Senate Banking Commitee on Foreclosure Fraud

Follow along on CSPAN or the Committee Site.

Dodd started by noting the increasing evidence that foreclosure fraud is a giant mess, both by referencing the Bank of America testimony that notes did not get sent to trusts during the securitization process, and by noting that the estimates for how much this may cost the bank have gone up, to $134 billion.

Btw, it’s not part of the hearing, but consider this stat:

Housing and aggregate demand have not recovered because nearly 15 million owners are estimated to owe about $771 billion more on their homes than they are worth.

That basically means that roughly 15 million families have had a $51,000 tax imposed on them, largely because of the bank-created inflated prices.

Thus far, FDIC head Sheila Bair has said that second lien-holders need to take a hit, and Fed Governor Dan Tarullo has said that banks will need to provide estimates for expected putback losses.

OCC Acting head John Walsh says they’ve got 100 Bank Examiners investigating foreclosure fraud.

John Walsh, in response to Dodd’s question about why the regulators have been so delayed, said, “We were conducting horizontal exams in 2008, saw rise in complaints, there were clear deficiencies. We were pushing servicers.” No. He hasn’t explained why they haven’t done anything about these deficiencies.

Tarullo: The attention was focused on pace of modifications, not on the process itself.

Shelby to Tarullo: When did you first learn of the problems.Tarullo: When Ally came to us the day before the public announcement.

Shelby: Are we close to solving problem. Tarullo: Related to relative balance of foreclosures to mods. Need integrated approach.

Shebly: They have standards.

Tarullo: No, the banks are required to have their own processes. Race to foreclose among owners, but be standardized.

Reed: Should 100% of loans be evaluated for mod.

Bair: We think a global settlement.

Bair explains that the servicers need to be out of modification business.

Tarullo: We’ve seen some degree of management failure, and from some banks, a substantial degree of management failure.

Bair makes the first mention of crime, discussing how, “Law enforcement … potential for law enforcement actions” might bring about systemic risk. An hour and 15 minutes into the hearing, the first acknowledgment that this stuff is criminal.

Until we get overhand in housing market, there will be problems in the housing market, and thus with the rest of the market. WRT putback risk, it’s a function of several things. Including default rate. We can model that based on macro assumptions. Second the legal issues. Those are harder to pull apart at this point. DeMarco can talk about GSE putbacks. When you get to private agreements, those vary enormously. You could have rep w/mortgages but w/o strong reps. We’re going to try to get to it in capital assessments.

Bob Corker’s worried about how this will affect property rights. But primarily in the way 2 liens have taken precedence over 1st liens.

Menendez now hitting on HAMP failure, particularly the use of just 2% of the funds. “Why can’t we get that done by Treasury?”

DeMarco repeats that things are upside down now, w/1st lienholders taking losses while 2nd lienholders continue to get payment. There’s some widespread concern about property rights here, but it only extends only to 2nd lienholders, not actual homeowners.

Merkley points out that Fannie and Freddie requests for putbacks exceed reserves. Asks Tarullo how big a problem this is. Though Tarullo refuses to say how big a problem, on scale of 1-10 it is, he says that for some “that number will be reasonably high.”

Merkley: We think this dual track is a bigger problem than Treasury does. Two banks just told us that they’re still engaged in dual track.

DeMarco (head of the GSEs) has basically just said, since I’m conserving these assets for the taxpayer, I’ve got to make sure we foreclose on the taxpayer in rapid fashion.

  1. klynn says:

    Thank you for following this hearing.

    I am confused by Walsh.

    If there are 100 examiners examining fraud, then each could have made it through 100 complaints quickly. They could have found the % of fraud per 100 mortgages in short order and determined the depth of the threat quite quickly and then address them.

  2. klynn says:

    That is crap. Fed had to know about it before Stephan’s second deposition. There were cases being filed all over the place before Stephan’s admission. Lawyers of hurt parties were finding this all over files.

