Business and management
America's mortgage settlement
Home Wreckers
Feb 9th 2012, 23:13 by T.E. | NEW YORK
AMERICA'S chaotic response to its housing crisis moved into new territory on February 9th with the announcement of a $25 billion settlement between five large financial institutions and a slew of state and federal entities.
Only Oklahoma stayed out of the settlement, with its attorney general Scott Pruitt releasing a scathing statement saying it rewarded homeowners who stopped paying their mortgages over families who continued to pay, thus encouraging more defaults.
The settlement was trumpeted by President Obama, who, on a stage crowded with government officials, said it was a “landmark settlement” that “will speed relief to the hardest hit homeowners” and “turn the page on an era of recklessness.” There will be, he added, refinancing for borrowers “stuck in high interest loans” and reductions in loans for families that owe more than their homes are worth.
Many of the key issues in the settlement remain unclear. None of the announcements even touched upon the reasoning behind a $25 billion price tag for the settlement. Who will receive the money is perhaps an even more pressing mystery. President Obama blamed the actions of banks and other related institutions for causing 4m Americans to lose their homes to foreclosures, but only a fraction will receive relief.
Federal and state governments will get $5 billion from the settlement, with $3.5 billion going into a nebulous pot “to repay public funds lost as a result of servicer misconduct and to fund housing counsellors, legal aid, and other similar public programs determined by the state attorneys general.” The largest pool, $20 billion, will go to homeowners, but there is, at least as of yet, no public formula.
The impact on the financial institutions themselves is unclear as well. On word of the settlement, the share prices of the publicly traded institutions—Bank of America, JP Morgan, Wells Fargo, and Citigroup—perked up, only to slide a bit after the announcement (the fifth, Ally Financial, formally General Motors Acceptance Corp, remains owned by America’s taxpayers after being bailed out). Huge reserves have already been put aside for legal settlements in general and this one in particular, so no large earnings impact is expected.
The administration and various attorney generals insist that the deal would not pre-empt future suits against the banks. But a release from Wells Fargo notes that as part of the deal it has been released from numerous categories of claims. In sum, it appears the line on litigation has been drawn finely enough for the government to say it has preserved the rights of any aggrieved bank clients and for the banks to say the deal ends a sordid legal chapter.
Among the most debated outcomes is the impact on the overall housing market and—because of the housing market’s importance—the American economy. During the settlement negotiations banks were reluctant to initiate foreclosures. This has buttressed the housing market by restricting supply, but left a huge overhang of properties that can be foreclosed.
The process will accelerate. Some families will presumably be spared losing their homes because of settlement funds, but others will not be so fortunate. The result is that many properties could be dumped on to the market. In the short-term this will cause prices to fall and genuine personal agony, but in the longer-term it will clear away a critical source of uncertainty about housing supply and demand. That certainty, ironically, will come at the price of much legal uncertainty.
(Image credit: AFP)
In this blog, our Schumpeter columnist and his colleagues provide commentary and analysis on the topics of business, finance and management. The blog takes its name from Joseph Schumpeter, an Austrian-American economist who likened capitalism to a "perennial gale of creative destruction"
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Clearly, crime does pay.
Make trillions and trillions corrupting the U.S. economy and destroying millions of lives.
Then, just pay a token penalty to the Government.
And the victims still see no light at the end of the tunnel, dismissed.
Richard Michael Abraham
Founder
The REDI Foundation
http://redii.org
Welcome to the new capitalist paradigm buddy, it's a trickle up effect these days, nay, a flood up effect!
How do you force a bank to make a loan?
@rslow, you nationalise the bank under workers control, with all wealth generated back into the economy.
Chronology please, this is legacy to be dealt with now. Something has already been done and now another step is taken. So what is the problem? Perhaps legal clarity is a long way off, cases are notoriously slow everywhere. So what to do in the meantime with clearance first and justice second. It is unfortunate but price support mechanisms need repairing. Without a restoration of asset values there can be no widely distributed multiplier effect and no return to sensible capital gain for development to have room enough not to be shackled to top-line earnings where the only recourse is to squeeze the bottom line. Lower wages, reduced hours and lack of flexibility in the workplace are all direct results of the collapse of Residential Mortgage Backed Securities (RMBS)in America.
