50-State, $25B Mortgage Settlement: Relief for Struggling Homeowners or Bailout for Big Banks?
The U.S. Justice Department has unveiled a record mortgage settlement with the nation’s five largest banks to resolve claims over faulty foreclosures and mortgage practices that have indebted and displaced homeowners and sunk the nation’s economy. While the deal is being described as a $25 billion settlement, the banks will only have to pay out a total of $5 billion in cash between them. We speak to one of the settlement’s most prominent critics, Yves Smith, a longtime financial analyst who runs the popular finance website, "Naked Capitalism." "The settlement, on the surface, does look like it’s helping homeowners," Smith says. "But, in fact, the bigger part that most people don’t recognize is the way it actually helps the banks with mortgages on their own books... The real problem is that this deal is just not going to give that much relief." [includes rush transcript]
JUAN GONZALEZ: We begin today’s show looking at the $25 billion mortgage settlement agreement by the nation’s five largest banks to resolve claims over faulty foreclosures and the mishandling of requests for loan modifications. The five banks involved are Bank of America, Wells Fargo, JPMorgan Chase, Citigroup and Ally Financial. President Obama hailed the deal at a press conference on Thursday.
PRESIDENT BARACK OBAMA: We have reached a landmark settlement with the nation’s largest banks that will speed relief to the hardest-hit homeowners, end some of the most abusive practices of the mortgage industry, and begin to turn the page on an era of recklessness that has left so much damage in its wake.
AMY GOODMAN: The bulk of the mortgage settlement is expected to go to as many as a million homeowners in the form of reduced mortgage debts or refinancing at lower interest rates. Another 750,000 people who have lost homes to foreclosure will receive between $1,500 and $2,000. President Obama went on to outline several aspects of the deal.
PRESIDENT BARACK OBAMA: Under the terms of this settlement, America’s biggest banks, banks that were rescued by taxpayer dollars, will be required to right these wrongs. That means more than just paying a fee. These banks will put billions of dollars towards relief for families across the nation. They’ll provide refinancing for borrowers that are stuck in high interest rate mortgages. They’ll reduce loans for families who owe more on their homes than they’re worth. And they will deliver some measure of justice for families that have already been victims of abusive practices.
This settlement also protects our ability to further investigate the practices that caused this mess. And this is important. The mortgage fraud task force I announced in my State of the Union address retains its full authority to aggressively investigate the packaging and selling of risky mortgages that led to this crisis. This investigation is already well underway and working closely with state attorneys general. We’re going to keep at it until we hold those who broke the law fully accountable.
JUAN GONZALEZ: The deal with 49 states and federal agencies is being billed as the largest federal-state settlement ever obtained, but many consumer advocates question if it actually makes a victory for the banks. On Thursday, shares of Bank of America rose point 6 percent, to its highest level since September. While the deal is being described as a $25 billion settlement, the banks only have to pay out a total of $5 billion in cash. Millions of struggling homeowners will not be affected because their mortgage is held by Fannie Mae and Freddie Mac or the Federal Housing Administration.
AMY GOODMAN: Joining us now is one of the most prominent critics of the settlement. Yves Smith is a longtime financial analyst, who runs the popular finance website Naked Capitalism. On Thursday, she published an article called "The Top Twelve Reasons [Why] You Should Hate the Mortgage Settlement." Yves Smith is author of the book ECONned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism.
Yves, welcome to Democracy Now!
YVES SMITH: Amy, great to be here.
AMY GOODMAN: Explain what this settlement is about.
YVES SMITH: The settlement, on the surface, does look like it’s helping homeowners, but, in fact, the bigger part that most people don’t recognize is the way it actually helps the banks with mortgages on their own books. What changed in the practice of how people do mortgages, and one of the reasons why we had so much trouble, is that most mortgages are now securitized. That means, instead of going to your bank like you did in the old days and having the bank make the loan and keep the loan, they’re then packaged with a lot of other loans, and the cash flows from them are distributed to investors. And the procedures for getting the loan from the bank to the trust on behalf of investors are very complicated, and the fact the banks didn’t behave those procedures then is what led to robo—is a big factor of what led to robo-signing. That’s why they had to sort of fix the paperwork for what they hadn’t done right in the first place.
Now, in many cases, borrowers don’t just have a first mortgage, they have a second mortgage. Unlike the mortgages that were sold, the banks mainly kept those second mortgages on their own balance sheets. The way this—and normally, if a borrower is in trouble, or in any—not just borrowers. You know, if a corporation has a bunch of different loans, you always reduce the weakest one first. You wipe it out, before you even touch the stronger mortgage. Ten billion of this deal is in the mortgage modifications, where the bulk of that is expected to come from investors, not from the banks. So even though this is billed as a $25 billion-plus deal, in fact, $10 billion of that is actually going to come substantially from investors.
