Liveblog: Senate Banking Committee on Foreclosure Fraud

See Part One of this liveblog here.

Shelby was actually pretty good, but then Johanns and Bennett went to some length to try to pretend the banksters weren’t doing what they were doing.

Johnson: Does the law need to be change?

Levitin: It’s not the law, it’s compliance w/the law. What was governing securitization was private contractual law. Servicers allowed to contract around UCC in Pooling and Servicing Agreements. Generally requirements set forth in PSAs not followed. A good reason for PSAs to be written the way they are: bankruptcy remote. If you don’t have that chain of endorsements, it’s going to be very difficult to prove you’ve got the chain of transfers in BK remoteness.

Levitin: This is a problem with following the law.

Johnson: What were barriers to recognizing doc problems that exist.

IA AG Tom Miller: People coming forward in foreclosure issues.

Johnson: What are the conflicts of interest?

BOA Desoer: “We do not take seconds into consideration” when modifying a first. 2nd Lien not an obstacle, does not get taken into consideration.

Chase Lowman: Second liens do not get in way of modifying first.

Tester: [referring to cases he’s followed in MT] It’s not a pretty picture. [Describes constituent told by BoA not to make any payments] Can you tell me how servicer can ever tell homeowner not to pay a mortgage.

BoA Desoer: That is not what we should be telling homeowners.

Tester: Would you attribute this to employee that screwed up.

BoA Desoer: We will reinforce that aspect of communication to our teammates.

Tester: How can someone receive notice he’s in foreclosure before foreclosure process restarted?

BoA Desoer: [Dodges] The sale will not take place, but that customer will continue to get notices.

Tester: These particular hearings not particularly enjoyable for me. Not an isolated incident. MT is not a state where people come to Senator willy nilly. I don’t know how many people didn’t come to me and they just wound up on the street. It’s clear servicers have been a little bit glib, particularly about risks to their own balance sheets. Quite frankly, there ain’t gonna be more bailouts.

IA AG Miller: We want to work with the banks and the Feds.

Tester: Go to what Levitin said about Countrywide. This can be taken care of by the servicers. Their heads need to roll.

Merkley: GSEs say if foreclosure has begun before mod, servicer continue foreclosure during Mod. Is continued pestering on foreclosure during mod due to parallel processing.

Chase: Foreclosure sale won’t take effect.

Merkley: You don’t take the final step. [Now repeats a story on similar story of parallel processing] Can’t we just change this policy and suspend proceedings while mod going on?

Chase: New process prescribed by HAMP would necessitate that we enter into Mod process and engage prior to commencement of foreclosure.

Now Chase dude trying to blame it all on only relying on evidence taken over the phone.

Chase: Now we collect docs before we enter into trial period.

Merkley: Would it be possible to suspend foreclosure during mod?

BoA: We’re proposing, but can only do on our own loans.

Merkley: MERS. Case in OR where MERS cannot foreclose where they have no damage. We’re talking about rights of homeowner, but also confusion that can send shockwaves through system of home finance. Can any of you comment about what to do to honor homeowner rights and shock waves.

MERS: MERS makes all of that more clear. Find out who servicer and note-holder. Never available prior to MERS.

Merkley: Person who reps MERS at proceeding is normally person you designate as certifying officer. How many?

MERS: It’s not temporary, it’s limited. Limited to 7 specific. 20,000 of those nationwide.

Bennet: It is so depressing how little we’ve moved in last 3 years. On HAMP, I wrote to Admin suggesting that servicers who were part of HAMP ought to not be able to pursue foreclosures. My understanding Admin put forward policy to that effect. Status? Are you in position to not pursue foreclosures?

BoA: Not in position to say we’re not going to follow foreclosure process in parallel. We will not proceed w/foreclosure sale. Eliminating parallel process has not yet taken place.

Bennet: Gating?

BoA: Investor requirements.

NCLC Thompson: For HAMP, does halt foreclosure process, but only for loans that are not yet in foreclosure. It does not relate back to cover loans already in foreclosure process.

Bennet: 22 months of town hall meetings people bringing their documents. Servicers telling them what they’re doing is okay. I can’t understand misalignment of interest. I don’t believe it’s possible to prop up value of all these houses. Clearly in interest to prop up the value of those homes. For investors in their interest to have homeowner to keep paying.