    That is total bull.

    • BoxTurtle says:

      Dodd is the banks stooge, and he’s just waiting for that corner office as soon as he leaves the senate. Any question he asks I assume has been pre-cleared by the MOTU’s.

      Boxturtle (“some degree of management failure” – Yeah, and I’ve noticed some lava chunks around Mount St. Helens)

  3. bobschacht says:

    OCC Acting head John Walsh says they’ve got 100 Bank Examiners investigating foreclosure fraud.

    How long before this is all swept under the rug in the name of looking forward, not backward?

    Thanks for this report, EW.

    Bob in AZ

  4. BoxTurtle says:

    Merkley points out that Fannie and Freddie requests for putbacks exceed reserves.

    Note that this is ONLY Fannie and Freddie. We haven’t even got into the non-government entities that also want their money back and that dollar value may be even larger.

    I’m betting the end game will include Fannie and Freddie cancelling their requests and receiving a taxpayer bailout. ObamaLLP isn’t going to let any of the Big Boys fail on his watch and it’s tough to figure a way for them to survive without SOMEBODY backing off on the givebacks.

    Let’s hope the pension funds are taking advantage of this looking forward and divesting themselves of bank stocks.

    Boxturtle (Once they do that, I think we can just close BofA via the FDIC with survivable impact)

  5. Mauimom says:

    Remember that little sleight of hand last year, in which Fannie and Freddie were granted, I seem to recall, almost unlimited ability to tap the Treasury for funds?

    Could we get an update from Those in the Know here about the effect of that move on the current [and future] action [i.e., Fannie and Freddie’s sopping up more and more of the banks’ crap, thus taking it off the banks’ balance sheets and dumping it on the taxpayers]?

  6. Mauimom says:

    BTW, shouldn’t we have some sort of TIMELINE on this?

    And is there, somewhere, a short and dirty capsule summary of what’s going on, ready for forwarding to folks who are just now beginning to catch up? [I.e., friends and family of pups, or pups who haven’t been following this as closely as they might like.]

  7. Gitcheegumee says:

    It will be interesting indeed to compare and contrast what is said today with the next document dump by Assange…which is allegedly going to involve a major financial instituition….make that institution,not tuition.

  8. tejanarusa says:

    Merkley just said the mod program is “an abysmal failure right now.”

    How bad is it to be reduced to feeling glad to hear the truth spoken in a hearing?

  9. tejanarusa says:

    I’m liking the professor – nameplate fuzzy – Eggert?

    He seems to be saying what I’ve only heard DFH’s saying till now.

    Market discipline, fairness to taxpayer, requires punishing servicers who operate in bad faith (very broad paraphrase).

    • BoxTurtle says:

      I’m afraid he’s said enough to earn a Faux News hitjob. Expect that bit of “investgative journalism” in a few days.

      I know math is not a Faux strongpoint, but you’d think they’d at least notice that the numbers say that BofA and Citi at least are technically insolvent.

      Boxturtle (Though I’m sure they’ll both find the money to continue their political donations)

  10. parsnip says:

    Edwards had the gall to say that families begin to detach from the home within 3-4 months, implying this as justification for dual track. This followed Bisenius saying that it costs to delay foreclosure initiation (implied: while pursuing fruitless, doomed loan mod). A$$hats. The dual track is intended to rack up fees to fleece the investors, while equity-stripping and emotionally beating down the families so they’ll give up and leave without a fight: It’s SHOCK and AWE, US-style. The foreclosure crisis is how the elite performs Shock and Awe on the US.

    The families detach due to the intentional servicer abuse, which is designed to ease them out. The more I hear, and read between these over-privileged jerks’ foul mouthings, the more convinced I am that it’s all being done intentionally. There is absolutely no one in these government institutions, regulators, GSEs, who is working for the people who pay their damned salaries. They all work for the banks.

  11. manys says:

    Housing and aggregate demand have not recovered because nearly 15 million owners are estimated to owe about $771 billion more on their homes than they are worth.

