Fed Orders New Stress Tests

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One of the things the Congressional Oversight Panel recommended the other day was new stress tests for banks, given the mounting evidence that botched securitization may make them insolvent (okay — that last bit is my shorthand).

Today, the Fed ordered up those stress tests.

The Fed, in guidance issued today, said all 19 banks must submit capital plans by early next year showing their ability to absorb losses under a set of conditions to be determined by the central bank. The request is part of the Fed’s effort to step up supervision at the nation’s largest financial firms.

While new stress tests are a no-brainer — at some point we’re all going to have to admit that Bank of America is insolvent and should be wound down — I’ve got zero confidence these new stress tests will be anything different than the kabuki stress tests the banks had in the last go-around: that is, a “test” designed to ensure everyone passes.

Chris Dodd Uses Hearing to Call on Geithner to Do His Job

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Chris Dodd didn’t have many questions in yesterday’s hearing on the foreclosure crisis. But he did use the opportunity to call on Tim Geithner to convene the Financial Stability Oversight Council to prevent this crisis from blowing up the economy.

Dodd: Attorney General Miller, at the outset of my opening comments I talked about the importance of getting the, this Financial Stability [Oversight] Council that we established in the Financial Reform Bill to anticipate systemic risk and to collectively work as a body chaired by the Secretary of the Treasury, along with the FDIC and the OCC–there are ten members of that, an independent member and five others that are part of it. This seems to me like a classic example–one that we did not anticipate necessarily when we drafted the legislation, but exactly, we are in a crisis with this. Now you can argue that it’s not yet a systemic crisis that poses the kind of risk we saw in the Fall of 08, but no one can argue that we’re not in the middle of a crisis. Now the idea of this, of course, was to minimize crises so they don’t grow into a large, systemic crisis. Have you had any contact with the Secretary of Treasury? Or is there any communication going on between the Attorney Generals and this Council or the Chairman of it, the Secretary of the Treasury, or their office, to begin to talk about what the role of the federal government might be in formulating an answer to all of this?

Miller: We haven’t had any contact with the Council. We have had repeated contact with the Department of the Treasury, with Assistant Secretary Michael Barr and his staff. We’ve developed a terrific ongoing relationship with them. We talk about these issues and try and help and support each other on these issues. So we’ve had a lot of discussions with Treasury but not with that particular Council.

Dodd: Again I saw [mumble] privately with Senator Warner and others may, Senator Merkley has a similar thought. I’m going to use this forum here, obviously in a very public setting, to urge the Secretary of Treasury and others to convene that Council to begin to work with you and others, so there is a role here to examine this question in seeking broad solutions. So my hope is they’ll hear that request to pick up that obligation that we laid out in that legislation.

You know, when the Chairman of the Senate Banking Community has to use a forum like this to try to remind the Secretary of Treasury of his obligation under Dodd-Frank, it does not inspire a lot of confidence.

About that AG “Investigation” and “Settlement”

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About four hours ago, Iowa’s Attorney General Tom Miller testified to the Senate Banking Committee  it would be months before the combined AG “investigation” came up with a settlement (he also suggested that there were new aspects that were just being added to the “investigation”).

Dodd: How long AG investigation?

Miller: Months, rather than year or longer. Depends on negotiations. If we expand scope, expands time. Maybe something on fees allowed. Forced insurance, huge abuse. Same thing w/dual track. If you all could solve the 2nd lien problem.

That’s almost exactly the moment when the WaPo posted a story reporting the AGs were close to a settlement.

The 50 state attorneys general are in negotiations over an agreement over foreclosures that would include a victims’ compensation fund that would provide money for borrowers whose homes have been taken away improperly, according to state and industry officials.

The discussions are still preliminary and the final deal may change significantly as details are hammered out and the settlement is vetted by 50 separate state offices, the official said.

Now, there’s a lot that’s weird with this story, aside from the way it seemingly contradicted what Miller was saying to Congress at precisely the moment he was saying it. First, only three of the big servicers were mentioned in the story:

While there’s no universal agreement that would apply industry wide and the AGs are negotiating separately with each bank, many of the stipulations are the same for the agreements being discussed with the three largest mortgage servicers: Bank of America, JP Morgan Chase and Wells Fargo.

