Interview with Yves Smith #3
(Conversation with Yves Smith recorded Thursday, February 9, 2012)
Here it is!
From deep inside your radio.
HARRY SHEARER: This is Le Show, and it’s time for what appears to be a semiannual visit from Yves Smith, a financial consultant and blogger. You heard her last on this program last fall talking about the European meltdown, and she has been our go-to person on the financial meaning of the foreclosure – as we call it here, the New F-Bomb, the foreclosure crisis. And she is here to talk about her analysis of the much bragged about, at least in Washington, settlement with the banks led by the United States Justice Department and agreed to by 49 of the 50 state attorneys general. A long-winded way of saying here once again is Yves Smith. Yves, welcome to the show.
YVES SMITH: Thanks so much, Harry.
HARRY SHEARER: I gather you’re not one of the cheerleaders for the settlement.
YVES SMITH: No, I’m not.
HARRY SHEARER: I’ll say, as you’re drawing that breath, you have been basically on this story since the first news broke of Iowa’s attorney general, Tom Miller, heading up the state AGs delegation to discuss this with Washington. This has been in the gestation period for 16 months now, which means that it’s taken about as long to birth as certain kinds of shark.
YVES SMITH: (laughs) I’ll have to remember that one.
HARRY SHEARER: I looked up “gestation period” this morning.
YVES SMITH: Oh that’s very good, that’s really very good. And it’s interesting that you go back to the beginning of this because of course in the beginning, like so many of the administration-related initiatives, the grand things are promised and then are walked back. I mean, Tom Miller at the beginning promised criminal prosecutions, and within weeks he was walking that back.
So we’ve had these negotiations drag on for a year with the banks continuing to maintain that A) these were paperwork problems, and B) they had solved them, when they’ve continued to file the same kind of problematic documents in courts.
You know, the evidence of the banks’ unwillingness – either unwillingness or inability – to fix this problem is partly evidenced by what’s happened in New York. New York implemented a fairly tough standard in its court system. The lawyers had to certify that they were submitting – that they had taken reasonable steps to verify the documents. Now that basically makes it easier for them to be disbarred or sanctioned if they don’t do that.
HARRY SHEARER: You mean they were legally required to submit documents that they could certify were true and accurate in court?
YVES SMITH: Right.
HARRY SHEARER: Imagine that.
YVES SMITH: I know. Well that’s actually what a lawyer should do anyhow.
HARRY SHEARER: Yeah!
YVES SMITH: You’re correct. But this basically made it easier, this procedure made it easier to sanction them if they didn’t do that. And foreclosures have basically stopped in this state. I mean they’ve gone from an average of over 150 a day to an average of less than 5. I mean that’s an admission. I mean, that’s continued now. That’s an admission that they can’t do this correctly.
And so here we had this settlement ballyhooed, where they’re talking about, depending on who’s doing the messaging, they talk about either greater than $26 billion, or some of them try to make the credits sound more impressive and I’ve seen it talked as nearly $40 billion, when it’s $5 billion in cash. Across these banks, that’s not even a meaningful number in a quarter. And the rest of the credits, the rest of the items, are almost certainly going to come from investor pockets and/or they’re a bit phony baloney. I mean, for example, one of the things they’re counting as a credit is $3.5 billion for writing off deficiency judgments.
Now, to unpack that, if someone is foreclosed on and they sell the house, and the proceeds from the sale of the house are less than the mortgage, there’s a deficiency judgment and depending on the type of mortgage they can in theory go after the borrower. Banks – even though banks are now making noise that they’ll do that, they basically hardly ever do. So they’re going to get to count for credit writing off money they probably weren’t going to go after anyhow. I mean that’s the sort of thing that’s in this deal.
But the part that’s really heinous is that of the number that’s credits, a big chunk of that is principal writedowns. So you say, “Gee, principal writedowns are great, how can you object to principal writedowns?” Well, these banks have second liens that they have on their balance sheet, whereas most of the first liens, the first mortgages, were securitized. Which means they are owned by investors, not the banks. And they get credit for writing down those first mortgages. So here they did bad stuff, but they pay for it by getting to get investors, third parties, to take the hit, and in many cases they have second liens on their own books. So if you write down the first mortgage, that makes the second lien better because the borrower’s got less debt and more ability to pay the second lien. Now they will have to knock down the second lien a little bit, but basically the bulk of the dollar value is going to come from the first lien, because the first liens are bigger numbers. So this is benefiting the banks, sort of, in the end.
HARRY SHEARER: You have been fairly consistent in pointing out the existence – the overhang of these second mortgages, these second liens, and asserting that as long as the banks aren’t forced to write them down to the new lower market value that the housing market has reached, they are able to forestall admitting billions of dollars of losses which in some cases, particularly Bank of America, might render the bank insolvent. Do I have that right?
YVES SMITH: That’s correct. I mean, Bank of America has, from these second liens, they’ve got about 120 billion dollars in second liens and their book value of – there are different measures of equity – their broader measure of equity is more like $230 billion. I’ve had investors tell me those second liens should be written down by $100 billion dollars, and in fact the market already thinks they’re worth less than that. Their market capitalization is actually $75 billion, so if you were to take the full hit on the second liens, it’s more than the stock is trading for in the market right now.
