Major banks were bailed out during the financial crisis of 2008. Ever since then, they have been scrambling to avoid financial responsibility for their imprudent lending practices that precipitated the crisis. The banks entered into a large settlement with the attorneys general across the country to ostensibly pay restitution for their shoddy paperwork and foreclosure practices, but that was not the end to the pain for their misdeeds. Now, a series of both public and private entities are suing them for fraud, duping investors, and lax underwriting standards.
I hope they lose.
They deserve to lose. The banks must bear the full brunt of their mistakes, or they will almost certainly repeat them.
Mortgage Crisis Presents a New Reckoning to Banks
By JESSICA SILVER-GREENBERG — Published: December 9, 2012
The nation’s largest banks are facing a fresh torrent of lawsuits asserting that they sold shoddy mortgage securities that imploded during the financial crisis, potentially adding significantly to the tens of billions of dollars the banks have already paid to settle other cases.
These are all claims outside of the massive settlement agreement over bad foreclosure paperwork. That settlement gives them no shield to protect them from these lawsuits.
Regulators, prosecutors, investors and insurers have filed dozens of new claims against Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and others, related to more than $1 trillion worth of securities backed by residential mortgages.
Estimates of potential costs from these cases vary widely, but some in the banking industry fear they could reach $300 billion if the institutions lose all of the litigation. Depending on the final price tag, the costs could lower profits and slow the economic recovery by weakening the banks’ ability to lend just as the housing market is showing signs of life.
The banks are battling on three fronts: with prosecutors who accuse them of fraud, with regulators who claim that they duped investors into buying bad mortgage securities, and with investors seeking to force them to buy back the soured loans.
Banks are guilty on all three counts. They should be facing numerous legal hassles for their bad behavior.
“We are at an all-time high for this mortgage litigation,” said Christopher J. Willis, a lawyer with Ballard Spahr, which handles securities and consumer litigation.
Efforts by the banks to limit their losses could depend on the outcome of one of the highest-stakes lawsuits to date — the $200 billion case that the Federal Housing Finance Agency, which oversees the housing twins Fannie Mae and Freddie Mac, filed against 17 banks last year, claiming that they duped the mortgage finance giants into buying shaky securities.
Last month, lawyers for some of the nation’s largest banks descended on a federal appeals court in Manhattan to make their case that the agency had waited too long to sue. A favorable ruling could overturn a decision by Judge Denise L. Cote, who is presiding over the litigation and has so far rejected virtually every defense raised by the banks, and would be cheered in bank boardrooms. It could also allow the banks to avoid federal housing regulators’ claims.
Lenders are trying to abdicate all responsibility for their so-called legacy loans. It’s as if the entire housing bubble period was some unaccountable free-for all and they should be absolved for all responsibility for their shoddy lending practices. I hope these lawsuits drain them of their profits and cause executives to lose jobs or at least lose bonuses.
At the same time, though, some major banks are hoping to reach a broad settlement with housing agency officials, according to several people with knowledge of the talks. Although the negotiations are at a very tentative stage, the banks are broaching a potential cease-fire.
Out of self preservation the banks need to negotiate another broad settlement over their bad loans. We can only hope the federal negotiators protect the taxpayers in the final agreement.
“All of Wall Street has essentially refused to deal with the real costs of the litigation that they are up against,” said Christopher Whalen, a senior managing director at Tangent Capital Partners. “The real price tag is terrifying.”
I get warm feelings from that.
Anticipating painful costs from mortgage litigation, the five major sellers of mortgage-backed securities set aside $22.5 billion as of June 30 just to cushion themselves against demands that they repurchase soured loans from trusts, according to an analysis by Natoma Partners.
But in the most extreme situation, the litigation could empty even more well-stocked reserves and weigh down profits as the banks are forced to pay penance for the subprime housing crisis, according to several senior officials in the industry. …
JPMorgan Chase and Credit Suisse, for example, agreed last month to settle mortgage securities cases with the Securities and Exchange Commission for $417 million, but still face billions of dollars in outstanding claims.
