Deal between states and banks on mortgages

So far, [mortgage relief] hasn't worked on a grand scale. As one person said to me, this is a slap on the wrist of the banks. It's not a fix for the housing problem. -NPR

http://www.nytimes.com/2012/02/09/business/states-negotiate-25-billion-deal-for-homeowners.html?_r=2
http://www.npr.org/2012/01/23/145535135/foreclosure-robo-signing-deal-worries-n-y-official?ps=rs

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"

Blair Mountain: the biggest US battle you've never heard of

http://en.wikipedia.org/wiki/Battle_of_Blair_Mountain
http://www.loe.org/shows/segments.htm?programID=10-P13-00041&segmentID=3
http://en.wikipedia.org/wiki/Mountaintop_removal_mining

When I heard the name "Battle of Blair Mountain" in West Virginia, I assumed it was some Civil War event, and in a sense it was, except that the combatants didn't wear uniforms. The year was 1921, during the industrial rise and massive profit-taking spree by America's super-rich prior to the Crash that I emailed about last time. The US labor force was struggling against the capitalists and management for fairness and rights. Coal miners in northern states had already formed unions, and southerners wanted to do the same. The US coal industry was incredibly exploitative and almost colonial in poor rural areas like WV. Coal company bosses literally ran towns, and hired professional strike breakers and private muscle to intimidate or suppress anyone suspected of standing up to them. At the time, most of WV's mines were unionized, but the southern part of the state was a stubborn holdout. In Mingo County in that area, martial law was declared, union organizers were jailed and deprived of due process, and even outside media was banned. In a show of solidarity, miners from nearby Logan County gathered what small arms they could find and marched towards Mingo to try to free their brothers.

The coal bosses got wind of this and asked the local sheriff's department and state police to stop the march. The Logan County Coal Operators Association (LCCOA) also hired mercenaries and fortified a high ground position with MACHINE GUNS along the route that the march would take (at the time, they had raised the largest private army in US history: 2,000 fighters). 13-15 thousand miners, armed with hunting rifles and untrained in warfare, marched towards that mortal danger because they were tired of being slaves in the land of the free. The battle raged for 5 days with over a million rounds fired, and was the largest civil insurrection in US history. Amazingly, only 30 died on the coal bosses' side and 50-100 on the miners' side, possibly due to their amateur training and heavy vegetation in the area. But President Harding ordered the US Army to intervene (on the coal bosses' side), and used MB-1 biplane BOMBERS to drop surplus WWI ordinance on the miners (gas and explosives). This was one of the rare occasions when the US government fired on its citizens, and maybe the first instance in history of aerial bombing of civilians (or at least non-uniformed soldiers). Obviously the coal bosses won and WV authorities imprisoned about 1,000 miners. It was a crushing blow to the United Mine Workers, and membership shriveled from 50 to 10 thousand in the coming years. Southern WV didn't fully unionize until 1935 under FDR, who also helped improve worker rights through his New Deal. The battle also served to galvanize workers and inform the public about abusive practices by the coal industry. Organizations like the AFL and CIO drew inspiration from the battle as they formed and grew.

And just because this happened almost a century ago doesn't mean the labor market is problem free now, as we all know. We probably believe that no company would dare to resort to these measures against disgruntled workers today, but it just blows my mind that they even thought they could then. Is this America? Those men hadn't committed any crimes, and were just walking in the forest with their hunting rifles. Sure they may have posed a threat to public safety considering the events in nearby Mingo County (where other civil rights abuses were taking place), but they were US citizens. What a stain on our history that the US government would be complicit and even participatory in their murders and deprivation of Constitutional rights. Today, greedy and negligent coal barons like Massey disabled safety monitoring systems and falsified documents at the Upper Big Branch Mine in WV. They put their workers in danger (and eventually killed some of them) just in the name of increased output. WV continues to be one of the poorest states with very shameful education and health statistics. Despite that, their politicians are usually ultra-pro-coal and well funded by them. Where is the trickle down of wealth that the free marketeers promised? In fact, WV's coal riches probably make the people poorer, just like the "curse of resources" in places like Nigeria and Sierra Leone. But America is hungry for abundant coal to as a seemingly cheap, easy way to power our electricity grid, so we turn a blind eye to the suffering of West Virginians and destruction of their land over the decades, and continue to side with the coal bosses.

What about the legacy of Blair Mountain? Leftist officials and academics have petitioned to make the battleground a protected US historic site. Finally in 2009, the National Parks Service did recognize it as an official Historic Place. This was especially important because in an almost ridiculously comical turn of events, modern coal companies that own the development rights to the Blair Mountain area want to destroy the battlefield as part of the largest proposed mountaintop removal coal project in US history. The coal bosses literally want to bury Blair Mountain. It wasn't enough that it was more or less stricken from the historical record and social consciousness (because labor rights are of course communistic and anti-American); now they want to destroy any physical trace of their atrocity. But under this NPS designation, Blair Mountain would be preserved for the benefit of Americans. There are even plans to turn it into a tourist and educational destination, despite its rural location. But like the original battle, the coal bosses won out again. A week after the NPS announcement, WV officials produced documents showing that now a majority of landowners in the area object to Blair Mountain becoming a historical site, so by law the NPS cannot recognize it. The conservation side fought back, and by their polling they think most local residents would support Blair Mountain becoming a park. The list of opposing parties that WV produced contained names of people that had been dead for decades. The case is still unresolved, but all the while the mining companies are getting ready to turn the area into a moonscape (see "before" and "after" photos attached of a similar mining project).