Now the banks argue they shouldn’t have to take the hit on this because they claim that people are still paying. Well, guess what, most of these are home equity lines of credit – they can play all sorts of games to make them look current, like taking a very minimal payment right before the 90th day or simply increasing the home equity line so the person pays with it from more money they’re borrowing from the bank.
HARRY SHEARER: Borrowing money from the bank to pay back the bank.
YVES SMITH: That’s right.
HARRY SHEARER: A conservative critique of this settlement alleged that of that 5 billion dollars in hard cash that you mentioned, that’s basically money that the banks got from the government in the bailouts.
YVES SMITH: That’s another good way of looking at it, yes.
HARRY SHEARER: But let’s talk about enforcement, because you’re a critic of the enforcement mechanisms that they’ve bruited about this settlement as well.
YVES SMITH: Well, they keep talking about how the states will have some enforcement power, but what counts here is, first line of enforcement is the banks will make quarterly reports. You don’t have independent parties going into the banks the way you do, for example, with regular bank regulatory abuse where you’ve got examiners come in and sort of kick the tires on a regular basis. Instead you’re going to have a process where the banks report on how they’re doing. Do you think if somebody’s doing their own grading they’re going to give themselves a bad grade?
And similarly, it’s modeled very much on the enforcement process the Office of the Comptroller of the Currency implemented in some consent decrees they had with these same banks over servicing in early 2011, and there’s already been a news report where the OCC found close to 400 million dollars of, you know, things that they thought the banks should be fined for. But they’re not going to charge them the fines, they’re just going to hold the fines in abeyance. And wave their finger at the banks and tell them to do better.
HARRY SHEARER: You had on your site, which I should mention – I didn’t in the intro. You’re the author of the book ECONned, and you’re the ringmaster of the wonderful website Naked Capitalism. And you had on your site – you had gotten from your sources the template of the press releases which the state attorneys general were to release simultaneously with the announcement of the settlement in Washington, and there was language in that template press release that described widespread fraud, was there not?
YVES SMITH: Yes. Which was a rather surprising admission. I was sort of shocked that that wound up in there. So they’ve admitted that there’s fraud, and yet they’ve now determined that the price of committing widespread fraud is $2000 per borrower. That’s the restitution that’s going to be paid for borrowers that had their homes foreclosed on from late 2008 through the end of 2011.
HARRY SHEARER: You’ve also been fairly adamant about the deficiency of this, or the advantage that was given to the banks and other financial organizations by the drawing out of this process of reaching the settlement – that is to say, they’ve passed the –
YVES SMITH: Statute of limitations, yeah. Yeah. You know, and honestly I don’t know if this was – in retrospect it looks like it was by design. It may have just been dumb luck. But some of the best legal theories are securities law theories, because for most other types of fraud you have to prove intent. And of course these organizations, you know they have all kinds of diffuse responsibility. I mean you see the way these CEOs regularly get up in congressional hearings and suddenly, you know, know nothing and have no memories.
HARRY SHEARER: It’s a real generation of hands-off management.
YVES SMITH: Yes, it’s really quite astonishing, isn’t it? But you also have, in the way process related to securitization, you have multiple hands on these things. So for example, you know, servicers foreclose but they use a company called Lender Processing Services as arms and legs, and Lender Processing Services inserted itself as the interface with the foreclosure attorneys. So the servicers have, you know, if you were to try to pin a lot of stuff on them, I mean you know you probably could in the end, but it would take a lot of work because they’ve got all of this, “Well, it was really the foreclosure mills guys,” or “Oh, Lender Processing Services did it.” I mean you have to dig a bit to actually find the smoking gun and paint the picture of how the servicer really must have known or did know what was going on.
But in any event, whereas with securities laws, they’ve got a very simple standard, which is that the foreclosures have to be – they have more technical language but it amounts to accurate and complete in all material respects. So that it’s not just that what you say is true – it can’t be like that sneaky true where you, you know, don’t omit to say certain things – the things you say have to be complete disclosures. So that if it turns out something wasn’t true and it was something you should have disclosed, just the inaccuracy of what you said is securities fraud.
HARRY SHEARER: Now, just on the issue of fraud for a moment. If I pass a check and I sign it as if I’m the authorized signatory on an account and I’m not, what might I be penalized with?
YVES SMITH: Yes. I would assume that as soon as they found out, the FBI or somebody like that would be on your doorstep pretty fast.
HARRY SHEARER: Yeah. And I might be even doing jail time. Is it not possible to interpret this entire affair as another example of, “We’re looking forward. We’re not looking back. We’re not –”
YVES SMITH: Right. No, I think that’s right. And the appalling part about this is not only is this yet another example that, you know, what does the rule of law mean in this country? I mean this was just the most massive abuse of well established property law imaginable. I mean, the precedents are so well set here. You know there’s no pretending that people didn’t know what they were doing, and these practices were institutionalized. I mean it’s been well publicized about how, you know, these robosigners were producing documents on a mass basis. There’s no question these organizations didn’t know about it. And that’s only the tip of the iceberg.
