Why No Investigation?

Here's a bombshell: the San Francisco City Assessor commissioned a serious audit of foreclosure documentation filed in the past few years. The audit examined 400 foreclosures.  It found problems with 85% of them, often multiple problems. What's more, some of the problems are pretty serious as they implicate not only borrowers' rights, but the integrity of mortgage-backed securities and the property title system.  

The San Francisco City Assessor's audit also serves as a benchmark for evaluating the Federal-State servicing settlement.  The San Francisco City Assessor managed to accomplish in a few months what the Federal government and state Attorneys General weren't able to do in nearly a year and a half with far greater resources at their disposal:  perform a credible investigation of foreclosure documentation with serious implications about the securitization process in general.  That's a lot of egg on the face of Shaun Donovan, Eric Holder, Tom Miller, et al.  The SF City Assessor report shows that it really wasn't so hard for a motivated party to undertake a serious investigation. And that raises the question of why the largest consumer fraud settlement in history proceeded with virtually no investigation. 

The lack of investigation was the compelling criticism that led the NY and DE AGs to stay out of the settlement for quite a while. I've never heard an answer as to why no serious investigation. As the SF City Assessor's audit shows, the documentation is all a matter of public record.  It's not that hard to do, especially if you have the resources of the federal government.  So the resources were there. The capability was there. So why no investigation?  The answer has to lie with lack of motivation. Were the Feds and AGs scared of what they would find if they delved too deeply into the issue? 

I hope that members of Congress will question the Attorney General and HUD Secretary the next time they show up to testify on the Hill.  The issue is also worthy of a GAO or IG examination.  

Break up Bank of America?

Steve's title was subtle, so in case anyone missed it, here are the materials on Public Citizen's website. The petition calls on the Federal Reserve and the Financial Stability Oversight Commission to use their authority under Dodd-Frank to break up Bank of America. (But still check out Steve's analysis on Dealbook!).

American Capitalism: Profit, But Fairly

Adam Davidson wrote up an interesting apologia for Wall Street in the NY Times last week, which I think is ultimately a call for better regulation, rather than bank-hating.  I missed the piece originally, but Yves Smith found it and has nothing good to say about it. I think Yves is a little too harsh on Davidson. I've got issues with parts of the piece, but on different grounds, namely that it efuses to engage on the real issue. The problem isn't financial intermediation.  That's a perfectly fine thing that plays a useful role in society.  

Instead, the problem is when financial intermediaries do not treat the intermediating parties (meaning consumer and investors) fairly. The history of US financial services is nothing short of a history of scandals involving financial institutions variously ripping off investors and consumers. I'm not just talking about those scandals we remember, like Milken or Madoff or the recent slew or even the second tier ones like the Salad Oil scam or all of 1920s mortgage bonds. The history of US financial services is largely a history of unregulated innovation resulting in abuse and then follow-up regulatory reform. Lather, rinse, wash, repeat. 

Davidson argues that the reason to "hate the banks" is that 

Wall Street firms enforce the cold rules of capitalism: hostile takeovers, foreclosures, fee increases, defaults. But those rules clearly do not apply to the largest banks themselves. 

Davidson misses the mark here a bit. It's not just that the banks get bailed out, meaning that the rules of market discipline don't apply to them. It's that the banks frequently break the rules when applied to others.  It's fine to do foreclosures or hostile takeovers or sell consumers speculative securities. But it's not ok to foreclose without following the law or to profit on insider knowledge on hostile takeovers or or to sell investors "safe" assets when you know they are junk.

The fundamental rule of American capitalism is "profit, but fairly." Whatever one thinks is "fair", I don't think there should be much disagreement that Wall Street too often disregards the second part of this dictum to focus on the first. But take away the "but fairly" and society quickly becomes a Gilded Age baronial kleptocracy, a post-Soviet (or pre-Soviet) Russia. If we want capitalism to work--meaning that there is social stability, pace OWS--market players must play by the rules. This is where the debate needs to be focused:  ensuring that our financial intermediaries play by the rules. 

The Fed on Mortgage Servicing

I had the privilege today of hearing Federal Reserve Board Governor Sarah Bloom Raskin deliver the keynote address to the Section on Financial Institutions at the American Association of Law Schools Annual Meeting.  Governor Bloom Raskin's topic: mortgage servicing, which is not something the Fed has previously addressed.  I strongly commend her speech to you. It's rare to see a bank regulator invoke Shakespeare to great effect, as she does, but it's much more important for some of the other things she says:

This wave of foreclosures is one of the factors hindering a rapid recovery in the economy. Traditionally, the housing sector, buoyed by low interest rates and pent-up demand, has played an important role in propelling economic recoveries. The increase in housing sales and construction often is accompanied by purchases of complementary goods, like furniture and appliances, which magnify the effect of the housing recovery.

However, six years after house prices first began to fall, the pace of the economic recovery remains slow. Nationally, house prices have fallen by nearly one-third since their peak in the first quarter of 2006, and total homeowners' equity in the United States has shrunk by more than one-half--a loss of more than $7 trillion. The drop in house prices has had far-reaching effects on families, neighborhoods, small businesses, and the economy, in part because so many American families--more than 65 percent--own their homes. The fall in house prices has caused families to cut back on their spending and has prevented them from using their home equity to fund education expenses or start small businesses. The decline in house prices has also impeded families from benefiting from the historically low level of interest rates, as perhaps only half of homeowners who could profitably refinance have the equity and creditworthiness needed to qualify for traditional refinancing.

This is a really important set of points. They shouldn't sound new to Credit Slips readers, but it's really important to have a Fed Governor saying them.  

MBIA v. Countrywide Ruling

There's been a lot of media coverage of the recent ruling of the NY Supreme Court (that's the trial court, not the final Court of Appeals) in MBIA v. Countrywide, a suit by the monoline bond insurer against Countrywide for fraud, negligent misrepresentation, etc. that induced it to insure Countrywide's mortgage-backed securities. This and Syncora's similar suit are being carefully watched because they are the MBS litigation that is the farthest along and thus seen as a belleweather for other rep and warranty suits.  While the monolines are in a somewhat different position than MBS investors, they provide a good indicator of what to expect from investor suits.  

For all the discussion of the opinion, no one seems to have actually read the damn thing, so here it is.

Lies and Denial: the 2012 GOP Strategy

The last 24 hours have witnessed some remarkable historical revisionism on financial regulation coming out of the GOP.

First, we had one of the most bizarre and simply untrue attack ads I've ever seen, courtesy of Karl Rove's Crossroads GPS outfit. The ad calumnies Elizabeth Warren, claiming that first she was responsible for the TARP bailout and then set out to butter up bankers. Is this man on drugs? Rove seems to be confusing Elizabeth Warren with George W. Bush. 

