On the mortgage/foreclosure fraud
front, Naked Capitalism's Yves Smith provides us with some of her most brilliant analysis to date in, "Rumors of Negotiations on Settlement of 50 State Attorney General Foreclosure Probe
." In it, we learn that some of the too-big-to-fail banks, led by Bank of America CEO Brian Moynihan, appeared to have attempted to float a rumor on Tuesday, starting with Diana Oleck over CNBC
, concerning settlement being "near" as far as the big banks' efforts to come to terms regarding "...the probe by 50 state attorneys general into robo signing and other foreclosure-related abuses."
The WaPo blog
picked-up on this rumor, but later modified their stories.
But, when Reuters contacted the office of the leader of the Attorneys General group, Iowa AG Tom Miller, he completely disputed this account, telling them that it would be at least "many months" before anything was settled.
Meanwhile, we also learned that the 50 state AG's are, apparently, turning their focus to the much more (potentially) financially damaging investor-side of the mortgage/foreclosure fraud issue. On top of this, Phil Angelides' Financial Crisis Inquiry Commission (the "FCIC") is also moving forward into this thicket.
Over in municipal- and state-default land, a (very) highly-respected stock market analyst, Institutional Risk Analytics' Chris Whalen, has made public pronouncements that California will default on its debt. It's also being reported by the Detroit News that Hamtramck, Michigan has notified the state of Michigan it will declare bankruptcy, as well. Just a few days ago (however, it's been reported for many months that this was imminent) Harrisburg notified the state of Pennsylvania that it's intending to do the same.
First, Yves (in some of her best work in a little while, IMHO) on the heat being turned up--not down--in the foreclosure/mortgage fraud scam...
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(Diarist has received written authorization from Naked Capitalism Publisher Yves Smith to reprint her blog's posts in their entirety for the benefit of the DKos community.)
Rumors of Negotiations on Settlement of 50 State Attorney General Foreclosure Probe
November 17, 2010 1:18AM
Two media outlets tonight, Reuters and a Washington Post blog post, discussed the idea of a relatively quick settlement of the probe by 50 state attorneys general into robo signing and other foreclosure-related abuses.
What is interesting is the timing of these sightings, which came the same day of the release of the Congressional Oversight Panel report on servicing and securitization, the promised American Securitization Forum defense of securitization industry practices, and Senate Banking Committee hearings on foreclosures and securitization.
As we discuss in other posts today, the day went very badly for the industry. The sudden, albeit small, flurry of "settlement talks are on" reports on the attorney general front bears all the hallmarks of a banking industry trial balloon being hyped as something further along to try to create the impression that the mess is on its way to being resolved on terms not terribly painful to banks.
The story seems to have started with a rumor on CNBC, which is being treated with more dignity than it deserves, particularly since the supposed source denied it.
CNBC reported that Iowa attorney general Tom Miller was nearing a settlement of the 50 state probe (we noted yesterday that CNBC ran a credulity-straining report on MERS, so it seems to be the preferred outlet for bank PR these days). But when Reuters contacted Miller's office, they disputed this account.
Nevertheless, this idea was carried further by the Reuters piece, which quoted Bank of America CEO Brian Moynihan stating that a "quick resolution" of the 50 state investigation would be be the best outcome for all parties involved.
That view strains credulity, unless you are of the "what is best for banks is best for America" school of thinking. The state AGs started their inquiry on October 13, and signaled their intent to go beyond the robo signing scandal. It's highly unlikely that they have gotten much of anywhere with their probe. And in normal negotiating settings, quick settlements take place only when there is little difference of views between the two sides on the facts or limited resources on both sides, which created a mutual recognition that they have a vested interested in reaching a resolution expeditiously. Neither of those conditions apply here.
So the argument that a quick settlement is best can only be based on the assumption that an investigation will uncover real dirt, and create market uncertainty. And of course we can't have that, now can we?
That hidden assumption, that there is real risk should investigations continue for a protracted period, is the polar opposite of the position that the banks have taken thus far, that there is nothing to see here, that the robo signing scandal was merely procedural (as if frauds on the court are mere "procedural" miscues) and the underlying foreclosure actions were all correct.
This evening, we see this rumor carried a step further in a post by Washington Post blogger Ariana Eunjung Cha:
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.
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.
Both sides have tentatively agreed that mandatory third-party mediation if a homeowner requests it is something that should be included. They also agree that there should be no more "dual track" loan modification negotiations that end suddenly with foreclosures. Many homeowners have complained that they were in the middle of loan modification discussions when they were foreclosed on or told to default on their loans to get a modification, and then ended up having their home foreclosed on.
