Bank Lawyer's Blog

Concentrate On This

Last October, when MetLife left the mortgage origination and servicing business, I pointed out the sad fact that 70% of the home loans originated in 2010 were made by five large financial institutions. Since then, the concentration of power has only accelerated. On top of the dog pile is Wells Fargo, which made one-third of all home loans in the first six months of 2012. Wells, Chase, and U.S. Bancorp combined made half. According to a recent Bloomberg article, this concentration is starting to worry people in high places.

The concentration in the mortgage business has drawn warnings from the inspector general for Fannie Mae and Freddie Mac, the head of Ginnie Mae, Fitch Ratings, and congressmen, including one from Wells Fargo’s home state, about growing risks to borrowers, taxpayers, investors, housing markets and the financial system. Scenarios include a setback or strategy shift at Wells Fargo that could choke off credit for homebuyers and compel the U.S. to again pump in money to keep the housing market from seizing up.

“A concentration of issuers creates an oligopoly,” said Bill Frey, head of Greenwich Financial Services LLC in Greenwich, Connecticut, whose firm invests in, creates and trades mortgage bonds and advises bondholders. The result will be “higher mortgage costs for generations, as well as slower economic growth. Housing is the keystone of our economy.”

While there's the obvious sense of irony when Aunt Fannie and Uncle Freddie bemoan the concentration of power in the residential lending sector resting in hands other than their own, our amusement shouldn't deter us from taking their warnings seriously. Notwithstanding those "experts" who think that the U.S. would be better off if there were just a few big banks left, akin to the situation in "Hoser Land" Canada, many of us in the land of the free prefer a "more's the merrier" approach to banking.

“The nation benefits from a broadly distributed mortgage- finance system,” said Stevens, whose organization represents more than 2,400 firms involved in housing. “If the market is too concentrated on one company, and if they were to change their strategy around mortgage originations or got into financial trouble and had to leave the market altogether you could have market disruptions.”

[...]

Edward J. DeMarco, acting director of the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, has said he’s concerned about concentration and urged officials in a May speech to consider changes. Freddie Mac -- with Fannie Mae, the recipients of nearly $190 billion in government aid --bought 82 percent of the single-family loans it purchased in 2011 from 10 firms, filings show, with 40 percent from Wells Fargo and JPMorgan.

Fannie Mae and Freddie Mac rely on Wells Fargo and other large servicers to collect payments for the loans they guarantee. That makes them vulnerable to the business practices and financial health of a few large banks, said Steve A. Linick, the Federal Housing Finance Agency’s inspector general. The top 10 serviced 75 percent of single-family mortgages guaranteed by Fannie Mae, according to company filings.

“A limited number of servicers poses a safety and soundness risk to the enterprises,” Linick said in a phone interview. This “ultimately could cause losses to taxpayers.”

The effect on servicing has also drawn the attention of Ted Tozer, president of Ginnie Mae, a government-owned corporation that guarantees mortgage bonds holding loans backed by the Federal Housing Administration and other agencies.

“If the quality of servicing deteriorates, you have to deal with it and that puts a lot of oversight responsibility on us, no question about it,” said Tozer, whose Washington-based operation guarantees more than $1 trillion of mortgage-backed securities. “That’s one of the big challenges.”

So, many "experts" agree this concentration is a bad thing. Therefore, what do they propose to do about it? The answer, for the time being, is Nada.

For now, regulators and lawmakers are more focused on keeping money flowing into home loans and are unlikely to force change, according to Bart Naylor, who works on financial policy at Public Citizen, a Washington-based advocacy group.

“To the extent a regulator wants there to be a thriving mortgage market,” they may defer to the largest lenders, Naylor said. “However, they should be cautioned that leading market share has led to oblivion.”

In other words, don't expect anyone to move to oppose this concentration anytime soon. In the interim (if the "interim" ever truly ends), expect the big to get bigger, concentration to continue unabated, and the lovers of the Canadian bacon banking system to have reason to feel warm and fuzzy.

It's not a question of our "fearless leaders" being asleep at the switch. It's that they see the train barreling down the tracks, know that there's a good chance that it may run off the rails, yet, instead of throwing the switch, they avert their eyes and pray for divine intervention.

I don't like the looks of this trend.

The Servicers Settlement Disconnect

The recent announcement that Bank of America cut a "side deal" to earn extra brownie points (and lower penalties) in the robo-signing settlement with state attorneys general touched off a round of criticism. As reported in The Wall Street Journal, investors are squawking about making them pay for the errors of the loan servicers by threatening bond principal repayments through mortgage principal reductions. In response, The White House claimed that the settlement terms would not require mortgage principal reductions in each case.

The Obama administration official said that principal reductions will be done only when there is a benefit to investors, meaning that the cost of the principal reduction will be less over time than taking the loan through foreclosure, and the principal reduction is done in accordance with investor contracts. "The misunderstanding somehow that the investors will be paying the banks' share is just false," Secretary of Housing and Urban Development Shaun Donovan said when the deal was announced last month.