Let's set the record straight.  Elizabeth Warren involvement with TARP was as chair of the Congressional Oversight Panel.  That was a body created by Congress to monitor and report on the effectiveness of TARP bailout.  The Oversight Panel did not create the bailout.  Congress did at the urging of the Bush Administration. The Oversight Panel had absolutely no authority to direct the use of the bailout. Its sole authority was to act as a watchdog.

And what a watchdog it was! It was Elizabeth Warren's trenchant criticism of the bailout that catapulted her to the national stage. The reason she started being invited to appear on the Daily Show and the like was because there was no better and more articulate critic of the bailout than Elizabeth Warren. The Oversight Panel could easily have been a sleepy, impotent backwater. Elizabeth Warren turned it into a ferocious bully pulpit for the interests of middle class Americans who were confused and angry over what was happening to their country. To blame Elizabeth Warren for the bailout is like calling Larry Bird the greatest New York Knick ever. It's so ridiculous that it's insulting. (And fighting words in Boston.) 

Then there's a hooter of a claim that Elizabeth Warren was courting bankers. Let's put that in some context to show how silly the charge is.  Elizabeth Warren left the Oversight Panel to help push for the creation of the Consumer Financial Protection Bureau, and for a long time it was thought that she would be nominated as the Bureau's Director. One reason she wasn't nominated was because the banks took an "over our dead [but now rescusitated via bailouts thank you very much] bodies" approach to Warren, claiming that she was "anti-bank."

Now, some might think that's a compliment, but Warren tried to show that she's not anti-bank. She just wants fair, transparent markets.  (Apparently, that's a problem for banks.  Heck, apparently, if you want market to be fair, and transparent and work as they are supposed to that makes one anti-bank, a socialist, a communist, or worse.  Capitalism, it turns out has nothing to do with markets.) To show that she wasn't anti-bank, Warren took great pains to reach out to banks and to show them that she's open-minded and willing to listen to their concerns, especially the concerns of small community banks and credit unions.  So now Elizabeth Warren is being damned for having been gracious and fair and open-minded. 

For more commentary on this lunacy, see here and here. 

Is Bank of America Gambling on Resurrection (or Is BoA Holding the US Hostage)?

What would you do if you were running an insolvent company? The smart thing is to bet big:  go with a high-risk/high-return strategy.  If the gamble pays off, you're solvent, and if not, well, you're already insolvent.  You're playing with the creditors' money. (And without a tort of deepening insolvency, there really isn't a clear downside for management.)  This is gambling on resurrection.  

We've seen the disastrous results of banks gambling on resurrection.  That was the S&L crisis. Rising interest rates in the late '70s decapitalized the S&Ls as the S&Ls' assets were long-term, fixed rate mortgages that paid lower rates than the S&Ls had to pay depositors.  The S&Ls, however, got a pliant Congress to agree to massive deregulation that allowed them to expand into all sorts of new business lines, like commercial real estate and race horses and junk bonds. Insolvent S&Ls went chasing high risk/high return projects.  The result was that the tab for taxpayers to fix the S&L mess was significantly greater.

Today, it looks like Bank of America is repeating the S&Ls' gamble on resurrection and using this gamble to hold the US government hostage.  

The Multistate Foreclosure Settlement

The New York Times came out with a strong editorial urging state AGs and the Administration not to rush into the proposed multi-state settlement deal. I think it's worthwhile reviewing what we know about the deal and the arguments for and against it.  Let's start with the facts that we know.  There aren't many that are publicly confirmed; the Administration, the AGs leading the multi-state settlement, and the banks very much want to avoid public comment on the deal--they want to present it as a fait accompli.  As a result, there hasn't been definitive reporting on the contents of the term sheet currently circulating among AGs.  It appears, however, the the deal has the following features.

Some 16 banks that do mortgage servicing will:

1. contribute a total of $5 billion in cash;
2. contribute total of mortgage assets with a face value of $20 billion, but a market value considerably lower; 
3. agree to uniform servicing standards.

In exchange, the state and federal authorities signing on would give the banks:

1. a release of all servicing claims;
2. a release of all origination claims, including discriminatory lending claims;
3. a release of all MERS claims against the banks, leaving MERS Inc. as a potential defendant for MERS related issues (MERS Inc. has no financial assets of note.)  

Perhaps $20B of the money would be used for principal write-downs and for interest rate reductions (via refinancings, which have the added benefit of relieving the banks of rep and warranty problems on the old loan) on the loans owned by these banks, which is less than 10% of the first lien loans in the U.S. 

Let's start with the argument for this deal and then consider why it is wrong.  

The US's Missing Housing Policy

The United States has no housing policy. And there's none on the horizon either. That's a scary thing, given the centrality of housing to domestic economic woes.  

Once upon a time, the US had a housing policy. It was focused on increasing homeownership. It might have been a misguided policy or at least a policy taken too far, but it was a policy and everyone understood that. It meant that programs were designed to work toward that goal.

Today, 4 years into a housing crisis, we still have no housing policy. There's no plan to clean up the legacy of the housing bubble and no plan to build the future of housing finance. This sad state reflects a singular failure of political leadership.  It also reflects a deeply fragmented housing finance world in which no one is in a position to call the shots. 

The Multistate Settlement Lottery: Bupkis

The NY Times had some details today about the multi-state attorney general mortgage servicing settlement in the works. It looks every bit as awful as one might have feared. Here's the criticial take-away:  this is bupkis. It gives meaningless relief to a meaningless number of randomly or adversely selected homeowners.  It doesn't do justice, even by halves. 

First, though, there's a detail reported in Gretchen Morgenson's otherwise insightful piece that I have on good source is incorrect.  The piece states that the banks would be doing principal write-downs on loans they own or service.  That's gotta be incorrect.  The banks can do principal write-downs only on loans that they own.  They have no legal authority to pledge write-downs on loans that they service on behalf of investors.  (Remember the Greenwich Financial suit against Countrywide for doing just that?)  

There's a critical implication here, then about the scope of the multi-state settlement:  at best 20% of the population of underwater mortgagees will be helped by this settlement, say 2.2 million homeowners.  The other 8.8 million (and probably 10 million by my reckoning) are SOL.  How do you think they're going to feel about their AGs?  About their President?  Too many times have American homeowners been promised help without receiving any.  It's getting old. 

The Sweep-It-Under-the-Rug Housing Plan (updated)

There is $700 billion in negative equity in the US. That is the critical figure. Any housing plan that doesn’t take a serious bite out of that $700 billion isn’t worth discussing. It’s just window dressing. And that’s exactly what the latest iteration of the Tom Miller-led AG mortgage servicing settlement is. Sure it’s been sweetened by the addition of some interest rate reductions for underwater, but current homeowners (discussed at the end of this post), but that’s small potatoes. The latest settlement proposal is an exercise in rearranging deck chairs on the Titanic.

