They're Getting Away With It
March 9, 2011 7:10 PM   Subscribe

Remember that whole thing last fall where the banks got caught lying in court while trying to foreclose? And the attorneys general of all 50 states got all pissy? Well, on the quiet, ever since then….in some states it seems like the banks have quietly stopped foreclosing. Even though they said this was all sorted out back in October. In state courts across the land, legal troubles for the banks are mounting --- most especially, with regards to the Mortgage Electronic Registration System, or MERS, which maybe kinda sorta hopelessly FUBARs 400 years worth of property law. But not to fear --- the nation’s largest banks are about two months from making this all go away: The state AGs and every federal regulator have almost come up with some sort of settlement plan with the banks. Details leaked today in American Banker (pdf of whole proposal; cliff notes version). Does the settlement have its heart in the right place? Or is it a useless slap on the wrist? posted by Diablevert (25 comments total) 21 users marked this as a favorite
Personally speaking, I think the central problem here is inherent to servicing and this settlement does fuck all to address it, potentially whitewashing some real problems. In a nutshell: One of the things that makes securitization of mortgages work is the breaking of the scut work of servicing the loan from the investor. Pension funds might have billions of dollars they’re happy to lend out at 6 percent interest, but pension funds are not in the business of nagging tens of thousands of individual borrowers every month to remind them to pony up their checks. Only if someone else is willing to do the nagging for them, for a small fee, does the investment become worth their time.
But breaking apart “being owed the money” from “nagging you to pay the money” and making that the separate responsibilities of two separate, independent, profit seeking entities, you completely and utterly fuck up the incentives when a loan goes to shit. Because when a loan goes to shit, all of a sudden you have to do a lot more nagging. And that’s fine, if doing some intensive nagging is going to mean you’re more likely to get paid more of what you’re owed.
But servicers don’t get paid more if they nag more. Servicers sign contract agreeing to get paid based on the total amount of the loans they’re servicing, plus a little side benny of late fees and costs. The longer you’re delinquent, the more fees they can tack on. If half the loans they’re servicing get a 10% reduction in principle, that’s 10% off the bottom line. And most importantly, they were only ever getting a few hundred bucks per loan to start with --- that means every call center drone they hire is covering hundreds if not thousands of loans.
Why aren’t the investors yelling at the servicers? Well, I’m sure they’re not too happy. But the contracts are signed, the structures of the industry mean switching to a new servicer is unlikely to alter the fundamental problem, and taking on the job themselves brings us right back to the beginning --- it would cost a shit load of money, and it’s not something they have experience with and are set up to do. Plus, each particular securitized pool of loans has hundreds of investors; they’d have to act as a group. Frankly, as a group they can barely get it together to sue the banks that sold them the bunk loans in the first place, and doing that has at least a shot at getting them shit-tons of money back, whereas improving the return on delinquent loans is a labor intensive, human resource intensive, document intensive process that gets you a couple grand here, a couple grand there.

This feels like nailing a plank over the rot and telling people to go ahead and jump up and down, the floor's solid....
posted by Diablevert at 7:15 PM on March 9, 2011 [8 favorites]

I wonder how the politicians will give the banks all the money this time?
posted by telstar at 7:44 PM on March 9, 2011 [6 favorites]

There's one rule in American law these days: the bank wins.

No matter what context, what plaintiff, what judge, what state, the bank always wins.
posted by T.D. Strange at 7:53 PM on March 9, 2011 [4 favorites]

I'm a pretty steady reader of The Consumerist, and just about every week it seems they have some new story about how some bank has fucked up a foreclosure or how someone has managed to beat the banks at their own game.

They've really screwed everything up to a point where it's not even possible to know whether property deeds are valid or not.

They've made their bed, and they should lie in it. It's a shame we bailed them out. It would have meant entering a new Great Depression, but at least the current system would have collapsed and we could have built something that actually works out of the ruins.

As it stands right now, we're still in the same system, playing by their rules, and we're only going to live to regret it in the long run.
posted by hippybear at 7:57 PM on March 9, 2011 [1 favorite]

GOP accuses White House of ‘regulatory shakedown’
Senior Republicans accused the Obama administration of a “regulatory shakedown” on Wednesday and called for a halt to the mooted $20bn settlement of the foreclosure crisis.

