Jacob Gaffney, Housing Wire

FHFA Director

As soon as the Department of Justice released a memo confirming the legality of President Obama’s decision to appoint Richard Cordray to head of the Consumer Finance Protection Bureau while Congress is in recess, speculation started that the same may happen for a new head of the Federal Housing Finance Agency.

“This gives Obama the green light to appoint a new FHFA head before his State of the Union Speech,” tweeted Mike Bergen @BergenCapital on Twitter. (The president’s annual speech to the nation is set for Jan. 24, and Congress is back in session Jan. 23.)

It’s an excellent point, and while President Obama is free to do so, it’s a move not likely to happen.

Certainly the administration wants current FHFA head Edward DeMarco gone. His aversion to principal reduction at Fannie Mae and Freddie Mac does not sit well in the housing ideology of the White House and Federal Reserve.

The upcoming departures of the government-sponsored enterprise CEOs — Mike Williams and Ed Haldeman, who are also staunch opponents of principal reduction — leave an opening for the appointment of administration-friendly replacements.

But while Obama has the green light, there are a few nagging points that make such an action unlikely.

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Dean Baker, UK Gaurdian

Two years ago, the top honchos at the Fed, Treasury and the Wall Street banks were running around like Chicken Little warning that the world was about to end. This fear-mongering, together with a big assist from the elite media (thatis, NPR, the Washington Post, the Wall Street Journal, etc), earned the banks their $700bn Troubled Asset Relief Programme (Tarp) blank cheque bailout. This money, along with even more valuable loans and loan guarantees from the Fed and FDIC, enabled them to survive the crisis they had created. As a result, the big banks are bigger and more profitable than ever.

Now, the same crew that tapped our pockets two years ago is eagerly pitching the line that their bailout was good for us. It may be the case that the history books are written by the winners, but that doesn’t prevent the rest of us from telling the truth.

Let’s step back to where we were two years ago. The huge investment bank Bear Stearns had collapsed. So had Fannie Mae and Freddie Mac, the mortgage giants. Lehman Brothers, the fourth largest investment bank had also gone down. AIG, the country’s largest insurer, had been put on life support by the government.

At this point, Merrill Lynch, Morgan Stanley and Goldman Sachs, the three remaining independent investment banks, all faced runs that would quickly sink them without government intervention. Citigroup and Bank of America, two of the three largest commercial banks, were also almost certainly insolvent. Many other banks also faced insolvency, especially if they took big losses on their loans to other institutions that were about to go bankrupt.

This was when the Wall Street boys made their mad rush for the public trough. They enlisted everyone that mattered in the effort, including Treasury secretary Henry Paulson, Federal Reserve Board chairman Ben Bernanke, and Timothy Geithner, then the head of the New York Federal Reserve Bank.

The line was that the economy would collapse if congress did not immediately rescue the banks. They were prepared to make up anything to save the banks in their hour of need. Bernanke was probably caught in the biggest fabrication when he told congress that the commercial paper market was shutting down.

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Dave Clark, Reuters

Federal Reserve Governor Sarah Bloom Raskin on Saturday said the Fed must impose monetary penalties on banks who entered into an April agreement with regulators over how to fix problems in their mortgage servicing businesses.

“The Federal Reserve and other federal regulators must impose penalties for deficiencies that resulted in unsafe and unsound practices or violations of federal law,” Raskin said in remarks to the Association of American Law Schools. “The Federal Reserve believes monetary sanctions in these cases are appropriate and plans to announce monetary penalties.”

Raskin did not say when the penalties will be announced.

She said that “appropriately sized” penalties would “incentivize mortgage servicers to incorporate strong programs to comply with laws when they build their business models.”

Mortgage servicers, many of which are large banks, collect home loan payments and manage issues like foreclosures.

The servicing issue burst into public view last year when government agencies began investigating bank mortgage practices, including the use of “robo-signers” to sign hundreds of unread foreclosure documents a day.