You know, one of the parts that keeps getting obscured here is the reason a lot of these bad practices happened was because there were other practices that people are aware of them but we still don’t really know the full extent of them because no one’s wanted to go there. The fact that these securitizations originally appear to have been done in a deficient manner in that they established really specific ways that the notes, which is the original – when you sign a mortgage you actually sign a note, which is a promise to pay, and that had to be transferred in a very specific way to the trust, which is basically the legal box that all the mortgages sit in, and then the money goes into that and then it gets distributed to investors. But there were very specific procedures and those were violated, and it looks like on an endemic basis. And that’s part of why we had the robosigning and the other abuses was to sort of fix the problems created by the fact they didn’t observe their own procedures.
So there are whole other layers of this mess that this talk about the robosigning in the settlement, you know, conveniently obscures.
HARRY SHEARER: Well, you, in our first conversation and in your writings on your website, more than 16 months ago you were on this, you were on the deficiencies of MERS, the electronic registry, which now – and much of what you’ve said has now been discovered and vetted and vindicated by judges in many states and by several attorneys general filing suit, most notably Eric Schneiderman filing suit against MERS. You have said, in your criticism of this settlement as it’s been a-borning, during its shark-like gestation period, how can you settle claims when you have never done an investigation of how widespread the wrongdoing was?
I’m going to quote you from the Justice Department’s own press release about this settlement, and it lists a series of investigating agencies that this settlement resolves their investigations, and it’s Justice, HUD, HUD’s FHA, state Attorney General’s Office, state banking regulators, US Attorney’s Office for the Eastern District of New York, US Attorney’s Office for the District of Colorado, Justice Department’s Civil Division, many US Attorneys office, Federal Trade Commission, Treasury, SIGTARP, which is the special inspector general for TARP, FHFA – Justice says these agencies conducted investigations. Your contention is they haven’t even started, right?
YVES SMITH: That’s correct. I mean, the two investigations that were the most serious were basically over the administration’s dead body. One was by the inspector general of HUD, which is an independent body within HUD, and they found errors by different servicers in some cases up at a rate of 60%, as high as 60%. The other one was by the US Trustees’ office where they found that the error rate in bankruptcy filings was ten times at the level found by a very limited federal foreclosure task force.
So, yeah, all these – the big investigation that they like to hang their hat on – big, I should put a big irony alert around that word – is one that they had a little more than a year ago, again, right after the robosigning broke. It was an eight-week investigation. It involved 11 different federal bodies, so, you know, those 11 names would all be on that list, but it was HUD, I think the FHFA, definitely the Office of the Comptroller of the Currency, definitely the Fed, and they looked at a grand total of 2800 loan files. They did not do any external verification of the information in those loan files, and they looked at a mere 100 foreclosures. That was considered to be adequate.
HARRY SHEARER: There have been certain states, certain counties even, that have sued the banks and MERS, trying to reach around MERS to the banks, for all of the fees that were not paid, that would have under normal real estate law have been paid as these mortgages were transferred from one hand to another on their way to trusts. Do those remain in force? Have those been wiped out by the settlement?
YVES SMITH: The Schneiderman lawsuit is the most recent. That stands. I’m pretty sure the other two – the Coakley and the Biden suits – stand as well. Now Biden only sued MERS and did not name any banks, but he said he would insist on being able to add banks, you know, basically when he developed the evidence.
HARRY SHEARER: That’s Delaware’s attorney general, Beau Biden.
YVES SMITH: Delaware, right. Beau Biden, right. Coakley of Massachusetts, Martha Coakley of Massachusetts, already named the five biggest servicers in her suit. Schneiderman named three of the five and he says that he reserved the right to name additional banks.
Now, that’s good news. The sort of, you know, bad news of this story is that it isn’t cl– and I’d be delighted to be proven wrong. I mean I would be delighted to be proven wrong. But it’s very clear that recording fees were avoided. I mean in fact MERS brags about this on its website, about one of its big raisons d’etre is that it saved originators the hassle of the multiple trans– again, we discussed earlier the way the notes were transferred multiple times? Well, every time the note was transferred, there was supposed to be a recording fee paid which averaged about $35. Obviously it varies a lot by county, but $35 is not a bad number. And they were able to skip a number of those transfers, and then only transfer the mortgage basically out of the MERS system when they try to foreclose.
Well, the problem is establishing who actually benefited from saving all that money. Now MERS clearly did, because, again, MERS brags about it, and MERS would have probably no business if it weren’t for saving the recording fees and also saving the hassle. But MERS is an itty bitty company with 50 employees. I mean there’s nothing there. There’s nothing to sue there. So to get any money and get any resolution, you’re going to have to recruit other parties.
And the problem is, who benefited from saving the recording fees? The banks are going to argue, “Oh, well it was all the parties to the origination, including these, you know, little shell companies that the notes were passed through, oh and the investors, oh and the borrowers.” I mean, they’re going to claim that, you know, they’re basically going to say, “To the extent we owe anything, it’s us and a zillion other people, and you gotta go after them too. You know, it should be prorated among us and a huge number of people, and we really don’t owe very much of this problem.”
HARRY SHEARER: But if MERS was formed – let’s look at it in the darkest possible light for a moment –
YVES SMITH: (laughter) Since we’re in that mode anyhow.
HARRY SHEARER: Yeah – as a conspiracy to avoid paying recording fees. If homeowners and all these little bitty shell companies were not present at the conception, how can you blame them?