Richard Shelby, the senior Republican on the Senate banking committee, said a planned fine on the largest US banks and a proposal to force banks to write down outstanding debt on homeowners’ mortgages was a shakedown that would “politicise the financial system”.
posted by Rhaomi at 8:11 PM on March 9, 2011

"... the situations exist & continue
quietly in the dark while the
protest goes on in daylight -
both unheard.

the police try to protect
the banks - and everything else
is secondary ...."

by d.a.levy
posted by hank at 8:11 PM on March 9, 2011

Well, thanks, Diablevert, for this FPP. I read a lot of the links. Your "more inside" info helped me understand the situation a little better. But, you know, most of us just do not understand how this works. We know that those who do understand how the process works are generally making a lot more money than those of us who do not understand how this works. (I keep on saying "how this works" because I do not understand the meaning of any of those three words!)

I bought a house twenty years ago, and refinanced it twice. It will be paid off in about five years, about the time I retire. I'm hoping that this will work out as planned.

But, like most people, I just trust the mortgage officer (is that the right word?) and sign the papers. What goes on behind the scenes is incomprehensible to most of us. I understand that somehow, trillions of dollars have been transferred from people like me, well below the top 10th percentile in terms of income, but not living out of my car, in the last forty years, to the people in the top 1% of Americans. These people in the top 1%, I'm guessing, would understand the details you are trying to explain to the rest of us. (Obviously, there are many non-rich people who have a better grasp of mortgages, securities, etc. than most of us.)

But how do these ultra-rich people get that way? Well, first of all, they need to understand all this stuff I don't. I'm not stupid, but my education is not in business or math. And then what? Are they ruthless, greedy and amoral? That would be a simplistic and knee-jerk liberal position, right? How have things come to this? I'm trying to understand.
posted by kozad at 8:19 PM on March 9, 2011

Gosh, I wonder if this will lead to reform or punishment of the guilty.

Are they black and do they have a bit of weed on them?
posted by maxwelton at 8:43 PM on March 9, 2011 [5 favorites]

But how do these ultra-rich people get that way?

You answered your own question: I just trust the mortgage officer (is that the right word?) and sign the papers.

By trusting someone whose incentives were almost certainly not completely aligned with your own, you put yourself in a position to be taken advantage of. Now perhaps in your case it was fine, and the loan officer didn't do anything that wasn't also in your best interest as well.

But what a whole lot of people seemed to forget is that the loan officer sitting there in the bank or mortgage broker's office, basically serves the same function as the guy in the pinstriped suit in a car dealership. The car salesman wants to figure out a way to get you into that new car, by hook or by crook, and pretty much everyone understands this. But for some reason people don't seem to grasp that mortgage officers are essentially "mortgage salesmen". They're trying to sell you on a mortgage.

Most people may not have much of a business or finance background, but most people don't have much of a background in automotive engineering either -- and yet most people do a fair bit of research when they go to buy a car, rather than just blindly trusting the salesperson. Why people are so quick to trust the salespeople who lurk in banks, when they're correctly suspicious of salespeople in virtually every other context, astounds me.
posted by Kadin2048 at 8:50 PM on March 9, 2011 [7 favorites]

Well, thanks, Diablevert, for this FPP. I read a lot of the links. Your "more inside" info helped me understand the situation a little better. But, you know, most of us just do not understand how this works.

Yeah, sorry, I kind of marinate in this stuff for various semi-professional reasons and it can be hard to remember how much the average person knows or doesn't know. And it is very fucking complicated, for even the brightest of bright sparks, which I am not. "how this works" vis-a-vis the whole new gilded age top 1% stuff is above my pay grade.

"How this works" as far as the modern mortgage market ---- well, that I could probably explain fairly well, but not, I think, in less than 1,000 words, and I've already monopolized this thread far to much. The nickle version is probably this: about 25 years ago someone noticed that mortgage debt and bonds were both kinds of IOUs, but mortgage debt usually earned higher interest rates and defaulted less. So they decided, hey, wouldn't it be great if we could somehow turn mortgages into bonds, because all the big money guys we sell bonds to would snap 'em up. So then a bunch of clever Wall Street types figured out clever ways to cram mortgages into bond mold molds. And everybody was happy, because mortgages were cheap and they sold a shitload of them. But nobody had ever sat down and thought about, "hey, what would happen if tons of mortgages went bust at once?" because that hadn't happened since the great depression, and we thought we were too clever to let it happen again. But it turns out that mortgages act quite different than bonds when they're starting to go south, for reasons both social and legal. And now the mold is breaking and everyone is trying to pretend that it hasn't because if we admit it has it would probably mean the banks are broke and mortgages would be a lot more expensive.
posted by Diablevert at 8:58 PM on March 9, 2011 [1 favorite]

Are they ruthless, greedy and amoral? That would be a simplistic and knee-jerk liberal position, right?