And then, the other piece, they’ve got another $7 billion, which they are—is other forms of relief. Some of that’s a bit dubious, too. For example, they’ve got up to—they’ve got $3 billion of that in forgiveness. If somebody’s been foreclosed upon, but the value of the house doesn’t pay, doesn’t cover the amount of the debt, that’s what they call a deficiency judgment. That means that, in theory, the bank could still pursue you for the money that they didn’t recover. In practice, banks hardly ever do that. So they’re basically going to get credit, you know, for people they weren’t probably going to go after anyhow.
JUAN GONZALEZ: And what is the impact of the decision that those mortgages covered by Fannie Mae or Freddie Mac or by FHA would not be subject to this settlement?
YVES SMITH: Well, that’s more than half the mortgages outstanding. So, more than half the borrowers aren’t even in consideration for any kind of relief. And then, of the ones that remain, you know, the number that the administration is using is around a million. It’s going to depend on how much the banks actually do and whether the enforcement is tough. And in fact, some of the provisions of the enforcement are very troubling. But even so, you’re talking that versus—you know, the numbers vary by who’s running the numbers, but roughly 10 or 11 million borrowers who are underwater. I mean, even if you accept this deal is going to work as it is on face value, only a very small proportion of borrowers who are suffering are going to get any help.
AMY GOODMAN: Can you tell us how this deal was made? Because, for quite a time, Eric Schneiderman, the attorney general of New York, and Kamala Harris, the attorney general of California, among others, like Beau Biden of Delaware, were opposing this.
YVES SMITH: Right. There was a big change in the last month. You know, initially, Schneiderman was one of the first to be critics, and he was one of the first to file subpoenas. And then other states, as you pointed out, you know, like Beau Biden, like Martha Coakley of Massachusetts, were critics and started filing suits. It really looked as if the deal wasn’t going to get over the line. And then, when Schneiderman agreed to form a federal task—join a federal task force that would do mortgage investigations, he went quiet on his opposition. And that appeared to have a very destabilizing effect on the other attorneys general who had been opponents of the deal. You know, Schneiderman kept talking as if this investigation will be very serious. Quite frankly, the record of—track record of these investigations has been very poor. He may sincerely believe this is going to be serious, but that very much remains to be proven.
JUAN GONZALEZ: The other aspect of this that hasn’t got much attention—and I was listening to Schneiderman being interviewed defending the settlement last night—is that a lot of these attorneys general will be getting cash payments directly from the banks to their offices, right, which they will then be able to decide how to use that money. In some cases, it’s $100 million or more going to some of these offices.
YVES SMITH: Well, that’s correct. And that actually always was part of the plan, and that’s why so many state attorney generals actually had been on board initially. The administration really knew that it already had at least 35 in its pocket. You know, there was—there were five that had been public in terms of being out, and then another 10 that had met—so it was 15 in total, that had met to discuss their, you know, possible opposition to the settlement. So we were fighting about these state attorney generals, but California was the big one that they were very concerned about getting in. And, of course, then there was also just New York because of its visibility and because New York has the Martin Act, which is much tougher in terms of—they can basically use it to file, effectively, securities lawsuits against banks. It’s the only state that has that power.
AMY GOODMAN: I wanted to turn to California Attorney General Kamala Harris, who ended up signing on to the deal after months of criticizing a settlement, as you said. On Thursday, she commented the settlement will not help the millions of homeowners whose mortgage is held by Fannie Mae and Freddie Mac.
ATTORNEY GENERAL KAMALA HARRIS: While this is a tremendous victory—$18 billion for those who are in their circumstance as a result of the conduct by the five biggest banks—the reality is, 62 percent of the mortgages in California are owned by Fannie and Freddie. And that is why, months ago, we sued Fannie and Freddie in California, because this is about making sure that we bring relief to all Californians. And our focus then cannot afford to be myopic and look only at the banks, because the reality is that Fannie and Freddie are right now being run by a fellow named DeMarco, who—I’ve said before, and I say again—should step aside, because the guy can clearly not figure out what his job requires. And in particular, it requires that in California we see principal reductions on those Freddie and Fannie loans. So, part of our focus is also on Freddie and Fannie.
AMY GOODMAN: And this is Attorney General Eric Holder at the news conference Thursday.
