C&L Opening Bell: How Screwed Are American Homeowners?

The answer is, "Extremely." But that doesn't even begin to do it justice, so I consulted the thesaurus, mashed up a bunch of different synonyms and came up with a whole new adjective: "Extrimmensaordinarily." That's pretty bad, if you couldn't

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The answer is, "Extremely." But that doesn't even begin to do it justice, so I consulted the thesaurus, mashed up a bunch of different synonyms and came up with a whole new adjective: "Extrimmensaordinarily." That's pretty bad, if you couldn't figure it out.

So why are American homeowners extrimmensaordinarily screwed? Well first, there's this:

Bank of America Corp. (BAC), the biggest U.S. lender by assets, is segregating almost half its 13.9 million mortgages into a “bad” bank comprised of its riskiest and worst-performing “legacy” loans, said Terry Laughlin, who is running the new unit. [...]

The legacy portfolio will hold 6.7 million of loans with outstanding principal balance of about $1 trillion, according to a presentation to investors today. The split leaves home loan President Barbara Desoer with about half her previous portfolio, as well as new lending going forward.

Laughlin’s portfolio will include loans that are currently 60 or more days delinquent as well as riskier types of loans the bank no longer originates, such as subprime, Alt-A, interest- only and option adjustable-rate mortgages, he said. He said the portfolios will be completely split by March 31 and that his will be liquidated over time. Of the 13.9 million loans Bank of America services, about 3.5 million are held by the company on its balance sheet. The rest are owned by other investors.

You got that? Literally half of BofA's mortgages are garbage that the company wants to sweep under the rug. Here's the punchline:

“It’s a way to get investors focus on the good,” said Paul Miller, a former examiner with the Federal Reserve Bank of Philadelphia and analyst at FBR Capital Markets in Arlington, Virginia. “It’s a way to talk about good things and ignore the bad.”

I'm not sure how declaring that nearly 7 million of your mortgages are worthless pieces of trash gets anyone to focus on the positive, but hey, whatever gets you through the night and so forth.

Meanwhile, America's attorneys general have released their proposed settlement terms with the banks over their widespread use of fraudulent practices during thousands of foreclosure cases across the country. Needless to say, the proposal is underwhelming. Felix Salmon breaks it down thusly:

For those who can wade through it, however, it really is a code of best practices for servicers and it’s sorely needed. There’s much to love here, but it all basically comes down to the golden rule: treat your borrowers with honesty and humanity and common sense and you’ll be fine. Do servicers really need to be told that if they make more money from a loan mod than from a foreclosure, they should do the loan mod? Or that “sworn statements shall not contain information that is false”? Evidently, yes, they do. [...]

[T]he big question here isn’t whether the settlement is reasonable — yes, it’s entirely reasonable. Instead, we should ask what the penalties for non-compliance are, since just about every servicer will be non-compliant for the foreseeable future.

Those penalties come at the end of the document and they’re extremely vague: there’s talk of “monetary penalties and additional remedial actions”, but there’s also talk of “failure to meet timelines”, which implies that much of this stuff could be pushed off far into the future and of “a special master or referee to resolve violations”, with no indication of how such a person might be chosen.

This is pretty much what I've come to expect from the American government when confronted with a case of widespread, systematic fraud committed by the financial services industry: Issue a bunch of vaguely-worded guidelines, lightly chide the banks for their ever-so-naughty behavior and make murky declarations that maybe in the future someone will be held accountable for defrauding people, but not right now.

Stephanie at FedUpUSA drops her jaw at the fact that part of the AGs' "settlement" mandates that banks promise to, you know, obey laws that apply to just about everyone else:

The entire document is a rehash of what servicers had a legal mandate to do right up front. Accurately apply payments. Respond to inquiries. Operate in good faith. Use a NPV test for HAMP (was in the HAMP program originally.) Document the assignment chain before foreclosing.

There’s exactly one substantive change, in that HAMP did not prohibit “dual-track” (that is, foreclosure while attempting modification.)

Essentially every other item in this 27 pages is something that Servicers already had a legal duty to do, either as a fiduciary to the investor or just through the ordinary covenant of operating in good faith (You know, the original standards that all businesses are held to that aren’t actually racketeering outfits and gangsters? Yes, that.)

There’s no prosecution for all the bad affidavits, despite them being apparent acts of perjury.

Some of this is truly laughable:

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You’re kidding, right? This is a NEW requirement?

Thou shalt not perjure! Really! We mean it this time!

The good news, in my mind, is that we;re seeing a movement of people in this country are are fed up with just taking abuse from the financial services industry. Witnesseth:

As attorneys general from across the country gathered at the Fairmont Hotel, housing advocates rallied at several sites across Washington, beginning with a stop at Bank of America on 15th Street NW, to press for tough sanctions against servicers.

National People's Action, a network of community groups, said it wants to heighten awareness of the talks taking place.

Outside the Fairmont, Miller's chief policy deputy, Tam Ormiston, joined the crowd for a quick prayer, in which the Rev. Tony Pierce of Illinois urged the chief law officers to "stiffen their backs" and "do justice by the American people."

As Pierce spoke, protesters corralled on the sidewalk thrust their banners into the air. One said "Make Wall Street Pay."

Many of the protesters were reacting to news reports about a $20 billion financial penalty under consideration by negotiators.

"It's peanuts. It's chump change," said Hugh Espey, executive director of Iowa Citizens for Community Improvement. Reported penalties "should be in the hundreds of billions of dollars."

During a news conference later in the day, Illinois Attorney General Lisa Madigan sought to comfort the protesters.

"For those consumer advocates who are rallying, we hear you," she said. "Laws are not being followed by the servicers. That absolutely has to change."

Y'know, that's not all that comforting. Because when I don't follow the law, I'm arrested and thrown in jail. But when bank CEOs do it? They're told to stop being naughty and are then left alone. What a weird-ass country we have.

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