In April, 14 mortgage servicers, including Bank of America (BAC.N) and JPMorgan Chase (JPM.N), entered into a settlement with the Fed, the Office of the Comptroller of the Currency and the now defunct Office of Thrift Supervision on steps that have to be taken to correct and improve their servicing practices, such as providing borrowers with a single point of contact for questions.

As part of the agreement, these mortgage servicers have hired consultants to review foreclosures that took place in 2009 and 2010 to see if any were improper.

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Jillian Berman, Huffington Post

Federal Reserve Chairman Ben Bernanke

More than four years into the housing crisis, and after millions of Americans have lost their homes, Federal Reserve Chairman Ben Bernanke is finally taking a stand.

Bernanke sent a Federal Reserve paper to the leaders of the House of Representatives’ Committee on Financial Services arguing that relying heavily on foreclosures to deal with mortgage borrowers that can’t meet their obligations is “costly and inefficient” for the housing market because they can lead to deteriorating homes and weigh on the property values in the surrounding community.

Instead, the paper encourages lenders to “aggressively” pursue loan modifications and for servicers to be given more incentives to seek alternatives to foreclosure.

Foreclosures “can result in ‘deadweight losses,’ or costs that do not benefit anyone, including the neglect and deterioration of properties that often sit vacant for months (or even years) and the associated negative effects on neighborhoods,” the paper said. “These deadweight losses compound the losses that households and creditors already bear and can result in further downward pressure on house prices.”

The Obama administration has already pursued policies aimed at encouraging lenders to modify loans, although to very limited success. The Home Affordable Modification Program, which Obama announced in February 2009, had helped fewer than 700,000 homeowners as of October, despite promises that the program would encourage banks to modify the loans of 3 to 4 million homeowners.

The paper mirrors findings from regional Fed banks indicating that foreclosures can be detrimental to more Americans than just those who are losing their homes. Properties that are occupied, but in foreclosure, drive down the surrounding property values twice as much as vacant properties, an October study from the Cleveland Federal Reserve found.

And with millions of foreclosed properties already in the pipeline, the foreclosure process is already taking longer than in recent memory — a situation that may only be exacerbated if lenders don’t take the Fed’s advice. The average foreclosure process now takes 674 days, almost triple the time necessary in 2007.

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A mortgage servicer may be granted a waiver from future claims depending on what sort of remediation a borrower gets from the foreclosure reviews conducted under federal consent orders.

Independent consultants, approved by the Office of the Comptroller of the Currency and the Federal Reserve, will review nearly 4.5 million foreclosure files over the next several months. They will be looking for any harm caused by improper practices uncovered last year.

The OCC, Federal Reserve and the 14 largest servicers are working out how to pay for any borrower claims for which consultants find the banks culpable. OCC Chief Counsel Julie Williams faced down skeptical lawmakers in a Senate subcommittee hearing Tuesday, pledging the consultants were independent and that the reviews would be thorough.

But she also revealed in some instances, they would be final. In some cases, a borrower would not be able to bring future claims against the servicer if he or she takes the payout.

“There could be situations where it may be sensible where a servicer gets a waiver. If the borrower gets the home back, expenses paid, maybe a lump sum payment on top of that, for a package of remediation like that, a waiver would be appropriate,” Williams said, adding that borrowers would be able to make that decision before agreeing to the deal.

A mailing campaign began Nov. 1. Borrowers who went through the foreclosure process at some point in 2009 or 2010 are eligible to apply by April.

It’s still unknown how any borrowers affected by the problems will be paid. The OCC provided 22 examples for what would constitute a “financial injury” (found on page 13 of Williams’ testimony).

But on the form filled out during the claims process, borrowers will have other options.

“The way the form is designed is it clusters some specific questions around the injury guidance,” Williams said. “But there is a portion of the form where the borrower can tell their story. What we want is the borrower to tell their story for how they were injured, and we will certainly try to get the message out about those.”

