Monthly Archives: January 2012

Bank of America Settlements Impede Fraud Probe, Arizona Says

By Karen Gullo

(Adds Arizona’s participation in multistate settlement in 13th paragraph.)

Jan. 26 (Bloomberg) -- Bank of America Corp. is impeding an investigation of its loan modification practices by negotiating settlements with borrowers who must agree to keep them secret and not criticize the bank in exchange for cash payments and loan relief, Arizona officials say.

The Arizona Attorney General’s office is asking a court to block those aspects of the settlements and require the bank to turn over all the agreements. The bank denies any wrongdoing.

One 2011 accord involving a borrower facing foreclosure who defaulted on a $253,142 mortgage included a $5,000 payment, plus $7,500 for legal fees, and the defaulted payments were waived and the loan was modified to a 40-year term with a 2 percent interest rate, court documents show. The terms of the original loan and the borrower’s complaint about the lender weren’t described in the documents.

The borrower “will remove and delete any online statements regarding this dispute, including, without limitation, postings on Facebook, Twitter and similar websites,” and not make any statements “that defame, disparage or in any way criticize” the bank’s reputation, practices or conduct, according to documents filed in state court in Phoenix. The borrower’s name and address were redacted.

Non-Disparagement

Bank of America attorneys argue that borrowers don’t have to sign the agreements to get a loan modification and deny that settlements hinder the state’s probe. Borrowers can be subpoenaed to disclose the accords, and the Charlotte, North Carolina-based bank won’t enforce the non-disparagement provision if they talk to investigators, the bank’s lawyers have said in court filings.

A hearing is set for Feb. 1 on the dispute.

Arizona Attorney General Thomas Horne, a Republican who took office last January, is investigating Bank of America as part of a 2010 lawsuit alleging customers of its Countrywide Financial mortgage unit were misled about requirements for loan modifications. The bank, which acquired Calabasas, California- based Countrywide in 2008, provided inaccurate and deceptive reasons for denying modification applications, according to the the complaint. A similar suit was filed by Nevada.

The settlement agreements came to light as state investigators followed up on borrower complaints filed with the attorney general’s office. The office learned of 12 settlements while examining 1,900 complaints and when it attempted to contact the borrowers, Assistant Attorney General Carolyn Matthews said in Jan. 11 court filing.

Frequent Contact

Only four returned phone calls and none would provide a copy of the settlement, Matthews said. Some who signed the settlements had previously been in frequent contact with the attorney general’s office, according to court records.

Matthews contends that under the terms of the settlements, even if subpoenaed, borrowers can’t reveal any unflattering information about the bank. They couldn’t talk about misrepresentations the bank made about loan modifications, which is what the state is investigating, she said.

“These agreements have completely silenced even the most communicative consumers,” Matthews said in the filing. “The settlement agreement purposefully makes it impossible, legally and practically, for a consumer signing it to come forward, voluntarily and promptly, to provide evidence in this case.”

She asked a state judge to order Bank of America to notify borrowers who signed the agreements that they don’t have to adhere to the confidentiality and non-disparagement provisions.

Settlement Talks

Arizona has been participating in settlement negotiations between the five biggest U.S. mortgage servicers, including Bank of America, and state and federal officials to resolve a nationwide prove of foreclosure practices, Matthews said in an e-mail yesterday.

If Arizona joins any final settlement reached, that would affect the state’s lawsuit against Bank of America, she said.

“While Arizona is evaluating and is interested in the multistate settlement, Arizona will not join it unless we are able to simultaneously resolve our claims against Bank of America set forth in our separate lawsuit,” Matthews said.

Inappropriate Practices

Settlements with borrowers are more likely in cases in which the bank engaged in inappropriate practices, such as steering customers away from more affordable loans, or canceling a mortgage modification after a single payment went missing from a borrower who otherwise kept up with payments, said Patricia Garcia Duarte, chief executive officer of Neighborhood Housing Services of Phoenix Inc., which works with families facing foreclosure. Bank of America is a contributor to the organization, according to the group’s website.