No mention of GMAC or Citi–or Goldman Sachs, which just announced a freeze on its foreclosures.

And this story reported that dual-track processing–in which people are being processed for modification at the same time they’re being foreclosed on–“should” stop.

They also agree that there should be no more “dual track” loan modification negotiations that end suddenly with foreclosures.

Yet at almost precisely the time when WaPo published this claim, BoA’s President of Home Loans, Barbara Desoer was explaining that they couldn’t end dual-track processing except on those loans BoA held on its own books and/or for loans that qualify for HAMP, and Chase’s CEO of Home Lending David Lowman was testifying that they wouldn’t end dual-track processing (he did suggest there was something Congress could do to give servicers safe harbor to end dual-track processing, but that he wouldn’t describe it in the hearing).

Then there’s the claim that there would be a compensation fund set up for those wrongly foreclosed.

The most radical part of the settlement deal has to do with providing monetary compensation for homeowners who have lost their homes but can prove that they have been foreclosed on wrongly. This is the most contentious item because the amount of the funds that would go into this have not been worked out and it’s also unclear how it would be administered.

At least the WaPo had the grace to suggest, without saying outright, that any such fund would be ripe for abuse by the banksters. The banks, after all, are often unable to give any real accounting of the amounts owned (and if they were able to, they’d be unwilling to show the illegal fees and accounting they were using). So how is a wrongly-foreclosed homeowner supposed to prove they were wrongly-foreclosed?

And then the article mentions nothing about modifications going forward. In other words, this “settlement” would achieve absolutely nothing–except for getting a bunch of banksters excused, again, for breaking the law. Not that I find that hard to believe. Just odd that WaPo wouldn’t mention that this alleged “settlement” wouldn’t accomplish the primary requirement of any “settlement:” fixing any problem but the legal liability of the banksters.

Mind you, I did note during the hearing that Miller didn’t seem to have consumers’ interests in minds when he was talking about any settlement, so I guess the outlined proposal is a possible one.

But most of all, note the big news in this story.

There is no mention of an investigation.

There was not a single soul at today’s hearing who claimed to have a good sense of the scope or reasons for the massive foreclosure fraud perpetrated by the banks. Indeed, almost everyone acknowledged the need for further investigation to make that clear.

That “investigation” was supposed to be conducted by the 50 AGs.

But if this article has even a shred of truth to it then the AG “investigation” is instead a fast-track effort not to “investigate” (god forbid, because you might actually expose how the banksters had ended private property and rule of law in the United States), but to find a way to get the banksters out of any accountability for their crimes.

Liveblog: Senate Banking Committee on Foreclosure Fraud

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See Part One of this liveblog here.

Shelby was actually pretty good, but then Johanns and Bennett went to some length to try to pretend the banksters weren’t doing what they were doing.

Johnson: Does the law need to be change?

Levitin: It’s not the law, it’s compliance w/the law. What was governing securitization was private contractual law. Servicers allowed to contract around UCC in Pooling and Servicing Agreements. Generally requirements set forth in PSAs not followed. A good reason for PSAs to be written the way they are: bankruptcy remote. If you don’t have that chain of endorsements, it’s going to be very difficult to prove you’ve got the chain of transfers in BK remoteness.

Levitin: This is a problem with following the law.

Johnson: What were barriers to recognizing doc problems that exist.

IA AG Tom Miller: People coming forward in foreclosure issues.

Johnson: What are the conflicts of interest?

BOA Desoer: “We do not take seconds into consideration” when modifying a first. 2nd Lien not an obstacle, does not get taken into consideration.

Chase Lowman: Second liens do not get in way of modifying first.

Tester: [referring to cases he’s followed in MT] It’s not a pretty picture. [Describes constituent told by BoA not to make any payments] Can you tell me how servicer can ever tell homeowner not to pay a mortgage.

BoA Desoer: That is not what we should be telling homeowners.