YVES SMITH: Well I think the issue is, it’s financially who benefit–
HARRY SHEARER: But if the legal theory –
YVES SMITH: Yeah. Yeah. Yeah.
HARRY SHEARER: But if the legal theory would be that you go after the conspirators, and who conspired to organize MERS in the first place?
YVES SMITH: Well, that’s an interesting way of going about it. I guess the problem I see with that is that normally you can’t reach through and assign liability to a shareholder. So if you were the venture capitalist who, you know – let’s say some high tech company launched a device that really did give everybody cancer very quickly. You know?
HARRY SHEARER: You can’t go after the venture capitalist investor.
YVES SMITH: Venture capital company, right.
HARRY SHEARER: Right. But let’s look at another analogy, use of the RICO statutes.
YVES SMITH: Everybody talks about that. I haven’t seen anybody willing to do it, and I admit I haven’t looked that hard, but Bill Black has written something and he hasn’t unpacked– Bill Black is a former banking regulator who is now a Professor of Law and Economics at the University of Missouri Kansas City.
HARRY SHEARER: And a criminologist.
YVES SMITH: And a criminologist, yes. In fact, he’s trying to promote the specialty of white collar criminology, and let’s hope he succeeds in turning this into a real discipline. But in any event, Black has basically said something in passing that I didn’t see him unpack, but he said basically that effectively that RICO suits are kind of hard to prove and he sounded like he wasn’t so keen about them. But I mean they certainly sound, you know, just in terms of getting to criminality, you know, sort of basically saying that something that was, you know, a pattern and practice, that was deliberate, really is criminal as opposed to civil. I mean, I think that, you know, if – I mean I wish it – I would pursue criminal angles here. I mean I think that that really everybody keeps pooh-poohing that that isn’t a deterrent, and I think that’s – the converse. I think white collar people are very afraid of going to jail.
HARRY SHEARER: If they’re not, they should be.
YVES SMITH: They should be. Yes, they need to be.
HARRY SHEARER: Yeah. There are a couple of videos on YouTube I could point them to if they’re not. The settlement is a release from certain civil cases, but it is not a release of criminal action, is that right?
YVES SMITH: That’s correct. But again, the only criminal action we’ve seen so far are suits of basically very specific actors. I mean, there was one in Nevada that was of two people who were effectively managers of a robosigning operation. They were sort of supervisory level. And then the other one was just filed in Missouri that goes after a shuttered subsidiary of the company Lender Processing Services. They go after both the company and the president of that company, the former president of that company. So that would be, you know, kind of interesting to see if that one goes anywhere. Because that actually would be a more senior level person. But again it’s related to forgery.
HARRY SHEARER: Was that DocX?
YVES SMITH: That was DocX, yes. And people seem remarkably unwilling to call forgery forgery. You know, it’s called all sorts of other things like robosigning or surrogate signing or…
HARRY SHEARER: Or paperwork problems.
YVES SMITH: Paperwork errors. Yeah, paperwork problems.
HARRY SHEARER: Yeah. You’ve also been fairly consistently critical of the impact that any such settlement would have on the buyers, which are identified by you and others as pension funds among others, of the securitized mortgages – the securities based on these sliced and diced mortgages. So, where are they in this, those buyers, those investors?
YVES SMITH: Well, there are a couple that I’ve been speaking to, and they were extremely unhappy with the provision that I mentioned earlier, that the first mortgages would be written down without the second mortgages being wiped out. Because normally you would always have a second lien eliminated before you would ever modify a first lien. Now that doesn’t mean that they’re opposed to mortgage mods per se, they just want the seconds to take – I mean the seconds got higher interest, you know? That was the whole second in line. And sort of why is this well established hierarchy of who gets paid first being, you know, upended? I mean, this is, you know, from a securities law, securities payment standpoint, this is unheard of.
But the fact is there seems to be no interest in fixing the private securities market. I mean, we’ve had – housing finance has been on government life support since the crisis. I mean, well over 90% – I think it’s close to – it was 99%, I think now there has been one category, a teeny category, that’s picked up a little bit, but basically mortgage finance is now completely coming from the government. There really is no meaningful private mortgage securitization market. Whereas before the crisis, about 60% of the mortgages were non Fannie and Freddy mortgages.
So there’s been a big shift in terms of how that market works. And the experts I speak to all say there’s no way that investors are ever going to come back into that pool. Or at least there’d have to be very, very radical changes. They weren’t even willing to invest before this, because they saw how bad the practices had been, both, you know, as we’ve alluded to earlier in this talk, the fact that the loans were really misrepresented in a very major way when these deals were put together. Investors were told they were better than they were, and then the deals were si–
HARRY SHEARER: Wasn’t that the purpose of the Triple-A ratings was to mislead investors as to the quality of the underlying loans?