Levitin: 2 problems. Mortgage servicers. Simply put, foreclosure is either less costly or more profitable than mod.

Bennet: Not for investors.

Levitin: Servicers do not match investors. Loans on bank books. Strong disincentive to recognize losses quickly. 40% not securitized. We don’t know how many mortgages there are in US. Somewhere between 50-60 million. If loan defaults, bank can stretch out time. If bank writes down now, it’s taking immediate loss. Almost all 2nd liens on banks books. Held by 4 largest banks. BoA, Chase, Citi, Wells. Roughly equal to mkt cap of those four banks. If they started writing off these liens, they’d be insolvent.

IA AG Miller: You’ve made my speech [to Levitin] better than I did. Culture to get over, that servicers traditionally their job was to turn over $$ to investors. Now being asked to do something totally different. To underwrite loans. Our belief, State AGs, like yours, a lot more mods should be made. Working w/servicers what solution should be.

Dodd: Yes or no, do you disagree w/what Bennet said.

BoA: Largest consumer bank, aligned w/consumers being healthy and economy recovering.

Chase: Yes.

Thompson: If I may, we spent a lot of time talking about why servicers aren’t modifying. [lays out report] Three key changes: Ending 2-track system, requiring mod before foreclosure, requiring that mod being offered if would provide net benefit to investor, BEFORE FEES ADDED ON. 2) complicated rules imposed by PSAs. Reduce repayment of servicer expense when mod. WHen foreclosure, servicers get paid off the top. 3) Reduce default fees.

Akaka: It’s not the law, it’s not being complied to. Many problems have been addressed here. Recs?

Thompson: Key recs in testimony. Much better compliance if you fund quality mediation programs and legal services. If you can get servicers into program to focus on that particular loan. Those need to be funded. Dodd Frank authorized 35 million for legal services, that money has not been appropriated. All robosigning found by legal services.

Miller: I’d underscore funding issue. Legal services terribly underfunded. In terms of substantive leg, it might depend on how we come out w/our investigation, if we can’t solve, you might think about regulation on fees.

Dodd: How long AG investigation?

Miller: Months, rather than year or longer. Depends on negotiations. If we expand scope, expands time. Maybe something on fees allowed. Forced insurance, huge abuse. Same thing w/dual track. If you all could solve the 2nd lien problem.

Levitin: Support everything Thompson and Miller. Alternative that would go farther. Taking servicers out of loan mod altogether. We’re trying to get them enter business line they’re not used to doing. Having federally administered loan mod program. Would not necessarily have to be through BK courts, though it could.

Reed: You anticipated my question. How do we deal w/millions of indiv cases? SDNY BK judges are already doing this.

Levitin: You need to make sure quiet title in US. Ultimately, real problem is that there are losses. We have to figure out how to allocate them. Right now losses put on MBS holders and average homeowners. Losses have to go somewhere. Banks, homeowners, govt, investors. Not govt, had that already in 2008.

Dodd; very perceptive.

Levitin: It might get me tenure. No one wants to see losses on homeowners, but that’s where it’s falling. So investors or banks. Investors didn’t originate problems. In many cases, investors saying “we thought we were buying better paper.” We need to allocate the losses. We can avoid that for a time. As long as we don’t address loss allocation, making a choice, stick losses on homeowners and investors, and that’s not where they should be.

Reed: What if it gets worse. Problem for all institutions. We have to start moving towards a solution, things are getting worse in my mind. Will your recs touch upon discussions about BK-like approach? Talk about some type of distrib?

Miller: Could be recs, core would be agreement w/banks that are servicers. Trying to change paradigm w/them staying in place. They’re not going to agree to kinds of fundamental change that you’ve talked about. So it functions way Bennet said it should function. Some provisions, requirements they’d have to live up to. There’d have to be some way it’d be enforced. We struggle w/dysfunction of system. It’s a system that was designed to collect $$. Talking to investors, talking to consumer groups. Do the best we can and let the chips fall. We need agreement from the banks.

Reed: Appreciate what you’re doing. MOnths from now, recs, which might take further. Do we have that time. Not just homeowners, but the economy. If economy gets worse for reasons unrelated, bottom keeps slipping down down down down.