Tester: Would you attribute this to employee that screwed up.

BoA Desoer: We will reinforce that aspect of communication to our teammates.

Tester: How can someone receive notice he’s in foreclosure before foreclosure process restarted?

BoA Desoer: [Dodges] The sale will not take place, but that customer will continue to get notices.

Tester: These particular hearings not particularly enjoyable for me. Not an isolated incident. MT is not a state where people come to Senator willy nilly. I don’t know how many people didn’t come to me and they just wound up on the street. It’s clear servicers have been a little bit glib, particularly about risks to their own balance sheets. Quite frankly, there ain’t gonna be more bailouts.

IA AG Miller: We want to work with the banks and the Feds.

Tester: Go to what Levitin said about Countrywide. This can be taken care of by the servicers. Their heads need to roll.

Merkley: GSEs say if foreclosure has begun before mod, servicer continue foreclosure during Mod. Is continued pestering on foreclosure during mod due to parallel processing.

Chase: Foreclosure sale won’t take effect.

Merkley: You don’t take the final step. [Now repeats a story on similar story of parallel processing] Can’t we just change this policy and suspend proceedings while mod going on?

Chase: New process prescribed by HAMP would necessitate that we enter into Mod process and engage prior to commencement of foreclosure.

Read more →

The Bankster’s Stenographer Claims Credit for Private Equity

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For some reason, Andrew Ross Sorkin felt the need to weigh in on the debate over whether Rick Wagoner or Team Auto should get credit for GM’s turnaround.

He probably shouldn’t have, seeing as how some of his evidence against Wagoner is that “he wasn’t able or willing to cull failing brands like Pontiac, for example, or get his arms around out-of-control legacy costs.” Steven Rattner himself admits, of course, that Wagoner’s the one who negotiated VEBA with the UAW and got the legacy costs of retiree health care off of GM’s books, even if he doesn’t emphasize that point.

But what’s most hysterical is that Sorkin’s defense of private equity guys…

Indeed, the private equity industry and its many lobbyists have been fighting for years to prove their value to the public, producing all sorts of studies and white papers to back up their claims.And yet, Mr. Gladwell gets to the nub of the image problem confronting the industry in the blink of a sentence (pun intended): “The mythology of the business is that the specialists who swoop in from Wall Street are not economic opportunists, buying, stripping and selling companies in order to extract millions in fees, but architects of rebirth.”

[snip]

He’s right: the GM turnaround is ultimately an act of financial engineering. While “financial engineering” has become an expletive of sorts, in this case it is actually a good thing. Indeed, G.M.’s turnaround should become a case study for when and why the private equity and restructuring business can work.

[snip]

But for certain companies — and only in certain circumstances — there is something to be said about bringing in an outsider with this credential on the résumé: financial engineering experience.

… doesn’t once mention that other company that got bailed out by Team Auto: Chrysler Cerberus.

For what it’s worth, I am willing to concede (and have) that it makes sense to bring in guys with “financial engineering” experience to revamp failed businesses (though just as critical is having someone with basic business expertise from outside of the culture of the industry in question).

But one of the biggest differences between Cerberus’ spectacular failure with Chrysler and Team Auto’s initial success with Chrysler Cerberus and GM is that Team Auto was not trying to suck the last bits of value out of a company (as Cerberus was trying to extract the finance part of Chrysler while screwing the manufacturing side).

An astute journalist probably would have acknowledged that point.

Update: This post originally called Sorkin “Aaron,” not “Andrew. Apologies to Aaron Sorkin and thanks to pdaly for pointing out my mistake.

TARP Oversight Panel: Securitization Mess May (Re)Crash the Economy

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The TARP Congressional Oversight Panel just released a report dedicated to the foreclosure fraud problem and the securitization mess underlying it. They conclude that the problems may represent a significant problem for the housing market and the financial system more generally.

