The WaPo reports that an SEC Inspector General report shows that the SEC gave Bank of America lenient treatment when it fined BoA for its funny business surrounding the Merrill Lynch acquisition, but did not place limits on BoA’s ability to issue securities that would normally be placed on a firm that violates securities law.

The inspector general found that the SEC showed leniency in the first settlement. He did not find that Bank of America’s status as a bailed-out bank affected the settlement’s price tag. Rather, he found that the SEC exempted Bank of America from other sanctions.

Like many of its competitors, Bank of America has long enjoyed a special status with the SEC that allows it to issue securities more easily.

Customarily, a firm that agrees to settle violations of securities law related to disclosures would lose this special status, thereby penalizing the firm with a lengthier and costlier process for issuing securities.

In settlement discussions with the SEC, Bank of America asked to retain that special status. The SEC, at first, declined, insisting that firms that violate the disclosure requirements of securities laws must suffer the consequences of those actions.

The agency reversed course in a last-minute meeting with Bank of America before the full commission voted to approve the settlement.

“In this meeting, BofA argued that the dire state of the financial markets made it critical that it be able to raise money quickly” by issuing securities, according to the inspector general’s report.

SEC officials decided to allow the bank to retain the special status because it had received taxpayer bailouts and “it would not be in the interest of the market or investors to prevent them from getting to the market,” according to the report.

This first settlement, btw, was the one Judge Jed Rakoff rejected, saying this of the settlement itself:

Overall, indeed, the parties submissions, when carefully read, leave the distinct impression that the proposed Consent Judgment was a contrivance designed to provide the S.E.C. with the façade of enforcement and the management of the Bank with a quick resolution to an embarrassing inquiry…

Mind you, this IG finding appears to represent the facade of oversight. In addition to finding the teeny fine and the way it was assessed to be no problem, SEC’s IG also had no problem with the way Treasury and the Fed were involved in the merger of BoA and Merrill Lynch.

The whole thing sort of makes you wonder about what other special treatment BoA has been getting all this time, all in an effort to avoid admitting that it is insolvent. Maybe Julian Assange can help us out there?

Yves does a thorough smackdown on the departing Michael Barr’s description of all the things the government is going to get to the bottom of the foreclosure fraud problem, noting that the foreclosure task force simply isn’t investigating the problem in enough detail to understand, much less solve, the problem.

But I wanted to look just at Barr’s language, both in his interview with Felix Salmon and in his presentation to the Financial Stability Oversight Council yesterday. Here are the five things he described as the key focus of the Foreclosure Working Group:

1. Determining the scope of problems
2. Holding the banks accountable for fixing these problems
3. Making sure individuals who have been harmed are given redress and that firms pay penalties where appropriate for their actions
4. Getting the mortgage servicing industry to do a better job for households in financial difficulty by providing alternatives to foreclosure
5. Acting in a coordinated and comprehensive way to hold the firms accountable, bring clarity and certainty, and help households

Note, already, the choice of language here. The working group will “hold the banks accountable … for fixing these problems.” The firms will “pay penalties where appropriate for their actions.”

Barr uses the language the federal government has been consistently using since the scope of this problem became widely clear, in which the government envisions “holding banks accountable” by forcing them to operate effectively going forward, while making right the crimes of the past. Nowhere, in his presentation to the FSOC at least, does Barr envision holding the people who committed fraud accountable. In fact, there’s a lovely detail at 7:54 where Barr describes that the process is designed to assess whether affidavits and claims “are accurate.” Now, the government learned sometime since May–six months ago now–that they are not. But they have not yet prosecuted anyone for fraud. Which leads me to believe that when Barr says “assess whether affidavits are accurate,” he means, “assess whether they accurately reflect the state of the loan,” and not whether “the claims made by robo-signers are in fact true.”

And besides, how in hell could the government give those who have been harmed redress if the government is only reviewing a select subset of the loan files? Is the government going to provide everyone who believes they were screwed some legal aid to prove their claim?

Now compare what the soon-to-be-gone Barr told the FSOC in its kabuki public session with what he told Salmon.

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.”

