When I was a young, hard-headed kid my mother often told me: “If you don’t hear then you have to feel.” Translation: if you insist on making imprudent choices then you’d better be prepared to suffer the consequences. Mom was no Tiger Mother, but she knew how to immunize me against the next outbreak of stupidity. A swat upside the head took care of both retribution and deterrence.
When I first read about the provisional National Mortgage Settlement announced 10 days ago, it was obvious that we were in a-slap-on-the-wrist territory. There would be de minimis consequences for the five major mortgage banks accused of massive lawbreaking on foreclosures. Once again, policymakers would protect them from the painful institutional memories that might one day protect us from their tendency to crisis. But new details released on Friday make clear that it’s even worse than that.
The settlement, between BofA, JPM, Wells, Citi and GMAC-turned-Ally Financial; 49 states and the District of Columbia (Oklahoma sat out); the Conference of Bank Supervisors, the the Department of Justice and the Department of Housing and Urban Development, is now getting mixed up with HAMP. HAMP is the Obama Administration’s Home Affordable Modification Program and it has been altered several times because it has failed on each occasion to help large numbers of troubled homeowners in a significant, sustainable way. The very latest changes, announced just last month, included even more sweeteners to get mortgage lenders to participate. They were already receiving larger taxpayer-funded incentive payments for modifying the loans; last month these were increased. And now it seems that these modifications will count towards the targets that the five banks must hit as part of the mortgage settlement.
The headline figure in the mortgage settlement is $25 billion. Only $5 billion of this will be new, direct payments made by the banks to state and federal governments to “repay public funds lost as a result of servicer misconduct, fund housing counselors, legal aid, and other similar purposes.” Shahien Nasripour, who’s done excellent reporting on this, tells us that “none of the five lenders have said they expect to incur a material charge due to the settlement.” How fortunate for them.
The other $20 billion will be provided in the form of “relief to borrowers” — including through principal reduction and refinancing. But any such relief that qualifies under the HAMP program will also count towards the banks fulfilling this part of the settlement. And if the modified mortgages are owned by the banks themselves (as opposed to investors in mortgage-backed securities) then HAMP, i.e. you and I, will pay them 63 cents for every dollar of loan principal that they forgive. We’ll pay them even more if the homeowners manage to stay current on the restructured loans. This is a bit like a rape victim being forced to post bail for her attacker.
Of course federal officials beg to differ. As Nasripour says in the Financial Times:
Federal officials involved in negotiating the settlement defended the arrangement, pointing out that the amount reimbursed to the banks could not be directly used towards fulfilling settlement obligations. For example, if a bank wrote down $100 of loan principal under Hamp and received $21 of reimbursement from taxpayers, the bank only could apply the $79 difference towards the settlement.
But regardless of whether the taxpayer subsidized portion is actually counted towards the settlement, the fact is that the taxpayer funds will still help to dull the sting of actions that the bank will undertake as part of their supposed “penalty”. Further, as David Dayen elaborates (my emphasis):
[..] there are all the “nudge” incentives, for keeping the loan current and doing it in the next year, money that the banks get that won’t detract from their credit for the principal reduction. People familiar with the preliminary terms, according to [Nasripour], say that with all these nudges, banks could actually turn a profit on the loans.
From Nasripour we also learn that state officials were not happy about this at all:
[...] state officials involved in the talks had had misgivings about allowing the banks to use taxpayer-financed loan restructurings as part of the settlement. State negotiators wanted the banks to modify mortgages using Hamp standards, which are seen as borrower-friendly, but did not want the banks to receive settlement credit when modifying Hamp loans. Federal officials pushed for it anyway, these people said.
And HAMP is not the only source of incentives — the settlement, itself, provides “incentives” for the offending banks:
To encourage servicers to provide relief quickly, there are incentives for relief provided within the first 12 months [...].
Again one wonders: perp walk or cake walk?
I’m pleased to see that attentions are finally turning to principal mods, the one tactic that has a chance of helping troubled homeowners. That’s swell. Leveraging HAMP just might help
get Barack Obama re-elected. But for those who, like my Mom, believe that an ounce of prevention is worth a pound of cure — well, you’re out of luck. No such tough love for the banks.
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Image credit: EJP Photo on Flickr