The Bank Settlement Solved Little

By Joel Ross

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Although one would think the payment of $25 billion as a fine would resolve outstanding claims and issues, it did little to really help the lenders. There are a substantial number of remaining claims and issues that will seriously inhibit mortgage lending and which will cost the banks and the economy for several more years. This settlement was just a politicians dream come true which allows them to go forth in the election and claim they won one for the “hard working people of America” against the big bad banks. Elizabeth Warren was the instigator of this damage, and Obama was the implementer. What is not publicly stated is that bond holders will lose as well, since part of the settlement requires the write down of principal. If a bank servicer does do a principal reduction, then the bank gets the credit, but the bond holder gets the financial hit. That will clearly not be beneficial to selling securitized home mortgages in the future, which means less liquidity in the mortgage market. A bad outcome for the consumer, and a bad outcome for the housing recovery and the economy.

Every servicer and lender will now have a government monitor. That person will have examination and enforcement powers. They will be able to decide they don’t like something and levy new fines. Translate this into excess compliance costs for servicers and extra procedures to approve a loan and service the loan. That cost has to get passed onto the consumer in fees or other costs. It also means a less robust response time to get mortgages approved and closed.

The new regulations and procedures agreed to by the big lenders will now become standard for all lenders. On one hand this can be good to standardize process and docs for future trading. On the other hand, there is substantial added cost for all lenders.

What the settlement did not do was stop all the attacks on the lenders. They remain subject to criminal claims and are still going to be battered by Holder’s new fraud task force which is tasked with finding banks to attack. Seek and ye shall find. It will become like Elliot Spitzer going after high profile people in New York and filing charges, even when they have no solid basis. They are good for political gain in the election, and Obama wants to look like he is punishing the big banks and Wall St. You can count on charges being filed.

The SEC is ramping up the fraud claims on securitized pools. That will not be hard to allege that there was fraud, when in many cases it was much more likely stupidity and careless underwriting, and not intentional fraud. Those cases will be hard for the government to win, but the cost to the lenders to defend, and the damage to the securitization market, will be material.

The NY AG is ramping up his claims against MERS. Again this is one the public will never understand and a jury will never understand, but Eric Schneiderman wants to run for higher office, so it makes great headlines. This will also cause huge added costs to the lenders and the system, and it will slow the repair of the housing market. Lots of lawyers will try to use it as a defense against foreclosure.

Fair lending claims. We still have Cordray ramping up to attack what his examiners will be directed to find-“unfair lending claims”. These are not stopped at all. They are yet to really get going. One more huge added compliance cost to the lenders.

Other things not covered are tax claims and defenses by borrowers who likely will be claiming they were defrauded in some way, and will use the settlement to help show that the banks are the bad guys.

In the end the foreclosure process will again be hampered and slowed. The market will not be cleared of defaulted properties and borrowers for several more years. The cost of all of this to the banks will be billions in added legal and compliance costs. There will be even more political pressure for principal reductions. More bond holders will suffer losses. Now we are using the money to pay a reward to defaulted borrowers with $2000 to prove that bad behavior gets rewarded in Obama’s world. The moral hazard of this is now set, and we will all pay a price for that. It is one more thing Obama and the state AG’s can go on the campaign trail to tout. They fail to understand that in the end the consumer they say they are helping, will be harmed by higher costs for mortgages and less availability of loans.

We will now see a major ramp up of the refi program, which is the one I provided the underlying parameters for to the White House. The clean up of the mess will get dragged out. The mortgage lending business will remain very constrained. RMBS will be much harder to execute. This is a lawyers dream come true.

For the housing recovery and the economic recovery, it is very bad. If Obama loses then there may be some relief. As soon as Cordray tries to inflict claims against a lender, there is an army of lawyers waiting to pounce with lawsuits claiming he is not legally appointed, and cannot exercise his authority. Those lawsuits will come from non bank lenders and banks. The money gathered for that fight is huge, and the war will be very nasty in this election year. It is very possible that these lawsuits will prevail since Obama signed the payroll tax legislation at the same time he claims the Senate was in recess except for the payroll tax law. Even a bunch of Democrats in Congress have quietly told financial executives that, were it not for the election, they would also be attacking Obama for the excessive seizure of power and bypassing of Congress by the appointment. Seizing powers granted to Congress is never a good thing for a president to do.

Because this is an election year, and many major law firms and others will be reluctant to publicly attack the administration, you will see a much more muted public response than is here. However, behind the curtain is a brewing war against all of the attacks on lenders. Cordray will be the focus of that war.

It is not that I think the banks and Wall St are blameless. They surely are not. They did a lot of bad and sloppy things. However, the more billions taken out of the banks to pay these settlements and fines, and the more layers of compliance costs added on, the longer this is dragged out, the more the solutions to the housing crisis will continue to be delayed, and the more these costs will be passed to the consumer and the economy. The irony is that in the end the consumer/borrower will pay the real price.

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