Patricia Lee Refo, a Bank of America attorney, said in court filings that the confidentiality provisions are common in settlement agreements, which the bank uses on a “limited” basis to resolve disputes and avoid a costly lawsuit. There’s no policy to ask borrowers to sign settlement agreements in exchange for loan modifications, David Thornton, senior vice president for social media and urgent customer relations, said in a filing.

‘Extremely Serious’

“Plaintiff cannot ask this court enter the extremely serious finding that defendants have interfered with law enforcement based on one settlement agreement, or even 12, containing plain vanilla terms litigants use every day to resolve disputes,” Refo said in a court filing.

The bank can’t say how many settlements have been reached with Arizona customers because the agreements aren’t centrally stored on computers, Thornton said.

“We look at each situation on a case-by-case basis and decide what to do based on the specific situation,” Shirley Norton, a Bank of America spokeswoman, said in an e-mail.

Wells Fargo & Co., the biggest U.S. bank by market value and the largest mortgage lender, has a similar practice, said James Hines, a spokesman for the San Francisco-based bank.

“Each case is unique and for a variety of reasons we may elect to include a confidentiality and/or a non-disparagement agreement as part of the settlement,” Hines said in an e-mail. He said he didn’t know how many settlements had been reached.

Borrowers’ Boon

Loan modification settlements are a boon for borrowers struggling to keep their homes, Duarte said in a phone interview. Duarte said she doesn’t see many such settlements and that borrowers who sign one can’t talk about them.

“That shouldn’t apply to investigators like the attorney general,” she said.

Lump sum payments of thousands of dollars and provisions blocking borrowers from criticizing banks aren’t common, she said.

“Clearly the banks are freaking out, they are paranoid,” Duarte said. Bank of America “has the worst reputation because it’s so large. A lot of it isn’t their fault, it was Countrywide.”

The case is Arizona v. Countrywide Financial Corp. CV2010-033580, Arizona Superior Court, Maricopa County (Phoenix).

--Editors: Peter Blumberg, Glenn Holdcraft

To contact the reporter on this story: Karen Gullo in San Francisco at kgullo@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

Obama To Announce Mortgage Crisis Unit Chaired By New York Attorney General Schneiderman

 WASHINGTON -- During his State of the Union address tonight, President Obama will announce the creation of a special unit to investigate misconduct and illegalities that contributed to both the financial collapse and the mortgage crisis.

The office, part of a new Unit on Mortgage Origination and Securitization Abuses, will be chaired by Eric Schneiderman, the New York attorney general, according to a White House official.

Schneiderman is an increasingly beloved figure among progressives for his criticism of a proposed settlement between the 50 state attorneys generals and the five largest banks. His presence atop this new special unit could give it immediate legitimacy among those who have criticized the president for being too hesitant in going after the banks and resolving the mortgage crisis. He will be in attendance at Tuesday night's State of the Union address.

"The goal of this joint investigation will be threefold: to hold accountable any institutions that violated the law; to compensate victims and help provide relief for homeowners struggling from the collapse of the housing market, caused in part by this wrongdoing; and to help us finally turn the page on this destructive period in our nation’s history," reads a White House document outlining the objectives.

"This is a big achievement and something the entire progressive advocacy community wanted [with respect to] housing policy," added the White House official.

The unit will not supersede the efforts already underway by the Department of Justice. Instead, it will operate as part of the president's Financial Fraud Enforcement Task Force. In addition to Schneiderman, the unit will be co-chaired by Lanny Breuer, assistant attorney general at the Criminal Division of the Department of Justice, Robert Khuzami, director of enforcement at the SEC; John Walsh, a U.S. attorney in Colorado, and Tony West, assistant attorney general in the Civil Division at DOJ.

News of the new mortgage unit comes amidst reports of a potential settlement between the five biggest banks, the Obama administration and the state attorneys generals. Under the deal, banks would agree to follow existing laws against abusive foreclosures and set aside $25 billion to both help homeowners who are underwater on their homes or who were wrongfully foreclosed. The agreement has been in the works for months, with disagreements over the level of legal immunity granted to banks accused of wrongdoing, and the scope of violations covered by the deal.Critics of the pending settlement have argued that the president should couple the financial relief for homeowners with a robust law enforcement effort targeting lawbreaking by big banks. Schneiderman has been among the settlement's most prominent critics for months, insisting that a deal not release bankers from criminal charges, and urging AGs to look into violations outside the foreclosure process, including issuing fraudulent loans and improprieties in the packaging of those loans into complex bonds that would become toxic assets.