But to posit "sides" and then say oh one "side" is as bad as the other with a throw up of the hands is as inaccurate as it is lame. Yes it takes two to transact and where only one side is privy to the most relevant information there is potential for, soon followed by, actual market failure - witness the infamous Paulson short. Market justice will assist many more people than eventual legal justice just as good public health saves more lives than open heart surgery.
By the way if the left comment people here actually want to know the causes of the crises they should read "Housing: Boom and Bust" by Thomas Sowell, and "Meltdown" by Thomas Woods.
However, I very much doubt that the left comment people do want to know the truth - after all the truth would spoil all their mythology and the "deregulation" of stuff by George Walker Bush. And how greedy bankers "tricked" people into buying houses that they could not afford.
I often attack things in the Economist - so justice demands that when someone asks me to read something (and a friend did ask me to read this article) and I find it is good, I say it is good.
This article is good - it gives a sense of the absurdity of this scheme.
Although, of course, the banks are also cowards to go along with it. No doubt they act as they do because they are so dependent on the good will of the Federal government (the drip feed of credit money from the Federal Reserve and so on).
The Federal Reserve has nothing to do with the government.
Whilst legally "private" (as the Bank of England was between 1694 and 1946) the Federal Reserve was created by Act of Congress (1913 - I think we would both agree it was an unconsititutional Act of Congress by that is a another matter) and its head is appointed by the President of the United States.
The Fed - like Fannie Mae and Freddie Mac (both set up by govenrment and now openly governent) is "private" in name only.
Although, yes, the relationship between the employers of certain favoured enterprises (such as Goldman Sachs and J.P. Morgan Chase) and the Federal Reserve would not be tolerated under the rules that the Bank of England and the Bank of Canada operate under. There is an unusually high level of the corruption at the Fed (although it can hit other Central Banks also - see the antics of the former Governor of the Bank of Switzerland and his wife's "fortunate" trading in the currency markets) and this corruption at the Fed may well be due to the way it is stuctured (with the represenatives of private banks active within it).
However, the Bank of England (which is free of this level of corruption) follows a monetary policy that is just as "expansionary" (i.e. just as much dominated by creating funny money) as the Federal Reserve does.
So the special treatment for Goldman Sachs and J.P. Morgan Chase is a side issue - although a very irritating side issue.
This is what my father would refer to as "a day late, and a dollar short," and my, oh, my, late, late, and short, short. This is a drop in the bucket compared to what is owed to the American people, and the global economy, which set into the motion the international fall out we see today. And where are these people who triggered it all? On a beach? Living in a nice fat villa? Where is the jail time? The punishment that goes with massive home loss, homelessness, and disaster, all played on a gamblers roll, the ultimate bet against America? Who won that bet? I want to see their face, and I want their names posted, and slandered, like the rest of us who trip, and stumble, but, nooo... It just goes to show you... that if you can throw money at a problem; it goes away, right? Tragic, and sad, but, not nearly enough: jail time is the only thing that will bring some sense of justice to the table.
Well, the real culprit in this self-inflicted US tragedy is called George Bush junior, who rescinded financial controls in the banking system to keep the housing bubble going. But don't worry, he will not be held responsible for that fiasco, nor the illegal war that he botched in Iraq costing more than 150.000 innocent Iraqi lives and still counting. Now comes the interesting part, somebody has to be held responsible for the suffering that troglodyte caused and who wouldn't be more convenient than Obama.
Greedy, irresposible foreclosed (ex)homeowners are just as guilty as the fat-cat financiers of those "NINJA" loans/mortgages that went belly-up. People who had zero/negligible savings & no decent job to boot - who would not be approved even for a $10K loan, under normal circumstances - went ahead & bought half-a-million dollar worth homes, with zero downpayments!!
What were they thinking or rather hallucinating about, when they bought those totally unaffordable 'dream' homes?? And when the money-hungry banks/financiers foreclosed on them, for defaulting on their mortgage payments, they play the "victim" card!! Yes victims of their own abysmal stupidity & insatiable greed, is what it is..
Much as I found the run up to the crash objectionable, dont forget the armies of glad handing pundits arguing that gravity had been repealed. Human beings are herd (or pack) animals depending on circumstance. The housing market was billed as a 100% reliable trampoline into the middle class.