After listing all the investigating going on, Barr stresses they’re coordinating with DOJ’s Financial Fraud Task Force. Why are they including the FFTF (which, btw, seems to focus primarily on origination fraud)? As a way, Barr explains, “to hold the banks accountable to fix it”–echoing that same formula of holding banks accountable to fix problems, but not to be prosecuted for committing fraud. Now jump ahead to where Barr describes how they can be held accountable: “they can be held accountable for not following the law. HUD can assess significant fines on them.” Let me repeat, again, that HUD has been aware of the foreclosure problems since around May and has thus far levied no fines. More importantly, note how (at least in Salmon’s presentation) Barr jumped from having DOJ hold the banks accountable to HUD doing so? Either Barr doesn’t believe DOJ has the power or the will to hold banks accountable and he reverts to fines as the magical way the federal government will holds the banks accountable. And the outcome of all this? To “increase the chance that when foreclosures happen, they will happen according to established law.” Not, “to make sure we restore the integrity of the property system,” but to increase the overall odds but not guarantee that when a family is thrown out of its home, they were done so legally.

Barr doesn’t even envision ending foreclosure fraud! He just envisions making it much less likely, shifting the odds somewhat from the stacked odds the banksters currently enjoy.

But then there’s this admission:

“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,”

The soon-to-be-departed Michael Barr, in describing a process designed to hold the banks accountable that will not conclude until months after he returns to UM, admits to believing that the banks won’t be able to fix this problem.

So let’s return, then, to the context of all this. Yesterday Michael Barr spent 15 minutes describing how FSOC will save the world and–at least in the public session–not only did no one ask any questions, but Barr didn’t reveal what he revealed to Salmon: that he believes the banks can’t fix this problem. Couple this, too, with Barr’s offhand comment that he believes the significant putbacks would continue for several years (even though this seems not to be part of the foreclosure task force’s purview).

Separate and apart from these forcelosure and modification violations, servicers may face risk from failure to follow investor guidelines for originating loans during the height of the boom. Origination putbacks at relatively large scale have been occurring for some time, and will likely continue for several years.

And all this amounts to not only pretty compelling evidence that (as Salmon and Smith explain) the government’s efforts to investigate this problem are not credible.

But also that Barr–who will be gone anyway in seven days–doesn’t believe they will work.

Yet rather than discussing that–at least in public–the folks tasked with keeping our economy from crashing again just passively listened to a kabuki presentation pretending that something is being done, even if everyone knows it won’t be effective.

As I noted, the Financial Stability Oversight Council is meeting today. As announced, they discussed foreclosure fraud and securitization.

For less than 15 minutes.

And then they moved on, without once raising the issue of whether or not the banks’ exposure due to securitization problems posed a systemic risk to our financial system.

As the first order of business in the public session (the Council had an hour of private business before the public session), the departing Michael Barr reviewed what the “foreclosure working group” was doing about the problem. He noted that there seemed to be problems, but described that onsite examiners were collecting information and would not be done doing that until the end of the year; they’d issue a substantive report in January. He did, however, say that there had been significant putbacks and he expected them to continue.

And that was it. Timmeh Geithner asked if anyone had questions. And no one did. No one asked, “What do you expect will happen between now and January?” No one asked, “Do you think this is systemic?” No one asked, “What kind of exposure are we talking about here? Are the banks insolvent?”

No one even pointed out that existing home sales were sliding again, at least partly because the banksters couldn’t sell their foreclosures and partly because consumers weren’t stupid enough to buy them. So no one mentioned that waiting until January may not be so smart, as nothing is getting fixed in the meantime.

Now perhaps they did ask these questions during the hour of private business before the cameras started rolling. Perhaps they spent the hour before we got to watch screaming “hair’s on fire, hair’s on fire, hair’s on fire,” before taking a sip of tea, and then performing a complete lack of concern about this. Perhaps they talked about how serious this might be before we were allowed to watch, not wanting to concern the markets (which are busy freaking out, in any case, about a run on Europe’s banks).

But the optics of it–this apparent lack of concern about the way the banks will postpone admitting to their own insolvency by degrading the private property system in this country at the expense of real people–suck. They sure provide zero confidence that the FSOC intends to do its job to prevent this from becoming a systemic crisis.

Update: Felix Salmon has a good article describing where Michael Barr thinks this is all going.

