Breaking news: Banks commit fraud, get away with it.

First, the FCIC report on the causes of the 2008 meltdown is out. The bottom line should be familiar to anyone paying attention over the past few years:  Banks make crappy loans, sell them to other banks and financial behemoths, who get a B.S. triple AAA credit rating stamped on them before selling them to pension funds.  They manage to make even more money off the whole mess by betting against the loans they no longer own.  When it all comes crashing down, the final losses are absorbed by pension funds, international investors, and US taxpayers. 


Lenders made loans that they knew borrowers could not afford and that could cause massive losses to investors in mortgage securities. As early as September 2004, Countrywide executives recognized that many of the loans they were originating could result in “catastrophic consequences.” Less than a year later, they noted that certain high-risk loans they were making could result not only in foreclosures but also in “financial and reputational catastrophe” for the firm. But they did not stop. And the report documents that major financial institutions ineffectively sampled loans they were purchasing to package and sell to investors. They knew a significant percentage of the sampled loans did not meet their own underwriting standards or those of the originators. Nonetheless, they sold those securities to investors. The Commission’s review of many prospectuses provided to investors found that this critical information was not disclosed.

Second, the latest SIGTARP report is out, and among other things has a succinct summary of why HAMP has been such a terrible failure:


of the great frustrations with HAMP, as expressed by legislators, consumer advocates, oversight bodies, and even Treasury itself, has been the abysmal performance of loan servicers, which not only operate as
the point of contact for distressed homeowners seeking to participate in the program but also administer the loans on behalf of investors. Anecdotal evidence of their failures has been well chronicled. From the
repeated loss of borrower paperwork, to blatant failure to follow program  standards, to unnecessary delays that severely harm borrowers while benefiting servicers themselves, stories of servicer negligence and misconduct are legion, and the servicers’ conflicts of interest in administering HAMP — they too often have financial interests that don’t align with those of either borrowers or investors — have been described both by SIGTARP and COP.

Treasury’s reaction to servicer non-compliance with the requirements of HAMP and its related programs appears to be driven largely by the fear that forcing servicers to comply with their contractual obligations will drive them away from HAMP. Despite nearly daily accounts of errors and more serious misconduct, Treasury reports that it has yet to impose a financial penalty on, or claw back incentives from, a single servicer for any reason other than failure to provide quarterly data. Treasury recently told COP that since participation by the servicers is purely voluntary, “our abilities to enforce specific performance are extremely limited” and “aggressive enforcement [is] difficult.” This same fear of servicer withdrawal was offered by Treasury in response to SIGTARP’s recommendation that Treasury reconsider its decision to make its Principal Reduction Alternative program entirely voluntary, and Treasury continues to operate an appeals system that leaves the ultimate decision of whether to approve or deny a modification squarely with the servicer. At some point, Treasury needs to ask itself what value there is in a program under which not only participation, but also compliance with the rules, is voluntary. TARP’s oversight bodies — SIGTARP, COP, and GAO — have all called on Treasury to get tough on servicers. Without meaningful servicer accountability, the program will continue to flounder. Treasury needs to recognize the failings of HAMP and be willing to risk offending servicers. And if getting tough means risking servicer flight, so be it; the results could hardly be much worse.


It turns out that administrative agencies staffed with banksters don't do a very good job policing banks.  Obama has full control and responsibility for his agency appointments, and in this respect he has failed absolutely. 



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Btw, thanks for the diary and your comments BChurch



I'm finally getting around to


I'm finally getting around to reading "The Big Short".  The basic facts I already knew, thanks in part to theforvm, but the way he tells the story really makes the book.

One heck of a writer


That Michael Lewis.

"I don't want us to descend into a nation of bloggers." - Steve Jobs

He was involved in the making


He was involved in the making of the film version of "The Blind Side", a well known abomination, by the mere act of writing the original book it was based on.  Can he be forgiven?  Discuss.

The beauty of our culture

HankP's picture

is that there is no end of works to ignore. If someone writes 1 great novel and 20 crappy ones, do we admire the great one or complain about the bad ones?

I blame it all on the Internet

We complain!  What kind of


We complain!  What kind of website do you think this is?

