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Obama to Use Pension Funds of Ordinary Americans to Pay for Bank Mortgage “Settlement”

Obama’s latest housing market chicanery should come as no
surprise. As we discuss below, he will use the State of the Union
address to announce a mortgage “settlement” by Federal regulators, and
at least some state attorneys general. It’s yet another gambit designed
to generate a campaign talking point while making the underlying
problem worse.
The president seems to labor under the misapprehension that crimes by
members of the elite must be swept under the rug because prosecuting
them would destablize the system. What he misses is that we are well
past the point where coverups will work, and they may even blow up
before the November elections. If nothing else, his settlement pact has a
non-trivial Constitutional problem which the Republicans, if they are
smart, will use to undermine the deal and discredit the Administration.
To add insult to injury, Obama is apparently going to present his belated Christmas present to the banking industry as a boon to ordinary citizens.
He refused to appoint a real middle class advocate, Elizabeth Warren,
to the Consumer Financial Protection Bureau, but he’s not above stealing
her talking points.
We and other commentators have discussed how the mortgage settlement
negotiations nominally led by Iowa attorney general Tom Miller had
descended into farce. Almost nothing the Miller camp said was
believable. They were presented as “attorney general” discussions when
the Administration was pulling the strings. They’ve described a deal as
weeks away for over a year. They kept claiming that they had undertaken
investigations when not a single subpoena was issued by the AGs still
involved in the negotiations. They’ve argued from the get go that a pact
will be good for homeowners when the deal reached by under-resourced
Nevada attorney general Catherine Cortez Masto with a single servicer,
Saxon, resulted in a payout that is 10 to 20 times what the
Administration is calling a victory. And that assumes that the banks
will live up to their side of the deal when past settlements of
servicing abuses have shown that they don’t.
The administration has finally woken up to the fact that the housing
mess is almost certain to get worse before it gets better, and Obama
must therefore be armed with better propaganda. The Miller-led talks
have become a bit of an embarrassment and needed to be put out of their
misery. So Team Obama and Federal banking regulators have agreed on
terms and as we discussed last Friday, are upping the pressure on state attorneys general to fall into line. As reported by Shahien Nasiripour of the Financial Times:
Banks and government negotiators have cleared a big
hurdle in efforts to resolve allegations of widespread mortgage-related
misdeeds, agreeing on terms for a settlement that are being circulated
to the 50 US states for approval, state officials and a bank
representative say.
The proposed pact would potentially reduce mortgage balances and
monthly payments by more than $25bn for distressed US homeowners…
State prosecutors have already received a set of documents detailing
new mortgage servicing standards that the banks and the government
negotiators have agreed to. The states were also being sent documents
detailing other main components of the deal, such as the liability
release for the banks, the so-called “menu” of options describing the
various forms of aid to be given to borrowers, as well as the precise
language of the so-called “most favoured nation” clause, which spells
out how participating states in the deal would be eligible to receive
more advantageous terms should a holdout state strike a more favourable
deal on its own with the five targeted banks.
The story did not outline terms, but previous leaks have indicated
that the bulk of the supposed settlement would come not in actual monies
paid by the banks (the cash portion has been rumored at under $5
billion) but in credits given for mortgage modifications for principal
modifications. There are numerous reasons why that stinks. The biggest
is that servicers will be able to count modifying first mortgages that
were securitized toward the total. Since one of the cardinal rules of
finance is to use other people’s money rather than your own, this
provision virtually guarantees that investor-owned mortgages will be the
ones to be restructured. Why is this a bad idea? The banks are NOT
required to write down the second mortgages that they have on their
books. This reverses the contractual hierarchy that junior lienholders
take losses before senior lenders. So this deal amounts to a
transfer from pension funds and other fixed income investors to the
banks, at the Administration’s instigation.
Another reason the modification provision is poorly structured is
that the banks are given a dollar target to hit. That means they will
focus on modifying the biggest mortgages. So help will go to a
comparatively small number of grossly overhoused borrowers, no doubt
reinforcing the “profligate borrower” meme.
But those criticisms assume two other things: that the program is
actually implemented. The experience with past consent decrees in the
mortgage space is that the servicers get a legal get out of jail free
card, a release, and do not hold up their end of the deal. Similarly,
we’ve seen bank executives swear in front of Congress in late 2010 that
they had stopped robosigning, which turned out to be a brazen lie.
So here, odds favor that servicers will pretty much do nothing except
perhaps be given credit for mortgage modifications they would have made
There are two clever features of the deal, but neither look intended
to benefit ordinary citizens. One is that the deal throws some funding
at chronically cash stressed mortgage counselors. They are thus certain
to voice approval of the pact. The other is (per the FT story) the
deal’s “most favored nations clause” is designed to reduce the
bargaining leverage of any AGs that go their own way. It means that any
servicer will have the incentive to fight hard against giving any state a
better deal because it will automagically trigger improved terms across
the states that signed on to the Federal deal. But this may have
interesting perverse effects, since banks that refuse to settle with
breakaway AGs will ultimately have damages awarded by a court. That
means longer and most costly fights by the states, but in most cases,
ultimately bigger awards (frankly, the fact set is so bad that all the
state AGs need to do is focus on fairly conservative legal theories to
have good odds of scoring big wins).
Dave Dayen seemed to think that the AG rebellion was likely to stay firm, given how few of the Democrats were going to Chicago on Monday
for an arm-twisting meeting with HUD head Shaun Donovan and an unnamed
emissary from the Department of Justice. I would not be so certain. With
states so budget starved, I don’t see how anyone can justify sending a
live body to Chicago when a phone briefing would work just as well. More
important, the most favored nation clause is nasty, and may nudge some
fence-sitters over the line.
And I have also been told that Donovan was on the Hill late last week
pressuring Congressmen to support the deal. Since this is a regulatory
measure that does not require Congressional approval, this move is meant
to deprive dissenting state AGs from any support in local media from
sympathetic Congressmen. For instance, 31 California representatives
wrote the Justice Department, the Federal Reserve and the Office of
the Comptroller of the Currency calling on them to “investigate
possible violations of law or regulations by financial institutions in
their handling of delinquent mortgages, mortgage modifications and
foreclosures.” Clearly they could be expected to support California
attorney general Kamala Harris’ withdrawal of the deal. Donovon is
trying to get them and like minded solons speaking from the Obama
But the Administration’s scheme may not be playing out according to
script. Senator Sherrod Brown sent a letter last week to associate
attorney general Thomas Perelli, Donovan, the CFPB’s Richard Cordray and
Tom Miller criticizing the settlement pact. It could have been written by Naked Capitalism readers. Key section:

Now while Republicans may relish the specter of Democrats infighting,
the fact is no one is going to want to be seen to be undermining the
leader of the party in an election year. So that will put a damper on
how aggressive the opponents will be. And media outlets have been
amplifying Obama’s efforts to take credit for gravity. For instance, the
Administration is touting the fall in foreclosures as an indicator of
success when their policies have ranged from do nothing to disasters
like HAMP. The fall in foreclosures is actually a sign of failure, as
banks are attenuating the process more and more, in some cases due to
their inability to come up with necessary documentation, in others out
of a desire to wring even more fees out of investors (when a borrower
can’t pay, the bank’s fees come first out of the eventual sale of the
Either a Gingrich nomination or Romney getting too dented during
Republican primary fights increase the odds of what heretofore seemed
impossible: an Obama win in November. So if the Republicans were smart,
they’d take advantage of a serious weakness in this deal: that it
violates the 5th Amendment takings clause. I am told by Bill Frey of
Greenwich Financial that a servicer safe harbor provision in HAMP, which
was supposed to shield servicers from investor lawsuits over mortgage
modifications, was passed by both the House and Senate but was removed
in reconciliation because that provision would have run afoul of the 5th
Amendment. This settlement is intended to have servicers engage in even
more aggressive mortgage modifications and would thus seem to have
precisely the same Constitutional problem.
As I urged last week, please call your state attorney general and
tell them you think taking from your pension to enrich banks for abusing
homeowners is a lousy idea and they should therefore refuse to sign on
to the settlement. You can find their phone numbers here. Please call today if you haven’t already. Thanks!

Added: Jan-24-2012 Occurred On: Jan-23-2012
By: 104JebackaBrigada
Tags: obama, lie, usa, war
Location: United States (load item map)
Views: 2728 | Comments: 11 | Votes: 0 | Favorites: 0 | Shared: 11 | Updates: 0 | Times used in channels: 2
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