It’s time that we recognize that negative equity is the critical problem in the US economy. Fix negative equity and you will fix the US economy. That is because negative equity is the key for repairing household balance sheets, and that is the catalyst for getting consumers spending again, getting banks lending again, and getting businesses hiring again. If we're serious about dealing with negative equity, we need to address it directly and not engage in an extend and pretend dance. 

It's also time that we recognize that negative equity didn't just appear by itself.  This wasn't a freak weather event.  It was a man-made disaster.  We ended up with negative equity because of a housing bubble inflated by very deliberate acts by a limited number of financial institutions that profitted greatly from bloating the economy with cheap and unsustainable mortgage financing. We witnessed a macro-economic crime and are living with the consequences of it. 

More on Foreclosure File Reviewers

A simple google search for "foreclosure file reviewer" turns up a bunch of interesting things, including who is searching, what Level 2 means (as opposed to Level 1 or Level 3) and the involvement of Promontory, a financial services consulting firm headed by a former Comptroller of the Currency:

Robosigning 2.0: Mortgage Foreclosure File Reviewers

Do you have what it takes to be a Mortgage Foreclosure File Reviewer Level 2?  An intrepid researcher forwarded to me a job ad for a mortgage foreclosure reviewer who will be reviewing bank foreclosures per the OCC/Fed servicing fraud consent orders. I have seldom seen a document that says more about the bullshit malarkey that the OCC and Fed are trying to pass off to cover for the banks than this job ad. I think it demolishes even the thin fiction that the OCC/Fed servicing consent orders are anything more than Potemkin villages. Instead, what we have here is nothing less than a federally-blessed Robosigning 2.0.

Occupy Wall Street, "Fringe Banking" and Public Options

I happened to walk by Zuccoti Park in Manhattan yesterday, where the Occupy Wall Street protest is centered. I picked up a few pieces of protester literature. I can't say that I was in any way comprehensive in my collection. Some of the literature was just nuts, e.g., a flier blathering about admiralty law usurping the common law and the Trading with the Enemies Act. This flier could just as easily have been found at a Tea Party gathering. It gave new meaning to the term "fringe banking." 

But I also picked up a thoughtful and intelligent, for example a flier about public banking and the Bank of North Dakota (the only state-owned bank in the United States).  Hmmm.  That sounds like a public option for banking. If the financial system is broken, maybe it needs some better competition. It's not such a crazy idea. We actually already do that quite a bit in the mortgage market-FHA, VA, RHS, Ginnie Mae, and historically the FHLBs, HOLC and Fannie Mae (Susan Wachter and I have a forthcoming book chapter on this, to be posted to SSRN soon). We've even done it in straight banking--most people forget that we used to have a U.S. Post Office Bank. We have an FDIC that used to compete with private bank insurance funds (see the opening chapters of Kathleen Day's S&L Hell for a description of the private Maryland S&L insurance fund that failed). And we have federal (public) currency that used to compete with and has now supplanted private bank notes.  My point here is not to endorse public options or not, but merely to note that historically they were a response to failed private markets and should be part of the policy discussion. 

OCC Servicing Settlement--Will Homeowners Get Screwed (Again)?

The WSJ reports on the latest development in the implementation of the OCC's mortgage servicing fraud consent orders.  It seems that the banks will have OCC approved "independent" foreclosure review consultants (chosen and paid by the banks) review foreclosure files from 2009-2010 and pay homeowners damages if there are any problems found.  

This proposal really worries me.  It's hard to imagine that the banks will part with any money unless they receive releases--broad releases--from the homeowners.  The homeowners, however, will not typically have legal representation and will lack the ability adequately value their claims against the banks. $100 for a complete release?  Why not?  

Bully for BofA: New Debit Card Fees!

Bully for you, Bank of America.  Bank of America's starting charging monthly fees for debit card usage to some customers. This is being taken as an "I told you so" by opponents of the Durbin Amendment, who argued that it would only result in higher costs for consumers. Actually, the BoA move is exactly what we might expect:  consumers are having to pay for their rewards. That's how it should be. They might be paying too much, but that's another matter.  So what does Bank of America's move tell us?

Safe Harbors Gone Wild

Yesterday's decision from the District Court court in the Madoff-Mets litigation is yet another example of why Congress desperately needs to revisit the safe harbors which exempt a host of financial transactions from the workings of the Bankruptcy Code (in this case, the Code as incorporated into SIPA).

The opinion is available here, but briefly, Judge Rakoff blew a giant hole in the trustee's suit against the owners of the Mets, dismissing all claims based on preference and constructive fraudulent transfer, whether under the Code or New York Law. The basis? Section 546(e) of the Code, which provides 

Notwithstanding sections 544, 545, 547, 548 (a)(1)(B), and 548 (b) of this title, the trustee may not avoid a transfer that is a ... settlement payment, as defined in section 101 or 741 of this title, made by or to (or for the benefit of) a commodity broker, forward contract merchant, stockbroker...  in connection with a securities contract, as defined in section 741 (7)...  that is made before the commencement of the case, except under section 548 (a)(1)(A) of this title.

Madoff was a stockbroker, in the loose sense that he was registered as a stockbroker. We now know that he was not actually doing any stockbroker like things for his investors. The Judge does not look into the definition of stockbroker in §101(53A) of the Code -- I think there might be an argument Madoff didn't meet it -- and moves right to the analysis of whether the transactions involved securities contracts and settlement payments.

Of course, there is no real reason to apply the safe harbors to this case. Madoff's transactions are not going to disrupt the financial markets if they were subjected to avoidance actions -- there was essentially no link to the financial markets whatsoever. But the Judge went with the planing meaning of the statute, which contains no such common sense exception. Hence the need for Congress to get involved.

Housing Finance: Role of the Government Guarantee

I'm testifying before the Senate Banking Committee on Tuesday about the role of the government guarantee in housing finance (a/k/a wtf do we do with Fannie and Freddie). My testimony is here. I expect it will manage to piss off people left, right, and center, but that's the nature of this GSE reform debate. 

I'm not thrilled with the prospect of a government guarantee, but I just don't think that there's sufficient the market demand for credit risk on U.S. mortgages for a non-guaranteed system to function. Do we really think that $6 trillion dollars of interest risk investors are suddenly going to decide they want credit risk as well?

Realistically, if it gets hairy enough, the government will bail out the system, Dodd-Frank, Tea Party, and all that jazz aside. We'll keep chanting no more bailouts until we do the next bailout. (Remember the War to End All Wars?) That means that it's better to have an explicit guarantee and price for it.  

