Felix Salmon in Reuter's blog writes about his doubts banks will fix themselves

Felix Salmon story from November 23, 2010 on how to fix foreclosuregate


Michael Barr’s departure is a serious loss for Treasury. I spoke to him on Friday; he was in Ann Arbor, where he’s returning to law school, and he wanted to take serious exception to my three monkeys post, where I accused Treasury of willfully ignoring the banks’ culpability in the mortgage crisis.


Barr rattled off a laundry list of reviews which are being done by various arms of the government, including what he described as an “11-agency, 8-week review of servicer practices, with hundreds of investigators crawling all over the banks”. That information is finding its way to the state attorneys general, in their review. Meanwhile, said Barr, an alphabet soup of regulators (OTS, OCC, FDIC) is looking at various financial services companies (MERS, along with lots of different servicers, trustees, and banks); HUD is holding everybody to FHA and HAMP guidelines; and the FTC is looking at non-bank lenders. And keeping everything coordinated is the new Financial Fraud Enforcement Task Force which has been put together under the leadership of Justice’s Tom Perrelli.

“Why are we investing these resources and including Tom Perelli in the discussions?” asked Barr. “We’re holding the banks accountable to fix it.” I asked him whether he thought that was even possible.



“Their conduct suggests they can’t,” he said, adding that “they can be held accountable for not following the law. HUD can assess significant fines on them.”

Barr was clear about what he expected to happen in 2011. Specifically, he said, “if there are legal violations found, banks are responsible for fixing them and for addressing the problems.” And more generally, the government’s actions “will increase the chance that when foreclosures happen, they will happen according to established law.”

The timetable for all this? The reviews should be largely completed this year, with the full scope of the problems being apparent by the end of January. By the end of the first quarter, the banks should be in serious discussions about how they’re going to fix what’s broken.
Stress-testing the Banking System: Methodologies and Applications
And then it gets necessarily hazier: “Institutions are resistant to change and have difficulty implementing,” said Barr, but “you’ll see flow improvement over the course of the next year.”

Could I hold Treasury to that? Sort of: “You should hold us to whether things get better or worse. If a year from now nothing has changed, that would be a reasonable criticism.”

I have two fundamental reasons to be skeptical of this approach. Firstly, it won’t work: the banks and the servicers simply aren’t set up to magically make their processes perfect, and the threat of lawsuits isn’t going to change that. And secondly, insofar as the problems are systemic and threaten the solvency of the banks, Treasury is going to blink first. As we just saw in Ireland, today’s governments are constitutionally incapable of forcing real pain onto banks.

But at the same time, there’s zero chance of getting any kind of resolution to the mortgage-mess problems if the government doesn’t have a firm grasp of exactly what they are. Barr told me that they’re doing file reviews which take between five and eight hours to go through a single loan file: this is hard, detailed work, and at the end of it all there will be a real understanding of what needs to be done—something necessary, if not sufficient, to finally resolve this mess.

Barr is a very honorable man, and a very hard worker, and I give him a lot of credit for the (mostly) excellent CDCI project. (I have quibbles about it, but can’t go into detail about what they are because most of what I know I learned as a board member of LESPFCU.) I think that Treasury is entering into this whole mortgage investigation in good faith, and will do what they can to push the banks to fix what’s fixable.

But I’m also pessimistic about their prospects: I suspect that only a radical restructuring of the entire securitization architecture—and especially the broken relationships between investors and trustees, and between trustees and servicers—has any chance of actually working. That is clearly not going to happen. But if you believe in the power of legal action to effect change, then maybe Treasury’s approach might work.


Read more on issues of bank fix or bank scam here
and here at financial reality revisited

Financial Stability Oversite Committee

Members of the Financial Stability Oversight Committee


c/o Secretary Geithner, Chairman of the FSOC

1500 Pennsylvania Avenue NW

Washington DC, 20220



In light of the recent report from the Congressional Oversight Panel regarding mortgage irregularities, we are writing to support the panel’s call for a new round of stress tests to examine stability issues arising from residential mortgages held in securitized pools. Stability issues that have not been included in previous stress tests include liabilities for breaches of representations and warranties in Pooling and Servicing Agreements, liabilities arising from systemic mortgage documentation irregularities, and conflict of interests for servicers affiliated with firms that hold significant portfolios of second liens. We urge the council to recommend that its members conduct specific, thorough reviews of the potential effects of these issues on the risk profiles of the institutions they regulate and also that the Federal Reserve incorporate these potential liabilities into the new round of stress tests it announced earlier this week. We urge that the Financial Stability Oversight Council consider, in light of those stress tests, requiring that some financial companies divest affiliates involved in servicing securitized mortgages.