Wait a minute: isn't that analysis supposed to be happening anyway? Isn't that what savvy servicers like Ocwen were being praised by the "main stream media" for three years ago? If they're already doing it, what does the settlement accomplish?

We suspect that what it accomplishes is "encouraging" (wink-wink, nudge-nudge) servicers to write down the principal balances of the loans they hold in portfolio. Investor-owned loans will be handled according to a net-present value analysis outside of this "settlement process," which is what the Wall Street Journal's article's quotations from other servicers, such Ally, suggest. In turn, by "taking one for the team," the loan servicers will give the Obama administration and the attorneys general political talking points in an election year.

Interestingly, the government owned "conserved" GSEs aren't jumping on the principal write-down bandwagon. In fact, they've driven that wagon into the ditch.

[FHFA chief Edward DeMarco} firmly holds his position on principal writedowns:

There is no question that underwater borrowers in California would benefit from other taxpayers across the United States paying off the underwater portion of their mortgage debt. My obligation to those taxpayers, including those living in California, is to ensure that the assistance offered to borrowers facing difficulty in making their mortgage payments maximizes the opportunity to assist those borrowers at minimum cost to taxpayers.

The numerous foreclosure avoidance options offered to borrowers whose loans are owned by Fannie Mae or Freddie Mac, including multiple loan modification options, do just that. We will continue to consider alternatives as they are proposed, but I will not further delay foreclosures provided those borrowers have been given a meaningful opportunity to avail themselves of a loan modification or some other suitable foreclosure avoidance alternative.

So, the state and federal governments stick it to the banks' shareholders but won't stick it to the taxpayers, at least not so openly, in an election year. We get it.

What we don't get is how mandating principal write-downs on underwater mortgages is a logical penalty, or appropriate remedy, for false attestations in foreclosure documents. We understand--and support--fining the lenders and individuals involved, and prosecuting those offenders who've committed perjury or other criminal violations. Those are punishments appropriate to the offense. As for the "injured parties," why not require that either their foreclosures be halted or set aside (if possible) or that they be identified and directly compensated monetarily by the offending servicers on a case-by-case basis? Aren't those more logical, equitable remedies that fit the offense?

Giving people who don't pay their mortgages a benefit that people who pay their mortgages do not receive may serve a larger economic policy agenda, but shouldn't that policy be implemented openly through legislation, either at the state or federal level? Oh, yeah: that would involve spending tax dollars and no one has the political will to do that in an election year, likely because (A) supporters couldn't get the votes to pass such legislation in the first place and (B) even if they did pass it, it would be unpopular with the majority of taxpayers who don't want to fund such relief, as Ed DeMarco correctly observes. Therefore, it's a backdoor means of creating popular "buzz" in 2012.

The icing on the cake is that, according to a Brookings Institution economist, only 5% of the nation's 11.1 million underwater homeowners would get a write-down under the terms of the settlement. That may or may not be an understatement, but it's my guess the final number is not going to be substantially higher once the dust settles. Then again, none of this is about anything other than smoke and mirrors, is it?

Update: Windy City and Windy Lawmakers

On the theme of "The Beat(ing) Goes On," we note the following:

First, the FHFA, parent of insolvent Fannie Mae and Freddie Mac, continues to slug it out with the City of Chicago over that city's requirement that lenders who have not yet foreclosed on vacant homes are nevertheless responsible for registering with the city, paying a fee, and maintaining the property (or facing fines). Freddie this week started requiring servicers of loans subject to the law to pay the fees under protest or not be reimbursed. As reported by Housing Wire, the effect of this battle is to slow down the already glacial pace of foreclosures and OREO disposition in the city. As to pro-consumer types who think that's a good thing, I remind you that if you're a taxpayer, it's not a good thing. As anyone who hasn't lived in a cave for the last few years understands, the American taxpayers are stuck with the tab for losses at Fannie Mae and Freddie Mac. If you're not a taxpayer, then it's a problem for the rest of working stiffs.

On another matter, Congressman Darrell Issa has apparently uncovered documents that directly link former Countrywide founder Angelo ("The Tan Man") Mazilo to the "Friends of Angelo" loan program that benefited members of Congress with favorable home loan terms.

Issa is working with Mozilo's attorneys at Irell & Manella to schedule questioning over the program, according to a letter provided to HousingWire. Since 2008, Issa pushed the Committee on Oversight and Government Reform to investigate the "Friends of Angelo" Countrywide program and uncover which lawmakers allegedly received heavily discounted mortgages in return for access.

[...]

"Documents obtained by the committee show that former Countrywide Chief Executive Officer Angelo Mozilo personally referred government officials and other individuals positioned to benefit the company into the VIP program, known internally as 'Friends of Angelo,'" according to the letter.