Put differently, the choice we face is not guarantee or no guarantee. That's just a false dichotomy. The choice instead is between an explicit and an implicit guarantee. The implicit guarantee is a guarantee of moral hazard. The government will bail, but won't price for it. The explicit one certainly has its own problems, but at least it means we are being candid about the risks the government is assuming and trying to price for them and structure the guarantee to mitigate the risk that it will be used.   

Nevada AG: Securitization Fail

The Nevada AG is looking to reopen the 2008 AG settlement with BoA:  the AG alleges rampant and immediate non-compliance with the settlement.  The NYT coverage missed what is arguably the bigger story:  the Nevada AG came out and alleged a securitization fail.  The NY AG moved in this direction in his BNYM settlement action intervention, but was a little more oblique on that point. The Nevada AG minced no words: 

Bank of America misrepresented, both in communications with Nevada consumers and in documents they recorded and filed, that they had authority to foreclose upon consumers' homes as servicer for the trusts that held these mortgages.  Defendants knew (and were on notice) that they had never properly transferred [text redacted] these mortgage to those trusts, failing to deliver properly endorsed or assigned mortgage notes as required by the relevant legal contracts and state law. Because the trusts never became holders of these mortgages, Defendants lacked authority to collect or foreclose on their behalf and never should have represented they could.   

See also paragraphs 53 and 137-149. Amazing how the federal regulators missed all of this. Realize that it's been less than a year since the robosigning scandal broke and the chain of title issues started getting some attention. I expect we will see a lot more action on this front over the next year. Prosecutors, investors, and consumer attorneys are getting a lot more savvy about these issues, and it's getting harder and harder for the banks to dance around the problem.      

More on Refinancing Plan

Chris Mayer, one of the authors of the refinancing plan, a version of which is currently being considered by the administration, wrote in to the comments on an earlier post, protesting my characterization of his proposal. I have no argument with Chris about there being too many frictions in the refinancing process. I'm not sure that this is the best way to fix them, however, and I'm also puzzled by what problem the proposal aims to solve.  Is the goal to stabilize the housing market or to provide economic stimulus?  

Feds to AGs: Can't Touch This

As this NYT story notes, the administration has been putting pressure on the AGs, particularly NY AG Schneiderman, for several weeks now, urging them to fall in line with the administration's hear-no-evil, see-no-evil position on MBS and servicing fraud.  The NYT story makes it sound as if the feds were jolted into intervening because of pleas from the banks.  It's enough to make one think that we're back in 2005.   

There are three things that particularly bother me about what's happening.  

Any Bright Ideas?

Jean Braucher has noted the FHFA's RFI on foreclosure prevention. A huge problem with any proposal is the time to implementation for anything. It took months to develop flops like FHASecure, Hope4Homeowners, and FHAShortRefi. Any program where the government and/or private parties have to do much gets a major ding in my book because by the time its rolled out and the kinks are worked out, it'll be too late.

So here are some thoughts. First, the government needs to settle on its policy goal. Why are we trying to prevent foreclosures? Is it a macroeconomic goal of stabilizing the housing market? Is it a macroeconomic goal of deleveraging consumer balance sheets? Is it a moral goal of helping unfortunates? Is it an electoral goal of making people feel that the government is doing something/is on their side?

Second, there are obvious limitations on what the administration can do. Anything involving legislation is a non-starter with this dysfunctional Congress. Rule-making too might be problematic. But there's plenty the administration can do without legislation or rule-making. What's upsetting is that the adminsitration doesn't seem to be giving any consideration to these options because it will involve some tussling with the financial sector. It's easier to pretend that its hands are tied by Congressional acrimony and that ideas don't exist. 

So let me throw out an idea: why not have FHFA order the GSEs as a safety-and-soundness measure to write-down the principal on all underwater mortgages?  Or to offer all underwater homeowners with GSE loans a shared equity refinancing? At the very least, this could be done no question on GSE portfolio loans, and with some smart lawyering probably also on GSE securitized loans. (And if there is securitizaiton fail with the GSEs, then they're all portfolio loans!) That deals with (1) strategic default/negative equity, and (2) consumer balance sheet deleveraging. It doesn't take much to expand that move to FHA/VA, bank portfolio loans, and to private-label (ah, what a squandered opportunity the servicing consent orders were...).  

Now this won't help with unemployment, but deleveraging consumers is the key to increasing consumer credit and increasing consumer spending, which is the key to increasing job growth. It's all connected.  It probably won't kick in until 2013-2014 (Maybe just in time for it to be known as the Bachman or Romney or Perry recovery?  If so, the GOP can thank the bank regulators), but it's the right thing to do. 

The Systemic Risk Industry

There seems to be a cottage industry now in proposals to solve and/or mitigate systemic risk. I'm myself somewhat of a guilty party. The producers here are law profs and economists (and probably some other disciplines as well). These proposals fall into three buckets. One focuses on executive compensation as the key area for reform, a second on activity and/or size limitations, and the third on changing banks' capital structures. Strangely there seems to be little integration of these three approaches, although they would seem to be complements, rather than alternatives. But we scholars tend to see every problem as a nail for our particular hammer. 

It'll be interesting to see if this industry has a half-life longer than a couple of years; I suspect not, as many of the producers in the industry are not particularly interested in financial institutions per se and are likely to migrate to the next hot application of their tool box. Among existing proposals, the most intellectual activity has focused on capital structures as key. We've seen myraid co-co bond proposals, living wills, holding company structures, alternative capital risk-weighting, leverage limits, liquidity requirements, expanded shareholder liability, and all sorts of other variations on contingent capital. (I'm pointedly not linking any of these because my point isn't to pick on any single proposal, but to note a phenomenon.)  Some of these ideas are quite creative; some reinvent the wheel (it's astonishing how many proposals are blissfully unaware that similar devices have been tried and rejected by the market in US banking history).  Some are realistic that they can at best mitigate risk; others seem to truly believe that they will make the world safe for banking and eliminate risk.  

I'm rather conflicted regarding how to view this industry. On the one hand, I'm thrilled to see this level of scholarly attention to financial regulatory issues. Would that had been the case pre-crisis. On the other hand, I get the eerie sense from reading some of these proposals that I'm witnessing a redux of structured finance, in which a lot of excellent brain power was spent on trying to develop capital structures that eliminated risk, only to find out that it had been shifted and concentrated, rather than removed. (This might be because of the prominence of co-co bond proposals, which, like securitization, are automated bankruptcy systems.) 