6 were appointed by Dems, 4 by GOPers,

Bird Dog's picture

so the commission is a political entity tilted toward Democrats. In the dissent, the writers observed that the same credit and housing bubbles occurred in Europe. One of the key issues is that securitizers such as Fannie and Freddie lowered credit quality standards. Banks aren't going to make loans that they can't sell. Canada avoided many of the problems that other nations faced because they didn't drop their drawers on underwriting and they had more conservative leverage and capital ratios.

As for HAMP, it was non-starter because of bad economics. It's just another well-intentioned but poorly conceived government program.

"Transparency and the rule of law will be the touchstones of this presidency."

--Barack Obama, January 2009

Could you explain your link, BD?


Because I've read the column twice, and I still can't figure out how the hypothetical homeowners housing expenses for the next five years count as a tax rate on the previous year's qualifying income.  It just makes no sense to me.  Help?

"I don't want us to descend into a nation of bloggers." - Steve Jobs

Fannie and Freddie


Fannie and Freddie are giants in the secondary market, but they were not responsible for the crisis any more than the private industry.  The true pioneers of the scam, like Countrywide, were well into toxic subprime mortgages before Fannei and Freddie lowered their standards.  The GSEs jumped on board a scheme that was already well in place.  That certainly didn't help things, but it wasn't the sole or even dominant cause of the crisis. 


As far as HAMP, that NY Times piece is probably the most asinine thing I've ever read on the subject.  The argument, if I follow correctly, seems to be that people who make an extra $50k per year before they were to apply for a modification would end up worse off.  First, how many people have seen $50k annual increases in income lately?  Even if such people exist they typically aren't the ones facing foreclosure or at imminent risk of default.  Moreover, these mythical beings wouldnt even qualify for a HAMP modification-- if their old mortgage payments are less than 31% of their new income they don't get a mod.  They don't have to worry about their new income goign towards a loan mod because they can afford their old payments with their new $50k/yr.  If their old mortgage payments are greater than 31% of their new income, even after having increased $50k, they would have defaulted long before that.   Even with millions of people facing foreclosure over the past few years, I doubt the author's ciriticisms have applied to a single actual human being.  Meanwhile, in the real world, HAMP is a failure because servicers make money off foreclosure if they play it right, in situations where they do want to modify they make more off an in house mod than a HAMP mod, and finally, nobody in the administration gives a crap if servicers comply with the rules.


Bird Dog's picture

it's about carrots and sticks, or more accurately, the lack.

"Transparency and the rule of law will be the touchstones of this presidency."

--Barack Obama, January 2009



Both Bush and Obama had the chance to make TARP funds conditional on pretty much whatever they wanted, including forcing banks to agree to principal write downs on preexisting loans, with strong clawback options and third party beneficiary status to homeowners.   That would have worked well.  I wouldn't have expected any meaningful demands from the Bush administration, but at one point I'd have expected better from Obama. Those days are long gone.


The way TARP played out is fascinating to me.  If the legislation had gone as it was written, the government would have purchased all these crap loans at a discount, and could have had total discretion to do what had to be done to salvage something from these loans.  Instead, a week after the bill was signed into law Paulson used the following definition to decide Treasury would not in fact purchase mortgage backed securities, but just shovel money at banks in the form of nonvoting common stock:


(9) TROUBLED ASSETS.—The term “troubled assets” means—

(A) residential or commercial mortgages and any
securities, obligations, or other instruments that are based on or
related to such mortgages, that in each case was originated or issued on
or before March 14, 2008, the purchase of which the Secretary
determines promotes financial market stability; and

(B) any other financial instrument that the Secretary, after
consultation with the Chairman of the Board of Governors of the Federal
Reserve System, determines the purchase of which is necessary to promote
financial market stability
, but only upon transmittal of such
determination, in writing, to the appropriate committees of Congress.

Paulson admitted that he made the decision to use TARP money as a common stock free for fall before the bill had passed, but, I suppose, forgot to inform Congress or the US public.  If the bill had gone as it seems to have originally been intended, HAMP would have been unnecessary.  Doesn't excuse Obama, but the whole thing was a clustf@#$ from the very beginning.