Reading the Big Short or Boomerang does give you an idea of just how strong the drive conjure the raw material for derviatives and cdo-s was. Reading something like Extraordinary Popular Delusions and the Madness of Crowds is another education in just how much bubbles are the product of human nature. It is remarkable that any economic system can be considered modern if it lacks structure to chill motivations that drive bubbles.
No legitimate bank sould have made any of these "bad" loans. In every lending situation the borrower must be qualified for the loan by the lender. If the banks had had in place any standards at all for making these housing loans the loans simply would not have been made. The nonsense that thousands upon thousands of people with no money or prospects went out and bought half a million dollar houses without the encouragement and complicity of the banks is beyond ridiculous. Ever applied for a loan? All the bad loans these banks and mortgage companies made simply should not have been made. Remember, please remember that the mortgage originators made the money off the banks, and the banks made the money off selling the bad loans after packaging those loans with good loans. Once the banks discovered that they could sell any loan when it was packaged and make significant profit, it was "game on" and so it was. Please, please don't blame the borrowers. No one forced these lending institutions to make these loans, to hand out money to non qualified applicants. This is the fiction that is being spewed from every defender of the defenseless in this most horrible of situations.
You got that right for sure. Blame it on "GREED"..
Nobody is suggesting that it's entirely the fault of the gullible borrowers. But they (borrowers) are/were just as greedy as those greed-driven & predatory ponzi banks/lending institutions, who offered them such ludicrous loans.
Using your own argument, no one forced these borrowers to accept such exorbitant loans, that they could ill-afford. Both parties must take responsibity for their glaring mistakes & stupidities, is all I'm saying.
Like they say: "It takes two to tangle"..
I'm hearing ya buddy, hang em high!
What, exactly, are the charges against the servicers which are now settled? General-market media can chant "the robo-signing scandal" as much as they want, but I expect The Economist to explain a little better just what this purported fraud-or-malfeasance _is_ (or, as I suspect and fear, to report more plainly that the emperor has no clothes.)
Near as I can tell, there's virtually no law and a ginormous pile of politics at work here. A boatload (an aircraft-carrier-load?) of people took out loans they can't afford. It's easy politics to realize this makes banks unpopular and to Do Something About It(tm), which appear to have been "look for a rubber-stamped signature and call it fraud". If there were stories of people being foreclosed upon when they were, in fact, current on their payments, they'd be shouted from the rooftops. As I hear no shouting, I conclude that mass wrongful foreclosures just aren't happening.
It's hard politics to tell millions of voters that they're responsible for their own actions.
Defaulting homeowners, who bought homes they ciould ill-afford, are just as much to blame as the financial institutions that approved such untennable mortgages. Both should be held responsible for their rash profligacies. Neither can claim 'victimhood'..
No, but the captains of the universe were the reputed "responsible" folk from whom the market was supposed to derive its discipline and self regulation from.
The general great unwashed are hardly privy to an education about the gullibility of man and populations; I doubt Extraordinary Popular Delusions and the Madness of Crowds is standard reading in high school, nor is a basic education in economics or banking.
That's where the education system & society have failed abymally. All it takes is commonsense, simple logic & basic arithmetic, to figure things out. Instead we are constantly promoting & pursuing self-conceit, hubris, entitlement, greed & selfishness.
Like you mentioned, those subjects should be "standard reading in high school" curriculam..
For decades, the housing system worked in the U.S. The banks had lending criteria that put millions of families in their own homes and held down foreclosures. Foreclosures were a rarity except when a large factory closed down or the home owners suffered major medical illnesses and resulting bills.
Then the Dummiecrats and Slick Willie Clinton decided to buy millions of Black, Hispanic and poor White votes by conjuring up the Community Reinvestment Act which required banks to begin making home loans to tens of thousands of previously unqualified borrowers. Slick Willie Clinton even used the Justice Department to hammer the banks, threatening them with civil rights actions if they did not begin making loans to previously unqualified borrowers.
The banks were forced to come up with gimmicks such as "balloon mortages" and "liar loans" to accommodate unqualified Black, Hispanic, and low-income White loan applicants. It took the Federal Government several years to destroy the housing system, and likewise take down the economies of dozens of foreign banks and investors who bought into mortgage-backed securities.