I've argued elsewhere that at best we can reduce risk--akin to building higher levees or flood walls--but that doing so has its own costs.  The key point is that we cannot eliminate it from the system and need to learn to live with it and allocate losses more efficiently, fairly, and transparently ex-post.  Even this, I'm not sure will hold up. Credit Slips' Own Anna Gelpern has wisely pointed out that rules are inevitably tossed overboard during financial crises as soon as they become inconvenient. I have to think that this would apply both to capital structure rules (would co-cos really convert if it affected other financial institutions' holdings?) and to ex-post loss allocation rules (again, co-cos being in effect an automated loss allocation). I hate to take such a nihilistic position, but I think we risk deluding ourselves if we think we can seriously contain, much less eliminate risk by solely by adopting new capital structures.

Bankruptcy Politics and State Bankruptcy

I have a new paper out, Bankrupt Politics and the Politics of Bankruptcy, that examines state bankruptcy proposals and then uses them as a jumping-off point for sketching out a political theory of bankruptcy as a "creditor's armistice," an unstable political bargain, rather than an economic bargain ala Jackson & Baird's "creditor's bargain."  

The paper argues that bankruptcy is unlikely to do much good for the states because states' fiscal woes are akin to business model problems, rather than simple overleverage, and bankruptcy cannot fix business models.  States' business model--US fiscal federalism--is an inherently procyclical business model that is exacerbated by a moral hazard problem in state politics. Bankruptcy can no more fix this bad business model than it can make a buggy whip manufacturer (or a brick-and-mortar bookstore or video store) a viable operation.  

The intensely and patently political nature of the issues raised by state bankruptcy show a major set of deficiencies in contractarian theories of bankruptcy law, which have been developed primarily in the business bankruptcy context.  While others (such as our former co-blogger Elizabeth Warren) have criticized the creditors' bargain for failing to account for all of the stakeholders in bankruptcies, I argue that the inclusion or exclusion of various interests in bankruptcy is itself an essential part of a dynamic system of competing rent-seeking interests.

I don't attempt a formal exposition of an alternative political theory of bankruptcy in this paper--that's for another day--instead, I use this paper to lay out the idea and start linking the sovereign debt, subnational debt, business debt, and consumer debt literatures into a "unified theory" (yeah, I'm going to aim big, why not?) of debt restructuring (as in bankruptcy with a small "b").  The abstract is below the break:

NY AG Unsheathes Excalibur

NY AG Eric Schneiderman came out with guns blazing in the proposed Countrywide investor settlement litigation.  It his filing intervening in the action and suing Bank of New York Mellon for breach of fiduciary duty, persistent fraud, and violations of the Martin Act (the "Excalibur" of the NY AG), General Schneiderman didn't mince words.  He explained that the loan transfer documentation for lots and lots of mortgages is FUBAR and that servicers and their vendors are trying to fraudulently paper over the problems (spiced, I might add, with a healthy dose of legalese):

One of BNYM’s primary obligations as trustee under these PSAs wasto ensure the proper transfer of loans from Countrywide to the Trusts.  The ultimate failure of Countrywide to transfer complete mortgage loan documentation to the Trusts hampered the Trusts’ ability to foreclose on delinquent mortgages, thereby impairing the value of the notes secured by those mortgages.  These circumstances apparently triggered widespread fraud, including BoA’s fabrication of missing documentation.  

Standing to Invoke PSAs as a Foreclosure Defense

A major issue arising in foreclosure defense cases is the homeowner's ability to challenge the foreclosing party's standing based on noncompliance with securitization documentation. Several courts have held that there is no standing to challenge standing on this basis, most recently the 1st Circuit BAP in Correia v. Deutsche Bank Nat'l Trust Company. (See Abigail Caplovitz Field's cogent critique of that ruling here.) The basis for these courts' rulings is that the homeowner isn't a party to the PSA, so the homeowner has no standing to raise noncompliance with the PSA.  

I think that view is plain wrong.  It fails to understand what PSA-based foreclosure defenses are about and to recognize a pair of real and cognizable Article III interests of homeowners:  the right to be protected against duplicative claims and the right to litigate against the real party in interest because of settlement incentives and abilities.  

A Template for MBS Settlements and How Safety-and-Soundness Regulation Is Incompatible with Law Enforcement

Over the past couple of years, the Massachusetts Attorney General's office has reached settlements with a number of major banks regarding mortgage securitization. These settlements has received very little notice in the press, but I think they provide a real template for future AG settelements and are worth examining. 

1. The Mass AG has gotten a good deal of principal reduction as part of these settlements. Of the $102M paid by Morgan Stanley for its New Century dealings, $52M went to principal reduction. Similarly, check out the remedy chart (below) for the settlement with Goldman Sachs. Granted, it only covered around 700 loans, but it should be the template for any AG settlement.  I haven't attempted to calculate what the cost would be for doing that nationwide (it'd be huge), but we'd have a real estate market that was immediately cleared.  It might require the recapitalization of our biggest financial institutions, but I've got to think that there are plenty of funds to invest in them once their balance sheets are cleared up. 

 

 

 

 

 

 

 

 

 

 

 

The Fed Bails Out the Banks...Again

[Updated 6.30.11]

If anyone doubted who set the marching tune for the Federal Reserve Board, it was sure clear today. The Fed announced its final rule under the Durbin Interchange Amendment, and it was quite the handout to the big banks.  

The Durbin Amendment instructed the Fed to pass rules that clarified its instruction that debit interchange fees must be reasonable and proportional to the incremental cost of authorizing, clearing, and settling an individual debit card transaction.  The Fed came out with a proposed rule last December that solicited comments on two alternative safe harbors.  One was for a flat fee of 7 cents per transaction, the other for 12 cents per transaction. The Fed also solicited comments on whether debit cards should have to be routable on 2 unaffiliated networks or on 2 unaffiliated PIN and 2 unaffiliated signature debit networks (4 networks total). 

Well, today the Fed came out with the final rule, and what a surprise.  

Dodd-Frank Gotterdämerung: The Durbin Amendment Rollback

As early as this Tuesday we might find out who runs this country.  Is it Wall Street and the financial economy or the real economy of consumer citizens and retailers?  We will know the answer to this question based on what happens when the Senate votes on a bill to unwind a Dodd-Frank Act provision that would prevent banks from charging anticompetitive debit card swipe fees.

This provision, known as the Durbin Amendment is a bellwether for the state of political power and thus financial regulatory reform in the United States. Banks are working furiously to roll back the Durbin Amendment, and their success or failure at doing so is a measure of the political power of financial institutions. If the banks win, it will not just be the traditional story of the banks' routing the consumer groups. If the banks win, it will show that the financial services sector is more powerful than the largest retailers in the US.  (Heck, the US Chamber of Commerce is on the banks side on this, which might say something about the Chamber's funding. It's certainly not from all the small businesses over which they weep crocodile tears.) 

