Wednesday, January 18, 2012

Mortgage Settlement Fades

According to Yves Smith at naked capitalism the mortgage fiasco that was supposed to be worked out in a fifty state agreement has now slipped into a truly comatose state. Smith says the states declining to [participate in the "50 state" talks may have increased from five to twelve and the number of "defectors" may be increasing. Chaos seems to be the order of the day for a while on this subject.


At least when Penelope was resisting her suitors, it was clear what her objectives were. She was holding out on her belief that her husband Odysseus would return. And the suitors come off like real boors, so maybe she had also decided the single life was a better option than marrying any of them.

By contrast, it seems as if the Obama administration has completely lost the plot in what was formerly called the 50 state attorney general negotiations, and that appears to have fed directly into the news today of meetings of a breakaway group interested in concrete results.

Remember that despite the successful effort of by the Feds to make the AG group the face of the effort, this drill is being quietly guided by the Administration (the DoJ, HUD, and other federal regulators are participating in the negotiations). A telling moment occurred when Iowa AG Tom Miller, the leader of the state AGs, practically fawned over then assistant Treasury secretary Michael Barr in Congressional hearings in late 2010.

When the talks started, it was clear that the Administration wanted to get the housing mess out of the headlines, based on the false premise that the use of enough cheap credit, regulatory forbearance (official speak for “extend and pretend”) plus some helpful-around-the-margins programs to distract the peasants, would allow the housing market to heal on its own. The evidence is overwhelmingly to the contrary. Housing credit is entirely dependent on government support, and there is not even a remote chance that this will change any time soon. The authorities are not only oblivious to the way servicers abuse investors, but New York Fed president William Dudley made it clear that he thinks it’s a great idea to reverse the creditor hierarchy and burn first mortgage investors to save second lien investors, who happen to be banks. And the supposedly helpful programs like HAMP turned out to be utter disasters.

But the most remarkable to see federal regulators do the equivalent of sticking fingers in their ears and yelling “Lalala” whenever the issue of servicer and foreclosure mill fraud comes up (they give servicing deficiencies plenty of lip service in testimony and speeches, but their actions convey a completely different message). As Michael Olenick discussed in a recent post, there is a massive overhang of shadow housing inventory. Buyers are reluctant to come into the market if they think (correctly in many locales) that prices have not bottomed. In states that for various reasons now have more teeth in foreclosure documentation requirements (New York, Nevada, and New Jersey), foreclosures have come to a near standstill. That’s a de facto admission that the parties representing creditors (almost always securities trusts) failed to live up to their promises to investors in the pooling & servicing agreements. It also raises the ugly likelihood that the borrower IOU, the note, never made it to the trust, but is in limbo earlier in the transfer chain.

So the Administration’s puppets, the cooperating attorneys general, have been engaged in truly bizarre negotiations. The banks know the real objective is to “reduce uncertainty” which is really “get possible sources of trouble neutralized”. AG suits can be very powerful, as Eliot Spitzer’s prosecutions of big corporate accounting abuses and dubious behavior by sell side analysts demonstrated. They change perceptions of what will be tolerated and also pave the way for private lawsuits. And as we’ve pointed out repeatedly, the banks keep asking for more and more at the negotiating table. That’s a bad faith bargaining strategy, one you pursue only if you are certain the other side is desperate to get a deal done. But the whole process has looked less and less plausible as the banks keep upping their demands and Tom Miller keeps saying, month after month, that a deal is mere weeks away.

But the pretense started to crack as important states exited the talks: New York, Delaware, Nevada, Massachusetts, and California. The Miller camp keeps mentioning that California may come back with no evidence to support that spin (non-developments or old news on the California front has been misrepresented more than once, a sign of desperation to keep a brave front up).

But today’s leak is a biggie. A little birdie had told me a bigger group was discussing an settlement in opposition to the AG format a couple of months ago, but this is apparently the first in person meeting of a group this large. The report by Loren Berlin at Huffington Post says as many as 15 states are participating, and Hawaii, New Hampshire, Missouri, Mississippi, Maryland, Kentucky and Minnesota joined the five states that had already abandoned the talks in pow-wow in Washington last Tuesday. So the known total of the possible breakaway group is 12, and we’ve heard past rumors of Colorado and Oregon as being not very keen with the Miller-led talks. Key extracts:

The meeting was prompted by the slow pace at which a national foreclosure settlement led by the Obama administration is progressing, and is likely to be the first in a series..

“The talks weren’t just about investigations,” said a source with knowledge of the discussions. “They were also about the attorneys general offices feeling uninvolved in a process by which their federal colleagues have been negotiating on their behalf.”

Hah, so we have confirmation of who is really driving this train.

Notice that this group includes only Democrats (Colorado is Republican but not confirmed as on the outs). However, even a group of 12 Democratic AGs is significant. First, it is a direct repudiation to the Obamap-led effort to sweep the mortgage mess under the rug. Second, 12 or more departures would undermine the status of the settlement. Per Dave Dayen in an earlier post:

The master settlement agreement with the tobacco industry in 1998 eventually got the agreement of 46 AGs, with the other four coming aboard later. That would be similar to the necessary outcome here; to become the official position of the National Association of Attorneys General, at least 38-41 of the AGs would have to sign on. And even that has no binding force to supersede state law.

In addition, despite the effort of Tom Miller to pretend that there is unanimity among the AG group, he not only has dissenters on the left but also on the right. Four Republican attorneys general said in a letter last April that they were firmly opposed to any principal reductions of mortgages as part of the deal, and that IS now part of the deal. So in the unlikely event the Miller talks get closer to resolution, these AGs are also likely to bolt.

So perhaps there is some Penelope-like logic behind the neverending negotiations. Bringing them to a close would reveal, finally, what we said all along: that there is no deal to be had among the participants. Since the objective is reducing uncertainty, Mr. Market will be happier with his fantasy that a settlement deal may finally take place than the recognition that attorneys general no longer have pretend negotiations keeping them from doing their job of pursuing mortgage miscreants.

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