Me? I’m w/Salmon. This isn’t going to fix things. Note, particularly, that Barr (who is probably one of the more aggressive folks at Treasury on this, at least for the next two weeks) is still just talking about fines, not prison.

Just one week ago, Iowa’s Attorney General Tom Miller told Chris Dodd that Assistant Secretary of the Treasury for Financial Institutions Michael Barr was the key person from Treasury working with the Attorneys General investigation into foreclosure fraud.

Miller: We haven’t had any contact with the [Financial Stability Oversight Council]. We have had repeated contact with the Department of the Treasury, with Assistant Secretary Michael Barr and his staff. We’ve developed a terrific ongoing relationship with them. We talk about these issues and try and help and support each other on these issues. So we’ve had a lot of discussions with Treasury but not with that particular Council.

That’s funny. Because Barr is leaving Treasury. Imminently.

Diana Farrell, deputy director of President Barack Obama’s National Economic Council, and Assistant Treasury Secretary Michael Barr are leaving the administration, adding to the turnover in the ranks of the White House economic team that worked on the government’s response to the worst financial crisis in more than 70 years.

Farrell will leave by the end of the year and Barr’s last day at Treasury will be Dec. 3. Both played key roles in shaping Obama’s financial regulatory overhaul plan, which was signed into law in July.

[snip]

Treasury spokesman Steve Adamske said Barr would continue his academic career at the University of Michigan in Ann Arbor.

(Note, Barr is not currently listed as teaching next semester.)

In addition to working with the Attorneys General “investigating” the banksters’ foreclosure fraud, Barr had been considered a leading candidate–after Elizabeth Warren–to lead the Consumer Finance Protection Board and/or the Office of the Comptroller of the Currency (the agency that regulates the big banks) and (as the Bloomberg piece makes clear) had a key role in Dodd-Frank.

As you recall, the same day that Tom Miller told Dodd he was working closely with Barr, at almost the moment when Miller said the investigation would take months, sources that sounded an awful lot like the banks were suggesting a deal on the “settlement” ending the “investigation” was close. But even that article didn’t seem to suggest it’d be done by December 3.

Also note, the Financial Stability Oversight Council–the entity set up by Dodd-Frank to stave off systemic crises–meets on Tuesday; they promise to address efforts so far on the foreclosure fraud problem.

The group will provide an update on what various agencies are doing to investigate widespread paperwork problems that have called into question millions of foreclosures across the country, as well as how regulators are coordinating with the Justice Department, state attorneys general and other officials scrutinizing the mess.

Mind you, I don’t know what Barr’s departure means. But I find it notable that–after recently being floated for key positions going forward and given his role in efforts to respond to the foreclosure mess–he is leaving now.

Yves Smith has a post laying out one of the most troublesome aspects of the response to the revelation of foreclosure fraud. As she explains, to conduct an “independent review” of its PR-servicing “review” of its own servicing practices, GMAC picked the lawfirm that has been in charge of its national counsel on servicing issues.

A Birmingham, Alabama law firm, Bradley Arant Boult Cummings, has been GMAC’s national counsel on real estate servicing matters for some time (see here for examples of some of the matters it has handled).

Curiously, Bradley Arant is one of the firms that GMAC engaged to conduct an “independent review” after its use of robo signing became public:

GMAC Mortgage is initiating an independent review of foreclosures in all 50 states and examining foreclosure sales nationwide to ensure procedures and documentation are accurate….

The firms hired to conduct the review are Sullivan & Cromwell LLP, Bradley Arant Boult Cummings LLP, Morrison & Foerster LLP and PricewaterhouseCoopers LLP, said a person familiar with the matter.

Given Bradley Arant’s long-standing and extensive involvement in GMAC’s mortgage business, how can it legitimately be part of the team conducting the review? It’s incentives will be to minimize any problems, for a host of reasons, the most important being so as not to ruffle a big meal ticket and to avoid the exposure of any issues that might create liability for the firm.

[snip]

Bradley Arant is certain to frame its examination as narrowly as possible and not consider potentially troublesome but germane questions such as who at the contracting organizations (LPS, Fannie, other servicers) might also be culpable.A broader look is key to understand who really bears responsibility. Foreclosures of securitized loans increasingly look to be what Bill Black would call a criminogenic environment, in which the major perps are deeply entwined and work together. And if caught, it is clearly in their best interest to cut loose the weakest, most dispensable actor in their tidy group, the foreclosure mill.