Miller: We feel that pressure, btw.

Reed: [To BoA and Chase] Implicit, could be significant losses. Are efforts being made to minimize losses, or to effectively deal w/mods. And I suspect constant tension.

BoA: Not conflict in our company. Nothing more important than doing this right. We have moved as many resources, into servicing space. We have made progress.

Chase: We have sustained billions of losses in this crisis, as a bank. Best outcome is to keep person in home and keep paying. Don’t have anything to gain to have someone go into foreclosure. Interests aligned, doing everything we can.

Reed: Require industry standard full attempt to mod prior to foreclosure being enacted, might require renegotiating contracts w/trust. Would you consider?

Chase: As we’ve described in HAMP program requirement today. Have to offer a mod.

Thompson: In our view HAMP, what Loman said, over time, we’ll see a mod being offered. Over time, means 10s and 100s and perhaps millions until you get to point before mod offered before foreclosure. Over time, millions of dollars of fees piled on.

Levitin: Requirement only applies to HAMP eligible, only 1/6. We have a problem of HAMP too narrow a focus.

Dodd: Importance to anticipate systemic risk. This seems to be like classic example. We are in crisis w/this. Not yet one that is systemic like 08. Idea is to head off systemic process. Any conversation w/Treasury?

Chase; Haven’t had contact w/council. Repeated w/AAS Michael Barr.

Dodd: Urge Sec Treas to convene that council to start talking about this.

Dodd: [To BoA and Chase] Suggestions Thompson made, Elimination of 2 track system. End of two track system. Second, proposes failure to offer mod, where mod net present positive, be allowed to use as defense against foreclosure. Principle reduction should be mandatory under HAMP.

Chase: WRT two track system. As I mentioned, HAMP already requires.

Dodd: Would you be willing to accept?

Chase: We have now, a process, where every defaulted borrowed. We start mod much sooner than when borrower referred to foreclosure.

Dodd: So you reject that. How about #2. If mod better return for investors, using as defense.

Chase: Net present value models, in cases where it is in interest of investor to mod, we offer mod.

Dodd: Using a model is one thing.

Chase: If we should mod, it should be modified.

Chase: Principle reduction. Participating in HAMP. Most important, affordable payments. REducing interest rate. Duty to investors to minimize losses. Need to insure that collatoral values are there.

Dodd: Why wouldn’t it make more sense.

BoA: Very interested in discussing changes w/existing pipeline. We do have proprietary program on principle reduction. For hardest hit states w/govt funding.

Merkley: Clarify a couple points. Sought to create safe harbor for servicers from investors so follow HAMP. Not subject to suits. Did it not provide enough protection?

BoA: Dual track, where BoA is investor, ability to do something about that. But for rest, it would take their approval.

Chase: I’m not certain we have the right safe harbor. But I’ll follow up.

BoA: We have inconsistencies. There are customer issues. I do not deny that. For a homeowner who has an ability to pay, that’s what we’re committed to make happen.

Merkley: Not contesting her assessment, but reputation of banks weighs that out.

Levitin: Many servicers in different sit than BoA. Plenty servicers who service under completely different name. Consumer unlikely to make any connection.

Merkley: Financial incentives not offset by reputation.

Chase: As servicer, calculation used to determine whether to foreclosure or renumerate doesn’t take into factor servicing $$. Incented to modify.

Merkley: Systemic risk that comes from legal issues being raised.

Dodd: Subject matter of next hearing. Say this respectfully of others. 30% in judicial states. Of that 30%, 60% in FL.

BoA: In BoA’s portfolio.

Dodd: 70% in non-judicial states. Burden on homeowner. Burden shifts. Judicial burden more on servicing side. Anything to draw from states, that 70% in non-judicial, why we’re seeing so many more foreclosures in non-judicial states.

BoA: Economic factors, unemployment, housing price declines. I don’t think FL is related to judicial or non-judicial state.

Dodd: Does framework have any impact on outcome.

Thompson: CA and NV nonjudicial. Some studies show judicial delays time to foreclosure, and increases slightly mod.

Dodd: Foreclosed homes bought, bought w/cash.

BoA: 30% of all purchases are purchased w/cash.