YVES SMITH: Well, the rating agencies would say that wasn’t the purpose of the Triple-A ratings, but, you know, certainly the people who put them together –
HARRY SHEARER: Well, the effect of –
YVES SMITH: The effect? No, the people who were putting together these deals knew that the – knew, understood how the rating agencies models worked and worked hard at gaming them. I mean, that’s, that’s, people in the industry are quite up front about saying that. But they also just affirmatively lied. And the rating agencies will say they weren’t responsible for – you know, they just take the information that’s presented to them and assume it’s truthful. They’re not in the posi– you know, they claim “Our job is not to verify the accuracy of the information.” Again, it’s supposed to be reported accurately in those Securities and Exchange Commission documents, that when somebody’s given a prospectus, the prospectus is supposed to be truthful and complete. You know, and so this is why the lack of securities suits is pretty appalling.
So that part is a mess. And the other part which is a mess, which isn’t as much talked about, but investors are acutely aware of, is a whole another level of servicer abuses that no one is talking about, the fact that the servicers are putting all kinds of junk fees and impermissible fees and just literally making numbers up.
I mean, this was one thing that came up in the US Trustees report, and they are basically the part of the Department of Justice that’s responsible for making the bankruptcy courts work well. And they found abuses literally like somebody in a bankruptcy, a servicer said that the borrower owed $50,000, you know, for one piece of the mortgage. Like, something like $50,000 in fees, and the borrower challenged them, and they said, “Oh, well it’s only $3,000.” I mean, and with no substantiation for either the first or even the second number. I mean, so where’d they get the $3,000 from? You know, that was probably made up too. It’s just $3,000 is better than, you know, $52,000.
But the point is that, as bad as that sounds for the borrowers, when it’s in a foreclosure, remember that all those fees that were thrown onto the borrowers, the borrower doesn’t pay them; it then gets recovered from the investor because when they sell the house, the thing that gets taken out first are the fees that the servicer charged or loaded in there that aren’t legitimate.
HARRY SHEARER: So that’s first out? That’s first out?
YVES SMITH: That’s first out. That’s first out. So actually, wait, take it back. The first thing that’s out is servicer advances. Take it back. The first thing that’s out, and that’s still not very good, is that when somebody defaults, the investor still keeps getting paid as if the loan was performing, as if the borrower was paying. So they’ll still keep paying as if the borrower was paying. So let’s say you’ve got a foreclosure that goes on 20, 30 months. The investor’s getting paid, but they’re just basically, you know, taking from one pocket and giving to another because that money then gets taken out of the liquidation of the house, the sale of the house.
HARRY SHEARER: So they have to turn right around and pay it right back to the people who –
YVES SMITH: They have to pay it right back. But that also gives the – and now that may sound like it’s a wash, but really it isn’t, because it gives the servicer motivation to keep extending these foreclosures, because as long as they still have the loan in their system and they haven’t actually sold the real estate, they’re still collecting a monthly servicing fee and they still get to collect late fees.
HARRY SHEARER: So that incentivizes the drawing out of the foreclosure process which people keep saying, “Oh, well we’ve got to clear the market. We’ve got to speed this up.”
YVES SMITH: Right. And they’re implying it’s all the fault of the court system, when again, you know, I gave the example of New York, but there’s also the example of Florida, where after the robosigning scandal, judges now say that they can’t get a bank in court. You know, that banks – and I heard a report just the other day from somebody in Baltimore saying, you know – now this may change a little with this settlement, but I sort of doubt it – where they said, you know, people who want to do, you know, short sales or buy properties that the banks own, the banks won’t talk to th– or that are in foreclosure and they think the bank is going to sell the property, right? The bank hasn’t actually, you know, finished the last step of eviction and putting the prop– there’s a category called real estate owned. You know they may sort of be in the advanced foreclosure stages, but you know there are cases in Florida where it’s months where from when they have a final judgment, where the bank really in theory owns the house, and they don’t evict. I mean, so there are other reasons they’re dragging it out, and that’s probably the second mortgages. Because once they evict and they actually finally take the property, then they would have to write down the second lien if there was a second lien.
So there are all kinds of – you know, there’s all kinds of behavior which is very dysfunctional, and people are theorizing as to why it is, and the court system does not seem to be anywheres near a sufficient explanation. I mean there are just too many facts out there in terms of what’s happening in the courts on specific cases that say it’s not court backlog.
HARRY SHEARER: If the investors are – and correct me if I’m wrong, but the investors are characterized, as I say, as pension funds among other things – CALPERS is in big time, right?
YVES SMITH: Right. And the very biggest ones, PIMCO, the big bond investor, is very big in that space.
HARRY SHEARER: Why aren’t they going after the banks and the servicers and the misbehavers?
YVES SMITH: Well, there are a bunch of complicated reasons. One is that they’re really not very well set up to sue people. Bond managers get very little in the way of fees. Most of them are part of bigger fund complexes, so it’s not like even if the manager of a particular fund is really motivated and upset and wants to do something, he can’t go launch a suit. He has to, like, you know, go through a big bureaucratic procedure and get the general counsel on it. You know, he can’t just call up a lawyer and do it. So you’ve got sort of those kind of, you know, internal bureaucratic reasons.
Another big reason is that for many types of lawsuits, there were restrictions. Now I don’t think that actually appl– it probably doesn’t apply to these sort of, you know, stealing from the trust ones, but for the ones that most people have talked about where they were lied to in the beginning of the deal about how good the deal was? Believe it or not, you have to get, in most deals, 25% of the investors together to sue, and it’s not easy to find them because there aren’t lists of who the other investors are. So literally somebody had to form a great big database even for investors to sort of find each other to see if they could get to the 25% number to be able to sue. So you’ve got that problem.
