Robo-Deal: The Price of Crime

” The biggest mistake being made in the settlement is that investors are being insulted. They won’t return to the same marketplace and invest in similar offerings in the future. This puts a permanent damper on credit markets and liquidity. Investors have no reason to trust a society that ratifies criminal fraud. Investors have a high tolerance for risk, but zero tolerance for corruption. The net effect will be investments going anywhere but the credit markets based on Wall Street, which means that fund managers are going to perceive that their only safe move is to go to a more stable environment in which crime is punished and fraud isn’t tolerated.” — Neil F Garfield, livinglies.me

EDITOR’S COMMENT AND ANALYSIS: If you steal a little money you go to jail. If you steal a lot you get to keep it. That seems to be the net impact of the multi-state settlement. Yves Smith (see below) and Adam Levitin are among many who decry this settlement and I agree with their reasons, but I don’t agree that this is the end of this “theater.”

It is probable that world class criminals will escape prosecution and it is certainly a bad precedent to put a price — $2,000 — on committing forgery, where the loss is in the hundreds of thousands of dollars. The driving theme behind the settlement is to get this episode behind us and so, like the tobacco settlement, this new deal is intended to start us on the path of clearing out the foreclosure problem — but unlike the tobacco settlement in which people were successfully encouraged to stop smoking, this settlement is based solidly on continuing false and fraudulent foreclosures on debts that have been paid if you apply the third party payments.

Those foreclosures cannot continue without continuing the fraud. This isn’t a paperwork problem — it is an economic one in which the real parties in interest have been left out.

Yet the theater is far from over because the title issues and the individual causes of action — for those homeowners who want to pursue them — still exist, and criminal prosecutions — for those prosecutors who won’t be stopped will also continue.  There is no avoiding the realization that the very banks who are parties to this settlement are not and never were parties to the loans. They never owned them and they never bought them.

Thus any document signed by these strangers to the transaction is no more than a wild deed that cannot support a chain of title. If this issue is not addressed head-on, who is going to buy anything or lend anything in a market where a growing number of supposedly ex-homeowners successfully overturn foreclosures and regain title and possession of their properties? It isn’t the number of people who succeed in this endeavor that matters — it is that the risk exists that it could happen on any property.

WHY ROBO? Take a step back and look at this picture. The Banks are settling claims for wrongful foreclosure but the wrongful foreclosure is being left intact. The obvious title problems are left intact like a disease on a rotting corpse. The question of why false declarations in false documents were used is being glossed over as though it doesn’t really matter why they did it. Isn’t anyone curious why banks would resort to widespread use of forged documents with false declarations contained in them? 

This issue won’t go away. If there was a cover-up, what were they attempting to cover up? For me the answer is clear — (a) the loans contain numerous fatal defects that eviscerate the debt mortgage securing the debt and (b) that there was no right or reason to foreclose except that the banks and servicers saw an opportunity to make even more money by taking the homes after they had already taken the investors and the homeowners to the cleaners.

The bottom line is (a) that there were fatal defects in both the documentation for the origination of the loan and the documentation for the origination of the sale of mortgage bonds to investors. This was intentional, so that the banks could do exactly what they are now doing, pretending on a grand scale to be the creditors when in fact the real creditors are being left out in the cold. And (b) there remain fatal defects in both the so-called mortgages and the foreclosure process as it has progressed thus far. The only settlement that counts, therefore, is one that stops the false foreclosures by strangers to the deal on loans that are not in default and that are not secured by a perfected mortgage lien.

In the end run, how much more the banks will be required to fork over will depend upon you and others who read this blog. If you call it quits, then the most you will see if in fact anyone sees it, is $2,000 for losing a home you should not have lost and being tricked into a loan that should have been far different in both amount and terms. Those who have not yet been foreclosed are not directly effected by the settlement. So assuming that the banks and servicers persist in pursuing foreclosures in which they have no interest other than greed, nothing we have so far will change anything.

Those who press on will see a benefit from their efforts although I concede that the turmoil of litigation is daunting at the very least. The prospect of overturning foreclosures and evictions that were based upon false declarations in false documents by banks and servicers who had no privity with the homeowner remains a viable and even an enhanced option. How Judges will react to the news of indictment for criminal activity and settlement with law enforcement officials is anyone’s guess. The added factor that has not been addressed is that most of the foreclosed loans were not in actual default.

In the final analysis, the crisis in title chains is not being addressed at all and there is a lot of work to do to clear it up one way or another. But one thing is certain: continued false foreclosures is not the path of recovery.