Dodd: That number, bought w/cash, these are not owner-occupied.

BoA: Vast majority investors rather than primary homeowners?

Dodd: Neighborhoods?

BoA: Could mean shift to rental, but primary indication is that there are investors w/cash who think price of property is right to earn return as rental. As we acquire real estate after foreclosure. Sell relatively quickly.

Dodd; Is correlation between having less owner-occupied and value of other properties.

  1. RoyalOak says:

    I am completely blown away by a mortgage servicer purposely misapplying payments. That has ALWAYS been illegal. Everyone on the AR side of business knows this. If I did that, I would lose my job. So why haven’t these people lost their jobs?

    • BoxTurtle says:

      You don’t jail a major campaign contributor for a employee screwup.

      Boxturtle (I’m sure many members of the committee could give you a different answer)

    • ian says:

      But that seems to be a feature of this particular crisis doesn’t it? There are laws/rules, and institutions across the board just ignored them or knowingly violated the law (think MERS), because they knew there would be no real penalty for doing so. As the Taibi article in Rolling Stone points out there is justice for corporations and a different justice for the individual.

      • Fractal says:

        they knew there would be no real penalty

        Sounded to me like the Congressional Oversight Panel report just warned in plain English that there WILL be severe penalties for the criminal banks’ failure to maintain control of the notes and blatant disregard of their obligations to meet underwriting standards, including, for example, a significant portion of $47 BILLION in mortgage losses facing BAC from a SINGLE lawsuit. COP now chaired by former Senator Ted Kauffman essentially just warned that BAC’s entire capital could be wiped out by losses on mortgage loans and securitization defects.

        • Fractal says:

          If Obama won’t even let his DOJ prosecute blatant torture, war crimes or obstruction of justice (covering up torture & war crimes), I see no way he will let his DOJ prosecute massive financial fraud in any way that could lead to prison time for his criminal banker friends.

          But there will be severe “penalties” for the banks’ foreclosure fraud: the banks will die. They will become (already are) insolvent and will be resolved under Dodd-Frank. Shareholders wiped out (including fatcats with their options), boards of directors humiliated & possibly barred from financial industry, executives disgraced & possibly barred from industry, employees wiped out.

        • ian says:

          I do disagree that the penalties will be nearly that severe, as that certainly wasn’t the case in the first part of this crisis. AIG, I suppose, was dealt with most severely, but nobody was barred from the Street.

          Also its some in the press and the bloggers that are calling this what it truly is, fraud, but that is by no means agreed upon by regulators or by those at the banks, as we’re seeing today.

        • bigbrother says:

          FDIC may become insolvent as they pick up the cost of the closed banks after transferring assests to solvent banks. See the list of almost 900 troubled banks under FDIC. TBTF may mean that FDIC cannot handle them and they may have to be taken over like Lehman.

        • Fractal says:

          Sorry, I was watching network news. Like parsnip said @37 the FDIC has been beefed up under Dodd-Frank. The FDIC has added fees to the annual dues or charges paid by every bank covered by FDIC insurance. Whether Dodd-Frank added new authority to collect those new fees, or FDIC’s organic statute allowed it to do so, it has upped its balance sheet to handle the higher tempo of bank failures in the past three years. It is true that FDIC apparently has an operating deficit or that it’s takeover fund is currently in the red, but it has issued public claims that it will have adequate funding to take over all the banks on its troubled bank list.

          Resolution of the huge money-center banks (the former TARP banks) under Dodd-Frank probably involves more agencies in addition to FDIC alone. I have not read that part of the statute, but IIRC the Federal Reserve and Treasury would play a role in identifying banks which cause systemic risks and resolving them if they don’t reduce the risks. I suspect the Fed can find whatever money it needs to put BAC or Citi or WFC or JPM out of business if needed.

          This is hard for progressives to accept, since we are convinced the Fed is part of the criminal conspiracy. But Dodd-Frank changed all the rules. Which is why the banks fought it so desperately and will probably try to use the GOP House to try to defund enforcement of Dodd-Frank during the next Congress. Surprise! Congress doesn’t appropriate funding for much of Dodd-Frank. For example funding for the Consumer Financial Protection Bureau is built in and exempt from appropriation or apportionment– the money comes directly from the Fed.