And then the other problem that you’ve got is frankly a lot of the investors are afraid of the banks. I had one of the attorneys, Tal Franklin, who has represented some investors in litigation, and he said to me that, he said that for some of these investors, if Jamie Dimon were to kill their children, they would not call the police. They do business with these banks. They think they depend on these banks. They don’t want to ruffle them too much.
I mean there was one investor – and it’s a completely different kind of abuse, but this is indicative of what the banks are getting away with these days. One former client of mine is a billionaire, and among all the industrial entities that he owns they had about a billion in cash sitting around, and they thought, “Well, a billion in cash, that’s enough, we should like, you know, get it together and have it managed a little better than we are.” And they didn’t have ambitious goals, they just wanted to get a little bit more than if they put it in Treasury bills. And they had all this – I mean I read the agreement. They had all this language about how it was supposed to be managed conservatively and distributed in different buckets and be very liquid – you know, “safe, safe, safe” was all over what they had written. Well, it turns out that on a billion dollars, JP Morgan Chase managed to lose about 100 million, on a billion, yes.
HARRY SHEARER: A hundred million.
YVES SMITH: So 10%.
HARRY SHEARER: Yeah.
YVES SMITH: And they’re suing them. And this billionaire goes on – and he makes it very clear that his beef is with JP Morgan, that he’s not an enemy of the banks generally, that he does a lot of business with banks and, you know, that he uses them for financing and whatnot. And all these players, you know, have some dependency on the banks.
And so unless you have a lot of big investors get together, individual ones feel very – it’s like the wildebeest, right? You know, if you’ve got one wildebeest on savannah it’s vulnerable? You know, if the wildebeests all go in a herd then they’re safe? You know, so you’ve got to get a really big herd of these investor wildebeests for them to feel safe, and so far they haven’t gotten together in big enough numbers to feel like they can, you know, go across the savannah together.
HARRY SHEARER: Well, hearing you describe that, my question would be, supposedly these banks compete. So if you sue –
YVES SMITH: (laughter)
HARRY SHEARER: Thank you.
YVES SMITH: Not when there are so few anymore.
HARRY SHEARER: Thank you. Thanks for the laughs. So, when you sue JP Morgan Chase, maybe Wells Fargo would like your business. So the theory behind this would seem to be that they have bigger fish to fry than competing against each other.
YVES SMITH: Oh, well, that part is true, but I guess, you know – and I should say that the other reason the billionaire is a different case is that he doesn’t need to work with as many different banks. These big funds typically already need to work with different banks. They typically are in a position where they couldn’t possibly work with one bank for all their business. They’re very horses-for-courses, so they – in particular the very large funds. I would suspect that the big funds like PIMCO probably have relations with all the major Wall Street firms. They use them for – you know, they spread their business around because they get intelligence and they don’t want to be too – they think they get intelligence. Who knows if the intelligence they get is any good. But they spread their business around. So, and even hedge funds that aren’t very large always try to spread their business around two or three banks.
HARRY SHEARER: So, the –
YVES SMITH: And there now aren’t that many left, right? So.
HARRY SHEARER: Yeah, right. So the civil litigation door in many cases is being shut by the settlement – litigation by governments – and the litigation by some of the affected parties, i.e., the investors, is forestalled by fear of bank retaliation. So what’s left is criminal prosecution in these few instances that are not where the statute of limitations has not expired. Is that where we are?
YVES SMITH: Well, and, individuals still can sue. So we’re going to have this crazy disconnect where borrowers are going – because borrowers are still getting more sophisticated in terms of understanding the problems with how these deals were put together and the bases they have for fighting banks. And this settlement is not going to provide relief – even to the extent it works, right? Because the principal modifications, the banks have three years to do that and I think the admin– I mean, you know, different people throw out different numbers, but at least the number that I’ve seen is 750,000, although I think HUD keeps spinning it as it could be up to 2 million. So either a few are going to get more, or a lot more are going to get less.
HARRY SHEARER: Out of 11 million people that are underwater.
YVES SMITH: Underwater. Exactly. Exactly. So, yeah, 2 million is the maximum, and given how well the administration’s past efforts to fix the problems have done – I mean HAMP I think came in at well under, helping well under a quarter of the people it was targeted to help.
But in any event, the point is you still have a large number of people who are not going to get a benefit from this who are under stress, and, AND we’ve got this huge number of foreclosures that are still in some degree of being processed that aren’t going to be affected by this either. So you still have this tremendous overhang of property – you know, what people are calling shadow inventory. Nobody sort of knows how big that number is, but it’s large.
And then you’ve also got the fact that borrowers are still going to be able to fight foreclosures on an individual basis very successf– you know, well, depends on the judge. I mean it all depends on their willingness to fight.
So the effect of taking the AGs out of the picture and the government out of the picture was that we’ve lost a big mechanism for coming up with some – a good – well, not there’s a good resolution to a bad situation, but a comprehensive solution that would really get at much more of the roots of this problem. Instead we’ve basically put a bandage over a gunshot wound that’s now starting to get infected and is on its way to gangrene. I mean this is just crazy.