So in many ways, the selection of Bradley Arant makes perfect sense. It is familiar with the terrain, so it will be able to issue a plausible-sounding report. It is also so deeply part of this questionable backwater that it is highly unlikely to make a bottoms up investigation and potentially rock the boat.

Couple the prospect of law firms involved in the fraud conducting “independent” investigations of their own fraud with this exchange from Thursday’s House Financial Services hearing on robo-signing. Maxine Waters asks the Acting Comptroller of the Currency, John Walsh, whether or not OCC (which regulates the big banks) has imposed any penalties on the servicers for their fraud.

Waters: I asked earlier about whether or not fines had been levied from the Treasury Department [see that exchange here]. Let me turn to the OCC. Since we started experiencing the fallout from the subprime boom, has OCC taken any enforcement actions against servicers?

[long pause]

Walsh: We have certainly issued supervisory requirements on them, matters requiring attention and other things to remedy–

Waters: Have you levied any fines?

Walsh: I do not believe that we have.

Waters: Have you issued any cease and desist orders?

Walsh: I don’t believe that there have been any public actions against them.

Waters: Have you threatened to revoke any charters?

Walsh: No.

Waters: Do you think that the servicers really believe that you mean business if they don’t have to fear any consequences?

Walsh: Well, I think the consequences are quite clear and present to them. I mean that we can compel action and the threat of more serious penalties–

Waters: But you haven’t done that. You haven’t done any of that! Why should they take you seriously?

Walsh: The supervisory process is one that happens–does not mainly happen in the public spotlight. It happens in the dealings directly with the institution through the process of examination, matters requiring attention, and other things. Only when a particular problem is identified that rises to the appropriate level do we get into the area–

Waters: Let’s talk about examiners. If you have examiners onsite, can you explain how you don’t know about all the problems that have recently come to light? What do the examiners do?

Walsh: There’s, as I mentioned, our attention was focused on the modification process, it would be quite unusual for us to be in the room or present at the point where an affidavit is being signed or a notarization is taking place. We do rely on the systems and controls of the financial institution, its own internal audit, or any flags that raise the issue, like our complaint function. And unfortunately those did not raise an alarm about this process. [my emphasis]

The supervision of the TBTF banks, the head of the OCC tells us, happens primarily in back rooms, and in spite of the examiners on OCC’s staff, relies on the internal controls of a bunch of financial institutions that already proved their internal controls either don’t or are designed not to function.

Walsh’s claim that OCC got no alarm about this process is an out and out lie, of course. When JP Morgan Chase and Wells Fargo refused to cooperate with the investigations of a bunch of state regulators, those regulators told OCC that some homeowners might be losing their homes improperly and asked for help. But instead of taking that as a red flag and conducting an independent review, they again relied on the banks’ own internal reviews.

When two banks – J.P. Morgan Chase and Wells Fargo – declined to cooperate, the state officials asked the banks’ federal regulator for help, according to a letter they sent. But the Office of the Comptroller of the Currency, which oversees national banks, denied the states’ request, saying the firms should answer only to inquiries from federal officials. In a response to state officials, John Dugan, comptroller at the time, wrote that his agency was already planning to collect foreclosure information and that any additional monitoring risked “confusing matters.”

But even as it closed the door on state oversight, the OCC chose itself not to scrutinize the foreclosure operations of the largest national banks, forgoing any examination of their procedures and paperwork. Instead, the agency relied on the banks’ in-house assessments. These provided no hint of the problems to come until they had tripped the nation’s housing market, agency officials later acknowledged.

[snip]

Even when the mortgage industry itself identified possible flaws in foreclosure paperwork, the agency was slow to act. In September, Ally Financial suspended foreclosures after discovering problems with tens of thousands of cases. But even then, the OCC did not begin to examine the operations of other major banks. Instead, the agency asked them to undertake internal reviews and told them it would conduct its own examination later, an OCC official said.

That GMAC “independent investigation” Yves focused on? That’s the one that OCC thought sufficient when Ally Financial admitted its own problems.