The SEC settlement was a slap on the wrist. Hopefully the private lawsuits will be a severe pounding. 
Bank of America is in the most precarious position, analysts say, in part because of its acquisition of the troubled subprime lender Countrywide Financial.
Last year, Bank of America paid $2.5 billion to repurchase troubled mortgages from Fannie Mae and Freddie Mac, and $1.6 billion to Assured Guaranty, which insured the shaky mortgage bonds.
Mozilo walked away with millions, and others have to pay the bills.
A settlement in that case could reach well beyond $1 billion because the Justice Department sued the bank under a law that could allow roughly triple the damages incurred by taxpayers.
I suppose we will take their money and give it back to them in a bailout.
Of the more than $1 trillion in troubled mortgage-backed securities remaining, Bank of America has more than $417 billion from Countrywide alone, according to an analysis of lawsuits and company filings. The bank does not disclose the volume of its mortgage litigation reserves.
“We have resolved many Countrywide mortgage-related matters, established large reserves to address these issues and identified a range of possible losses beyond those reserves, which we believe adequately addresses our exposures,” said Lawrence Grayson, a spokesman for Bank of America.
Bullshit.
Adding to the legal fracas, New York’s attorney general, Eric T. Schneiderman, accused Credit Suisse last month of perpetrating an $11.2 billion fraud by deceiving investors into buying shoddy mortgage-backed securities. …
“We need real accountability for the illegal and deceptive conduct in the creation of the housing bubble in order to bring justice for New York’s homeowners and investors,” Mr. Schneiderman said. …
JPMorgan Chase told investors that as of the second quarter of this year, it was contending with more than $3.5 billion in repurchase demands. In the same quarter, it received more than $1.5 billion in fresh demands. Bank of America reported that as of the second quarter, it was dealing with more than $22 billion in unresolved demands, more than $8 billion of which were received during that quarter.
The banks deserve no mercy. Whatever money doesn’t go toward write downs should go to the government and other parties who relied on lenders to be responsible. Perhaps investors were just as stupid for believing the banks, and they deserve the pain they are experiencing, but many investors relied on the banks to do their jobs as prudent lenders. When the banks abdicated their responsibility for maintaining prudent lending standards to ensure their loans were repaid, they earned the losses from lawsuits and buybacks. My only worry is that banks will receive another blank check from the US taxpayer to bail them out once again.
Loaning money to obvious Ponzis
When an underwriter looks at a borrowers history, it’s fairly easy to tell when a borrow has gone Ponzi. It doesn’t take elaborate analysis to spot a pattern of ever-increasing debt. If lenders had bothered to filter for this behavior, many bubble loans — the loans on which the banks are being sued — would never have been made.
- The former owners of today’s featured REO paid $1,172,500 on 12/22/2000. They used a $820,000 first mortgage, a $117,200 second mortgage, and a $235,300 down payment.
- On 9/26/2001 they refinanced with a $927,500 first mortgage and a $198,700 stand-alone second. This effectively withdrew their down payment.
- On 6/20/2002 they refinanced with a $1,000,000 first mortgage, a $250,000 stand-alone second, and obtained a $250,000 HELOC.
- On 5/13/2004 they refinanced with a $980,000 first mortgage. Apparently, they paid down their mortgage at that time.
- On 3/7/2006 they opened a $749,000 HELOC.
- On 1/30/2007 they opened a $1,000,000 HELOC… A $1,000,000 HELOC.
- They defaulted and were served notice on 7/7/2011. They were allowed to squat in their mansion for over a year before the bank bought it at auction for $1,801,000, the full amount on the deed.
Union Bank was pretty stupid.