Have you ever played Dungeons and Dragons?

You know that guy, the one that people tolerate but don't really like to play with, because he's obsessive about the game but... he isn't actually into the role-playing, the game he likes to play is the rules of the game themselves. He's obsessively into the rules. He scours every nuance, and while everyone else is rolling up their level one characters as reasonably normal, inexperienced people (ie level one characters), he's pulling obscure rules to counter other rules, using the resulting loopholes to build bigger and bigger wedges, combining other rules in ways that could never have been envisaged. He twists and warps the rules until he's created a "level one" character nearly as powerful as a god. And in some sense of the word, it's legitimate.

That's his fun. His game is single-mindedly wringing the unthinkable out of the rules. He is a hacker obsessed with beating the system, using the system. He will never stop.

Take that mindset, swap dungeons and dragons for business and law and politics and intrigue, add wealth, and watch in fascination and horror.

It's the same game, the same obsession, just different toys.
(Obviously this isn't everyone, but it's quite a few.)

This is also a reason to stop playing dungeons and dragons - you could be out in the real world using those powers for evil!

But how do these ultra-rich people get that way?

Being born rich helps. It usually takes money to make money.

There is also the network. You know a mechanic who can do you a favor and fix your radiator for the price of a junker part. That's a really good deal! Instead of a mechanic, John RichDude knows a head of an oversight agency who will give his company a free pass on some regulation that others must respect. And he knows a politician who will change the law to funnel government dollars into his company. Of course it would be too big an imposition to ask the politician to write a new law to do this, John has his own lawyers write the new law, pays some lobbyists to spread the word so when his mate introduces it, congress passes it.
John's company is now on a free money gravy train.
But John doesn't need to figure out these things or do them - his company does them for him. It takes care of itself and it takes care of him. And so on.

Maybe he gets sued. Maybe his company overreaches and is ruined.
No matter - another friend of his know of a big contract coming up, and John would be just the guy for that! Even when John is a failure, his network will pull him back into the game.

A network of powerful people is obviously powerful, but it's surprising how powerful.
At least it is to me. Looking from the outside.
posted by -harlequin- at 9:00 PM on March 9, 2011 [17 favorites]

Maybe a better mechanic example would be "you know an emissions tester who will look the other way when you drive up with your old beater car idling at an unusually low rate. He runs the meter, gives you your pass and waves you out on your way back to get your motor tune returned back to its normal level which would never pass."

Some people do that at a bigger scale.
posted by -harlequin- at 9:05 PM on March 9, 2011

I will extend your metaphor. harlequin. There is one build which attains ultimate power in level one with finagling: the famous Pun-Pun of DnD 3.5. It has some parallel to the situation.

How the Pun-Pun build works is by leveraging the rules of the Sarrukh, specifically a special ability called Manipulate Form. Manipulate Form can change the stats of anything with scales (how to qualify? Start as a reptilian kobold), keeping them the same or lowering them or, most notably, raising them up to your level arbitrarily and permanently. Manipulate Form also allows you to give special abilities to others, not excluding Manipulate Form itself. The Sarrukh is a level 20something creature, designed against epic encounters, and the encounter situation it runs up against is entirely different from the level 1 characters. Pun-Pun is a wizard: he needs to be, in order to get a snake familiar.

In order to get that Manipulate Form ability without getting it from a Sarrukh, what Pun-Pun does is call Pazuzu, the demon prince of the gates of the Abyss (how the level 1 character calls a demon prince is another, slightly more complicated matter). He is described as having any special ability to give, via a process as sadistic as the wish spell; nevertheless, he can get Pun-Pun that ability. When Pun-Pun gets it, he gives it to the snake. So whenever he wants, he can cast some temporary stat boost to the snake and have the snake buff him up permanently, thus getting arbitrary stats. To get any ability, there are some other tricks.

This is only the beginning of it. Using the artificer class and some spells from the Book of Vile Darkness, we can get to true infinities at a level of 5, perhaps less. I do not think it ends at aleph-null infinities, either. Do you see the law in it? Do you see the strange coincidental multiplicative power of business in it? Misapplication, misreading and stubborn application of the Rules As Written leads to such things. Manipulate Form was written terribly, but the wrongdoing is in the player who spreads it out to grossly spread its vile influence outside of the fluff in which it was conceived.