      • RoyalOak says:

        Ian, it’s not just a feature of this particular crisis, over the last decade or two it’s become a feature of this time, this country, this life. If it does not change soon, we are surely lost. A land without equal laws for everyone is chaos waiting to happen.

  2. BoxTurtle says:

    Tester: Would you attribute this to employee that screwed up

    When it happens once, it’s a screwup.When it happens twice, it’s a miscommunication.

    When it happens this many times, it’s a policy.

    Boxturtle (Tough to run for re-election, ask a question, and kiss butt at the same time)

  3. BoxTurtle says:

    BoA, Chase, Citi, Wells. Roughly equal to mkt cap of those four banks. If they started writing off these liens, they’d be insolvent

    And let’s not forget, there’s investors wanting them to buy back some “assets” from The Mighty Shitpile. Oh, and some states want their filing fees as well.

    Boxturtle (and did we mention that the market for your foreclosed assets is pretty thin?)

  4. Fractal says:

    Marcy, thank you very much for continuing this liveblog. C-SPAN Radio cut away at 5 PM so I have only this thread to keep me connected.

    I’m very glad Sen. Tester laid down his marker: there won’t be any more bailouts. Progressives are so shell-shocked by the past three years, many just assume that the evil banks will find ways to dump all their foreclosure fraud losses on us. I think Tester is right: there is no way the banks get paid off again. The banks are still in denial about how deep the shitpile really is, as Marcy says. But I see less than 10% chance Congress passes another bailout before the 2012 presidential election.

  5. ian says:

    And we’ve known that the bigger banks were under capitalized anyway for a while now. I’m not sure some will survive the stress of litigation and penalties. They’ll essentially be to big to bail…That’s going to be painful for everyone.

    • ShotoJamf says:

      Given that all of the large institutions are already insolvent (if marked-to-market), they should immediately be placed into receivership and systematically broken down into manageable pieces.

  6. parsnip says:

    Dodd fails to understand that the servicers pile up the fees during foreclosure in order to rake them off the top after the foreclosure sale, bilking the investors!

    • Fractal says:

      That was good. Thank you. What else happens in the runup to delinquency that is not generally known? For example, do homeowners fall behind in property taxes or homeowner association dues as the servicers start compounding late fees? Who else are the servicers robbing?

      And why can’t these Senators get more clarity/honesty from these bank witnesses about conflicts arising from their dual roles as both mortgage originators and servicers?

  7. parsnip says:

    Lowman: we can’t reduce principal, or we’d be bankrupt. All borrowers just want a lower monthly payment. Transl: Borrowers are really just renters.

  8. parsnip says:

    Financial incentives which favor foreclosure are offset by wanting to preserve reputation of BoA.

    Lowman denies Chase has incentive to foreclose because performing loans provide an income stream.

    • janeeyresick says:

      I really wonder about that and I think it is a pivotal question.

      I would really like to know the role of the secondary insurers. Everyone says that it’s a given that the investors/banks are better off if foreclosure is avoided, but is that a true statement?

      If BOA, for example, still holds a loan and they foreclose AND are the servicer, aren’t they making money every step of the way and then some? If they foreclose, they get the proceeds of the foreclosure sale, but do they also get money from private mortgage insurance, Fannie and Freddie, AIG credit swaps, etc., etc.?And wasn’t TARP supposed to be about getting the “toxic assets” off the books of the banks?

      If it were true that they lose in foreclosure, why are they all stoking the engine of the foreclosure train? Something just simply does not add up.

      (this is a dupe of a question I asked in the other thread on this hearing. I am dying for someone to ask this in an open setting and put this question to rest once and for all.)

      • Kassandra says:

        Well, that’s the problem isn’t it? That Obama could have taken a little time when these pigs were screaming for cash.
        Now, everybody in the world ( except the American people and their government) know that the banks are back to their old defrauding ways and will take down the economy again if something substantial , legally is done.
        This BS about HAMP and foreclosure being parallel is a total lack of care in setting up the HAMP program and not keeping the banks in loop and enforcing it, IMO

  9. BoxTurtle says:

    Levitin: Requirement only applies to HAMP eligible, only 1/6. We have a problem of HAMP too narrow a focus

    Unh, HAMP has burned almost every homeowner who touched it. Fix it before you try to burn the rest. Even the eligible borrowers are staying away.