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Proprietary OC Housing News home purchase analysis
11540 HOXIE Dr Tustin, CA 92782
$2,050,000 …….. Asking Price
$1,172,500 ………. Purchase Price
12/22/2000 ………. Purchase Date
$877,500 ………. Gross Gain (Loss)
($164,000) ………… Commissions and Costs at 8%
============================================
$713,500 ………. Net Gain (Loss)
============================================
74.8% ………. Gross Percent Change
60.9% ………. Net Percent Change
4.7% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$2,050,000 …….. Asking Price
$410,000 ………… 20% Down Conventional
3.86% …………. Mortgage Interest Rate
30 ……………… Number of Years
$1,640,000 …….. Mortgage
$411,367 ………. Income Requirement
$7,698 ………… Monthly Mortgage Payment
$1,777 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$513 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$640 ………… Homeowners Association Fees
============================================
$10,627 ………. Monthly Cash Outlays
($1,398) ………. Tax Savings
($2,422) ………. Equity Hidden in Payment
$538 ………….. Lost Income to Down Payment
$276 ………….. Maintenance and Replacement Reserves
============================================
$7,620 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$22,000 ………… Furnishing and Move In at 1% + $1,500
$22,000 ………… Closing Costs at 1% + $1,500
$16,400 ………… Interest Points
$410,000 ………… Down Payment
============================================
$470,400 ………. Total Cash Costs
$116,800 ………. Emergency Cash Reserves
============================================
$587,200 ………. Total Savings Needed
The property above is available for sale on the MLS.
Contact us for a comparative market analysis, a cost of ownership analysis, or information on how you can make an offer today!
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Unwinding the government guarantees will be difficult because groups will continue to pressure for more government subsidies.
Group Argues for Federal Guarantee in Multifamily Market
With about one-third of the American population residing in rental housing with climbing rents even despite largely stagnant incomes, the Center for American Progress argues for continued participation of the federal government in the multifamily housing market.
Specifically, the organization supports a federal guarantee on multifamily mortgages.
CAP says the Federal Housing Finance Agency “appears poised to pursue plans to privatize the multifamily mortgage market.” However, CAP says doing so would “be a big mistake.”
The 100 million American families in rental housing have experienced a 4 percent increase in rents this year, and the National Association of Realtors expects another 4.6 percent rise next year, followed by 4 percent increases in over both of the next two years.
CAP suggests without the support of Fannie Mae and Freddie Mac, rents would have risen even more sharply over the past few years.
“Without the availability of government-backed capital from Fannie Mae and Freddie Mac, as well as loans insured through the Federal Housing Administration, the entire rental finance market would have ground to a halt in the early years of the financial crisis,” CAP stated in a recent report.
CAP believes the answer to today’s rental market struggles lies in a “limited guarantee on certain multifamily mortgage-backed securities issued by private firms, provided that the underlying loans meet strict underwriting, loan-type, and size requirements.”
Additionally, according to CAP’s plan, 51 percent of rental properties financed by the government would be required to be “affordable,” which CAP defines as rent levels lower than 30 percent of the income of individuals with incomes of or lower than 80 percent of local median income.
It’s high time that the Federal Government step up with a program to provide subsidized rent to complement their impressive portfolio of programs assist housing debtors.
We can have all the renters sign up at the FHA for their monthly allowance and collect a check each month that they will promise under the honor system to hand-deliver to their landlord each month.
It’s good to see you again, David. Thanks for stopping by.
Section 8 for the middle class to codify our rentier aristocracy.
DeMarco on way out: Principal reduction on way in
Edward DeMarco’s days directing the Federal Housing Finance Agency (FHFA) may be numbered, according to a report from The Wall Street Journal.
“People familiar with the discussions” told The Wall Street Journal the White House is preparing to nominate a new director. According to those sources, administration officials are still in the process of gathering names for potential nominees.
DeMarco has no shortage of nemeses both in and out of Washington, and many experts speculated that no matter who won the presidency in November’s election, his time at agency would not last much longer.
Perhaps his most unpopular policy has been his staunch opposition to principal reductions for loans owned by Fannie Mae and Freddie Mac, both of which are held in conservatorship by FHFA. In a response earlier this year to congressional inquiries over whether or not FHFA would direct the GSEs to implement the Home Affordable Modification Program Principal Reduction Alternative (HAMP PRA), DeMarco concluded that the benefits of such a program would not outweigh the costs and risks.