Here’s a great summary of why:

If documentation problems prove to be pervasive and, more importantly, throw into doubt the ownership of not only foreclosed properties but also pooled mortgages, the consequences could be severe. Clear and uncontested property rights are the foundation of the housing market. If these rights fall into question, that foundation could collapse. Borrowers may be unable to determine whether they are sending their monthly payments to the right people. Judges may block any effort to foreclose, even in cases where borrowers have failed to make regular payments. Multiple banks may attempt to foreclose upon the same property. Borrowers who have already suffered foreclosure may seek to regain title to their homes and force any new owners to move out. Would-be buyers and sellers could find themselves in limbo, unable to know with any certainty whether they can safely buy or sell a home. If such problems were to arise on a large scale, the housing market could experience even greater disruptions than have already occurred, resulting in significant harm to major financial institutions. For example, if a Wall Street bank were to discover that, due to shoddily executed paperwork, it still owns millions of defaulted mortgages that it thought it sold off years ago, it could face billions of dollars in unexpected losses.

[snip]

In addition to documentation concerns, another problem has arisen with securitized mortgage loans that could also threaten financial stability. Investors in mortgage-backed securities typically demanded certain assurances about the quality of the loans they purchased: for instance, that the borrowers had certain minimum credit ratings and income, or that their homes had appraised for at least a minimum value. Allegations have surfaced that banks may have misrepresented the quality of many loans sold for securitization. Banks found to have provided misrepresentations could be required to repurchase any affected mortgages. Because millions of these mortgages are in default or foreclosure, the result could be extensive capital losses if such repurchase risk is not adequately reserved.

To put in perspective the potential problem, one investor action alone could seek to force Bank of America to repurchase and absorb partial losses on up to $47 billion in troubled loans due to alleged misrepresentations of loan quality. Bank of America currently has $230 billion in shareholders‟ equity, so if several similar-sized actions – whether motivated by concerns about underwriting or loan ownership – were to succeed, the company could suffer disabling damage to its regulatory capital. It is possible that widespread challenges along these lines could pose risks to the very financial stability that the Troubled Asset Relief Program was designed to protect. Treasury has claimed that based on evidence to date, mortgage-related problems currently pose no danger to the financial system, but in light of the extensive uncertainties in the market today, Treasury‟s assertions appear premature. Treasury should explain why it sees no danger. Bank regulators should also conduct new stress tests on Wall Street banks to measure their ability to deal with a potential crisis. [my emphasis]

There’s a lot of conditional language here, reflecting a general uncertainty about how deep the shitpile is this time around. But the demand that Treasury conduct another stress test of these obviously insolvent banks is a good start.

David Stern, Foreclosure King, a Deadbeat

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If only David Stern were being treated as badly as he treats homeowners, this would bring real schadenfreude.

In a regulatory filing published today, Stern’s publicly traded company revealed that one of its subsidiaries failed to pay rent in November on its towering office building in Plantation, Florida, and had received a notice of default.

[snip]

Stern’s financial troubles stem from the implosion of his foreclosure empire. In the months after Mother Jones published its investigation, he’s lost clients such as Citigroup, GMAC, Wells Fargo, Fannie Mae, and Freddie Mac, and laid off nearly 450 employees. New business to his companies, he wrote in a recent letter, has declined by a staggering 90 percent in the past six months.

And it gets worse for Stern and his foreclosure operation. The same regulatory filing shows that another Stern subsidiary recently defaulted on a $15 million line of credit from Bank of America, on which the company still owes $12 million in principal.

Alas, Bank of America has given Stern another month to pay that bill (though it does sound like Stern is planning on going out of business at the end of the month, just in time for Thanksgiving).

So now, eight months after the Mortgage Bankers Association managed to negotiate a short sale of its new headquarters, the Foreclosure King is about to be foreclosed on. But both got far, far better treatment than the average homeowners who–unlike these MOTUs–had nothing to do with the crash of our economy.

I guess some deadbeats are more equal than other deadbeats.

DOJ IG Doesn’t List Foreclosure Fraud among Significant Performance Challenges

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A month ago, the Financial Fraud Task Force first started to get around to investigating the systemic fraud in our foreclosure system.

Federal investigators are exploring whether banks and other financial firms broke U.S. law when using fraudulent court documents to foreclose on people’s homes, according to sources familiar with the effort.