ATTORNEY GENERAL ERIC HOLDER: Our investigations revealed disturbing practices. For instance, we saw that, far too often, services pushed borrowers into foreclosure, even though federal regulations require the servicers to try other alternatives first. These failures didn’t just hurt borrowers who might have been able to afford modified mortgages, they fueled the downward spiral of our economy and of communities nationwide. They eroded faith in our financial system. And they punished American taxpayers, who have had to foot the bill for foreclosures that could have been avoided. With this settlement, we are recovering precious taxpayer resources.
AMY GOODMAN: That was Attorney General Eric Holder. Your response to Harris and Holder, and then, exactly how much the banks are having to really pay out?
YVES SMITH: Well, the fact is that even though Fannie and Freddie have not—are not part of this deal, Fannie and Freddie actually have done, so far, more in the way of mortgage modifications than other—than the banks have so far. And as much as DeMarco—you know, you can argue whether Fannie and Freddie have done more—should have done more, the fact is that they’re kind of under conflicted guidelines. You know, as a conservatorship, DeMarco is actually supposed to recover for taxpayers, so his guidance, in terms of what he’s doing, is a bit conflicted.
But the real problem is that this deal is just not going to give that much relief. The mortgages are underwater—in the U.S., $700 billion. Even the most generous estimate of how much relief that this deal will provide is $35 billion to $40 billion. I mean, that just isn’t that much. And the notion that homeowners who were foreclosed on are going to get a $1,500 to $2,000 check, I mean, we’ve just basically said the price of fraud is $1,500 to $2,000.
JUAN GONZALEZ: Well, that’s what I wanted to ask you about, this whole idea that these 750,000 people who lost their homes, and through processes that clearly now were fraudulent, in terms of the robo-signing that we’ve had the judge from Brooklyn here talk about several times, that basically now these banks and their companies that participated in this massive fraud, in terms of signing these documents, are now off the hook.
YVES SMITH: Well, it’s even worse than that. I mean, Holder sort of alluded to it: he said that the servicers actually drove foreclosures. And that’s an astonishing admission. And it’s actually true, that there’s plenty of evidence that it isn’t just the paper—you know, the banks keep loving to talk about the paperwork. It’s the fact that the banks often charge abusive and impermissible fees. You know, there was a story by Gretchen Morgenson about a fellow who first got on this trail in the mid-'90s, a fairly—a man from a fairly wealthy family, who discovered that the banks had—when he tried to pay off a mortgage, there were $18,000 in—where they said he had paid light or he had made all the payments on time, and even he couldn't win in court, because just the evidentiary burden—you know, getting the banks to even produce the records is quite difficult. So, there’s a whole 'nother layer of the story that this is papering over, about the banks' abusive practices and how they charge borrowers.
AMY GOODMAN: Well, you basically say the banks are getting parking tickets for felony offenses.
YVES SMITH: That’s about right.
AMY GOODMAN: What do you think has to happen now?
YVES SMITH: Well, we’ve made it difficult for the right things to happen. I mean, it had—you know, where we had been before the deal was that attorneys general would—you know, at least some of them would pursue the banks aggressively enough that then the federal government would have to follow. We’ve seen that with other financial abuses. There was a big scandal a couple of years ago in the auction rate securities market, where the SEC did nothing until the states started going after the banks. So, we’ve taken away the biggest opportunity to get this fixed.
AMY GOODMAN: What—how does Schneiderman, the attorney general of New York’s lawsuit, filed, what, Friday, fit in with this story against the banks? And do you think he caved, decided to sign on to this settlement, because Obama gave him this leadership of the task force?
YVES SMITH: Well, I know a number of people who believe that Schneiderman is sincere in this effort, but people can still be sincere and make poor decisions. The New York State Attorney General’s Office apparently has had very severe budget cuts, and so he felt—I’m told he felt constrained, in terms of what he could do. Now, the suit that he filed against the electronic registry, MERS, both names the registry itself—which basically has no people and no money, so even though that part of the suit is quite winnable, it’s not going to produce much for homeowners—he also names the banks. And getting—no one has yet gone through MERS to actually pin the liability tail on the banks’ donkey yet. In theory, if he took that suit all the way all the way, that could provide much more aggressive reforms, in terms of just the day-to-day way the banks handle the paperwork. But again, most of these cases settle. I mean, 95 percent of cases settle. So if he just gets monetary damages, that doesn’t mean that the underlying problem is going to be fixed.
AMY GOODMAN: Yves Smith, I want to thank you for being with us, financial analyst, runs the popular finance blog Naked Capitalism, author of the book ECONned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism.
What do you think? Leave a comment below. See our commenting guidelines.
Sign up for regular Resilience bulletins direct to your email.