UPDATE: Schneiderman's office sends over the following statement from the Attorney General.

I would like to thank President Obama for his leadership in the creation of a coordinated investigation that marshals state and federal resources to bring justice for the victims of the misconduct that caused the mortgage crisis.

In coordination with our federal partners, our office will continue its steadfast commitment to holding those responsible for the economic crisis accountable, providing meaningful relief for homeowners commensurate with the scale of the misconduct, and getting our economy moving again.

The American people deserve a robust and comprehensive investigation into the global financial meltdown to ensure nothing like it ever happens again, and today's announcement is a major step in the right direction.

 

Occupy the Neighborhood

How Counties Can Use Land Banks and Eminent Domain 

by Ellen Hodgson Brown

An electronic database called MERS has created defects in the chain of title to over half the homes in America.  Counties have been cheated out of millions of dollars in recording fees, and their title records are in hopeless disarray.  Meanwhile, foreclosed and abandoned homes are blighting neighborhoods.   Straightening out the records and restoring the homes to occupancy is clearly in the public interest, and the burden is on local government to do it.  But how?  New legal developments are presenting some innovative alternatives.

John O’Brien is Register of Deeds for Southern Essex County, Massachusetts.  He calls his land registry a “crime scene.”  A formal forensic audit of the properties for which he is responsible found that:

• Only 16% of the mortgage assignments were valid.
• 27% of the invalid assignments were fraudulent, 35% were “robo-signed,” and 10% violated the Massachusetts Mortgage Fraud Statute.
• The identity of financial institutions that are current owners of the mortgages could be determined for only 287 out of 473 (60%).
• There were 683 missing assignments for the 287 traced mortgages, representing approximately $180,000 in lost recording fees per 1,000 mortgages whose current ownership could be traced.

At the root of the problem is that title has been recorded in the name of a private entity called Mortgage Electronic Registration Systems (MERS).  MERS is a mere place holder for the true owners, a faceless, changing pool of investors owning indeterminate portions of sliced and diced, securitized properties.  Their identities have been so well hidden that their claims to title are now in doubt.  According to the auditor:

What this means is that . . . the institutions, including many pension funds, that purchased these mortgages don’t actually own them . . . .

The March of the AGs

When Massachusetts Attorney General Martha Coakley went to court in December against MERS and five major banks — Bank of America Corp., JPMorgan Chase, Wells Fargo, Citigroup, and GMAC — John O’Brien said he was thrilled.  Coakley says the banks have “undermined our public land record system through the use of MERS.”

Other attorneys general are also bringing lawsuits.  Delaware Attorney General Beau Biden is going after MERS in a suit seeking $10,000 per violation.  “Since at least the 1600s,” he says, “real property rights have been a cornerstone of our society.  MERS has raised serious questions about who owns what in America.”

Biden’s lawsuit alleges that MERS violated Delaware’s Deceptive Trade Practices Act by:

  • Hiding the true mortgage owner and removing that information from the public land records.
  • Creating a systemically important, yet inherently unreliable, mortgage database that created confusion and inappropriate assignments and foreclosures of mortgages.
  • Operating MERS through its members’ employees, whom MERS confusingly appoints as its corporate officers so that they may act on MERS’ behalf.
  • Failing to ensure the proper transfer of mortgage loan documentation to the securitization trusts, which may have resulted in the failure of securitizations to own the loans upon which they claimed to foreclose.