    In other words, the same as the $800B that was given to the banks.

  12. Fractal says:

    Thanks very much for liveblogging, Marcy! I was listening to streaming audio from C-SPAN while commenting over at Naked Capitalism on other fun events of the day.

    It was hard to stomach Dodd’s self-righteousness when he failed to hold these hearings until far too late to save millions of homeowners or to affect the legislative calendar in this Congress. I also was baffled why he had assholes (except Bair) from the same regulatory agencies in the first panel as he had for the first hearing. I wanted to reach out and shake them silly for dodging the key questions. It was amusing though, to see the guy from American Securitization Forum (ASF) deliver his pompous denunciations of critics and basically get ignored by the Senators.

  13. parsnip says:

    Panel 2, 11:54 AM EST

    Terry Edwards, Executive Vice President, Credit Portfolio Management, Fannie Mae
    Donald Bisenius, Executive Vice President, Freddie Mac
    Tom Deutsch, Executive Director, American Securitization Forum
    Kurt Eggert, Professor of Law, Chapman University School of Law

    Opening statements:

    Edwards: Help families; stewards of tax$; short sale or deed in lieu; helped >600,000 avoid FC: HAMP & FNMA mods. Not set up for tidal wave. Know Your Options websites, blah. All dovetail w/HAMP. Servcr incentives to help fams out of homes via Shortsale or deedinlieu. Meet w/sr servcng leadership regularly. How can FNMA make svrs jobs easier. Only instructed svcrs to review their procedures for FC. Dualtrack: FNMA has a 1track process of 3 months before FC. We expect svcrs to communicate w/borrowers w/1º point of contact in 1st 90 days.

    Bisenius: sourcing, pricing securitization of mtgs Freddie purchases. no mention of svcr fee-padding. 449 day default window.

    Tom Deutsch: 330 ASF members: originate collateral, traders, investors; 55M 1st liens $9.7T; 3/4 is securitized: pension & mutual funds; Trusts may not actually own those mtgs; he disses the concerns about non-conveyed notes. Just academic theories. mistaken core premise is incorrect, so dire consequences will not follow. refers to the ASF white paper. Rebuts Levitin & Max Gardner’s ABCD theory, claiming all steps were fully documented by a separate contract (?) Language in the contracts provides opportunity to cure probs.

    Eggert: waited to hear a regulator say here’s what we’ve done to sanction svcr misbehavior. Didn’t hear it. Didn’t hear: Here’s what we could do to sanction them. Only heard we’ll look into it. Eggert wrote a 2004 svcr abuse paper, nothing’s changed since. Not just FC crisis the problem: it’s svcr regulation & how svcrs are organized that’r the problem. Anecdotal or proof of systemic problem: do svcrs FC more if they’re 3rd-party or on their own liens? [a study showed that] They FC more often when it’s for investors. “3rd-party bias.” Compelling empirical evidence. Things are getting worse. Unregulated. No svcr has been sanctioned by HAMP for misbehaving. If HAMP & regulators aren’t sanctioning, is mkt? Investors have little control over svcrs: they treat us like the Tgiving turkey: where to carve. Now investors are getting together to try to force svcrs to do the right thing. Junk fees victimize investors as well as borrowers. Svcr prob must be fixed for a robust mtg mkt.

    Dodd: Why haven’t GSEs made svcrs do right? Edwards: Tried to do it w/influence. Moved some loans to other svcrs. Capacity problem, staffing (not abuse?). Counsel people to a graceful exit is what GSEs want svcrs to do.
    Desinius: Seen improvement of svcng on GSE delinquent loans.

    Dodd: F&F have diff mod programs. Why not the same? Edwards: We don’t talk (antitrust); have different books, that perform differently. Desinius: Not so diff books; close in most aspects.

