Regulators Ask Banks to Re-check their Foreclosures

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Editor’s Comments: There are two ways of looking at this development. One is that the regulators are setting up the banks for failing to comply with the requirements of their regulators — and potentially extending the statute of limitations on Fed action against the banks.

The other is that the regulators are either politically motivated or so incredibly stupid that they are outsourcing the investigation of wrongful behavior of the banks to the potential defendants and respondents.

I can see a rationale in the first scenario but I am concerned that it is the second rationale that is at play here. The Paulson-Geithner doctrine of keeping the banks safe from collapse still appears to be guiding the regulators and law enforcement.

This isn’t really so difficult: first you ask those already in litigation to send in their papers. Second you ask the banks to show proof of payment and the entire money trail to show proof of loss. If the banks are able to show the actual proof of loss then the paperwork problems become less severe in terms of twisting the outcome. If the banks are not able to show they had any losses then it is true, all hell will break loose.

If the banks were in fact not using their own money on the loans that were originated, transferred and eventually offered for assignment into the loan pools, then their claims of loss to insurance companies and counter-parties to credit default swaps and other hedge products (and of course TARP) are subject to repayment to the insurers because the banks had no insurance interest and received the money anyway — not as agent for the investors who are the real losers, but for themselves. Having lied to the insurers, the ratings companies, and the investors, they were forced to lie to the government who gave them the TARP money to save the banks from going under as a result of huge losses in the credit markets.

A quick look at the 10K annual reports filed with the SEC will show that the banks were not showing any exposure to a risk of loss on the residential mortgage loans that were funded with investor money. Simple arithmetic would establish whether or not the total money given by investors was even close to the money used to fund actual loans.

One of two outcomes is possible if the banks were in fact lying to everyone. Either they owe back the insurance dollars they received and kept instead of passing it on to investor/lenders; or they owe the investor/lenders the money from insurance, credit default swaps etc. And THAT would reduce the loan receivable on the books of the investor/lenders. This in turn would reduce the amount due under the loan to homeowners, which in turn would flip the situation from homeowners being underwater to homeowners having equity.

Insurers and counter-parties in credit default swaps might have an unsecured claim for contribution from homeowners, but more likely they would be blocked by their own waiver of subrogation or extinguished in bankruptcy. The rest would be subject to negotiations on a level playing field whereby the investors could mitigate their damages while they recover the balance stolen from them by the banks.

It is difficult to imagine the banks reporting themselves for mistakes or criminal misbehavior. The regulators must know that. So there must be some plan working whereby the banks get further umbrella coverage from the Feds or where the Feds go into action against the banks. Only time will tell.

By Mark Russell,  Newser Staff

(Newser) – In the quest to right wrongful foreclosures, government regulators are turning to the last people on Earth one might expect—the unscrupulous lenders who did the foreclosing in the first place. An attempt to distribute billions of dollars in aid by independent consultants was shut down after it was found to be rife with delays and inefficiencies—consultants charged the government $2 billion in fees for 14 months of review, despite examining only a small number of the 500,000 complaints filed. So instead the Office of the Comptroller of the Currency is tapping the banks to re-evaluate their own foreclosures for errors, reports the New York Times.

Banks are to sort improper foreclosures according to degree of error, with the seriousness of the foreclosure error determining how much aid a homeowner might get. But critics say the new process is full of conflicts of interest and many loan files are in disarray. “The whole process has been a slap in the face to homeowners and a slap on the wrist to banks,” said one homeowner advocate. On the other hand, the federal comptroller’s office has asked the banks to self-regulate their foreclosure practices before.

Tags: follow the money trail, OCC, self-regulation, wrongful foreclosure
Posted in bubble, Corruption, Eviction, securities fraud |