It’s difficult to keep track of all the things that all the people are suing all the banks for regarding mortgages. A place to start is by remembering that banks stood in the middle of originating loans to people who didn’t pay them and selling them to people who are now sad that they didn’t get paid. So the flow of money was kind of Investor -> Bank -> Homeowner -> Incinerator. If you think of that flow of money, it makes sense that the people are are doing the most suing are the investors and GSEs who bought mortgages, and regulators who sort of kind of represent the investors, and so in fact there are a lot of big numbers sloshing around in pretty normal securities-fraud-y lawsuits of exactly that sort.
But there are also lawsuits, with quite large dollar numbers attached to them, that go the other way. In these, homeowners, and regulators who sort of kind of purport to speak on behalf of the homeowners, are suing the banks for really quite stonking amounts of money.
It’s analytically helpful for me to separate those suits into two further buckets: Read more »
Like many people, I like to believe that I prefer the government policies that I prefer because they’re a Good Thing for the world, not because they advance my self-interest. But as a relatively new homeowner, I break down a little on mortgages. Sure the mortgage interest deduction is a crazy and inefficient boondoggle, but it’s my crazy and inefficient boondoggle, and I don’t really want my apartment to lose (more) value if the deduction goes away.
Similarly, I’m pretty psyched about the plan that’s been kicking around, and that made it in vague form into the president’s jobs proposal, to allow people to refinance mortgages even if their houses are underwater or their income wouldn’t support the new payments. When I took out my mortgage I had a bit over one turn of leverage, as it were, which had my mortgage bankers congratulating me and asking if maybe I wanted to take a little more money just in case. Whereas now I make TXU look like a strong credit. Because um blogging pays less than banking you see. So I like the idea of being able to reduce my mortgage payment without actually having to try to convince a banker that it’s a good idea for me to keep this much debt. Even though I’m not entirely convinced that it’s good for the world.
Others are also skeptical. Read more »
The Federal Housing Finance Agency’s lawsuits against every bank paint a pretty dastardly picture of the seventeen big banks – three of which are now BofA – committing all sorts of frauds in securitizing mortgages and selling them to Fannie Mae and Freddie Mac. This in turn caused Fannie and Freddie to have a series of accidents that left them wards of the state under FHFA conservatorship. FHFA’s lawyers are thorough, quoting among other people the Financial Crisis Inquiry Commission, SEC investigations and suits, and even Matt Taibbi. One thing they don’t do, however, is give any hint of how much money they’re looking for.
Others have jumped in to do the math for them. A popular approach, taken by FT Alphaville and Nomura, guesstimates that the damages will be around 20% of the original principal amount. The reason for this is that it seems to be the amount claimed by FHFA in its suit filed against UBS in July – there, FHFA sought $900 million on $4.5bn notional of mortgages. As the total claims against all the banks are around $200 billion, that gets $40bn of potential damages.
Keefe Bruyette & Woods has a higher estimate of $60 billion. They note that the potential liability is for “rescission”: if the FHFA proves that the banks lied materially in their prospectuses, then the banks are on the hook to buy back the mortgages at par, and thus are at risk even for losses due to the general housing market downturn and unrelated to shoddy underwriting.
Goldman has a note out today that uses two methods – the 20% UBS precedent, and the precedent of the proposed $8.5 billion settlement that Bank of America negotiated with its non-FHFA private label mortgage investors:
Read more »
The last month or so has not been the best of times for Phil Falcone. Harbinger Capital’s flagship is down, Goldman Sachs, Blackstone and some others have pulled their money, investors have been giving him shit for borrowing $113 million from one of his funds (where redemptions had been frozen) in order to pay personal taxes, he had to put up his art as collateral to borrow even more cash (for what, it’s unclear), he’s being investigated by the SEC and Wilbur, the family’s dancing pig, has been such a god damn bitch. He told the Times none of this is any way a big deal (“The last thing I’m thinking about in the morning is whether I have a cash-flow problem,” he said) and now, he’s be forced to defend his liquidity again. This time, with regard to the mortgage he took out on his house over the summer, after buying it for $49 million in cash. Read more »
Citi’s correspondent lending division, which produced $58.5 billion in mortgages last year and probably had a hand in the $28 billion in losses last year, recently sent out a letter to clients notifying them that the unit is shutting down their well oiled machine for two weeks to look into some mortgage applications that didn’t meet their lofty quality control standards.
According to the June 22 letter, the review identified “valuation concerns” where “appraisal documentation is missing or incomplete,” or where property-assessment methods were “insufficient/lacking.”
Other missing information included employment confirmations, phone numbers, credit reports and rent verification, the letter said. The review also found “income calculation errors.”