About Those Notes...Evidence of Securitization Fail

Since last October, shortly after the robosigning scandal broke, I've been talking until I turned blue in the face about robosigning being the tip of the iceberg with mortgage problems and that the real issue was chain of title. Robosigning appeared to be an almost unexpected deposition by-product; the real goal in the depositions that uncovered the robosigning was exposing the backdating of mortgage endorsement. And that they did--the notaries' whose seals were on the documents didn't have their commissions when the assignments supposedly took place. 

But why would anyone bother backdating mortgage assignments? The immediate reason is to show that the foreclosing entity was the mortgagee at the time the foreclosure action was brought. And lurking behind this is the mother of securitization fail issues (see also here and here)--the potential failure to transfer the mortgage notes into the securitization trusts.  

When the securitization fail issue was getting attention last fall, one thing that was sorely lacking from the discussion was empirical evidence. I could refer to individual mortgage files I'd seen and a host of anecdotal evidence, but I hadn't attempted to do any sort of empirical survey. 

But Abigail Field at Fortune has actually gone and done this. Incidentally, this is what federal bank regulators were supposed to do--go and look at the actual notes for foreclosure filings. Amazing how one intrepid journalist was able to accomplish much more than a beavy of bank examiners. And Field finds that there are real problems with the mortgage files.

The Three Consumer Banking Systems

For the past couple of years we've heard a lot about shadow banking versus traditional banking. But this dichotomy treats the traditional banking system as a unitary whole. That's hardly the case for consumer banking. The United States currently has three consumer banking systems. They have somewhat separate regulation and market segments, but they are fundamentally in competition with each other. 

The first system is the too-big-to-fail commercial banks. They are almost all structured as national banks, regulated by the Office of the Comptroller of the Currency. The second system are the community banks and credit unions.  They tend to be regulated by the FDIC and NCUA, but also by the Fed or state banking supervisors.  And the third system are the nonbank finance companies (payday lenders, title lenders, even pawn, etc).

Despite the competition between these sectors, they have cooperated to a surprising degree recently, particularly community banks and credit unions with commercial banks. For example, on both bankrutpcy cramdown and the Durbin Amendment, there were carve-outs for small institutions (<$10B net assets), but the small banks still fought furiously despite being exempted. I'm frankly puzzled why they are willing to carry water for the big boys (do they want to be part of the club?). Maybe someone will explain in the comments. But below the break I'll lay out the case for why the smaller banks should actually be strongly supportive of recent consumer finance regulatory initiatives. 

Google Wallet-Regulatory Implications

Yesterday, Google unveiled its Google Wallet near field communications payment app for Android phones. As far as I can tell, Google Wallet basically stores your payment card information for multiple cards (credit, debit, prepaid) and then lets the phone act as the NFC device instead of a RFID chip in a card. That's not particularly remarkable. What is cool about Google Wallet is that it integrates a loyalty/coupon system (Google Offers) with the payments. I haven't been able to figure out if the loyalty/coupon system integrates locationally-based offers (e.g., GPS in phone says you're 5 blocks from a Home Depot so you get a SMS text message telling you about the proximity and with a link to a digital coupon that has to be used within 2 hours).

HuffPo: HUD IG Finds Servicing Fraud

Shahien Nasirpour at Huffington Post has broken a story that HUD's Inspector General has conducted an audit of FHA-insured loan foreclosures by the big 5 servicers (BoA, JPM, Wells, Citi, Ally) and concluded that they have been defrauding the government by filing for FHA insurance payments to cover losses "on foreclosed homes that sold for less than the outstanding loan balance using defective and faulty documents."  Shahien reports that the HUD IG has referred the matter to the Department of Justice for potential False Claims Act (defrauding the government) suit.  

Three things are worth noting here. First, the HUD IG seems to have been able to conduct a much more thorough review of foreclosures than any of the bank regulators.  The HUD IG's office has a small staff. Compare this with the enormous examiner teams at the disposal of the OCC and Fed. Yet somehome the HUD IG has been able to accomplish a much more insightful review than the federal bank regulators. The clear implication here is that regulatory motivation matters in investigations. HUD has its own money (the FHA insurance fund) on the line. HUD doesn't want to be defrauded. Compare that to the OCC, which makes its money by chartering banks. The OCC wants to keep the banks happy. And that means looking the other way. Regulatory incentives matter. Makes one wonder what the AGs or CFPB will turn up (shudder) if/when they get into the mix.  

Second, the all-clear sounded by the OCC and Fed on the servicing front just isn't credible. This is a major problem for the US financial recovery. Financial regulators are the guarantors of the credibility and soundness of the US banking system. The financial system is built on trust. In fall 2008, that trust disappeared and there was paralysis until the US government substituted its own credit for those of the major banks. But that's a situation that no one wants to continue indefinitely. To ween ourselves off of the government, however, the market must be confident in the quality of the banks' books. And that's where the federal bank regulators' credibility comes into play.

If it looks like the OCC and the Fed are sweeping the problem under the carpet here, why should markets feel any more confident about the stress tests or anything else about the US banking system? The banks' paperwork problems are proving hard to paper away. The banks' failure to do their paperwork correctly because it was cheaper not to might well be the most serious source of systemic risk in the US financial system at present. 

Third, it's worth noting that irrespective of whether DOJ pursues the HUD IG's findings under the False Claims Act, HUD has a major disciplinary tool at its disposal:  FHA lender eligibility.

Potemkin Regulation: Servicing Fraud Cease & Desist Orders

There appear to be forthcoming cease-and-desist orders on servicing fraud from some of the bank regulators, and the American Banker has a draft C&D order up.

The draft C&D order is a regulatory equivalent of a Potemkin Village. (In truth, the better analogy for bank regulation has the inmates running the asylum.) On the surface it looks like a very serious thing--C&D orders are an extraordinary regulatory response in the banking world, where a lot of regulation is done informally. They typically indicate a very serious problem. But when one looks at the substance of the C&D order, one is struck by how empty it is. All sizzle, no steak.

Shakedown or Bailout? The Mortgage Servicing Settlement

How's this for contrasting interpretations:  the AGs' proposed mortgage servicing settlement is being termed both a "shakedown" (WSJ editorial page) and a "bailout." (Jesse Eisinger at ProPublica--ok, he uses the word "gift", but still).  

Wow.  That's some divergence in characterization of an incomplete term sheet.

I think both of these interpretations miss the mark, as neither really gets what a settlement is.  A settlement is a voluntary contract and represents compromises by both sides in order to avoid uncertain litigation outcome.  The WSJ's interpretation is just nuts--the cheerleaders for freedom of contract are complaining about the price of a contract offer.  Addressing Eisinger's bailout charge is more complex.  Details below the break.    