So it works like this: The regulators allow the banks to self-report on their own processes. When the banks identify what are pretty apparently significant instances of fraud, the federal regulator still allows them to investigate themselves, in GMAC’s case, having the law firm that conducted much of the fraud in the first place act as an “independent” investigator of processes the law firm itself provided. And then, even in the face of that obvious fraud, the regulator refuses to impose any penalties–or even, to conduct any oversight outside of a back room–claiming all the time that the threat of penalties the banks know OCC won’t impose are enough to gain compliance.

As DDay reported on Friday, here’s what Professor Adam Levitin had to say about such a scheme:

When the regulation and investigation all comes down to the banks and their corrupt law firms investigating themselves, you can be pretty sure the system is designed to not find the obvious fraud everyone is talking about.

DDay has a really important post that–along with a great interview with Brad Miller–includes a letter from Miller and other members of Congress, urging the Financial Stability Oversight Council to take action to prevent the foreclosure fraud problem from becoming a systemic crisis. The letter reminds the FSOC that Dodd-Frank gives them the power to avoid a systemic crisis.

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.

And lists three things the FSOC should do to prevent the foreclosure fraud problem from becoming a systemic crisis:

1. Examine a representative sample of loans to see whether they comply with legal requirements and pooling and servicing agreements.
2. Determine whether the second liens servicers have on loans have led them to act contrary to the interests of the first lien holders.
3. Require big banks to divest themselves of servicing businesses.

House Financial Services Committee Chair Barney Frank is one of the first ten people to sign this letter.

Put together with Senate Banking Committee Chair Chris Dodd’s call on Tim Geithner to consider how the FSOC can mitigate the risks of this crisis, you’ve got both Chairmen of the relevant committees urging the FSOC to do something about the potential systemic risk of this crisis. You’ve got Dodd and Frank, the two guys with their name on the financial reform bill, calling on the Administration to use the authority granted under Dodd-Frank to prevent another meltdown.

And thus far?

Crickets. From both the Administration and the media.

One of the things the Congressional Oversight Panel recommended the other day was new stress tests for banks, given the mounting evidence that botched securitization may make them insolvent (okay — that last bit is my shorthand).

Today, the Fed ordered up those stress tests.

The Fed, in guidance issued today, said all 19 banks must submit capital plans by early next year showing their ability to absorb losses under a set of conditions to be determined by the central bank. The request is part of the Fed’s effort to step up supervision at the nation’s largest financial firms.

While new stress tests are a no-brainer — at some point we’re all going to have to admit that Bank of America is insolvent and should be wound down — I’ve got zero confidence these new stress tests will be anything different than the kabuki stress tests the banks had in the last go-around: that is, a “test” designed to ensure everyone passes.

Chris Dodd didn’t have many questions in yesterday’s hearing on the foreclosure crisis. But he did use the opportunity to call on Tim Geithner to convene the Financial Stability Oversight Council to prevent this crisis from blowing up the economy.

Dodd: Attorney General Miller, at the outset of my opening comments I talked about the importance of getting the, this Financial Stability [Oversight] Council that we established in the Financial Reform Bill to anticipate systemic risk and to collectively work as a body chaired by the Secretary of the Treasury, along with the FDIC and the OCC–there are ten members of that, an independent member and five others that are part of it. This seems to me like a classic example–one that we did not anticipate necessarily when we drafted the legislation, but exactly, we are in a crisis with this. Now you can argue that it’s not yet a systemic crisis that poses the kind of risk we saw in the Fall of 08, but no one can argue that we’re not in the middle of a crisis. Now the idea of this, of course, was to minimize crises so they don’t grow into a large, systemic crisis. Have you had any contact with the Secretary of Treasury? Or is there any communication going on between the Attorney Generals and this Council or the Chairman of it, the Secretary of the Treasury, or their office, to begin to talk about what the role of the federal government might be in formulating an answer to all of this?

Miller: We haven’t had any contact with the Council. We have had repeated contact with the Department of the Treasury, with Assistant Secretary Michael Barr and his staff. We’ve developed a terrific ongoing relationship with them. We talk about these issues and try and help and support each other on these issues. So we’ve had a lot of discussions with Treasury but not with that particular Council.