As we noted a couple of months ago, this is incredibly old news that, based on the complete lack of ethics sanctions so far, is unlikely to to lead anywhere other than to a pile of political hay in an election year.

Certainly, we expect an ethics committee than ran off the rails trying to investigate Maxine Waters' more obviously questionable activities to wake up and look deeply into whether, six years ago, four House members got their discount points waived or an interest rate that even Warren Buffet couldn't garner. Of course, we also expect Bill Clinton to swear off sex and enter a Franciscan friary next week.

We note that Clinton is still nowhere near any Franciscan friars.

FHFA To Issa: It's No Big Deal

Responding to charges that Bank of America's sale of servicing rights to Fannie Mae was some kind of "back door bailout" of BofA (as writer Francine McKenna charged at Forbes.com last month and as Congressman Darrel Issa reiterated last week), Edward DeMarco, the acting head of Fannie Mae's overseer, the Federal Housing Financing Agency, publicly defended the deal in a recent speech.

"We are certainly concerned about ensuring that these higher risk mortgages are adequately and appropriately serviced, and this was an arrangement that helped to realize that goal," Edward DeMarco, acting director of the Federal Housing Finance Agency, said after remarks at a mortgage conference sponsored by the N.C. Bankers Association.

So, Bank of America was not capable of "adequately and appropriately" servicing the loans? According to BofA, the ultimate buyer of those servicing rights from Fannie Mae (Fannie Mae doesn't service loans itself) is an entity with "loss exposure" on the loans. Is the argument being made that the originator of the crappy loans that are being serviced by BofA (since that entity has the "loss exposure," I assume it originated the loans) is going to be better at collecting those crappy loans than America's biggest bank? That defense is hardly "robust."

The suspicion voiced by McKenna and Issa is that the $500 million Fannie paid for those servicing rights might be more than "market," or that the decision to purchase the servicing rights wasn't motivated by anything other than the fact that BofA needed the cash so that it could, among other things, spend it on loan repurchase requests of Fannie Mae and Freddie Mac and to settle litigation recently brought by the FHFA against BofA and 16 other banks over the lousy loans those banks sold to the GSEs. DeMarco's statement does nothing to allay those suspicions.

BofA was a little more "on point" with its response to the critics.

Bank of America spokesman Dan Frahm said the bank periodically sells mortgage-servicing rights or transfers mortgage-related assets to third parties. "This is a commonly accepted, industry-wide practice that many mortgage loan servicers, including Bank of America, have engaged in for many years," he said.

Just business as usual, according to BofA. Nothing to see here. Move along.

You believe that, don't you?

Yeah, that's what I thought. I don't think Rep. Issa's backing off his inquiry, either.

Hard To Pick A Winner

Kevin Gale, Editor-in-Chief of the South Florida Business Journal, asks a very intelligent question in a recent article about the lawsuit that the FHFA filed against Bank of America and other large financial institutions: Who gets stuck with the tab?

His answer is the US taxpayer, small business owners, or bank shareholders, "take your pick." Since the US is pumping money into the failed Fannie Mae and Freddie Mac (on whose behalf the FHFA is suing) like they were actually worth something, if the big banks like BofA defrauded Fannie and Freddie, then its those of us who actually pay federal income taxes who are being stuck with the losses suffered by those GSEs.

On the other hand, by devoting income and capital to paying litigation expenses and reserving for (and, perhaps, ultimately paying) losses, the defendants have less to lend to small business owners, and many of the defendants have, according to Gale, already been criticized for retreating from small business lending. Gale also mentions the fact that such a retreat has been exacerbated by "knuckle wrapping" regulators who seem to be attempting not to manage risk, but to eliminate it. Thus, small business owners are losers, along with the big banks everyone loves to hate.

Ultimately, however, the banks' shareholders stand to lose big as the expenses mount, income depletes, and losses are incurred. It's the problem that the Wall Street Journal's David Reilly today described as the "whack-a-mole" phenomenon.

So while investors may want banks to find a way to write a check and put all of their mortgage woes behind them, the multifaceted nature of the threat means it isn't likely to happen.

Rather, banks' legal battles will stretch over a period of years. That could prove a consistent drag on earnings, providing yet another challenge as banks face a lower-return future and a slowing economy. That grim reality needs to factor into any calculations of still-elusive "normalized" earnings.

It's easy to bash big banks, and we often leap on to the dog pile, ourselves, because we always go for the cheap laugh and the easy way out. However, we also own mutual funds which invest in the stocks of some of those big banks, and in that respect we aren't any different than millions of Americans who, directly or indirectly, own pieces of the same pie, a pie that's getting sliced thinner. The only folks ultimately getting fat and happy are--you guessed it--trial lawyers on both sides of the table.

Yes, I know: once again, I've proved myself to be a glass-half-full kind of guy.