“Given our multiple responsibilities to conserve the assets of Fannie Mae and Freddie Mac, maximize assistance to homeowners to avoid fore closures, and minimize the expense of such assistance to taxpayers, FHFA concluded that HAMP PRA did not clearly improve foreclosure avoidance while reducing costs to taxpayers relative to the approaches in place today,” he wrote in July.
The response brought down a firestorm from critics, including Nobel Prize-winning economist and New York Times columnist Paul Krugman, who replied with a piece titled simply, “Fire Ed DeMarco.”
Not everyone has been critical of his performance, however. Supporters hail DeMarco as a director who refuses to gamble the future of the GSEs (and taxpayer money) on policies whose benefits are not certain. The Washington Post called his decision “a defensible judgment call on a politically polarized question that is, in policy terms, actually very close.”
“Mr. DeMarco’s statutory mandate includes the responsibility to make sure Fannie and Freddie ‘preserve and conserve’ their (taxpayer-supplied) capital, as well as operate ‘consistent with the public interest.’ That can be read to include not only the fiscal impact of two organizations that have already absorbed more than $188 billion in taxpayer aid but also the market repercussions of offering principal reductions to some people who have stopped meeting their contractual obligations while others have sacrificed to keep theirs,” the publication said in an August editorial.
Should DeMarco be forced to depart his post, it seems likely that his successor will be someone friendlier to the idea of principal forgiveness and other oft-discussed assistance programs.
This is not going to end well. Watch FHA insurance premiums will be just a little more expensive than Fannie or Freddie.
Why would you put 20% down on a house ever again? Just wait for your properties values to drop and ask for your reduction? Let’s just hold no one responsible ever again.
Wouldn’t it have been nice to have heard these questions asked in the presidential debates, or at least all in ANY questioning of politicians at ANY time since 2008?
Politicians got away with avoiding housing as an issue during the campaign. Nobody wanted to face the thorny political issues surrounding debt forgiveness or government subsidies. Even if the questions were asked, the responses would have been evasive sound bites.
They were like cats quietly covering up a stinking dump.
Nobody will be responsible ever again. With our new era of housing entitlements and government loss prevention guarantees, everyone will speculate in the housing market because they get to keep all the gains, and they won’t experience any losses.
FIRE professionals these days reminds me of those people whole sell the same over priced second hand orifice over and over again until it’s worthless.
MBA Opposes G-Fee Hike to Pay for Non-Housing Reforms
David Stevens, president and CEO of the Mortgage Bankers Association (MBA), spoke out Thursday on the group’s opposition to House bill H.R. 6429, which would raise guarantee fees (g-fees) on single-family mortgages by Fannie Mae and Freddie Mac to pay for immigration reforms.
The bill is designed to provide immigrant visas for qualified persons who “hold a doctorate degree in a field of science, technology, engineering, or mathematics from a United States doctoral institution of higher education” and who seek to put their skills to use in the United States.
In his statement, Stevens asked Congress to keep housing funds away from other causes.
“Fannie and Freddie’s guarantee fees are supposed to be used to help offset the risk inherent in providing mortgages, and any increases to those fees should be used for that purpose,” Stevens said. “Dipping back into the housing piggybank to pay for unrelated policy items on the backs of America’s homebuyers sends the wrong message at a time when the housing market is starting to show signs of recovery.
“We are asking Congress to reconsider the approach of using guarantee fees for anything other than their intended purpose,” the statement goes on. “Increasing the cost of most mortgages will only add to the uncertainty that is plaguing the mortgage market and holding back a more a robust housing recovery.”
Consumers Show Increased Delusion About Housing
Consumers’ perceptions of housing and the economy are growing more and more positive, according to responses in Fannie Mae’s November 2012 National Housing Survey.
“Consumer attitudes toward both the economy and the housing market continue to gather momentum, with many of our 11 key National Housing Survey indicators at or near their two-and-a-half year highs,” said Doug Duncan, SVP and chief economist at Fannie Mae.