Dodd: Again I saw [mumble] privately with Senator Warner and others may, Senator Merkley has a similar thought. I’m going to use this forum here, obviously in a very public setting, to urge the Secretary of Treasury and others to convene that Council to begin to work with you and others, so there is a role here to examine this question in seeking broad solutions. So my hope is they’ll hear that request to pick up that obligation that we laid out in that legislation.

You know, when the Chairman of the Senate Banking Community has to use a forum like this to try to remind the Secretary of Treasury of his obligation under Dodd-Frank, it does not inspire a lot of confidence.

About four hours ago, Iowa’s Attorney General Tom Miller testified to the Senate Banking Committee  it would be months before the combined AG “investigation” came up with a settlement (he also suggested that there were new aspects that were just being added to the “investigation”).

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.

That’s almost exactly the moment when the WaPo posted a story reporting the AGs were close to a settlement.

The 50 state attorneys general are in negotiations over an agreement over foreclosures that would include a victims’ compensation fund that would provide money for borrowers whose homes have been taken away improperly, according to state and industry officials.

The discussions are still preliminary and the final deal may change significantly as details are hammered out and the settlement is vetted by 50 separate state offices, the official said.

Now, there’s a lot that’s weird with this story, aside from the way it seemingly contradicted what Miller was saying to Congress at precisely the moment he was saying it. First, only three of the big servicers were mentioned in the story:

While there’s no universal agreement that would apply industry wide and the AGs are negotiating separately with each bank, many of the stipulations are the same for the agreements being discussed with the three largest mortgage servicers: Bank of America, JP Morgan Chase and Wells Fargo.

No mention of GMAC or Citi–or Goldman Sachs, which just announced a freeze on its foreclosures.

And this story reported that dual-track processing–in which people are being processed for modification at the same time they’re being foreclosed on–“should” stop.

They also agree that there should be no more “dual track” loan modification negotiations that end suddenly with foreclosures.

Yet at almost precisely the time when WaPo published this claim, BoA’s President of Home Loans, Barbara Desoer was explaining that they couldn’t end dual-track processing except on those loans BoA held on its own books and/or for loans that qualify for HAMP, and Chase’s CEO of Home Lending David Lowman was testifying that they wouldn’t end dual-track processing (he did suggest there was something Congress could do to give servicers safe harbor to end dual-track processing, but that he wouldn’t describe it in the hearing).

Then there’s the claim that there would be a compensation fund set up for those wrongly foreclosed.

The most radical part of the settlement deal has to do with providing monetary compensation for homeowners who have lost their homes but can prove that they have been foreclosed on wrongly. This is the most contentious item because the amount of the funds that would go into this have not been worked out and it’s also unclear how it would be administered.

At least the WaPo had the grace to suggest, without saying outright, that any such fund would be ripe for abuse by the banksters. The banks, after all, are often unable to give any real accounting of the amounts owned (and if they were able to, they’d be unwilling to show the illegal fees and accounting they were using). So how is a wrongly-foreclosed homeowner supposed to prove they were wrongly-foreclosed?

And then the article mentions nothing about modifications going forward. In other words, this “settlement” would achieve absolutely nothing–except for getting a bunch of banksters excused, again, for breaking the law. Not that I find that hard to believe. Just odd that WaPo wouldn’t mention that this alleged “settlement” wouldn’t accomplish the primary requirement of any “settlement:” fixing any problem but the legal liability of the banksters.

Mind you, I did note during the hearing that Miller didn’t seem to have consumers’ interests in minds when he was talking about any settlement, so I guess the outlined proposal is a possible one.

But most of all, note the big news in this story.

There is no mention of an investigation.

There was not a single soul at today’s hearing who claimed to have a good sense of the scope or reasons for the massive foreclosure fraud perpetrated by the banks. Indeed, almost everyone acknowledged the need for further investigation to make that clear.

That “investigation” was supposed to be conducted by the 50 AGs.

But if this article has even a shred of truth to it then the AG “investigation” is instead a fast-track effort not to “investigate” (god forbid, because you might actually expose how the banksters had ended private property and rule of law in the United States), but to find a way to get the banksters out of any accountability for their crimes.

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.