STOCK MARKET WATCH -- Tuesday, 24 January 2012

[Demeter]

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

http://www.nakedcapitalism.com/2012/01/obama-to-give-banks-mortgage-get-out-of-jail-almost-free-card-pressures-state-attorneys-generals-to-capitulate.html

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....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 anyhow.

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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:



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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: http://www.consumerfraudreporting.org/stateattorneygenerallist.php Please call today if you haven’t already. Thanks!