Small Banks and Debit Interchange Reform: Winners or Losers?

The banking industry is making a full court press to get the Durbin Interchange Amendent implementation delayed. Given that a year of delay is worth about $15-16 billion in swipe fees, the banks are quite motivated, and they've managed to get legislation introduced to delay the rule-making so the Fed can study the issue further.  

A potent force in attempts to delay the Durbin Amendment's implementation are community banks and credit unions. While most debit swipe fees go to a handful of very large banks, small banks have been quite concerned about the impact of the Durbin Amendment. And community banks and credit unions carry outsized political influence because of their presence and standing in every community. The local Chambers of Commerce and Rotary Clubs, etc. are filled with the CEOs of community banks and credit unions, not the local branch managers of Bank of America or Citibank.  

But are the small banks right to be so worried about the Durbin Amendment? It's not so clear, and a recent American Banker reader poll indicated that a majority of readers thought that small banks would actually benefit from the Durbin Amendment (I've made a similar argument about credit unions benefitting from the CARD Act.) The Machiavelli of the card industry himself, Andrew Kahr, even opined in the American Banker that small banks would benefit from Durbin. In his words, the claim that Durbin hurts small issuers is "Poppycock." It's pretty hard to argue with Kahr's math, when it observes that it can only help small banks if they get 100bps vs. 30bps for the big banks. So what gives?

Foreclosure Fraud Settlement: The Empire Strikes Back (or Why Are Republicans So Obsessed with Backdoor Cramdown?)

It's not surprising to see the banks and their supporters on the Hill pushing back on the proposed Foreclosure Fraud settlement term sheet. (See here and here and here).  There seem to be three major lines coming out of the banks:

 (1) It's "backdoor cramdown," and the agencies shouldn't be pursuing a policy rejected by Congress.  

Thus, House Republicans wrote to Treasury Secretary Geithner that "The settlement agreement not only legislates new standards and practices for the servicing industry, it also resuscitates programs and policies [namely bankruptcy cramdown] that have not worked or that Congress has explicitly rejected."  These House Republicans want to know:  "What specific legal authority grants federal and state regulators and agencies the power to require mortgage principal reductions when the House and Senate have voted down such proposals?"  .  Similarly a coterie of bank-friendly pundits chimed in calling this sub rosa cramdown.  

(2) CFPB has no business being involved given that it doesn't have a director.  

This has to be read between the lines as a thinly veiled Elizabeth Warren witch hunt.  At least one commentator was upfront about that in the American Banker.   

(3) The settlement could negatively affect the safety and soundness of the banks.  

Let me address all of these points.  There's a lot of willful confusion about this term sheet and what it is.  

BoA Nonesense

The irony of the CEO of Bank of America kvetching that it would be unfair to responsible homeowners for the bank to give principal reductions to homeowners in default is really too much. Does he recall that he's the CEO of a bank that is only still in business by grace of a federal bailout?

But where is Moynihan getting that he'll be required to help only deadbeats, when he feels morally bound to share the love with current borrowers?  I sure didn't see anything in the AG/CFPB term sheet that requires that.  Instead, it leaves the question of who will live and who will die up to the banks, precisely so they can't bellyache that federal regulation is restricting their ability to do loan mods, as they have about HAMP.  

Here's the relevant language from the term sheet.  As far as I can see, the basic principle for mods is NPV maximization (i.e., investor protection).  Default status surely plays a role in that calculus, but it's the servicer's decision how to account for that: 

• "Servicers employees shall not advise, instruct, or recommend that borrowers go into default in order to qualify for loss mitigation relief."  (p. 17)
• "Servicer shall consider and apply principal reductions in appropriate circumstances for sustainable modifications." (p. 18) 
• There is a particular requirement that servicers evaluate all defaulted loans with an LTV>100% or CLTV>115% for principal mods in a particular manner, but that's not saying only defaulted loans are eligible for principal mods. (p. 18)

My read here is that Moynihan's real complaint is that BoA might have to dish out $4-5B (relative to earnings of $35-40B, it's not so huge, even if it is is the largest bank fine ever by an order of magnitude) and leave the AGs and CFPB with the ability to hammer it for noncompliance.  (And again, I emphasize that the AGs and CFPB do not currently have authority over things like noncompliance with HAMP or PSAs, but would under the term sheet, meaning there would be a real cop on the beat).  

Foreclosure-Gate Settlement--More Thoughts

[Updated 3.8.11]

Some bloggers on the left (e.g. here) and on the fringe right (see here)  are upset with the servicing standard term sheet that got leaked because they think it just prohibits things that are already illegal.  This is an incorrect reading of the term sheet.  Let me give three examples.

Foreclosure-Gate Settlement?

What appears to be part of a Foreclosure-gate settlement has been leaked.  There's a lot in this 27-page document, but here are some initial thoughts.

Securitization Chain-of-Title: The US Bank v. Congress Ruling

Over on Housing Wire, Paul Jackson is crowing that chain-of-title issues in mortgage securitization are overblown because an Alabama state trial court rejected such arguments in a case ironically captioned U.S. Bank v. Congress.

But let’s actually consider whether the opinion matters, what the court actually did and did not say, and whether it was right.

Of Lehman and Goats

As Stephen Lubben has remarked on this blog, the litigation filed by Lehman against JPMorgan regarding JPMorgan’s alleged role in Lehman’s demise is heating up. Late last week, JPMorgan filed a colorful amended counterclaim, citing how Lehman had described the collateral it had given JPMorgan as "goat poo" internally and other things besides. The issue of Lehman’s collateral underlying its funding arrangements is a highly interesting one, not least because it ought to provoke some thought about how far we have come in managing and regulating liquidity risk.

Clearly, Lehman, then the fourth-largest investment bank, was playing with fire in trying to fund its daily business activities by putting down “goat poo” as collateral, and not just that, putting the system at risk by doing so. Lehman’s access to liquidity in its last days was highly dependent on its access to secured credit, and when lenders belatedly asked for more and better collateral, fell days later.What have regulators done since then?

Macroprudentially Yours: A Literature Review

"Macroprudential" (policy, outlook, regulation, zeitgeist ... whatever ...) has been so in  of late, it threatens to beat out its cousin "Systemic" for the Random Overuse Award of the Century.  Worse, it is even trite to say that no one knows what Macroprudential is, or how to do things Macroprudentially:  macroprudentialists are totally hip to this line and have their talking points lined up ...  but in the end, you are still left wondering, if a little more sheepishly.  Nonetheless, I am convinced that the quest for macroprudential meaning is essential to design and implement viable financial reform.  There seems to be no better language to talk about interconnectedness, transmission, contagion, spillovers, and all the other scary crisis business at once.  This is why I was thrilled to stumble on this literature review from the ever-helpful folks at BIS.

