http://www.nytimes.com/2012/
http://www.npr.org/2012/01/23/
So I guess the states' AG's are closing in on an agreement on the big settlement with the banks over robo-signing and other improper foreclosure procedures. Considering current economic and budgetary conditions, the banks seemed to be playing the states against each other in order to get a sweeter deal. Some of the states hardest hit by foreclosures (CA, FL, NY, MA, DE) initially refused to endorse the deal because they thought the banks were getting too much immunity without sufficient investigation, and it would prevent them from launching future civil lawsuits as more evidence emerged. But critics within those states, as well as the other states already endorsing the settlement, were pressuring the holdouts to get on board. They justified the compromise by saying, "It's not a perfect deal and we're not getting everything we want, but homeowners are suffering every minute we delay and we need relief now."
States are hurting financially and are willing to drop the investigations for some chump change (the current deal sends $2.7B directly to states). At least NY and CA pushed at the eleventh hour to retain the rights to seek future damages regarding improperly formed MBS's and some criminal wrongdoing. But even if the states build strong cases on those charges, the track record suggests that banks will continue to stall, appeal, or pressure states into hasty settlements.
Despite the billions earmarked in the accord, the aid will help a relatively small portion of the millions of borrowers who are delinquent and facing foreclosure...
Another 750,000 people who lost their homes to foreclosure from September 2008 to the end of 2011 will receive checks for about $2,000. The aid is to be distributed over three years...
On average, these homeowners are underwater by $50,000 each... A recent estimate from the settlement negotiations put the average aid for homeowners at $20,000. -NYT
So the bank seizes your home illegally and you get $2K over 3 years (with discounting more like $1.93K in value)? Do they get to live in their homes again? And distressed homeowners who on average owe $50K more than their homes are currently worth are only getting $20K in assistance on average, so how much help is that really? I guess we should be grateful for any charity that the mighty banks see fit to bestow upon us, but the refi-restructuring aspect of this settlement will only help less than 15% of underwater borrowers. It clearly is not big enough to "fix" the housing market, and is just serving to help the banks sweep their past misdeeds under the rug.
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It's a pretty big bank bailout. Note how effective the Obama administration has gotten at concealing these. Orwell would be proud: a bailout of the banks presented as a victory for the homeowner. A couple little comments.
- Only about $5B of the touted $25B comes from the banks. The rest of it is coming from you and me. $3B is for refinances, which reduces the amount paid to the investor who owns the security. $17B is actually credits for principal modifications. Banks either get 1:1 credit for mods to bank-owned mortgages, or 0.5:1 mods for investor-owned mortgages. That is, instead of taking the $17B hit on their own balance sheet, they can choose to put a $34B hit to the investors they sold the mortgages off to. I wonder which one they'll choose. Since the investor is pensions, 401k's, and the taxpayer (via Fannie and Freddie), that's us paying $20B of this settlement.
- One thing we've heard a lot about is how the market for mortgage-backed securities has been very shallow since the crash. This is the usual argument for why Fannie/Freddie have to step up their purchases of mortgages, because no one else is buying them. The banks have argued that it's skittishness, or that investors don't have money, or whatever, but a big piece of it is that investors are rightfully wary of putting money into a market that they know is deeply opaque and full of chicanery. This was the big argument in favor of stock market regulation in the past, that if you have a strong SEC making the stock market transparent and legal, investors will flood into that market. The banks have done the opposite to the mortgage-backed securities market, and it should be no surprise that investors are wary. Now that investors see that $20B of settlement fees are going to get pushed down their throats, do we imagine anyone is going to be willing to buy mortgages? Expect Fannie and Freddie, and through them the taxpayer, to continue to be on the hook for this because no one wants to participate in a market that is so clearly rigged.
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Thx. I really appreciate your insights on these topics. As you said, it should tell us something when only the politicians with skin in the game are celebrating this settlement, and the homeowners and advocacy groups are mostly silent or upset. I didn't know about those accounting schemes to shift the costs to investors (us) - are any media outlets getting the word out? Then that begs the question: is it cost-effective to siphon money from taxpayers and investment funds in order to give marginal relief to a small subset of distressed borrowers, with no guarantee that the aid is sufficient to keep them in their homes? If at proper scale and price tag, I think mortgage relief is an important social priority now, and if that means investors needing to write down some of their returns, then that should be nothing new considering what we've gone through since 2008. But I'm just not sure that this is the right plan for that objective.
I totally agree - without confidence in a market (especially ones dealing in virtual capital), who the hell would want to invest? That's why savers in banana republics (and some G20 nations) prefer to keep their cash under their mattresses. Effective regulation can be GOOD for business as you intimated. It's not as bad these days, but investors have been so risk averse during this downturn that the yield on some short term Treasuries was actually negative (i.e. they would rather burn some of their money in return for safety, rather than trust the stock market or secretive banks). And as you said, now gov't & taxpayers have to hold their nose and chug more toxic assets. It's amazing that after 3+ years, we still can't effectively value these vehicles, and some banks still haven't come clean on their balance sheets (and their stock prices continue to get punished for it).
"They'll see, real estate is going to make a comeback!" - Dick Fuld (Lehman's last CEO, a week before his firm folded in 2008) in the film "Too Big to Fail"
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