Attitudes about the current selling environment continue to improve, with 23 percent of respondents saying now is a good time to sell a home, the highest percentage since the survey began in 2010. The number of respondents who say now is a good time to buy stayed flat for the third consecutive month at 72 percent.
The average home price change expectation remained steady from October at 1.7 percent, up from 1.5 percent in September but down from this year’s high—2.0 percent—in July. Fourteen percent of those surveyed say home prices will drop in the next year, up 4 percentage points over October, while the number of those expecting increases over the next year inched up one point to 37 percent—tying the survey high.
The share of respondents who said they would purchase a home if they were going to move edged up to 67 percent, while the share who would rent remained unchanged at 29 percent. The majority of respondents—48 percent—expect rental prices to increase in the next 12 months, though that share is slightly down month-over-month. The average rental price change expectation hit 4 percent, a 0.9 percent rise over the past two months.
With mortgage rates currently nesting near record lows, the number of respondents who believe rates can only go up in the next year increased 4 percentage points to 41 percent. Interestingly, even with the mortgage market suffering from tight credit conditions, the share of respondents who say it would be easy to get a mortgage at this point rose to 51 percent, its highest level since the survey began.
“This growing confidence in a housing recovery, in addition to other factors, may reinforce growing consumer optimism regarding the improving direction of the general economy,” Duncan said. “Those indicating that the economy is on the right track has risen to 44 percent while those saying it’s on the wrong track has fallen to 50 percent, the smallest gap since the survey’s inception.”
The tide of the masses is often self fullfilling.
MOO
Fannie Mae’s November 2012 National Housing Survey??
LMFAO!!!
Hey IR – what are your thoughts on the chance of the sticky fingers in D.C. eliminating or drastically reducing the mortgage interest deduction? Is this realistics? What kind of impact would that have on housing prices in OC?
I think it’s more likely than not, that it’ll be modified. The Right’s whole push is to limit any increase in rates, and therefore they need to find deductions to create a sufficient amount of revenue (because neither side really wants to decrease spending).
ObamaCare already slightly tackles one of the biggest deductions – employer provided healthcare premiums. The other biggie is the MID. To modify it fairly, means the change will be complicated. The benefit of complication, is that you can confuse most people and maybe they won’t think you’re “raising their taxes.”
Obama wants to limit all deductions to the 28% bracket. That’s probably the simplest solution, and a good starting point (and likely ending point). They could further modify the MID by limiting it to personal residences and knock down the amount of qualifying debt from $1m to $500k (or the conforming loan limit).
There are endless possibilities…
Perspective has good comment above. I think the pressure for increased revenue will cause some form of change to the deduction. The will likely cap all deductions to reduce the value people obtain from the HMID. If the value of the HMID is reduced, it will increase the cost of ownership, perhaps significantly, and it will halt the price rally in OC in its tracks.
What’s even more worrisome to local home buyers should be rumblings at the FHA about reducing the conforming limit on FHA loans from $729,750 to $368,000. That change would absolutely crush the OC housing market, and it would cause builder sales to plummet.
Long-treasured mortgage interest deduction may face changes
But the longtime tax break could face major changes as Washington policymakers search for ways to reduce the deficit as part of the debate on the so-called fiscal cliff. And that’s sending shivers through home buyers such as White and much of the housing industry.
The home mortgage interest deduction is one of the most cherished in the U.S. tax code. It’s also one of the most expensive, estimated to cost the federal government $100 billion this fiscal year.
For that reason, the deduction taken on income tax returns is expected to be on the table in Washington’s search for more money to reduce the budget deficit and resolve the fiscal cliff.
But the specter of scaling back the tax break, particularly with the housing market still trying to recover from the collapse of the subprime mortgage bubble, is raising alarms among homeowners, Realtors and home builders.
There is agreement that reducing the interest deduction — no one is talking about eliminating it — would cause prices to drop as buyers scale back the amount they could afford to spend.
The concerns are even greater in Southern California and other high-priced regions where homeowners benefit more from the deduction because their mortgages are larger.