Citigroup Halts Some Mortgage Applications, Cites Missing Data [Bloomberg]
If the mortgage market blows up again, the FHA told you so. Faced with record high demand for government backed home loans, the FHA is concerned that it can’t properly handle the additional volume and is going to get picked off.
“FHA will be challenged to handle its expanded workload or new programs that require the agency to take on riskier loans than it historically has had in its portfolio,” Kenneth Donohue, the inspector general for the Housing and Urban Development Department, told lawmakers today. “The surge in FHA loans is likely to overtax the oversight resources of FHA, making careful and comprehensive lender monitoring difficult.”
Evidently saying ‘no’ to loans that appear suspect is not a viable option.
Demand for FHA Loans Is Overtaxing Agency, HUD Official Says [Bloomberg]
We really aren’t that sure how to greet this news, considering that we aren’t really sure that another $3 trillion in lending transactions is exactly what we need right now. But, then again, it does feel like 2005 for the first time all over again, and we’ve got that going for us. So that’s nice. And, we suppose, to the extent this is refinancing, that’s a good thing. For half of the market.
Mortgage Bankers Association boosted its forecast for 2009 home-loan originations by $800 billion to $2.78 trillion, which would make it the fourth- highest year on record.
The increase is due to the drop in fixed mortgage rates following last week’s Federal Reserve announcement that it will triple its planned purchases of mortgage-backed securities, the Washington-based trade group said.
U.S. Mortgage Lending May Reach $2.78 Trillion, Bankers Say [Bloomberg]
We’ve heard mixed stories about the effect of being “underwater” on home equity. We’ve heard that owners are likely to walk away, leaving the keys and moving on, and we’ve heard that it makes little sense to bail out on even a deeply underwater mortgage. It seems the former view has taken widespread hold as “walkaways” spike.
While others persist in draining savings and running up credit card debt in a last-ditch bid to save their homes, a growing number see no point in making boom-level mortgage payments in a bust market — with no bottom in sight.
“People are hurting,” said Barnard, who includes himself in that group. “They’re scared or they’re angry,”
In California’s Inland Empire east of Los Angeles, where Barnard lives and sells real estate, median home values have plunged more than 40 percent in the last year as formerly sidelined buyers snapped up foreclosed properties.
Those bank-owned homes moved at fire-sale prices that decimated the value of neighboring homes — many of which are owned by people who have limited “skin in the game” because they put little or no money down at purchase.
The cascade effects of a few “abandons” in the neighborhood tend to set up a few more, and, contrary to the more optimistic gesticulations of some observers, this suggests that the housing crash is long from over.
Owners skulking away from “underwater” U.S. homes [Reuters]
Late last year, an 18,000 square foot Bridgehampton house suffered the humiliation of foreclosure, an indignity that’s supposed to be reserved for Ed McMansions in California. Adding insult to injury is the news that the home, which features 8 bedrooms, 9 ½ baths, a pond, elevator and “flower-cutting room,” all set on 4-acres, has just seen its asking price reduced from $27 million to $19.5 million. The only thing that could possibly make this sad situation even worse is if Lenny Dykstra is able to successfully sell his Thousand Oaks home for the delusional price of $24,950,000 (i.e. 33% more than what he bought it for less than a year ago) before this place goes (which might actually happen, considering Nails is throwing in some deal-clinching extras, such as his “Discarded Dips of Distinction,” a collection of chewing tobacco from the great moments of one illustrious career, tastefully encased in a white gold-flecked display case). The silver linging? John Paulson, now shorting the individual mortgages of down-on-luck friends in the Hamptons, is going to make a killing on this one.
$19.5 Million Hamptons Mansion In Foreclosure [WSJ]
Homeownership is overrated and the government went too far in pushing it on the American people, Paul Krugman writes in today’s New York Times. He suggests it’s time for America to “drop the obsession with ownership.”
We couldn’t agree more. Four months ago we wrote: “The social engineering program entitled the ‘ownership society’ has failed and ought to be abandoned.”
Read more »
It turns out that the housing bailout bill really is “exactly what Bank of America and Countrywide wanted.” A memorandum dated March 11, 2008 has surfaced, and it seems to support the idea that BofA essentially wrote the bailout section of the bill. “Almost all of BofA’s preferences are mirrored in the Dodd-Shelby legislation,” Stephen Spruiell writes.
The BofA document even offers tips on how to manipulate the public’s reaction to the bill: “We believe that any intervention by the federal government will be acceptable only if it is not perceived as a bail-out of the bond market.”
This news should hurt the bill’s chances. It has already been tainted by news that its most prominent supporter, senate banking committee chairman Chris Dodd, received massive campaign donations from Bank of America executives and sweetheart loans from Countrywide. The president has to veto the bill on the grounds that it would “unfairly benefit lenders who made bad loans.”
BofA-Scripted Bank Bailout Looks Awfully Similar to Dodd-Drafted Housing Bill [The Corner]