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.
Yves here. Exactly how many sources are there for this story? As I read it, it could be as little as the CNBC and Moynihan statements (if you believe the Miller rumor, he's a state official, Moynihan is clearly an industry official), plus a conversation with one unnamed official (presumably industry).
And the account simply does not add up. First, we have Ohio, which is one of the lead actors in this 50 state effort, pushing for a speedy trial in a robo signing case in which it is seeking sizeable damages. I can't see Ohio agreeing to any settlement as long as Ohio attorney general Richard Corday is in office (admittedly only till the end of January). And he is clearly trying to get enough stakes in the ground so as to limit his successor's ability to make a radical retreat. In addition, the supposed process for these negotiations, which the Washington Post says is bank by bank, assures a protracted process. And it ALSO indicates that any settlement would have to be approved by 50 "separate" state offices. So even by the account presented in the Post, there is not a cohesive front on either side of this supposed initiative, which begs the question of who exactly is driving this train.
The only way you could get fast resolution in situation like this is to get all the parties in a room and treat it as a a two-sided negotiation.
However, we have indicated that efforts by attorneys general need to be regarded with some skepticism. We've pointed to instances in which AG initiatives add up to far less than their headlines would lead you to believe. They do have incentives to collect a scalp quickly and declare victory. But given the high level of public ire and the economic importance of the foreclosure crisis, the AGs are likely to appreciate the dangers of appearing to cave in to bankers. They clearly have them on the run now; why act in haste when keeping the pressure on will lead to a more favorable outcome?
The one area where I could see a relatively quick resolution is if the robo signing abuses were carved out from the other issues and negotiated separately. But overall, it appears likely that this convenient story of advanced settlement talks is just that, a mere story
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Here's Charles Gasparino on the FCIC jumping into the fray (h/t Zero Hedge):
...The Financial Crisis Inquiry Commission, which Angelides chairs, has begun investigating whether mortgages packaged into bonds and now held by investors including government agencies like Fannie Mae and Freddie Mac were done so improperly, thus calling into question the legality of trillions of dollars of debt, according to people with direct knowledge of the matter.
The inner workings of the mortgage-backed securities market have come under intense scrutiny in recent months following revelations that big banks may have committed fraud by hiring so-called robo-signers to approve foreclosure applications on tens of thousands of mortgages. At issue: Whether the robo-signers properly approved foreclosures and whether people forced from their homes received due process.
The latest twist in the robo-signer controversy involves whether improper foreclosures and banks failing to follow proper legal procedures will call into question the mortgage bonds themselves. Many of the foreclosed mortgages aren't held by banks, but have been placed in bonds held by investors. The money thus is returned to an investor holding the bond.
But if the foreclosure has been done by a robo-signer, or if the banks creating the bond did so improperly, as a recent congressional study suggested, then the bonds themselves could be declared illegal. That could pose big problems for the banks that created the mortgages and sold the bonds, like Bank of America (BAC: 11.94 ,-0.16 ,-1.32%) and JPMorgan (JPM: 39.58 ,-0.47 ,-1.17%) because it would allow investors to "put", or force the banks to buy back, the underlying mortgages...
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And, while the world's eyes are on the bad luck of the Irish, consider this a reminder that the economy of the State of California is considerably larger:
...[Chris] Whalen thinks that California will default on its debt--hammering all the pension funds and other investors who have loaded up on apparently safe state bonds.
The state won't immediately default, Whalen says. It will start by issuing the same sort of IOUs that it issued to by itself time during its budget crisis last year. But, eventually, the debts will have to be restructured, and this will result in those who own California's bonds receiving less than 100 cents on the dollar.
Why won't California just get a bailout?
Because the Republicans now control Congress, Whalen says. And also because, if California gets bailed out, dozens of other states will immediately line up with their hands out. The public is fed up with bailouts, Whalen says--and eventually, the country will be forced to face up to its bad debts and write them off.
Of course, if Whalen is right, the country could have a major crisis on its hands. California is hardly the only state in trouble (click here to see the worst ones), and pension funds and other "safe" investments that Americans depend on will get hammered if states begin to default.
Fixing state and local obligations will also require the renegotiation of pensions and salaries that government workers have long since taken for granted. And they certainly won't give those up without a fight...
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Yes, nothing says "f*ck you" quite like a GOP-controlled House of Representatives.
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