The criminal investigation, still in its early days, is focused on whether companies misled federal housing agencies that now insure a large share of U.S. home loans, and whether the firms committed wire or mail fraud in filing false paperwork.

The announcement was tied to a Shaun Donovan announcement that a HUD investigation started in May had identified problems from some mortgage servicers; HUD is a member of the Financial Fraud Task Force.

Donovan said the administration had yet to complete its review, which began in May. Thus far, though, it had found “significant difference in the performance of servicers, and in particular, information that shows us there is not compliance with FHA rules and regulations around loss mitigation.” Donovan said the findings were limited to firms that deal with FHA loans. He declined to single out servicers.

All of which would seem to suggest that HUD–and therefore the Financial Fraud Task Force–knows there’s some there there (though they deny it is systemic).

Which is why I find it rather troubling that, two months after it became clear foreclosure mills and servicers are engaging in rampant fraud, DOJ’s Inspector General Glenn Fine does not specify it among the significant performance challenges for the year (Financial Crimes generally places seventh on his list of issues, after IT planning and violent crime, the latter of which is falling).

7 Financial Crimes and Cyber Crimes: The need to aggressively combat financial crimes and cyber crimes is an increasing challenge for the Department. Financial fraud continues to affect the economy, and the increased use of computers and the Internet in furtherance of financial crimes, as well as the international scope of these criminal activities, has exacerbated the challenge of cyber crime.

In November 2009, a presidential Executive Order created the Financial Fraud Enforcement Task Force (Task Force). The Department described the Task Force as the “cornerstone” of its work in the financial fraud area. Led by the Department, the Task Force combines the work of several agencies to focus on mortgage crime, securities fraud, American Recovery and Reinvestment Act (Recovery Act) and rescue fraud, and financial discrimination.

In connection with the Task Force the Department launched Operation Stolen Dreams, a multi-agency initiative designed to combat mortgage fraud. In June 2010 the Department reported that this operation involved the prosecution of 1,215 criminal defendants nationwide who allegedly were responsible for more than $2.3 billion in losses. The Department also reported that the operation recovered more than $147 million through 191 civil enforcement actions.

The Department and the Task Force are also focusing investigative resources on securities fraud as well as on Recovery Act fraud and fraud in other rescue funds. Among other things, the Department is providing training to federal grantees and contractors on ways to prevent and detect such fraud.

Note that Operation Stolen Dreams is focused on the small-scale thugs that pumped up housing prices. That’s apparently a priority. But Fine, at least, seems to think an investigation into the GMACs and BoAs, the David Sterns and Lender Processing Services, is not a priority.

He may well be right in that DOJ doesn’t consider this a top challenge. So while counterterrorism is number one–based partly on two unsuccessful attacks launched by losers in the last year–the wholescale assault on our economy is apparently not even part of number seven.

Sheriff Dart: 5% of Chicago’s Foreclosures DON’T Have Problems

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The WaPo has a story on the growing realization that the banksters have been engaging in massive fraud to keep churning out foreclosures. It includes a detail about Chicago Sheriff Thomas Dart’s refusal to enforce foreclosures I did not know: that when he had a sample of foreclosures reviewed, he found that only 5% of them had all their paperwork in order.

After reading about problems such as banks “robo-signing” foreclosure documents without verifying their accuracy, Dart asked that attorneys for mortgage companies sign something personally confirming that evictions are justified. None did. So Dart has refused to honor their requests.

[snip]

In Illinois, Dart said in an interview that, after hearing about improperly prepared paperwork at major lenders, he and his deputies pulled an admittedly unscientific sample of 400 foreclosure cases processed by the courts. He said they found that only 20 of them had the proper paperwork and that the others were missing “very significant” documents.

While not carrying out evictions could land Dart in trouble if a judge decides to bring contempt-of-court charges, he said he thinks his actions have been “just and legal.”

“When I have the lending institutions themselves admitting to problems, what are we supposed to do?” Dart said. “All I’m asking them to do is certify that what they are doing is legal. The fact that they are not racing to do this makes the case for us.”