Clash of the Titans: RMBS Edition

And so it begins. We're about to witness the main event in financial institution internecine warefare: investment funds (MBS buyers) vs. banks (MBS sellers). 

There have already been some opening skirmishes. The monoline bond insurers (MBIA, Syncora, FGIC, Ambac (and here), CIFG (and here), and--I haven't found any litigation with them on this, but there's gotta be some--ACA) have been litigating against some of the banks whose securitizations they insured for various fraud, negligent misrepresentation, and breach of warranty claims. Many of the Federal Home Loan Banks (Chicago, Indianapolis, Pittsburgh, San Francisco, Seattle, maybe others that I don't recall of the top of my head), which slurped up RMBS during the bubble, only to find them toxic, have brought (separate) suits mainly on securities fraud charges, but also on common law fraud and negligent misrepresentation claims. (See here for a totally dated, August 2010 estimation of the liabilities in these suits.)

Then last fall the financial world was shaken by the New York Fed, BlackRock, and PIMCO's demand letter to Bank of New York Mellon and Countrywide. That showed that A-list financial institutions were taking the range of problems with RMBS, from representation and warranty breaches to servicer malfeasance, seriously. (You can see the NY Fed, acting for the Maiden Lane LLCs, as really another representing AIG, essentially the mother of all monolines for these purposes.) But that wasn't litigation proper, just an angry growl, with a threat of litigation if things weren't resolved. (When you see the letterhead for the response, you'll see that BoA/CW is taking this mighty seriously. Despite the typo in that snippy letter, it didn't come cheap. These guys are lawyering up.)   

And now we have the first A-list litigation. We have TIAA-CREF, New York Life, and Dexia suing Countrywide (and assorted other defendants). And it alleges invalid chain of title--the mortgage-backed securities are actually non-mortgage backed securities!

Must-read Crisis Book

Today's mail brought my hot-off-the-press copy of the essential crisis reference, The Subprime Virus by Kathleen Engel and Patricia McCoy.  Subprime Virus chronicles the rise and fall of the subprime market and the regulatory (non) response, from the Clinton Administration through the 2007/2008 financial crisis, the bailout and the Dodd-Frank reform legislation.  The most vital contribution comes in Part III, where the authors relentlessly catalog the missed opportunities, systematic capture and complete failure of one regulatory agency after another, including the Federal Reserve, the banking regulators and the SEC.  The authors, of course, enjoy a unique credibility for having warned us early and often about the dangers of subprime lending and securitization, for both homeowners and investors. For those looking for an authoritative, scholarly and accessible account of the subprime crisis from its origins in the predatory lending of the 90's through the bubble, blow-up and bailouts, look no further.

Ibanez and Securitization Fail

The Ibanez foreclosure decision by the Massachusetts Supreme Judicial Court has gotten a lot of attention since it came down on Friday. The case is, not surprisingly being taken to heart by both bulls and bears. While I don't think Ibanez is a death blow to the securitization industry, at the very least it should make investors question the party line that's been coming out of the American Securitization Forum. At the very least it shows that the ASF's claims in its White Paper and Congressional testimony are wrong on some points, as I've argued elsewhere, including on this blog. I would argue that at the very least, Ibanez shows that there is previously undisclosed material risk in all private-label MBS.

The Ibanez case itself is actually very simple. The issue before the court was whether the two securitization trusts could prove a chain of title for the mortgages they were attempting to foreclose on.  

Subprime Crisis Books

As the subprime crisis enters its fourth or fifth year, depending on when your version of the story begins, there is an ever-expanding menu of crisis books to choose from.  I have particularly enjoyed the less scholarly and more journalistic tales set in the boiler rooms of Orange County California (the Monster, by Michael Hudson) and the towers of Wall Street (Griftopia, by Matt Taibbi).  Others on my list include Dan Immergluck’s Foreclosed, and Thirteen Bankers, by Simon Johnson and James Kwak, which tell the stories of mortgage regulation/deregulation and the financial-regulatory complex, respectively, less colorfully but more exhaustively.  Next on my list:  The Big Short and Too Big to Fail.  The bookshelves are also bulging with chronicles of collapsed (or nearly collapsed) companies—Lehman Brothers, AIG, General Motors, etc… So gentle readers, which are your favorite crisis books?

21% HAMP First Year Redefault Rate

The Congressional Oversight Panel has a new HAMP report out. Like all COP reports, it's long and chock full o' analysis. There's an executive summary up front, but some of the most important points are only in the report proper (especially pp. 100-111). I think there are three big things to take away from the report:  

• First, 21% of HAMP permanent modifications have redefaulted in their first year. That's ghastly given that HAMP permanent modifications have an additional 3 months of trial seasoning and fairly serious payment reductions. The fact that Treasury hasn't been reporting on this itself, much less analyzing the reasons for the redefaults is disgraceful. 

• Second, if past trends continue, starting this month, there will be more HAMP redefaults each month than new permanent modifications. That means that the total number of active permanent modifications will peak at around 500,000 and decline. 

• Third, it looks as if Treasury will only end up spending $4B for HAMP out of the $75B allocated for homeowner assistance. 

My take: Treasury should shut down the program. At this point all it does it provide political cover for the failure to take meaningful steps to help homeowners and stabilize the housing market. But is anyone really buying it?  

Expanding Chapter 9

I wade into the "states in bankruptcy" debate over at Dealbook.

Fisking the American Securitization Forum's Congressional Testimony

Tom Deutsch, the Executive Director of the American Securitization Forum (ASF) testified before the Senate Banking Committee this past week about chain of title problems in securitization.  I was fascinated to see how much attention the ASF spent in attempting to rebut my testimony from a pair of previous hearings (here and, in a more polished form, here). My first thought was "gosh, ASF's awfully defensive. They sure seem spooked." And on looking at the details of the ASF's rebuttal, my sense is they're on very shaky ground if these are the best arguments they have.  

Below I review some of the ASF's arguments and show why they're just wrong. In particular, note the PSA language that I quote that demolishes the ASF's claim that PSAs do not require an endorsement from every party in the securitization chain:

"the original Mortgage Note bearing all intervening endorsements showing a complete chain of endorsement from the originator to the last endorsee"

If there's any doubt about what that language means (more discussion below), I'd love to hear it in the comments.  There's a very specific method of transfer required in securitization by PSAs and if it wasn't followed, then under New York law, the transfers are void.  And it is sure looking like many deals didn't comply with the PSA terms.