The past few weeks have been pretty blogtastic on a topic so near and dear to my heart: the manifold ways U.S. fiscal/monetary policies, laws, and culture underwrite the st/c-upidity of the wealthiest among us, why it got us in the mess we're in, and why it isn't going to get us out.
Let's start with some of the good-ish news: the subjects of foreclosure fraud and loan securitization issues are coming to light, especially insofar as they underlie current and potential corporate lawsuits - which can be good things. Unlike some people, I don't pooh-pooh direct/deriv corporate actions as mere "strike suits" - I believe they serve valuable disciplinary purposes much like my private attorney general argument).
In a related story, Housingwire’s publisher declares his faith in a highly specialized private-sector solution to address the massive foreclosure clog that’s thwarting the robotic loan servicers (which already incentivizes "creative" solutions of dubious legality, e.g. fraudclosure tactics) and killing banking sector investors’ returns.
… not all debt is as fungible as everyone tends to believe. And this has huge implications, not only for investors, but for servicers as well.
In a recent news report, Bank of America... spokesman Dan Frahm lamented about the lack of a uniform standard for foreclosure affidavits — implying that BofA’s real problem isn’t that it cuts corners in loan servicing. The real problem, instead, is that big-box servicers simply have a hard time digesting an increasingly complex patchwork of local ordinances, regulations, and courtroom rules.
If anything, many servicers ultimately end up reflecting the mindset of the investors they so often serve: they are paid as if every loan is the same, and so in return they act as if every loan were the same.
What servicers really want, then, is uniformity. It’s inherent in the business model. So long as investors seem content to pay for loan servicing in this manner, I don’t know that I see anything changing in terms of how servicers approach the management of borrowers in default. There is little incentive to do otherwise…
I think it’s time to admit that this is a broken model… If investors are committing time to re-thinking the securitization process as a whole — and they are — how servicers get paid should be near the top of this list.
There are new-breed servicers that specialize in defaulted loans, and work with a niche group of private investors (or are captive to them): I coined the term ‘high-touch servicing’ in early 2008 to describe this group, a term that has now become part of industry lexicon. These servicers operate on a different level: paid for performance, and by outcome, they invest more in the people and processes needed to find an disposition other than foreclosure.
UPDATE: Fed Reserve Board Governor Raskin echoes HousingWire’s conclusions.
Unfortunately, the Federal Reserve is crowding out such private-sector innovations with its federal debt monetization policies (ZIRP, QE2 announcements, recent POMO days where they go through with it).
QE2 especially is already having some interesting wealth effects. Folks who aren’t upper class take the hardest hits in inelastic good prices.
Retirees especially are going to be hurt because they have a very short time horizon and won’t have a chance to make their money’s value back by riding out the business cycle.
Zerohedge also points out that it’s very likely the QE policies are really directed at masking the derivative exposure of the top remaining megabanks.
Side note: as banks become more and more consolidated and coalesce more and more into quasi-governmental Freddies and Fannies, and with the frequency of bailouts increasing at an accelerating rate, the emergence of policies like QE should not be a surprise, even though they are evil, economically speaking (the laws of fluid dynamics can teach us something here – see around the 2 minute mark).
All this means: More backdoor bailout. I guess it’s not enough that banks win on housing repurchase prices, interest rates, toxic asset unloading, depository insurance, government looking the other way at fraud, etc. etc. etc.
Meanwhile, in a dastardly perversion of the equitable doctrine of mootness: crony-court systems like Florida’s “rocket docket” use the finality of the foreclosure process to rapid-fire sweep live cases of fraud under the rug:
The rocket docket wasn't created to investigate any of that. It exists to launder the crime and bury the evidence by speeding thousands of fraudulent and predatory loans to the ends of their life cycles, so that the houses attached to them can be sold again with clean paperwork. The judges, in fact, openly admit that their primary mission is not justice but speed.
This is the dirty secret of the rocket docket: The whole system is set up to enable lenders to commit fraud over and over again, until they figure out a way to reduce the stink enough so some judge... can sign off on the scam.
Thank God for Matt Taibbi.
In some good news, New York state wised up and enacted preventative policies to keep these same kinds of due process deprivation from happening.
Putbacks are also in the news as investors are beginning to make legal demands that the banks (whose shares they own) reimburse debt purchasers / servicers for the full price of the bad loans due to fraud on the banks’ end.
As one blogger writes:
There are two key points to be made. One is to look at how often they expect investors and agencies to attempt put-backs -- in the worst-case scenario, J.P. Morgan analysts estimate investors will do this for about twenty-five percent of the failing securities. Given the current concerns about problems with these instruments, we can expect that attempt number to rise, especially if agencies like Fannie Mae and Freddie Mac have an incentive to shift their losses onto the private sector. The other issue is that these estimates are mainly focused on put-backs for problems with conforming loans, not on the burgeoning issues around fraud in the securitization chain, which adds another wrinkle. The point is this: These early cost-estimates are conservative and reflect uncertainty up and down the line, but this problem is likely to get larger, not smaller.
As self-dealing issues proliferate as investors and boards slug it out over put backs, another front has opened up in the corporate weasel war mortgage lenders are waging against everyone else. Force-placed insurance scams have developed wherein lenders are on both sides of the transaction, much like the employee payroll schemes that plagued Texas Energy Companies of yesteryear. Gee, with all the problems going on in the mortgage lending world, you'd think they might hesitate to be on BOTH sides of such transactions? I chalk this kind of phenomenon up to TBTF / Bailout Culture - the feeling of bulletproof-ness that accompanies consistent government intervention incentivizes entire institutions to engage in marginal behavior.
Finally, to add a whole new dimension on the economic meltdown we’re living through, Zerohedge again has the scoop on the US Shadow Inventory system:
The market’s inability to absorb the excess volume has created excessive “shadow inventory” that consists primarily of distressed, foreclosed and bank REO properties…. Most references to shadow inventory do not include the disgruntled existing home owner that has had to temporarily take their property off of the market due to weak demand, nor the new construction that has turned to rental waiting for the market to firm. As any sign of a firming market returns, there will be a deluge of supply to meet it, thereby throwing the supply/demand balance back to the supply side….
What has been referred to in the media as the “fledgling recovery” continues to remind us that we will not find equilibrium until the shadow inventory is exhausted and the excess problem loans are purged from the system. Foreclosed sales account for nearly a quarter of total national housing sales with an average discount of c26%. That number surpasses 55% in some states! Any foreclosure moratorium (such as the defacto ones we have now or the legislated one we had last year) further exacerbate the situation as pent-up foreclosures re-enter the market, compounding the problems at hand.
That is enough for today!