It's a Mess


for sure, and not clearly written, but if parsed in the right light, makes some sense, in a tortured way, as a complaint about the method the program uses to determine the 31%.


Say our borrower had an income last year of $100k. This year, however, due to job loss or whatever, our borrower has an income of just $50k. The HAMP rules dictate (according to the UC Prof's followup in comments) that last year's income is the basis for determining the 31%. Instead of a cap of $15,500, (31% of $50k), the cap is $31,000.




That's his follow up in comments


His original point seems to be that people whose incomes increase by $50,000 per year would have to devote that "extra" income exclusively to increased cost of mortgage payments if the payments were also reset to 31% of the new higher income.  This is of course total nonsense, betrays a misunderstanding of how HAMP works by means of a ridiculous hypothetical (guy gets rich, faces foreclosure).(EDIT: It also fails even on its own terms, b/c he adds the costs of the increased mortgage payment over five years, but only considers a single year's worth of increased income.  So the hypothetical is that HAMP fails b/c of all the people in foreclosure who receive single year $50,000 income increases, before reverting back to their normal salary.  I don't know whether I'm surprised or not that this guy is an econ professor at U. Chicago.)


He then tries to walk it back in comments, talking about people whose income has decreased.  Even this gets it wrong.  Under HAMP, it is not "last year's" income that matters.  Servicers do request prior tax returns, but gross income is self reported and supported by four to eight weeks of paystubs.  Servicers routinely reject income documentation that is more than 90 days old, much less 360 days old.  I've helped people fill out these MHA forms, and for new clients their income is almost always lower than it was last year.  I encourage them to put whatever their actual current income is, document it as best as possible, and it's usually not a problem if you're willing to fight over it.  These people aren't rejected for HAMP because they made to much money before they lost their jobs, they're rejected because either (1) they have no documentable income now and are pretty much screwed, (2) servicers can shift around the mysterious and opaque "NPV test" when they don't want to modify, (3) servicers jerk them around with "lost" paperwork so long that either the foreclosure process completes with the homeowner forced out or the homeowner just gives up. 

You're Blocking the Light


and making a charitable read impossible to sustain.


If, as you suggest, last year's income is irrelevant to HAMP, then Mulligan's got nothing.

Such as Fannie and Freddie?


Who were the largest "mortgage securitizers"?


Well, let's google it.

The top four U.S. mortgage securitizers are Bank of America, Wells Fargo, JPMorgan Chase & Co. and Citigroup, according to Inside Mortgage Finance.

Fannie and Freddie were players, but they weren't key players. Why focus on them?



The right just can't allow anything to interfere with its narrative that free markets are flawless, and all problems come from government.  As with global warming, if the facts interfere with the theory, fix the facts.

"I don't want us to descend into a nation of bloggers." - Steve Jobs

I think I found the problem

brutusettu's picture

[quote]Banks aren't going to make loans that they can't sell.[/quote]

I think the lesson is banks will try to sell people a merde sandwich and people next down the line are too stupid to check for themselves in an otherwise limited government to the extreme free market?

It was common knowledge™ that banks were giving out risky loans, that knowledge seemed lost when 2 pieces of bread were put on 2 ends of it and sold as a deli sandwich.

What I find surprising

mmghosh's picture

is the extent of regulatory oversight, in an advanced economy with extensive information available to analysts.  Also, a curious lack of desire to recoup losses.  Which makes me feel that perhaps too many people were in on the game.

Recouping losses


The people and institutions responsible for the crisis have had their losses recouped, by dumping the toxic loans to sucker investors before the crisis, and using their clout within the government to make sure even the side bets were paid off in full during the cirises (using taxpayer money).  It's no coincidence that when AIG was bailed out, it paid off its obligations on these CDS/CDOs 100 cents to the dollar (when they would have otherwise gotten nothing in a traditional bankruptcy).


The people who really ended up stuck with losses are the people whose pension funds ended up full of worthless mortgage securities.  Which is pretty much everyone.  There's also the people suckered into stripping the equity from their homes by shady mortgage brokers eager to feed the fraud machine. 