First, we urge that the members of the Council examine a representative sample of collateral loan files of each major servicer to determine if the files contain all the documents required by contract or by law, including the note; mortgage, deed of trust or equivalent document; and all documents evidencing or constituting the necessary assignment, delivery and recording of those documents. The Council should determine if the documents satisfy contractual representations and warranties in the pooling and servicing agreement or other governing instrument for the mortgages in question, and if not, any potential liability that may result. The collateral loan files examined should be selected at random, not by the servicers.



Questions about the documentation of securitized mortgages have received much recent attention. The financial institutions involved in securitization, including sponsors, trustees and servicers, have said publicly that any problems are isolated, technical in nature and easily cured. Others contend that the problems are pervasive, incapable of cure, and may ultimately require financial institutions involved in the securitization of residential mortgages to repurchase at face value hundreds of billions of dollars of mortgages, many of which are now non-performing. Many of the financial companies with potential liability to repurchase those mortgages are on any list of systemically significant firms.

More to the story here.

Second, we urge the Council to examine the servicing of first mortgages by servicers that hold second liens or are affiliated with firms that hold second liens. The largest servicers hold almost half a trillion dollars in second liens, which are valued for accounting purposes at approximately 85 percent of face value. Those servicers, also systemically significant firms, assert that the second liens are performing, as are the first mortgages on the same property, and thus the second liens are accurately valued. The servicers contend that any interest the servicers may hold in second liens has not affected their servicing of securitized first mortgages. Others contend that there is an indefensible conflict of interest for servicers of securitized first mortgages to hold second liens on the same property, that servicers have acted contrary to the interest of the beneficial owners of first mortgages to avoid accounting losses on second liens, and that servicers face significant unrealized losses on those second liens.



An important purpose of the Dodd-Frank Act is to identify risks to the financial system as early as possible, so that regulators can take corrective action or minimize the disruption to the financial system that results from the insolvency of systemically significant financial companies. It is also a purpose of the Act to make risk to our nation’s financial system transparent in order to restore the confidence of the American people in the financial system and in their government. It would serve those purposes to examine these issues and make the result of that examination public.



Finally, we urge that the Council consider use the authority under the Dodd-Frank Act to require that financial companies divest affiliates or other holdings involved in servicing securitized mortgages. There is no apparent advantage in having financial companies that securitized mortgages also act as trustees or servicers, and there is an obvious conflict of interest. The uncertainty about the extent of the risk to our nation’s financial stability posed by the mortgage irregularities is largely the result of the control of critical information by financial companies at risk of insolvency from potential legal liability to mortgage investors and others. The control of critical information by financial companies with a possible motive to conceal systemic risks is incompatible with the intent of the Dodd-Frank Act, and is a grave threat to our nation’s financial stability.



Thank you for your attention to this matter.



Andre Carson (IN)

Stephen Lynch (MA)

Joe Baca (CA)

Jackie Speier (CA)

Danny K. Davis (IL)

Laura Richardson (CA)

Barney Frank (MA)

John Conyers (MI)

Luis Gutierrez (IL)

Maxine Waters (CA)

congress is fleecing America

The banks have been blackmailing the congress since september 2008. I can't believe how little courage congress has shown in dealing with the bankers. The have just rolled over and caved before the election out of fear and lack of fortitude. Congress is the biggest bunch of reactionary fearful criminals ever assembled. Now they are are going to over pay the banks for their toxic assets because the banks will pout and whine and cry if we make them sell to the market. I agree 100 percent that the banks will continue to blackmail congress at the expense of the taxpayer. I can't believe what I am seeing as our representatives who know next to nothing about economics are now under a president who knows less than next to nothing about economics and we are being driven into deeper into a system that is psuedo capitalism that is removing any sense of free market from the economy. It is a sad state of affairs. http://financialrealityrevisited.blogspot.com