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The path of economic interest is strewn with casualties, what some analysts call collateral damage. In this issue, we look at the who is looking out for whom and ask the question of whether or not something other than the relatively narrow interests of central government and corporate management need to be taken into account in the greater scheme of restoring confidence in the financial system. — D.S. 

First we send kudos to the Federal Reserve Board for approving the acquisition of a UT based industrial lender by Green Dot Corp, as reported by American Banker. It is long past time for the Fed to encourage the entry of new capital investment and management talent into the banking sector

“Green Dot’s dominant partner is Wal-Mart Stores Inc., which is also a shareholder and relies on Green Dot to help run its own prepaid cards,” American Banker’s Dean Anason reports. Now federal regulators, however, face the near certainty that another large industrial corporation will challenge the non-bank moratorium that has been in effect, illegally, at the FDIC for many years. We repeat our call for Congress to repeal the ownership restrictions in the Bank Holding Company Act.

It is our strong preference to focus on the future and solutions, but we also need an accounting. Thus the continued discussion about the fitting punishment for the wrong doers in the subprime debacle. In their latest review, “Should Some Bankers Be Prosecuted?” November 10, 2011, The New York Review of Books, Jeff Madrick and Frank Partnoy review several congressional reports as well as the new book by William D. Cohan, Money and Power: How Goldman Sachs Came to Rule the World.

The question the reviewers ask: Should the bankers who helped to create the financial catastrophe we call the subprime debt crisis be held accountable at law? They conclude:

“If serious prosecutions of fraud by Wall Street firms are never brought, the public’s suspicion about Washington’s policies toward bankers will only grow, as will cynicism about the rule of law as it is applied to the rich and powerful. Moreover, if investing institutions and individuals come to believe that bankers cannot be trusted, the underpinnings of the market will be eroded. Without solid, well-functioning markets, the economy cannot adequately and efficiently allocate capital to high-valued uses and create jobs. Lack of ethics and corrupt behavior will channel the nation’s resources to uses that are wasteful and unproductive, as they arguably have for several decades now as too many unethical practices have gone unchallenged.”

Most of the readers of The IRA would probably agree with the statement above by Partnoy and Madrick. To read the related comment by IRA co-founder Chris Whalen on the review by Madrick and Partnoy of Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon by Gretchen Morgenson and Joshua Rosner, click here.

But an important and almost equally important issue regarding professional malfeasance is the question of how, in practical legal terms, investors and other creditors pursuing bad actors and organizations for civil money damages. Here the situation is quite clear, but not the way you might think. Even with all of our collective experience and time spent on the housing finance mess, there are new details for investors and professional advisors to discover and evaluate every day.

The widespread assumption is that the government, in the case of the SEC and FDIC pursue such civil claims on behalf of investors, but that is not always or even mostly the case. Investors often unknowingly abandon billions of dollars in potential private tort claims against advisors and other professionals involved in the creation of fraudulent securities, as in the case of the class action litigations involving Bank of America and other large banks. Often times managers and advisors leave on the table big money that ought be pursued on behalf of their clients to offset losses.

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Four large mortgage servicers supervised by the Board–GMAC Mortgage, HSBC Finance Corporation, SunTrust Mortgage, and EMC Mortgage Corporation–are required to conduct this program as part of their compliance with enforcement actions issued by the Board in April 2011. Under these actions, servicers are required to compensate borrowers for financial injury resulting from deficiencies in their foreclosure processes. A number of servicers supervised by the Office of the Comptroller of the Currency must also conduct the program.

As mandated by the Federal Reserve’s enforcement actions, the four servicers were required to retain independent consultants approved by the Federal Reserve to conduct the reviews. Borrowers are eligible for a review if their primary residence was in the foreclosure process in 2009 or 2010, whether or not the foreclosure was completed. The review is intended to determine if those borrowers suffered financial harm directly resulting from errors, misrepresentations, or other deficiencies. The Federal Reserve will monitor the implementation of the program and the servicers’ outreach efforts.