There are a few reasons these people aren't clamoring to recover their losses.  First, many don't even understand they've been had.  They look at the collapse as an arbitrary and mysterious act of nature, which no one could have predicted or prevented.  They know their house is tens of thousands of dollars underwater, and that their pension fund has been halved, but they don't make the connection between this and intentional fraud by major banks and financial institutions.  Worse, a significant portion of the country has been tricked into believing the crisis was caused by the government or poor people.  These people are angry but without a rational explanation, their anger is easily redirected to various red herrings.  IMO, this is the stuff the Tea Party is made of.


Second, even if people were to understand the actual causes of the crisis, they'd be politically impotent to do anything about it.  Republicans are unabashedly in favor of protecting the financial industry, and are the ones behind the misdirection above.  Some Democrats seem to be in favor of actual reform, but certainly not the President or his economic advisors and appointees.  It's a poster child situation for public choice theory.  Most politicians from either party are happy to accept piles of cash from the financial industry, who will then evaluate their behavior with a more sohpisticated and demanding eye than the average voter.  Taking a stand for actual reform is going to be opposed by most of those who understand it, and met with shrugs or outright hostility from those who its designed to help. As a result, very few Americans have the option to vote for a noncorrupt candidate for any national office.

And if those of us who think we have a wave of inflation on the


way are right then tehre will be another tax on the rubes and pensioners by way of the dwindling buying power of their savings. I see that the govenor of the Bank of England was good enough to make an appology of sorts to the savers in his economy.

Recouping Losses Redux


There's the above, there's also judicial inertia. Some of those who were had (such as the banks themselves and bond insurers and investor groups) do have the wherewithal to pursue their claims in court, and they are just now getting to the interesting stuff.


Loans So Bad Bear Didn't Want to Know

In fact, the suit claims Bear would not only securitize those loans but would also go after the companies that sold the loans to Bear in the first place, settling with them in secret. Bear apparently had two departments dedicated to getting paid back for the bad loans, despite the fact that it had already securitized them. And the volume of bad loans grew so much that the departments became overwhelmed. "By mid-2006," the suit notes, "Bear Stearns' repurchase claims against the suppliers had risen to alarming levels, prompting warnings from its external auditors and counsel" that Bear was breaching its contracts.


Indeed, the deal manager for one 2006 securitization was clear about the incredibly poor quality of the underlying loans, referring to the deal when emailing Bear's trading desk as a "sh!t breather" and "a SACK OF SH!T."


Things got so bad that in 2007 Bear stopped wanting to know about loan quality, the suit says. Citing a deposition, Ambac charges that Bear told its employees to simply stop reviewing certain loan files and just securitize them. And not just any loan flies -- the instruction to stop reviewing applied specifically to mortgages Bear had already purchased from lenders whose standards were so poor that Bear wouldn't buy any more from them.


You read that right: Bear knew some lenders were making such risky mortgages that it would no longer buy from them, but rather than risk getting stuck holding the loans it had already bought from them, it securitized those loans while purposely not reviewing their quality -- or so the evidence cited by the lawsuit says.

Good point


My guess though is that these suits are more likely to bring down a few firms, or settle at relatively low costs, than they are to actually recoup investor losses in a significant way.  Which would be fine except that whatever costs actually arise will be borne by shareholders, and the individuals actually responsible will just move on the the next shop or government agency.  I'd be much happier with criminal prosecutions, but I'll be following these civil suits. 


EDIT:  I'd also like to see more government leverage applied to force servicers into modifications or principal reduction on these loans, which would actually help investors and toss a bone to some of the homeowners who were also victims of this scheme. In fact, Treasury wouldn't even have to get involved directly, if they simply opened to door to private enforcement by homeowners in foreclosure.  As you point out, the most effective way to regulate may be to give a means for the individuals actually affected to enforce their rights in court.



Edit Redux


Yeah, cramdown plus a HAMP program that actually executed should have been part of the bailout/post-bailout reform. Given the politics (who's gonna represent homeowners' interests?), that's just how it goes.



Given the politics


of a sputtering economy and the resulting drubbing in the midterms, firing Geithner and helping the housing market is good politics.

You'd Think That Would Be Enough


but it isn't. For the process to work, you need organization and money to make the case.