    Dodd: to ASF: conflict betw svcrs & investors. What about force-placed; fees, etc. Deutsch: 1st lien investors concerned about svcr conflict. How do we sell off credit risk w/out lying on reps & warranties.
    Eggert: Edwards said interesting thing: we fired svcrs who weren’t performing. Why don’t more people say that? ASF: must have 25% of investors to fire svcr. but who else is a better svcr?

    [No GOP sens?]

    Edwards: FNMA has requested ≤2% of putbacks.

    Merkley: Dual track was denied [called miscommunication] until admitted 2 weeks ago. Why not mod? Why is deck stacked for FC, 5 reasons given: lack of svcr capacity; financial incentives; easier to FC; limits on authority of securitization. trustees; conflicts betw 1st & 2nd lienholders. Why do F&F tell their svcrs to aggressively pursue FC? People leave out of exhaustion, give up & abandon house. Why this aggressive pursuit of FC simultaneous w/mod? People say F&F are driving the dual track.
    Bisenius: Yes, it’s counterproductive. Fudges: it costs if you wait to start the FC process. [By this he means it’s policy for the svcrs to rack up fees to strip the investors. He said it’s bad for the economy to FC, yet implies the cost to svcrs is more important.] Implies that borrowers are non-responsive to svcr attempts at loan mods, says that the threat of FC induces borrower to contact svcr. [This is 180º wrong]

    Edwards: Inadequate staffing is reason for dual track [?] Families detach from the home @ 3-4 months of delinquency. [BS: They detach from the home because of the svcr abuse. Wow]

    Dodd: Picking up on Merkley re: dual track. Eggert: Must have Natl stds & 1 reg agcy to protect consumers: CFPB. There must be sanctions, loss of license. Dodd: What about lack of underwriting stds when loans made (aside from later job loss). Is there capacity for determining lost cause families? Edwards: unemployed get 6 months forbearance, then HAMP when re-employed at lower income. Eggert: When talking about putbacks, they only talked about soundness of the institutions, but when there’s a breach of reps & warranties they should be forced to take back. “You were a sophisticated investor & shoulda known” doesn’t pass.

    Merkley: Bankers had said that F&F are forcing the dual track. [non-responsive replies]
    12:50PM adjourned

  14. CTuttle says:

    Bair: We think a global settlement.

    Ya think…? Hello UBS and Deutche Bank(s)…! *gah*

    What kind of local exposure is their MERS related title recording fees…?

  15. lawgrace says:

    Request for Congressional Foreclosure Panel to Examine Foreclosure Lawyers

    Lawyers are officers of the court knowledge of applicable laws and civil procedure is not required from mortgage lenders, nor loan servicers. In states that require judicial foreclosures, FORECLOSURE LAWYERS are the ones who file lawsuits to seize and sell property; and lawyers are responsible for filing and recording foreclosure property deeds.

    An investigation could prove helpful to sorting out whether improper and illegal foreclosure proceedings are linked to any self-dealing conduct disadvantaging lenders, investors, homeowners, and city governments. . .”

    Inadequate or questionable foreclosure can lead to useless property deeds that impede real estate sales. Increasing numbers of title insurance companies are refusing to cover foreclosed properties; and certain mortgage default claims, are being denied because of defective foreclosure proceedings.

  16. fatster says:

    Fed wants to strip a key protection for homeowners

    “As Americans continue to lose their homes in record numbers, the Federal Reserve is considering making it much harder for homeowners to stop foreclosures and escape predatory home loans with onerous terms.”


  17. timbo says:

    Basically these bozos have either not been doing their job effectively policing our entire financial system…or well, there really isn’t any other alternative explanation.

    What is sickening is watching our representatives hem and haw about actually enforcing the laws and enacting new ones that will actually make our country’s financial future sound for more than a handful of the filthy rich. It’s disgusting, all this fawning over the banks and lending institutions…and a harbinger of the dystopia that is likely to result from the greed and incompetence our society has tolerated and even encouraged in our socioeconomic system.