To apply for a review, individuals may call 888-952-9105, Monday through Friday from 8 a.m. to 10 p.m. (ET), and Saturday from 8 a.m. to 5 p.m. (ET). Individuals can get more information about the review through a website set up by the servicers, www.IndependentForeclosureReview.com . In addition, the servicers will conduct an advertising campaign and send letters to borrowers who may be eligible to participate in the review to provide information.

Requests for review by the servicers’ independent consultants must be received by April 30, 2012. Borrowers are encouraged to carefully consider the information about the review program to determine if they should participate. There are no costs associated with being included in the review.

In addition to conducting the reviews generated by this outreach program, the independent consultants retained by the servicers supervised by the Federal Reserve will separately review all cases in certain categories of foreclosure actions by the servicers to determine whether borrowers suffered financial injury. These categories include members of the military who were in the mortgage foreclosure process in 2009 or 2010 who were covered by the Servicemembers Civil Relief Act and borrowers who had previously filed complaints with the servicers about foreclosure actions that were pending during 2009 or 2010. Borrowers who previously filed complaints with these servicers about foreclosures pending during the review period also may seek independent reviews of their foreclosures.

The enforcement actions issued by the Federal Reserve in April also require the servicers to correct other deficiencies in residential mortgage loan servicing and foreclosure practices going forward. Under the plans, among other things, servicers must specify a single point of contact for certain borrowers who are having difficulty paying their mortgages, ensure that foreclosures are not pursued when a borrower is performing on a loan modification, and establish robust controls and oversight over their third-party vendors.

As previously stated in April, the Federal Reserve believes monetary sanctions in these cases are appropriate and plans to announce monetary penalties. These monetary penalties will be in addition to the compensation provided to borrowers in the independent review process.

For media inquiries, call 202-452-2955.

Discussions around this weekend’s International Monetary Fund annual meetings in Washington made it clear that the standard macroeconomic toolkit has little more to offer the U.S. It’s time to try something else.

Monetary policy has reached its limits, and further fiscal stimulus isn’t in the cards. Three years into the financial crisis, the U.S. economy is still held back by weak consumer confidence. Meanwhile, the global financial system continues to face instability, most notably because of the persistent sovereign-debt crisis in Europe.

With roughly a quarter of all U.S. households with mortgages owing more on their loans than their homes are worth, it’s no surprise that consumption, which accounts for 70 percent of gross domestic product, is restrained.

The consequent lack of demand discourages business investment, which means job creation remains weak. People are afraid of losing their homes and that fear keeps spending down and thus prevents them — and their neighbors — from getting jobs.

What can be done to break this vicious circle? One suggestion from some officials this weekend — and of course many banks — is to accept a relatively small amount of money to settle the various robo-signing and other mortgage document cases that state attorneys general are pursuing. The claim is that this would put the banks back on their feet and spur lending. This is a complete illusion.

TARP Props

The biggest banks were propped up during the crisis by the Treasury Department using Troubled Asset Relief Program funds and by the Federal Reserve with huge loans in various forms. Some institutions, including Citigroup and Bank of America, were put back on their feet several times.

But this approach has proved insufficient to spur an economic recovery. Left to their devices, banks will always fail to restructure loans on a scale sufficient to make a macroeconomic difference. Negative equity or near negative equity weighs on consumers and depresses confidence, but no single private firm will ever take into account those broader consequences.

To date, the government’s efforts on mortgages have been lame — and much less than was done to save the biggest and worst managed banks. There’s also zero chance that this Congress would authorize the use of any public money to support mortgage relief. At the same time, it’s only fair and reasonable that there should be redress for homeowners who were tricked into mortgages they couldn’t afford, evicted without due process or otherwise mistreated by banks.

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