    Boxturtle (perhaps a small accounting rule change to force banks to value froeclosed assets at market rates)

  10. parsnip says:

    Dodd: 30% of foreclosures are in judicial states, and 60% of those in FL. 70% nationwide foreclosures are in non-judicial states. Burden on homeowner to make their case. Is there a conclusion to be drawn from the fact more foreclosures are in the non-judicial states?

    DeSoer: It’s unemployment/economy.

    Dodd: But does judicial framework matter?

    Thompson: Judicial FC state delays time to foreclosure & increases chance getting a loan mod.

  11. Kassandra says:

    Interesting that the lack of appropriation for legal aid cam into the discussion. They’d better get that done before the Huns arrive.
    It seemed that was a point that was pretty well hammered AND that it was the legal aid attorneys were the ones that found the problems in the first place.

  12. parsnip says:

    Dodd: 30% FC sales bought w/cash. DeSoer: 30% of all home sales are purchased w/cash. (for the past several months)

    Dodd: Investment properties?

    DeSoer: Yes, bought by investors. Shift to rentals. Cash investors are swooping in, in certain communities.


    Parsnip: This last bit points to possible selective foreclosure in areas where quick sales can be counted on. I was suspicious of this possibility based on my other reading of late. They’re foreclosing by zipcode.

  13. mzchief says:

    Is it me? Why do so many of these Senators act like they just heard about this issue today? Are they really that behind the “power curve”? Seriously, is their job just too big or too hard to do as the tasks are presently organized/distributed? The performances in today’s hearing begs such “organizational health questions” IMO.

  14. parsnip says:

    Mortgage insurers have stopped paying, and BoA has sued Old Republic over its foreclosure claims. Chris Whalen had reported this on 10/27.

    I want to learn more about who’s paying on CDS on defaults. Ever since AIG there’s been silence on subsequent payouts on defaulting mortgages.

  15. parsnip says:

    bmaz replied to a comment I made the other day (#44):

    I believe in many instances the banks are actually covered for losses on these by the government. Yes, I know it sounds stupid, but they are literally offering bogus assistance/workout plans, charging fees and payments outside of the mortgage, and then foreclosing anyway and then, after all that, still getting reimbursed almost fully for any losses. It is quite amazing.

  16. Stephen says:

    It would be good to clear the air and put forward a list of all possible crimes committed, and by who. For example, what crimes are the banks possibly responsible for and so on. Many people hear the word fraud but actually do not know what laws were possibly violated.

  17. parsnip says:

    Fractal @ 25:

    What else happens in the runup to delinquency that is not generally known? For example, do homeowners fall behind in property taxes or homeowner association dues as the servicers start compounding late fees? Who else are the servicers robbing?

    I think the banks stop paying taxes too. HuffPo did an investigation into PE buying up RE tax liens: The New Tax Man: Big Banks And Hedge Funds

    There was a case where the condo assn. got the vacant condo back when the bank stopped paying dues.

    • MadDog says:

      It’s against the law now to mention FRAUD or CRIME in the presence of MOTUs and their Congresscritter lackeys, doncha know?

  18. timbo says:

    Sadly, this is the conversation that should have seen legislation two years ago. It may be too late now. Still, it’s fascinating stuff from a government policy, action/in-action point of view. Regrettably, millions of people will be thrown out on the street…because the Congress and Bush Administration were craven hacks for the financial industry…as opposed to patsies, like the Democratic leadership this past four years.

  19. Professor Foland says:

    It’s not very hard to envision a scheme in which someone (say, an enterprising member of the Russian mafia) takes advantage of the ubiquity of “technical” documentation errors and attendant legal laxness to foreclose on mortgages they don’t own. (Based on their success in stealing credit card numbers, it would probably not be too hard for them to get a list of homeowners who really are behind in their payments, to make it look kosher.) Pocket the proceeds from the foreclosure auction, and it will be years before the trustees and investors who actually DO own the mortgage figure out what’s happened.

    I wouldn’t want to be the new homeowner three years down the line when they finally do figure it out.