One of the biggest problems communicating the problems the deadbeat banksters have introduced through their own shoddy or fraudulent work lies in explaining the scope of the problem. And while the numbers Chicago found may be worse than other places–with a very high population of people of color, after all, it would have been a target for predatory lending–I’m happy using the 5% number a law enforcement officer has provided in the interim.

Are Obama and Congress Set To Screw American Counties, Homeowners and Give Wall Street Mortgage Banksters a Retroactive Immunity Bailout?

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There are rapidly emerging signs the Obama Administration and Congress may be actively, quickly and covertly working furiously on a plan to retroactively legitimize and ratify the shoddy, fraudulent and non-conforming conduct by MERS on literally millions of mortgages.

From CNBC:

When Congress comes back into session next week, it may consider measures intended to bolster the legal status of a controversial bank owned electronic mortgage registration system that contains three out of every five mortgages in the country.

The system is known as MERS, the acronym for a private company called Mortgage Electronic Registry Systems. Set up by banks in the 1997, MERS is a system for tracking ownership of home loans as they move from mortgage originator through the financial pipeline to the trusts set up when mortgage securities are sold.

Just to make clear the implications of this craven action, the White House and Congress are conspiring to give a get out of jail free bailout card to the biggest banks and finance companies in the country to cover up and mask their illegal behavior and behavior that did not conform with state, county and local laws throughout the United States. On at least sixty (60%) percent of the existing mortgages in America.

There are dozens of implications to individuals and both private and public entities. At a root minimum, it will likely decimate, if not bankrupt, most counties in every state of the union.

If courts rule against MERS, the damage could be catastrophic. Here’s how the AP tallies up the potential damage:

Assuming each mortgage it tracks had been resold, and re-recorded, just once, MERS would have saved the industry $2.4 billion in recording costs, R.K. Arnold, the firm’s chief executive officer, testified in 2009. It’s not unusual for a mortgage to be resold a dozen times or more.

The California suit alone could cost MERS $60 billion to $120 billion in damages and penalties from unpaid recording fees.

The liabilities are astronomical because, according to laws in California and many other states, penalties between $5,000 and $10,000 can be imposed each time a recording fee went unpaid. Because the suits are filed as false claims, the law stipulates that the penalties can then be tripled.

Perhaps even more devastatingly, some critics say that sloppiness at MERS—which has just 40 full-time employees—may have botched chain of title for many mortgages. They say that MERS lacks standing to bring foreclosure actions, and the botched chain of title may cast doubts on whether anyone has clear enough ownership of some mortgages to foreclose on a defaulting borrower.

Why would the Obama Administration and Congress be doing this? Because the foreclosure fraud suits and other challenges to the mass production slice, dice and securitize lifestyle on the American finance sector, the very same activity that wrecked the economy and put the nation in the depression it is either still in, or barely recovering from, depending on your point of view, have left the root balance sheets and stability of the largest financial institutions on the wrong side of the credibility and, likely, the legal auditory line. And that affects not only our economy, but that of the world who is all chips in on the American real estate and financial products markets.

What does that mean to you? Everything. As quoted above, even the most conservative estimate (and that estimate is based on only a single recording fee per mortgage, when in reality there are almost certainly multiple recordings legally required for most all mortgages due to the slicing, dicing and tranching necessary to accomplish the securitization that has occurred) for the state of California alone is $60 billion dollars. That is $60,000,000,000.00. California alone is actually likely several times that. Your county is in the loss column heavy from this too.

Where will the roads come from? Where will the county courts, judges and prosecutors come from? The Sheriffs? Who will build and maintain the bridges, parks and public works entities? Removal and obviation of this funding mechanism may literally kill any and every county.

That is without even going into the real and myriad effects on individuals, families and communities. This is a death knell to the real property system as we have always known it and the county structure of American society as we have known it. And millions of people will have lost the ability to benefit from the established rule and process of law that they understood and relied on. After the fact. Retroactively. So Obama and Congress can once again give a handout and bailout to the very banks and financial malefactors that put us here.