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.