Mortgage Settlement 'Whitewash': US Taxpayers Will Pay for Big Bank Settlement

Friday, February 17, 2012 by Common Dreams
Mortgage Deal or Not, Abusive Foreclosures Continue

UPDATE: Reports in the Financial Times and elsewhere say that US taxpayers may be on the hook to bail out big banks -- again.

Neil Barofsky, the former special inspector-general of the TARP, said this morning that the recently approved mortgage deal between the nation's largest banks was "supposed to be a settlement for this remarkable fraud that the banks and the servicers have created across the country" is, in fact, a "political whitewash" because instead of the banks facing punitive action it "is actually going to involve money flowing from the taxpayer into the banks." And, straight to the point, he said, "We're bailing them out again!"

Barofsky, appearing on Marketplace radio this morning in an interview with Adrien Hill, said of the deal:

It's kind of crazy when you think about it. This mortgage settlement is supposed to be a settlement for this remarkable fraud that the banks and the servicers have created across the country -- lying on affidavits, forging affidavits during foreclosures, all sorts of different abuses. And the idea behind the settlement, at least this is what we were told during the press conference, is was this was going to bring accountability. It was going to punish the servicers. It was going to be punitive and make them pay for this remarkable misconduct that occurred. And now we're finding out that this so-called penalty is actually going to involve money flowing from the taxpayer into the banks. We're bailing them out again!

When asked what this revealed about the "true intent" of the mortgage settlement, Barofsky replied:

Well I think what it does is it shows that the true intent of the settlement may differ from that which we were told during all the various press conferences. And instead of really, at the heart of this, being about accountability and punishment it seems like frankly a political whitewash during an election year. So it makes the Department of Justice look good. It makes the attorneys general look good. The banks are happy because they are going to get all the credit for this settlement while receiving money from the taxpayers. Really the only big losers are the taxpayers and, of course, the homeowners.

* * *

According to CBS News:

A clause in the provisional agreement allows the banks to use the government's Home Affordable Modification Plan, or HAMP, to cover the principal reductions. Neil Barofsky, the former special inspector-general of the TARP, described the clause as "scandalous." Says Barofsky: "It turns the notion that this is about justice and accountability on its head."

A little refresher on the HAMP plan: Banks receive payments from the government when they negotiate with underwater homeowners to avoid default. The taxpayer reimbursement is used to help cover the banks' costs to write down principal balances and keep homeowners in their homes. Last month, the Treasury department announced it was tripling the incentive payments to owners of mortgages who agree to reduce loan balances. The timing of the settlement is therefore perfect.

As the FT notes, "by reducing those balances under HAMP, investors -- including the banks who agreed the settlement -- now will receive cash payments of up to 63 cents on the dollar for every dollar of loan principal forgiven. They also will receive additional funds when borrowers keep current on their restructured mortgages."

* * *

Settlement or No, 'Abusive' and 'Illegal' Foreclosures Continue


A $25 billion settlement agreement between the nation's largest banks, states, and millions of homeowners who were victims of bad lending practices and fraudulent foreclosures has yet to be fully realized, but a new study from California indicates that many of the same 'illegal' foreclosure practices are still occurring at alarming rates.

Reuters reports:

A report this week showing rampant foreclosure abuse in San Francisco reflects similar levels of lender fraud and faulty documentation across the United States, say experts and officials who have done studies in other parts of the country.

The audit of almost 400 foreclosures in San Francisco found that 84 percent of them appeared to be illegal, according to the study released by the California city on Wednesday.

"The audit in San Francisco is the most detailed and comprehensive that has been done - but it's likely those numbers are comparable nationally," Diane Thompson, an attorney at the National Consumer Law Center, told Reuters.

Across the country from California, Jeff Thingpen, register of deeds in Guildford County, North Carolina, examined 6,100 mortgage documents last year, from loan notes to foreclosure paperwork.

Of those documents, created between January 2008 and December 2010, 4,500 showed signature irregularities, a telltale sign of the illegal practice of "robosigning" documents.

The report also makes the familiar point that one of the major problems throughout the foreclosure crisis has been how murky it has become to know who owns the loans on the home being foreclosed upon:

One of the major problems that has emerged in the foreclosure crisis is that it is far from clear that many lenders foreclosing on properties actually own the loans and have the right to take action against them.

In many cases during the housing bubble that burst in 2008, original mortgages were repackaged and sold to so many investors that it is now unclear who actually holds the loans. [The study] could only find the current owners of the mortgages [...] in 287 out of 473 cases.

In the San Francisco study, which studied properties subject to foreclosure sales between January 2009 to November 2011, 45 per cent were sold to entities improperly claiming to be the owner of the loan.

"It is not impossible that there are homeowners who are alleged to have defaulted on loans to which they never fully agreed to and, further, are being foreclosed upon by lenders that might not even own such loans," the report stated.

* * *

All of this might be less shocking if it wasn't right on the heals of the mortgage settlement which, as Yves Smith explains at Naked Capitalism on Thursday, is a canard when it comes to bank accountability. The whole point of the settlement -- even the threat of investigations -- has been to make sure the banks change their practices. She writes:

The whole purpose of a settlement is that a party pays damages to rid themselves of liability, and the amount they pay (and “pay” can include the cost of reforming their conduct) is less than what they expect to suffer if they were sued and lost the case (otherwise, it would make more sense for them to fight). 

But in the topsy-turvy world of cream for the banks, crumbs for the rest of us, we have, in the words of Scott Simon, head of the mortgage business at bond fund manager Pimco, in an interview with MoneyNews, lots of victims paying for banks’ misdeeds: 

“A lot of the principal reductions would have happened on their loans anyway, and they’re using other people’s money to pay for a ton of this. Pension funds, 401(k)s and mutual funds are going to pick up a lot of the load… 

“Think about this, you tell your kid, ‘You did something bad, I’m going to fine you $10, but if you can steal $22 from your mom, you can pay me with that.’”