Both GOP and Dem politicians running for the open US Senate seat from WV this November support the coal industry and endorse the mining project that will bring WV a whopping 230 jobs. I bet the tax revenues will probably be meager as well due to so many corporate loopholes and write-offs. And even if the site does get preserved, who can see it? The mining industry has made the area totally unlivable with constant industrial noise, heavy equipment traffic congestion, and toxic waste release in the air and waterways. They're destroying the regional history, culture, and Appalachian way of life, and it's mostly all legal. I can understand why the US and WV governments would want to sweep Blair Mountain under the rug, but they would be hypocrites because we have acknowledged the evil of slavery, the crime of Japanese internment, and other black marks on our record. But when it comes to the hot-button issue of labor rights and corporate abuse (even corporate violence with government support), we can't go there, not even during these hard economic times where corporate abuse of worker and property rights are well known.

http://amsterdamnews.com/articles/2010/10/10/news/doc4cacd34797eae468575454.txt

Ironically, a bill to make it EASIER for banks to foreclose on borrowers just passed Congress when this news broke. Obama then vetoed it. After all the public support and patience the banks have received since 2008, how dare they. Maybe some of it wasn't malicious and just due to overwhelmed staff facing 10X more foreclosure case workload than usual, but negligence can be as harmful as greed and hate. How much more trampling of individual property rights will we tolerate? If just one citizen was improperly dispossessed of their home due to regulatory lapses, procedural errors, or outright crime, what does that say about the self-proclaimed greatest country in the world's history? And what about honest buyers who unknowingly purchased a home that was improperly foreclosed? What a can of worms. The housing market is holding back our economic recovery, and banks are already swamped with more foreclosures than they can process and price, so why cut corners to add more fuel to the fire? Were they under incentives to foreclose as many as possible, or keep up with some ludicrous pace? Foreclosures have huge socioeconomic costs on consumers and communities, and banks also lose money and man-hours on them. Why not work with borrowers as the Obama Admin. has tried to persuade them to, instead of break rules to hastily kick them to the curb? Banks' cash flows look better when borrowers are making their (hopefully reasonable) monthly payments. They get nothing if the borrower defaults and the property languishes for months. Or are they doing it as part of a major corporate land-grab and shake-down of consumers, just so they can resell distressed properties for pennies on the dollar to vulture speculators, or in some cases the investment branch of their own firm? Is this yet another method of funneling wealth from the indebted masses to the rich elite?

Homeowner Stability Initiative

To Obama administration,

I am writing to question some aspects of the Homeowner Stability Initiative that the President unveiled this week. I do not know why jumbo mortgages above $417,000 are disqualified from assistance, since that loan amount is about average for attractive metro areas like the San Francisco Bay. Today on the real estate website redfin.com, a modest 1,100 sq. ft. home in San Mateo built in 1941 (just a couple blocks from a horse track and adult bookstores) still has a $799,000 asking price. I know that the government should not rescue speculators or people who "bought too much home", but in inflated real estate zones like mine, a jumbo loan does not constitute a jumbo home. Moderate homes cost $400-700 per square foot, which almost necessitates a jumbo loan, especially for younger buyers who haven't had time to accumulate much savings (car and student loan payments). Foreclosures exist in "wealthier" neighborhoods too, even though many residents are not rich. But this part of your plan boils down to geographical discrimination. Could you please reconsider this restriction?

Out of fairness and common sense, I would also request that you expand assistance to would-be homeowners as well. The government does not want to see more vacant, bank-owned homes further depressing the already troubled market. But in terms of the housing market, it does not matter if homes are occupied by the original residents, barely making payments even with federal assistance, or new buyers taking their place. Prospective buyers want and deserve a home just as much as those who were irresponsible or naive during the boom. But they should be given the benefit of the doubt because they didn't directly contribute to the problem. Under the temptation of easy credit and social pressures to convey financial status through home ownership, they showed restraint and prudence, and lived within their means. Now that prices have corrected somewhat, many Americans are better positioned to afford their first home, which can help stabilize the market. But they are also unsure about the future and may hesitate to act. Don't they also deserve government intervention to negotiate a fair mortgage that limits their interest rate, so that monthly payments do not exceed 31-38% gross salary? It would be a confidence boost instead of a lifeline.

In addition, I have to question the overall moral hazard posed by supporting duped borrowers and manipulative lenders. Then what is the incentive for lenders to make concessions to help restructure impossible mortgages, or borrowers on the cusp to tighten their belts in order to keep up with payments? As long as they appear to be sufficiently struggling, eventually Washington will intervene with taxpayer aid. I know that homes are a sensitive subject and part of the American Dream, but I hope that such sentimentality will not preclude sound judgment. We cannot save everyone, and experts are fairly sure that a good portion of the people who sign up for your mortgage relief plan will still lose their homes in the coming years. We trust you to manage our finite resources, and times are tight. Therefore, we expect you to allocate them in ways that provide the most benefit for the cost, and help the people who merit it most.

http://news.yahoo.com/s/time/20090219/us_time/08599188047300
http://www.time.com/time/politics/article/0,8599,1880259,00.html