it will instead come from the taxpayer. By twisting the language in HAMP and HARP, existing Treasury programs, these programs will wind up funding most of the "individual" mortgage relief. By allowing banks to choose which loans to write down, they will choose those in which they have an indirect pecuniary interest.
Let me explain the latter, since Mr. Skeel, who claims the title "Professor", didn't bother mentioning this (we can have the debate over whether that was intentional or out of his lack of understanding later.)
Banks have a few hundred billion of second lines -- HELOCs and "Silent Seconds" -- on their books. The huge majority of dollar volume of these loans during the bubble were in the sand states -- Florida, California, Arizona and Nevada. All four have had monstrous drops in house values, as all four were the land of froth and bubble. These bubble valuations were driven by fraudulent underwriting and resale of the firsts (as admitted under oath before the FCIC) along with various other misdeeds, including appraisal tampering that goes back to the early part of the decade (and which generated a petition from appraisers at that time -- which was ignored.) The banks made a crapload of bogus "profits" by churning these firsts into alleged trusts ("mortgage backed securities"), many of which on even cursory investigation did not comply with either their own PSAs (the legal documents governing their formation and operation) and in many cases appear to have violated NY and Deleware Trust Law (where nearly all of them are sited for legal reasons.) There is enough material there for hundreds of thousands of felony criminal charges -- well, there was anyway before the Statute of Limitations began to run, and soon it will be too late for all of them to be brought.
No, that delay was not an accident. Indeed, it's my position that all of this arm-waving has been for the explicit purpose of delaying justice until said time has expired, at which point it becomes justice denied.
But the seconds were never securitized; nearly all of those are in fact on bank balance sheets. They are, almost to an individual bank, being held at valuations in the mid to high 90% of face value range. This is farcical in that a second line has no recovery in the case of foreclosure until and unless the first is entirely satisfied, and with somewhere around half of the homes in these states with notes from that time being underwater and a large percentage delinquent, the odds of these loans performing "as agreed" is vanishingly small.
This problem, incidentally, is one of the reasons that getting approval for a short sale is often nearly impossible. The second holder has to approve the sale but has zero incentive to do so, as the sale forces recognition of what has up until now been an intentionally hidden loss. This "mark to myth" game is part and parcel of what came out of the early 2009 Kanjorski hearing. Indeed, but for that hearing and the arm-twisted FASB rule changes one could make a quite-cogent argument that these balance sheet games amount to bank fraud -- by the bank itself.
So if you're a bank, told to write down $5 billion worth of mortgages (your "share" of the total) and given discretion as to which ones you write down, on which loans do you "write down" the principal?
You write down those on which you hold a second, because it increases the value of the second in actual terms on a dollar-for-dollar basis!
Note that this does not change the balance sheet numbers, since you're already claiming that these loans are good when they are not. But it does help to "rescue" your bad paper. This would be a circle-jerk and of no consequence if the funds for the write-downs were coming from the banks. But they're not -- they are instead largely coming from Treasury, that is you and I as a taxpayers, via HAMP and HARP.
The bad news is that the paper holders will take it in the back door again. Not so much by defaults, but rather by prepays into a world where the only replacement paper yields half of what they were getting before. Since the major holders in the US of this paper are pension funds and insurance companies, all we're doing here when you analyze this on a macro-level balance-sheet basis is creating a detonation in pension funding a few years out. I've been talking about that too for a while, but once again nobody wants to hear it, and I'm sure in five or ten years when all these pension funds blow sky high we'll be told once again "nobody could have seen it coming."
Welcome to Washington where the spin machine is that the banks will "pay a penalty for their bad conduct" when in fact you, dear reader, will get it up the back door once again in that you will be forced to pay for someone else's bad conduct - twice.
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