HARRY SHEARER: But, had the settlement not occurred, the attorneys general might have pursued investigations, the results of which could have benefited those private parties in litigation. That is to say they could have used the fruits of the investigations –
YVES SMITH: Oh, yes, absolutely. So this has weakened, yes – even though private parties can still sue, they aren’t in as good a position as they probably would have been if they had, you know, evidence that had been found by attorneys general and legal theorists.
Plus, just the press. I mean, look how the robosigning changed the attitudes of judges. I mean, judges, it used to be that if a borrower came into court and tried saying the bank screwed up, it was just like, “You’re a deadbeat borrower, the bank’s a bank, of course I’m going to believe the bank. I mean, who are you? You didn’t pay.” And the robosigning scandal, the press around that completely changed attitudes of, not all, but a lot of judges. And similarly, if the attorneys general were pursuing suits, again the press around it would have an impact on judicial attitudes.
So, yes, the banks, you know the banks won on, you know, even though private parties still can sue, or fight, this was still a very big win on lots of other levels for the banks.
HARRY SHEARER: So your overall verdict on this settlement, Yves?
YVES SMITH: Well it’s stinky. (laughs) It’s really bad. You know, I just am so, I’m just so appalled that the – you know, in some ways I’m actually more appalled by the attorneys general who had been fighting, throwing in the towel. I mean because the administration’s behavior on this was predictable. And the administration really could have done a deal even with the 40 attorneys general – 40 to 44 they were probably going to get anyhow. I mean, all of the Republican AGs were going to go for this, except interestingly for the Oklahoma holdout, and a significant number of the Democratic ones were really not going to pursue any investigations, either for budget or just attitude reasons. But the ones who were pursuing this aggressi– and of course they’re going to maintain they’re still pursuing it aggressively, but they’ve just narrowed what they can do tremendously. They’re basically saying, “Well, you know, we’ve decided that just picking a few spots will be okay, and we’ll live with that.” I mean I just find that really inadequate.
HARRY SHEARER: So, what’s your view of the state of the law of real estate transactions and financing –
YVES SMITH: Well, it’s really been thrown – we’re really back to before something called the 1677 Statute of Frauds. I mean, these procedures all came about, the whole, the fact that you have a signature notarized by an independent party, you know that came about because there was a period in England where literally you could basically hire an expert witness and have a person lie and steal someone’s property. And things became so chaotic that they had to basically say, stop, and we’re going to implement some procedures. And those procedures comported themselves very well for hundreds of years. And now we’ve decided to reverse that to a significant degree, because we’ve decided the banks can’t take a hit. I mean this is just crazy.
I mean, you know, even – you sort of alluded to conservatives earlier on, but you know conservatives believe in the sanctity of contract and the sanctity of property rights. I mean this is an issue for people of both sides of the political spectrum, and it’s shocking that if you and I signed a contract we’re held to it, and if a bank signs an agreement they’re not. I mean that they can just, you know, pay a fine, which is not proportionate to the damage they’ve done, and treat it as a cost of doing business. I mean, and there are cases.
You know, I keep coming back to this issue of what is called “servicer-driven foreclosure.” You know, first there – and there are lots of levels of abuses that are less than that. But for example, there’s one attorney that I know who he first got into foreclosure defense when a guy walked into his office at 5 in the evening and said, “You gotta file bankruptcy.” And he says, “What are you talking about? Filing for bankruptcy at 5 in the evening? I mean, can’t this wait?” And he goes, “No, the bank’s about to take my house and I need to file for bankruptcy now,” and he said, “Now I’ve really made all my payments. You know, I’ve been fighting with the bank and, you know, this is why it’s happening at such a late hour, you know, I haven’t been able to get them to pay attention.” And he says, you know the guy goes, he goes, “I’ve done a lot of law,” he goes, “like you know the guy coming in says I made all my payments.” And the guy says, “Yeah, I have,” and he says, “Here.” And he like dumps it on the guy’s desk. And he goes through it and the guy had made all his payments on time. The foreclosure had been precipitated by a single $75 disputed late fee. And the guy still had to cla– And you know then he calls the attorney from the foreclosure firm and said, “Look, this guy’s really right. You know, you got to stop this foreclosure. You know, let’s figure out how we straighten this out.” And the guy said, “No, we’re foreclosing tomorrow.” And so he had to file, he had to like get an emergency petition to the court and the guy had to go through bankruptcy.
I mean but that’s the kind – I mean that, that’s, that’s, you know, a more extreme version, but this kind of thing – you know, when people are close to the edge financially, and that’s where a lot of people are with this economy still being weak and a lot of people having hours cut back or job losses, it doesn’t take much in the way of fee abuses to push somebody who could pay with some strain into being, you know, pushed over the edge, and that’s happening a lot. And it’s just not getting, it’s not getting the attention it deserves.
So the whole notion that the banks are always right and the borrowers are, you know, “Well, it’s not so bad, the borrower lost their house, I mean even if the bank screwed up on the paperwork, you know, they really deserved it.” I mean, to this point of wrongful foreclosure. In many cases it’s not just wrongful because of the problems with the documentation and the fact that the banks screwed up on their own contracts, in many cases, and many and again unknown because nobody has investigated. You know, there is a significant but unknown number of foreclosures which really are not warranted. They really are a bank abuse.
