Despite Scandalous Abuses, Banks Are Off the Hook Again
Americans know that banks have mistreated borrowers in many ways in foreclosure cases. Among other things, they habitually filed false court documents. There were investigations. We’ve been waiting for federal and state regulators to crack down.
Prepare for a disappointment. As early as this week, federal bank regulators and the nation’s big banks are expected to close a deal that is supposed to address and correct the scandalous abuses. If these agreements are anything like the draft agreement recently published by the American Banker — and we believe they will be — they will be a wrist slap, at best. At worst, they are an attempt to preclude other efforts to hold banks accountable. They are unlikely to ease the foreclosure crisis.
All homeowners will suffer as a result. Some 6.7 million homes have already been lost in the housing bust, and another 3.3 million will be lost through 2012. The plunge in home equity — $5.6 trillion so far — hits everyone because foreclosures are a drag on all house prices.
The deals grew out of last year’s investigation into robo-signing — when banks were found to have filed false documents in foreclosure cases. The report of the investigation has not been released, but we know that robo-signing was not an isolated problem. Many other abuses are well documented: late fees that are so high that borrowers can’t catch up on late payments; conflicts of interest that lead banks to favor foreclosures over loan modifications.
The draft does not call for tough new rules to end those abuses. Or for ramped-up loan modifications. Or for penalties for past violations. Instead, it requires banks to improve the management of their foreclosure processes, including such reforms as “measures to ensure that staff are trained specifically” for their jobs. The banks will also have to adhere to a few new common-sense rules like halting foreclosures while borrowers seek loan modifications and establishing a phone number at which a person will take questions from delinquent borrowers. Some regulators have reportedly said that fines may be imposed later.
But the gist of the terms is that from now on, banks — without admitting or denying wrongdoing — must abide by existing laws and current contracts. To clear up past violations, they are required to hire independent consultants to check a sample of recent foreclosures for evidence of improper evictions and impermissible fees.
The consultants will be chosen and paid by the banks, which will decide how the reviews are conducted. Regulators will only approve the banks’ self-imposed practices. It is hard to imagine rigorous reviews, but if the consultants turn up problems, the banks are required to reimburse affected borrowers and investors as “appropriate.” It is apparently up to the banks to decide what is appropriate.
It gets worse. Consumer advocates have warned that banks may try to assert that these legal agreements pre-empt actions by the states to correct and punish foreclosure abuses. Banks may also try to argue that any additional rules by the new Consumer Financial Protection Bureau to help borrowers would be excessive regulation.
The least federal regulators could do is to stress that the agreements are not intended to pre-empt the states or undermine the consumer bureau. If they don’t, you can add foreclosure abuses to other bank outrages, like bailout-financed bonuses and taxpayer-subsidized profits.
By: The New Yor Times, Editorial, April 9, 2011
Note To Banks: It’s Not 2006 Anymore
Nostalgia is running high on Wall Street for the days when junk mortgage underwriting and opaque derivatives trading juiced bank profits. As regulators continue to devise the machinery of the Dodd-Frank regulatory reform law, major financial institutions are working overtime in Washington to bring the good times back again.
Unfortunately for taxpayers, some of these efforts are gaining traction, particularly regarding the regulation of derivatives and mortgages.
As you may recall, Dodd-Frank was supposed to shed light on derivatives trading so that the risks and costs of these instruments would be clear to regulators and market participants. To this end, the law required derivatives to be cleared and traded on exchanges or through other approved facilities. But Dodd-Frank contained a big loophole: the Treasury secretary can exempt foreign-exchange swaps from the regulation.
Currency trading is enormous: on average, about $4 trillion of these contracts change hands each day. Major banks are huge in this market. According to the Comptroller of the Currency, trading in foreign-exchange contracts generated revenue of $9 billion in 2010 at the nation’s top five banks. That’s more than was produced by any other type of derivative.
No one was shocked when the banks began pushing the Treasury to exempt these swaps from regulatory scrutiny. From last November through January, Treasury officials met to discuss foreign-exchange swaps with 34 representatives of large financial institutions, the Treasury’s Web site shows.
A spokesman for Timothy F. Geithner, the Treasury secretary, said last week that Mr. Geithner had not made up his mind on this matter. If Mr. Geithner sides with the banks, he will have bought into their argument that foreign-exchange swaps are different from other derivatives, that this market performed ably during the financial crisis and does not need additional oversight.
