Saturday, May 14, 2011

Summary of the State AGs Case Against Mortgage Fraudsters

Mike Konczal at RortyBomb points to a very informative and eye-opening summary of the state attorneys general case against the mortgage services and banks by Adam Levitin: The Servicing Fraud Settlement: the Real Game. One fun aspect: looking at the actions of Senate and House Republicans, particularly their oppostion to and attacks on the Consumer Financial Protection Bureau (CFPB), it's clear that they are completely depraved and shameless whores for the banksters. His conclusion is also interesting, and repeats a point that I've seen made a few times recently: Republicans and conservatives, because of their blind ideological faith in "market efficiency" just have a hard time accepting that large economic actors have engaged in massive fraud and criminality.

Basically, the banksters made $25 billion in mortgage servicing fraud - the largest consumer fraud qua consumer fraud in world history. The settlement being discussed would have the banksters disgorge almost all of this illegally gained amount. The real fight now is over mortgage principal reductions, which could cost the banks up to $160 billion - wiping out a third of the equity of the four biggest U.S. banks.

As Levitin explains:
. . . So if servicers were simply fined $24B, it wouldn't include any actual penalty. It would only be disgorgement of wrongful profits. I don't think anyone has really understood the significance of this number. It means that the CFPB's (frankly rather conservative) estimate is that the banks made $24B from servicing fraud. That's the largest consumer fraud in history.

If the cost of peace with the AGs and Feds was a mere $24B, the banks would settle. Remember, that’s $24B for all the banks, not $24B for any one bank. The mortgage servicing issues are an enormous drag on BoA generally, Wells knows that it is a huge litigation target in every state, Citi just wants to keep its head down, and Ally wants a clean bill of health for its IPO. The banks really want to put these issues behind them.
$5B a piece for each of the big servicers isn’t a ridiculous price for putting the issue to rest. Indeed, news reports that the banks will consider $5B-10B. . . .

At the extreme level, if the settlement would cost a total of $160B, that would be about a third of the equity of the four biggest banks. (Compare that with the $750B in negative equity that exists.)
Further down, Levitin emphasizes:
Anything less than $24B would let the banks come out ahead. Let me repeat that. Anything short of $24B means that the banks broke the law and got to keep some of the profits. If that's what the AGs settle for, it's a disgrace. $24B really has to be the baseline above which there's a settlement.
Levitin provides a number of important links, including to the CFPB powerpoint presentation that illustrates the various dollar amounts of different approaches to addressing the issue of mortgage principal reductions. Levitin argues that the antics of the banksters and their Republican whores are easily understood once you focus on the issue of how much will be taken out of the banksters' hides to begin solving the problem of homeowners with fraudulently settled mortgages now being forced to hold negative equity in their homes. Right now, there is three quarters of a TRILLION dollars of negative equity weighing down the U.S. economy, enfeebling all attempts to get a genuine economic recovery going.

As Levitin notes, "If the banks are willing to pay $24B, but not the additional cost of principal reduction mods, it makes sense for them to run the clock," because, first, inflation over time will reduce negative equity and hence the dollar amounts of reductions of mortgage principal owed by homeowners, and second, any litigation by the state AGs will take years to work through the court system, all the while the number of mortgages needing principal reduction will decline if there is an economic recovery.

Third, the one agency that could really speed along litigation is the CFPB. The part of the litigation that will take up the time would be discovery, but the CFPB could speed that up significantly through its examination power. But the CFPB can only be effective with this if it has a Director. And that explains why the banks (and the OCC) brought out the Wall Street Journal editorial page and Congressional Republicans to wage war on Elizabeth Warren, the frontrunner to be appointed CFPB Director. . . .

There was a lot of justified pushback (including from yours truly) against the attacks on Elizabeth Warren. So rather than beat up on Professor Warren, the bank strategy changed to attacking the CFPB itself under the guise of regulatory “improvement.” First, the GOP pushed several bills in the House Financial Services Committee meant to smother the CFPB in its crib. Then the GOP in the Senate said that they wouldn’t confirm any CFPB Director unless the House reforms were made, and then they started making unpleasant noises at the suggestion that there could be a recess appointment.
Levitin continues to fill in the details. First, he stresses that
Principal reduction mods are not about correcting robosigning. Robosigning is what's gotten the most media attention, but that's not the only issue around. There are a host of other flat out legal violations (just consider the $20M jury verdict in the Servicemembers Civil Relief Act cases to get a sense of what these violations cost-1,000 verdicts is $20B). There's another panoply of questionable, but perhaps not illegal acts (e.g., MERS issues). And if you want a doozy, how about the many loans that are endorsed like simply to Deutsche Bank as trustee, rather than Deutsche Bank as trustee for a particular trust (Deutsche is trustee for over 2,000 RMBS trusts). That didn’t fly in a North Carolina appellate court, and it wasn’t a fluke endorsement (and there are worse problems than that in terms of endorsements).
And then there's also lots of good policy reasons for pushing principal reduction modifications. Principal reduction modifications start to address the $750B in negative equity in this country and help the housing market to clear without the inefficiencies and social externalities of foreclosure. And of course principal reduction mods make the banks pay an appropriate price (and in an appropriate form) for the economic and social harms they caused with the housing bubble and foreclosure aftermath, including threatening our fundamental property title systems via corner cutting on paperwork.
Finally, consider what it means that we're even seeing an eye-popping figure like $160B. It might be out there just to push the banks toward settling. But the amount of shit that the feds and AGs must think there is to come out with a number like that down on paper (especially for an agency under as much scrutiny for an sign of going off the rails as CFPB) makes my skin crawl. I worry that we don't have any handle on just how much rot is in the system and that we've been papering over it as the stock market rebounds.

Final thought: If I'm right about this, and that the number being bickered about isn’t $5 vs. $10B but something more like $40B-$60B, I worry that all hell is going to break loose. Progressives that were hating on the AG settlement for being too light on the banks, might rethink that position. And the howl we are going to hear from the right is going to be unparalleled. The idea that businesses could have done multi-billion dollars worth of harm to consumers (or the legal system) simply isn’t within the conceptual grasp of the Wall Street Journal editorial page and its ilk. The only possible explanation they have for this is a shake-down. Oh it’s going to be a fun summer.
Read the entire article on Servicing Fraud Settlement: the Real Game.

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