HARRY SHEARER: Now you’ve used a phrase in the site that I’ve never quite understood in the context of servicer abuses. What’s “forced place insurance”?
YVES SMITH: Okay. In most home purchases, you write a check to the bank and the bank pays for insurance and taxes. And then if for some reason the insurance lapses, or the bank pretends you’re not insured, they can then put their own insurance policy on, and there have been cases where banks have – and that’s why it’s called “forced place.” You didn’t sign up for the insurance, the bank basically puts the insurance policy on you and demands that you pay for it. And typically these policies are egregiously priced. Bank of America had its own subsidiary that provided insurance so there was a direct conflict in many –
HARRY SHEARER: How convenient!
YVES SMITH: Yeah. In many case– sorry, the old Countrywide, but now Bank of America, so this was an old Countrywide thing that Bank of America inherited. But also there have been cases where the servicer has been found to get, you know, commissions, i.e., kickbacks, you know, large kickbacks for the forced place insurance, and there have been cases where they’ve just put insurance on, you know, like the borrower would suddenly have forced place insurance and they already had an insurance policy and the only way the bank should think that they didn’t have an insurance policy would be if the insurer sent them a note saying we’ve canceled the policy. You know? I mean there was no reason, there’s no legally justified reason for the bank suddenly to have put an insurance policy on. So that’s one type of abuse that’s been happening.
HARRY SHEARER: So, if you grade this settlement. If you were teaching a class and this settlement was presented as a solution to this problem, what grade would you give it?
YVES SMITH: Oh, it’s an F. I mean, it’s not a solution to the problem at all. I mean, because as I said, there really are much larger problems and what this one does is it takes away from the banks the liability for the behavior that it’s easiest to demonstrate that they did wrong.
And you know the classic way that you prosecute people is, oftentimes when there’s complex behavior that’s difficult to prove, is to go after the easy stuff to hope that you’ll get the evidence of the hard stuff. You know, that you go into discovery and the discovery on the easy – or the classic mob strategy, which is what at least the Nevada Attorney General Masto appeared to have been starting – I don’t know if she’s going to continue on that path or not with the suit she was pursuing – but where she criminally prosecuted a couple of employees for forgery. And that was criminal. But the point is you can do a civil version of the same, right? You target some of the companies in the environment. You go in and you do discovery, and then you find more evidence and you add to the charges as you go in and you pursue the paths that you get from discovery just on the clear abuses.
And you know these were meaty enough, the violations on these were meaty enough that they were worthy targets in and of themselves. I mean, you could, if nothing else, most states have consumer fraud statutes. For example, the New York MERS suit, I think it’s $5,000 per violation. I think in Nevada it’s $10,000 per violation. But a lot of the stuff you could wrap in consumer fraud statutes, and you could define the violations as being pretty specific, like, you know, a bad document filed in court. So you could have gotten to reasonable damages that would make it worthwhile for an AG to pursue this and then see where it led. And, you know, that’s just been cut off now.
HARRY SHEARER: So basically they killed the low hanging fruit?
YVES SMITH: That’s right. That’s a good way of putting it, yes, yes.
HARRY SHEARER: Yves Smith. You make the complex and almost impenetrable so easy to understand daily on nakedcapitalism.com and in ECONned and on your occasional visits to Le Show. Thanks.
YVES SMITH: Oh, thank you so much. I really appreciate your making the time for me.
HARRY SHEARER: My pleasure. Vice versa.
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HARRY SHEARER: And now, as if that’s not enough, I’m going to read the trades for you. Because you see that interview was recorded on Thursday, the day that the settlement announcement was made in Washington. Less than 24 hours later, this from American Banker magazine. I’ll read it for you.
More than a day after the announcement of that mortgage servicing settlement, the actual terms of the deal aren’t public. The website lists the document as “Coming soon.” That’s because a fully authorized, legally binding deal has not yet been inked. Spokespersons for both the Iowa Attorney General’s office and the Department of Justice told American Banker the actual settlement will not be made public until it’s submitted to a court. A representative for the North Carolina Attorney General downplayed the significance of the document’s non-final status. Other sources who spoke with American Banker raised doubts that everything is yet in place. A person familiar with the mortgage servicing pact says that a settlement term sheet doesn’t yet exist. Instead there’s a series of nearly complete documents that will be attached to a consent judgment eventually filed with the court. Some who talked to American Banker said that the political pressure to announce the settlement drove the timing, in effect putting the press release cart in front of the signed settlement horse.
We got sharks, wildebeests and horses, ladies and gentleman. It’s a wildlife edition of the show.
Whatever the reason for the document’s continued non-appearance, the lack of a public final settlement is already the cause for disgruntlement among those who closely follow the banking industry. Quite simply, saysAmerican Banker, the actual terms of a settlement matter. The devil’s in the details, says the chairman of a law firm, Venable Financial Services Group. Until you see the document, you’re never quite sure what your rights are.” Few news outlets asked for the actual document, and those that did, like American Banker, have been unsuccessful.
So you understand why they didn’t ask. Just the maraschino cherry on top of that particular sundae, evidently. Ladies and gentleman, when I read the trades for you, it is so very much a copyrighted feature of this broadcast.