“A lot of people buy rather than rent simply because, after the mortgage deduction, it’s more affordable,” said Syd Leibovitch, president of Rodeo Realty in Beverly Hills. “To limit it or take it away, I think you’re going to be surprised at the shocking effect it has on the real estate market.”
I am glad that the banks are being forced to pay…I just wish some of the burden fell on the executives who pocketed millions in bonuses because of the shoddy work they did. Right now many CEO’s, officers, and directors are protected by insurance policies purchased by the banks (paid for by shareholders). Even if they lose the litigation their payments amount to pennies, if any. Most of the losses and the legal bills are paid by insurance firms. We have a horrible system of perverse incentives, where huge gains go to the people perpetrating the fraud, but almost all of the losses are born by shareholders.
The bank bailouts saved us from a deeper recession, but there was a cost, in more than just tax dollars spent. Just check out this story from Yahoo Finance yesterday about the pay at Fannie. All of these people should probably be working elsewhere, and maybe in other fields; but instead, we bailed-out Fannie/Freddie and the banks, and most of their higher-ups keep on collecting this type of pay for failure.
More than 2,000 non-executive senior managers at the two firms were paid over $200,000 in 2011, The Wall Street Journal reports, citing a new report from the Federal Housing Finance Agency. Among those senior managers, the median pay of vice presidents was $388,000 while 1,650 “directors” had a median income of $205,300. Other findings in the report:
The top 90 executives at the two firms took home a combined $92 million last year.
The median pay for 23 executive vice presidents was $1.7 million.
The median pay for 62 senior vice presidents was $723,500.
Good to see our bailout dollars continue to enrich those who cost the taxpayers $150 billion… not.
There’s nothing quite like a soft parachute landing as the plane you were previously steering crashes spectacularly to the ground.
The problem with the bank bailout is that old rules of lending where never put back in place. We don’t have Alt-A or ARM’s (in great degree) but you have subprime loans via FHA with low downpayments. Plus, squatters don’t get a tax hit or foreclosed upon.
Now, there are hints of principal reductions in the future. We saved from the depression, but setting up the bubble for another crash.
But you are very right on Fannie and Freddie. They are being paid for failure.
I feel like we have learned a thing.
Tax all compensation over 400g at 90%+ like we did back during Eisenhower and this corruption will disappear. Executives will go back to donating to worthy causes and having their names on nice buildings.
For as radical as that sounds, it would be effective. Wall Street executives take enormous risks because they hope to emass multi-generational wealth. Take away that possibility, and they won’t take such crazy risks.
“Depending on the final price tag, the costs could lower profits and slow the economic recovery by weakening the banks’ ability to lend just as the housing market is showing signs of life.”
This will probably never happen, but if it did, I think it would be a short-term slow down. The financial industry has a number of medium-sized and regional banks who are healthy – or at least healthiER, than some of these big boy banks are.
My dream is that the medium/regionals would capture market share and buy up big boy branches at a discount to serve the market more effectively with a different attitude toward customers, better service, prudent lending practices and more solid bank ratios.
Bernanke won’t turn off printing presses in his tenure.
Fed to expand assets to $4 trillion
Posted by cmlynski on 12/11/12 at 2:29pm
In a SFGate article, 48 out of 49 economists predict the Federal Open Market Committee will purchase Treasuries to bolster an existing program to buy $40 billion in mortgage bonds each month.
“It’s going to be massive and open-ended in size,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York and a former New York Fed economist.
Here’s a bit from the article.
Chairman Ben S. Bernanke and his FOMC colleagues will press on with purchases at least through the first quarter of 2014, according to the median estimate in the Dec. 7-10 survey. They are expanding the balance sheet beyond $2.86 trillion in a bid to spur growth and lower an unemployment rate of 7.7 percent.
Bennie can prove that all the investment vehicles the fed promotes are sound. Lofty academics never make bad investments.
Tell that to Isaac Newton. He lost most of his wealth in a Ponzi scheme.
I have a great idea. Let’s open slave plantations in a communist dictatorship to do the work, give them all our technology, build every US citizen a mansion out in the desert, and burn up a billion years worth of stored carbon ASAP.