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by Yves Smith

Here are the top twelve reasons why this deal stinks:

1. We’ve now set a price for forgeries and fabricating documents. It’s $2000 per loan. This is a rounding error compared to the chain of title problem these systematic practices were designed to circumvent. The cost is also trivial in comparison to the average loan, which is roughly $180k, so the settlement represents about 1% of loan balances. It is less than the price of the title insurance that banks failed to get when they transferred the loans to the trust. It is a fraction of the cost of the legal expenses when foreclosures are challenged. It’s a great deal for the banks because no one is at any of the servicers going to jail for forgery and the banks have set the upper bound of the cost of riding roughshod over 300 years of real estate law.

2. That $26 billion is actually $5 billion of bank money and the rest is your money. The mortgage principal writedowns are guaranteed to come almost entirely from securitized loans, which means from investors, which in turn means taxpayers via Fannie and Freddie, pension funds, insurers, and 401 (k)s. Refis of performing loans also reduce income to those very same investors.

3. That $5 billion divided among the big banks wouldn’t even represent a significant quarterly hit. Freddie and Fannie putbacks to the major banks have been running at that level each quarter.

4. That $20 billion actually makes bank second liens sounder, so this deal is a stealth bailout that strengthens bank balance sheets at the expense of the broader public.

5. The enforcement is a joke. The first layer of supervision is the banks reporting on themselves. The framework is similar to that of the OCC consent decrees implemented last year, which Adam Levitin and yours truly, among others, decried as regulatory theater.

6. The past history of servicer consent decrees shows the servicers all fail to comply. Why? Servicer records and systems are terrible in the best of times, and their systems and fee structures aren’t set up to handle much in the way of delinquencies. As Tom Adams has pointed out in earlier posts, servicer behavior is predictable when their portfolios are hit with a high level of delinquencies and defaults: they cheat in all sorts of ways to reduce their losses.

7. The cave-in Nevada and Arizona on the Countrywide settlement suit is a special gift for Bank of America, who is by far the worst offender in the chain of title disaster (since, according to sworn testimony of its own employee in Kemp v. Countrywide, Countrywide failed to comply with trust delivery requirements). This move proves that failing to comply with a consent degree has no consequences but will merely be rolled into a new consent degree which will also fail to be enforced. These cases also alleged HAMP violations as consumer fraud violations and could have gotten costly and emboldened other states to file similar suits not just against Countrywide but other servicers, so it was useful to the other banks as well.

8. If the new Federal task force were intended to be serious, this deal would have not have been settled. You never settle before investigating. It’s a bad idea to settle obvious, widespread wrongdoing on the cheap. You use the stuff that is easy to prove to gather information and secure cooperation on the stuff that is harder to prove. In Missouri and Nevada, the robosigning investigation led to criminal charges against agents of the servicers. But even though these companies were acting at the express direction and approval of the services, no individuals or entities higher up the food chain will face any sort of meaningful charges.

9. There is plenty of evidence of widespread abuses that appear not to be on the attorney generals’ or media’s radar, such as servicer driven foreclosures and looting of investors’ funds via impermissible and inflated charges. While no serious probe was undertaken, even the limited or peripheral investigations show massive failures (60% of documents had errors in AGs/Fed’s pathetically small sample). Similarly, the US Trustee’s office found widespread evidence of significant servicer errors in bankruptcy-related filings, such as inflated and bogus fees, and even substantial, completely made up charges. Yet the services and banks will suffer no real consequences for these abuses.

10. A deal on robo signings serves to cover up the much deeper chain of title problem. And don’t get too excited about the New York, Massachusetts, and Delaware MERS suits. They put pressure on banks to clean up this monstrous mess only if the AGs go through to trial and get tough penalties. The banks will want to settle their way out of that too. And even if these cases do go to trial and produce significant victories for the AGs, they still do not address the problem of failures to transfer notes correctly.

11. Don’t bet on a deus ex machina in terms of the new Federal foreclosure task force to improve this picture much. If you think Schneiderman, as a co-chairman who already has a full time day job in New York, is going to outfox a bunch of DC insiders who are part of the problem, I have a bridge I’d like to sell to you.

12. We’ll now have to listen to banks and their sycophant defenders declaring victory despite being wrong on the law and the facts. They will proceed to marginalize and write off criticisms of the servicing practices that hurt homeowners and investors and are devastating communities. But the problems will fester and the housing market will continue to suffer. Investors in mortgage-backed securities, who know that services have been screwing them for years, will be hung out to dry and will likely never return to a private MBS market, since the problems won’t ever be fixed. This settlement has not only revealed the residential mortgage market to be too big to fail, but puts it on long term, perhaps permanent, government life support.

As we’ve said before, this settlement is yet another raw demonstration of who wields power in America, and it isn’t you and me. It’s bad enough to see these negotiations come to their predictable, sorry outcome. It adds insult to injury to see some try to depict it as a win for long suffering, still abused homeowners.