The FEDS can force the banks to anti-up too much money as the FEDS caused the problem in the first place with the vote-buying schemes of Dummiecrats such as Slick Willie Clinton and Bawny Fwank.
I didn't know there were such things as "black" or "white" loans - well, we French people are colour-blind...
This settlement is simply another example of the Obama-Democrat concept that it is the legal and moral obligation of the responsible members of a society to subsidize the irresponsible members of the society. Those who buy a house they can't afford must be rescued by those who live within their means.
You mean like Goldman Sachs?
More CRA crap . . . Try factoring some of the following into your mythology.
Removing the 5% rule and the first subprime problem in the late 1990’s. Mortgage brokers incentives, Alt A, No-Docs, and Interest only, Countywide, Ameriquest and the hundreds of originators that sprang up in the early 2000’s. Where the explanation of mortgage backed securities, the rating agency’s “mistakes”, credit default swaps, AIG and all the other NON-GOVERNMENTAL part of this fiasco?
How come you can’t see this? If the only culpability you see here is the government your beliefs are blocking your information-gathering ability. Reality, what a concept. “Confirmation Bias” look it up
May be not all Banker's, are guilty of this crime, we the humanbeing-differ from each other, dont you thik so ?
Cllr Ken Tiwari (Oxford UK)
what was the alleged misconduct? loaning to the poor at government request? asking to be paid back? leading their own investors to believe that these loans were sound? myself i think the banks should collect from the government, it is the villain.
I am deadly afraid that this so-called "deal" is just a way to get Big Banks off the hook of a couple of TRILLION DOLLARS worth of lawsuits and put the US government and taxpayers responsible in the long run. Now that the POLITICAL CAMPAIGN HAS abandoned its small donor pretense they need REAL BIG DONORS FROM WALL STREET to fill the coffers. All attempts to have Democrats practice the giving of the 10% to the campaign thru out the 2012 campaign fell on deaf ears. My fellow Democrats want any one other than themselves to pledge a significant monthly portion of their own budget. In fact, if all elected Democrats and party officials, especially fund raisers, gave 10% to the 2012 campaign the Democratic Party would have much more credibility in approaching "targeted" future donors. THIS IS A SHAME.
This is really nothing more than a shakedown of the too-big-to-fail crew . Think of it as an insurance policy to stay in the good graces of their bosses in Big G . Sort of like when Tony Soprano shows up at your pizzeria and hits you for a couple hundred bucks a week so nothing bad should maybe happen . And anyway none of the malfactors take the hit ;it's the shareholders' money . BTW nice to see that UBS is serious about clawbacks of bonuses so that the bums who made the mess have to clean it up or at least not profit from it .
The posts are outrageous. Who held the gun to these home buyers heads when they signed up for these mortgages? Where's the personal responsibility on their part? Nobody bailed me out on losses I took on stocks like Allied Irish Bank and AIG? It's part of the market and if you take risks in a seemingly forever rising housing market and it turns out to be a bubble, you should take losses too. It's not like most of these folks saved assiduously for a substantial down payment on these loans. They were underwater for a very good reason. This is pure populism by the Obama administration.
I am sorry sir, but I would have to agree to this reimbursement. Not for the sake of the irresponsible people who took out loans, but from responsible adults who were cheated by the system. My parents are both very successful in their work, and took out a loan to buy a house. They never used credit or took out loans, and paid for things in cash with the exception of the home. My family lived there for 5 years, and my parents were 2/3 through with the housing payment. My father became unemployed, and my mother applied to refinance our home. (They made the payments larger when my father was employed) It took six months for them to get back to us, and we still made all the payments on time. After the 6 months, things started getting rough, and they were not cooperating with our situation. My mom was late on a payment by 6 days, and continued to pay on time after that mishap. My father got a job and things went back to normal, and THEN we got a letter in the mail saying that our "house is being foreclosed" and we were forced out of our home. This is the essential problem, honest, responsible people are getting screwed over by big banks. These bankers probably made BILLIONS off of these illegitimate foreclosures. Sure, my parents should probably sue, but they are not rich enough to hire the lawyers.