So here is your introduction to harlequin's theoretical optimization. What prevents it from actually happening in games? The DM necessarily takes a purpose in his DMing, whether it be perversely punishing the players (the Gygaxian) or to increase the amount of fun (the milquetoast). This is a table without a DM, and nobody willing to stand up and DM.
posted by curuinor at 9:47 PM on March 9, 2011 [6 favorites]


I think that Diablevert does a great job of getting to the point. I would want to add something here:
And everybody was happy, because mortgages were cheap and they sold a shitload of them. But nobody had ever sat down and thought about, "hey, what would happen if tons of mortgages went bust at once?"...
Those lines contain some very important points that may require further explanation.

First, you have to understand that the process of mortgages being "molded" into bonds means that the banks, themselves, are no longer owed money. The buyers of the bonds are owed the money. This means that the banks, as mortgage lenders, are made whole.

Second, between the time that you bought your loan and 2007, meeting the requirements for getting mortgage became easier and easier to achieve because the banks began to lower their standards.

Third, since the banks weren't worried about the lower standards being set in the creation of the loans, because they molded the loans into bonds and sold them to bond buyers.

Fourth, The organizations that did the actual molding of the mortgages into bonds got paid a commission for every slice they cut for a bond buyers. These were the investment banks (i.e. Lehman Brothers, Bear Stearns, Goldman Sacks, etc.).

Finally, the commercial banks (Chase, BoA, Wachovia) are, often, still in the middle of the deal...they are the "servicers" we are talking about here. They charge a fee to bondholders for doing the work of collecting and distributing payments. They get to charge and collect late fees, etc. from homeowners who are paying their mortgages.


Now, if you understood all of this (and are still reading) get ready to have your socks blown off because here is the part that is beyond ridiculous. In order to prop up the price of the the mortgage bonds, both the commercial banks and the investment banks were significant bond buyers.

They bought their own low-quality bonds, the so-called toxic assets. Let that sink in for a moment.

If your socks are still on, they may get blown off now. One of the investment firms making these molds really saw the writing on the wall before the mortgages went bust. So they bought insurance. Lots of insurance. Did this mean that they stopped molding bonds? No. Did this mean that they stopped buying slices of the bonds the made? No. Motherf$#@ers!!!

By getting insured, they knew could still buy bad bonds and not have to worry about taking loses. By continuing to buy bonds, they could avoid tipping anyone off that they knew something was amiss. Having said that (and someone correct me if I'm wrong here), the investment firm didn't exactly hide that it was getting insurance on the bonds and other entities did, too (btw, brokered by said investment bank).

When things finally went bust, that insurance company couldn't pay its commitments. And this is the background behind the US government paying AIGs commitments.


How was the money made? It was made by unethically (often fraudulently) selling mortgages they weren't going to hold on the bank's books and collecting billions in an array of fees: initiation fees, commissions, brokerage fees, servicing fees etc. It was made by getting insurance on a product that was known to be low-quality.
posted by Hypnotic Chick at 11:32 PM on March 9, 2011 [10 favorites]

The top five mortgage servicers had a combined profit last year of over forty-three billion which makes twenty billion seem a little low as a fine. Is that only covering consumers directly?
Still a lot of the new regulations look like a step in the right direction. Some things look like they will simplify the process of dealing with banks. A couple hard rules about responding to mortgage restructuring with a required default answer something other than 'no'. However I read the condensed version and it looks like a couple of the guidelines are similar to the old guidelines. I guess they're trying to tell the banks it's serious this time?

Kozad, if you would like a more concrete example of the sorts of behavior being described in this thread. The FPP about a drug manufacturer obtaining exclusive rights to a drug that had already been produced by someone else. Seems like a fairly reasonable example of: a network pulling someone back up, collusion with regulators, and twisting rules and laws into previously unimaginable ways in order to stay rich.
posted by JackarypQQ at 1:02 AM on March 10, 2011

Why people are so quick to trust the salespeople who lurk in banks, when they're correctly suspicious of salespeople in virtually every other context, astounds me.

I'll tell you why: because the math is harder.
posted by Civil_Disobedient at 5:21 AM on March 10, 2011

This feels like nailing a plank over the rot and telling people to go ahead and jump up and down, the floor's solid....

Well, sure....but that's basically what they've been doing since 2007.
posted by spirit72 at 5:22 AM on March 10, 2011

They've really screwed everything up to a point where it's not even possible to know whether property deeds are valid or not.

Ooo, this sounds like good timing for some socialist land reforms!