Others disagree. Testifying before the House Financial Services Committee in October 2009, Gary Gensler, the chairman of the Commodity Futures Trading Commission, said: “Any exception for foreign-currency forwards should not allow for evasion of the goal of bringing all interest rate and currency swaps under regulation to protect the investing public.”
Dennis Kelleher, the president of Better Markets, a nonprofit organization that promotes the public’s interest in capital markets, said he was dubious of the contention that the market for foreign-exchange contracts performed well during the turmoil of 2008. Mr. Kelleher said that the only reason this market did not seize up like others was that the Fed lent huge amounts — $5.4 trillion — to foreign central banks through so-called swap lines during the fall of 2008.
“We suggested that Treasury hire truly independent experts to look at the data and provide the secretary with advice on whether or not the FX market performed well in the crisis and whether the exemption should be granted,” he said.
The analysis could be done within 60 days, he said. The Treasury told him it was confident that it had all the information it needed. “Their response was, ‘Thank you,’ ” he said.
Big financial institutions are also eager to return to the days of lax mortgage lending, judging from two initiatives being discussed in Washington. Both are intended to get the home loan market moving again — and to buoy falling home prices.
One relates to how regulators define a “qualified residential mortgage,” a term of art in the Dodd-Frank law. Issuers of asset-backed securities that are made up of such loans needn’t keep any credit risk of those securities. But sellers of loan pools that don’t consist of qualified mortgages are required to retain some of the risk in them. This provision was meant to eliminate the perverse incentives of the mortgage boom, when packagers of loan pools were encouraged to fill said pools with toxic waste because they had little or no liability for the deals once they were sold.
What constitutes a qualified mortgage has become a battleground issue because of the risk-retention rules under Dodd-Frank. Qualified mortgages should be of higher quality, based upon a borrower’s income, ability to pay and other attributes to be decided by financial regulators.
The board of the Federal Deposit Insurance Corporation will hold an open meeting on Tuesday to discuss qualified mortgages and the risk-retention rule. Among the questions to be considered is how much of a down payment should be required in a qualified loan, and whether mortgage insurance can be used to protect against the increased risks in loans that have smaller down payments.
The use of mortgage insurance during the boom effectively encouraged lax lending. Investors who bought securities containing loans with small or no down payments were lulled into believing that they would be protected from losses associated with defaults if the loans were insured.
But when loans became delinquent or sank into default, many mortgage insurers rescinded the coverage, contending that losses were a result of lending fraud or misrepresentations. When they did so, the insurers returned the premiums they had received to the investors who owned the loans. Lengthy litigation between the parties is under way but has by no means concluded.
Clearly, for many mortgage securities investors, this insurance was something of a charade. So any argument that mortgage insurance can magically transform a risky loan into a qualified residential mortgage should be laughed off the stage. And yet, mortgage insurers are making those arguments vociferously in Washington.
The final front in the mortgage battle involves a plan to restart Wall Street’s securitization machine with instruments known as covered bonds. Here, too, the big banks and the housing-financial complex are arguing that if private investors are to return to the mortgage market, we must create a new instrument that will let the good times roll again.
Covered bonds are pools of debt obligations that have been assembled by banks and sold to investors who receive the income generated by the assets. The bank that issues the bonds, meanwhile, retains the credit risk. If losses arise, the bank that issued the covered bonds must offset the loss with its own capital. That could push troubled banks closer to the edge.
If an asset in the pool defaults, a separate entity would be required to remove the assets from the bank’s control. The assets would then be out of reach of the F.D.I.C. should the bank fail and the agency step in as receiver. The investors who bought the covered bonds would have first call on the assets, ahead of the F.D.I.C.
This structure would wind up bestowing a new form of government backing to the major banks issuing the bonds, raising the potential for losses at the F.D.I.C. insurance fund, which protects savers’ deposits.
Equally troubling, the covered bond structure favored by the banks would let the pools invest in risky assets such as home equity lines of credit. These loans have been among the worst-performing assets out there. Covered bonds issued overseas, by contrast, typically consist solely of high-quality loans.
“The industry is trying to do an end run around the F.D.I.C.,” said Christopher Whalen, publisher of the Institutional Risk Analyst. “This proposal is about restarting the Wall Street assembly line for selling toxic waste to investors.”
Clearly, the battle for the safety and soundness of the nation’s financial markets is far from won. The issues are complex and confounding — by design, in many cases — and financial institutions have armies of advocates in Washington. The taxpayers do not, which makes monitoring of these crucial proceedings all the more essential.
By: Gretchen Morgenson, The New York Times, March 26, 2011
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