Did your parents consult a lawyer? 6 days late and a bank foreclosed? Loan sharks are more flexible and neither loan sharks nor banks have any great interest in shoving people out on the street when they'd be stuck with a home in a tanking market. If your parents were making payments, the bank would much rather have that money coming in than be stuck with a home they can't unload. Bankers made many mistakes, many at the behest of Fmae and Fmac, conspicuously absent in all this, yet what you describe is not a mistake any sane banker would make.
BlackBear, sorry if things were exactly as you described, but hard to believe they were.
Your folks had enough cash to pay the mortgage, so I think they could have found enough to have an initial consultation with a lawyer before packing up and moving out.
Also, as tieratze says, the bank would rather have the money than the house.
Your very simple account gives off a funny smell.
Just like in all markets the level of manipulation has to be regulated less they swerved into serious damages. When greed and getting extreme wealth is key to the neighbourhood, the collective drive to achieve wealth through all means amount to fraud - massive. Maybe, the US lawmakers cannot prosecute the frauds because they themselves did benefit from the initial market upturn.
Will bankers be required to recind the losses they wrote off to the IRS two+ years ago?
I certainly hope that SOMEONE addresses the LONG OVERDUE CRIMINAL CHARGES by both lender reps AND BANKING EXECUTIVES that CRIMINALLY and DIRECTLY LED to people losing their homes and their lives!
There is ABSOLUTELY a CRIMINAL ELEMENT involved here that is being compeltely ignored by Congress, et al...IT'S CALLED "FRAUD", and it IS A CRIME under the US TITLE CODE!
The fraudulent representation that was rampant among lending reps (et al)who raked in billions from unsuspecting consumers (victims) who THOUGHT THEY WERE PROTECTED BY LAWS...the same laws that ae TOTALLY Failed to be IMPLEMENTED by the federal government and Congress who MADE THOSE LAWS!!!
One of the BIGGEST failures is the failure to implement laws, that directlycounter the COST TO TAX PAYERS in Legislative FEES that WE the PEOPLE are FORCED BY GOVERNEMTN LEGAL RESTRAINTS to UPHOLD!!!
The "criminal element" seems to be the ONLY FREEDOM afforded to our country, and it is taking a HEAVy toll on law-abiding citizens' lives!
Ironically, current slave owners running the banking industry that likens itself to a corrupt plantation government should be lynched for their detrimental slavery imposed upon ALL of its citizens (banking pawns)...this includes unsavory credit companies.
I just don't see situational improvement happening, as long as the detrimental entourage of “outsiders” with greedy personal interest remains in AMERICAN GOVERNMENT and amongst our citizenry that harbors outsider, illegal alien interests! I think this also holds true for many European counterparts who realize the many detrimental CAUSE AND EFFECTS within our societies that are being ignored, instead of RESOLVED.
After all, this is AMERICA, NOT Yugoslavia or Slovakia! Shame on the INTERNAL enemies of the USA! The EU is also showing signs of the SAME cause and effect failures by allowing so many outsiders and illegal aliens to "escape their own terrible lives", imposing that detriment onto our societies (we already have enough internal problems that are NOT BEING RESOLVED, only being scapegoated by politicians and those with greedy self-interests).
The entire concept of "War on American soil" has taken a whole new dimension...I hope SOME LEADER is smart enough, wise enough and financially independent enough to COMBAT these detriments AND TRULY SAVES THE USA from complete implosion from this burden!
The days of isolation may be over, but NOT THE FIGHT FOR AMERICA's GREATNESS! Who let these guys in here? When did they put the blindfold on Lady Liberty with a surprise internal attack? She has been taken hostage, and must be returned in ALL lands where disreputable selfish interests have turned on their own people...kind of reminds me of the storming of the Bastille...I wouldn't depend on security, as many guards in the French Revolutions turned on traitors of royalty. I already know many military members who have become enlightened as to their being used as government/elitists pawns...As history does repeat itself under similar circumstances...I just don’t want to be alive to watch another “Fall of Rome, or Storming of the Bastille.”
How about we saw some prosecution of bankers for the crimes and fraud they committed resulting in the financial crisis.... that is long overdue...
Did you mean 'formally' or 'formerly'