So sorry that we can't reimburse you for lost property, Big Banks. We would if we could figure out what you actually, definitively own. How 'bout we call it even for engineering that whole worst recession since the Great Depression financial crisis thing?

posted by eviemath at 6:12 AM on March 10, 2011

I think 2 of the biggest reasons our financial industry is in this mess are:

1) The people pushing mortgages are paid for writing the deal. After the mortgage is signed, the mortgage is then packaged with other mortgages and sold as an investment. The company writing the deal has no skin in the game, if the mortgage is made to someone who can't pay it back, hey, it's not their money. They got paid for the deal and moved on to the next hot prospect. They're mercenaries with no loyalty to anyone but themselves. This "getting paid to write the deal" situation led to a greater number of creative mortgages like 106% financing (lending 106% of the value of the property since "real estate always increases in value," interest only loans (the borrower only paid on the interest, the payment did not include any repayment of the money actually borrowed,) floating rate loans with initially low teaser rates (when the rate increased many borrowers could no longer afford their mortgage payment. There was a whole industry created to provide unqualified borrowers with a phony income reference, including an 800 number and fake paystubs for verifying non existent income.

2) Low tax rates on income and capital gains mean that the wealthy have to look for new places to put this all this new money they suddenly have. When supply is greater than demand prices go up. After investors lost money in the dot com bubble, many of them looked for tangible assets to put their money in. Again, oversupply came into play when housing bought by people who couldn't repay their mortgages caused the housing market to crash. The really bad part is that profits in this country are privatized and big losses are socialized.

On a macro level, I believe most of our problems are caused by the way our elections are run and financed. politicians have no hope of being elected unless they raise vast sums of money. This creates a situation where wealthy individuals and corporations buy favorable legislation and press. Politicians are incentivized to to produce short term positives only and defer or avoid painful remedies for the long term good of the country as a whole. Screw altruism, it doesn't pay worth crap.
posted by Daddy-O at 6:48 AM on March 10, 2011 [1 favorite]

I've said it before, I'll say it again. The reason this is allowed to persist is because there is no mandatory, universal land registration system in the United States. My state, Massachusetts, has a land registry which is optional, and as a result the same charlatans and swindlers who make their money from messy titles never tell their clients about the prospect of registering their land so that there can never be a title contest again. The same kind of crookedness keeps the "title insurance" business afloat, a business that shouldn't even exist today. The registration rate in Mass is only about 12%, and it's because none of the pros have an interest in increasing it.

Australia created the first Torrens title system 153 years ago. Why can't the USA get its act together and abolish its Medieval, crappy land registries?
posted by 1adam12 at 7:30 AM on March 10, 2011 [1 favorite]


For anecdotal evidence, read this from WaPo:
Last fall, my wife and I refinanced our mortgage with Citibank. Sixty days later, we received a "cancellation notice" from our homeowners insurance company "for non-payment of premium."

Turns out Citibank, which had been collecting hundreds of dollars a month from us to pay the insurer, hadn't made the payments. It was, I later learned, one of the usual tricks mortgage servicers use to squeeze more cash out of their customers. About a month later, I learned of another trick: Citibank informed us that it was increasing our monthly payment by nearly $300.
posted by Hypnotic Chick at 8:52 AM on March 10, 2011

I'll tell you why: because the math is harder.

Not harder -- it's the same underlying math, assuming you're financing your car purchase. I think it's more accurate to say that the subtleties of that math matter more on mortgages because the stakes are higher. Though I guess with all the creative lending products, the application of the math definitely gets harder.

I have to say, though, I don't think this is what the real problem is. I think banks have done what more or less amounts to some fine-tuned image/social engineering. Everyone understands cars as wares that someone's pushing, as *retail*. Lending and fincance, though, have had an image that's more like medicine or law -- these are *professional* services. What's that you say? Professionals are in it for the money, too? Well, sure, but they have profession-standards! My doctor would never sell me a drug or a procedure or ask me to come in for another visit just because he stood to make a buck off it. My mortgage officer is the same way -- and you can tell by the way they carefully screen me to make sure I "qualify" that this isn't some salesman just waiting to saddle me with whatever they've got in stock so he can make his commission. Besides, look at their professional dress standards, office-y looking offices, and by the way, these people must know what they're doing and be very careful, given their important part in handling so much money, which they seem to know more about than I do.

Increased mathematical/financial literacy might help you cut through that and make better decisions -- I think it's probably been a mild asset, and has probably kept me out of a few bad transactions. But the most telling thing to me about the general usefulness of it has been that (a) a few times I've been on the edge of or have gotten in anyway and (b) on the few occasions I've probed ostensible professionals on the math (usually when I didn't understand balances/values/charges), they've never engaged on it, they've always fallen back on the authority of their systems or their policies or their terms of service -- ultimately, on their status as the bank. That tells me which tools they find useful and important.
posted by weston at 10:20 AM on March 10, 2011

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