Legally, this last defect may be even more fatal than filing in the name of MERS in establishing a break in the chain of title to securitized properties.  Mortgage-backed securities are sold to investors in packages representing interests in trusts called REMICs (Real Estate Mortgage Investment Conduits).  REMICs are designed as tax shelters; but to qualify for that status, they must be “static.”  Mortgages can’t be transferred in and out once the closing date has occurred.  The REMIC Pooling and Servicing Agreement typically states that any transfer after the closing date is invalid.  Yet few, if any, properties in foreclosure seem to have been assigned to these REMICs before the closing date, in blatant disregard of legal requirements.  The whole business is quite complicated, but the bottom line is that title has been clouded not only by MERS but because the trusts purporting to foreclose do not own the properties by the terms of their own documents.

Courts Are Taking Notice

The title issues are so complicated that judges themselves have been slow to catch on, but they are increasingly waking up and taking notice.  In some cases, the judge is not even waiting for the borrowers to raise lack of standing as a defense.   In two cases decided in New York in December, the banks lost although their motions were either unopposed or the homeowner did not show up, and in one there was actually a default.  No matter, said the court; the bank simply did not have standing to foreclose.

Failure to comply with the terms of the loan documents can make an even stronger case for dismissal.  In Horace vs. LaSalle, Circuit Court of Russell County, Alabama, 57-CV-2008-000362.00 (March 30, 2011), the court permanently enjoined the bank (now part of Bank of America) from foreclosing on the plaintiff’s home, stating:

[T]he court is surprised to the point of astonishment that the defendant trust (LaSalle Bank National Association) did not comply with New York Law in attempting to obtain assignment of plaintiff Horace’s note and mortgage. . . .

[P]laintiff’s motion for summary judgment is granted to the extent that defendant trust . . . is permanently enjoined from foreclosing on the property . . . .

Relief for Counties: Land Banks and Eminent Domain

The legal tide is turning against MERS and the banks, giving rise to some interesting possibilities for relief at the county level.  Local governments havethe power of eminent domain: they can seize real or personal property if (a) they can show that doing so is in the public interest, and (b) the owner is compensated at fair market value.

The public interest part is obvious enough.  In a 20-page booklet titled “Revitalizing Foreclosed Properties with Land Banks,” the U.S. Department of Housing and Urban Development (HUD) observes:

The volume of foreclosures has become a significant problem, not only to local economies, but also to the aesthetics of neighborhoods and property values therein. At the same time, middle- to low income families continue to be priced out of the housing market while suitable housing units remain vacant.

The booklet goes on to describe an alternative being pursued by some communities:

To ameliorate the negative effects of foreclosures, some communities are creating public entities — known as land banks — to return these properties to productive reuse while simultaneously addressing the need for affordable housing.

States named as adopting land bank legislation include Michigan, Ohio, Missouri, Georgia, Indiana, Texas, Kentucky, and Maryland.  HUD notes that the federal government encourages and supports these efforts.  But states can still face obstacles to acquiring and restoring the properties, including a lack of funds and difficulties clearing title.

Both of these obstacles might be overcome by focusing on abandoned and foreclosed properties for which the chain of title has been broken, either by MERS or by failure to transfer the promissory note according to the terms of the trust indenture.  These homes could be acquired by eminent domain both free of cost and free of adverse claims to title.  The county would simply need to give notice in the local newspaper of an intent to exercise its right of eminent domain.  The burden of proof would then transfer to the bank or trust claiming title.  If the claimant could not prove title, the county would take the property, clear title, and either work out a fair settlement with the occupants or restore the home for rent or sale.

Even if the properties are acquired without charge, however, counties might lack the funds to restore them.  Additional funds could be had by establishing a public bank that serves more functions than just those of a land bank.  In a series titled “A Solution to the Foreclosure Crisis,” Michael Sauvante of the National Commonwealth Group suggests that properties obtained by eminent domain can be used as part of the capital base for a chartered, publicly-owned bank, on the model of the state-owned Bank of North Dakota.  The county could deposit its revenues into this bank and use its capital and deposits to generate credit, as all chartered banks are empowered to do.  This credit could then be used not just to finance property redevelopment but for other county needs, again on the model of the Bank of North Dakota.  For a fuller discussion of publicly-owned banks, see the Public Banking Institute.

Sauvante adds that the use of eminent domain is often viewed negatively by homeowners.  To overcome this prejudice, the county could exercise eminent domain on the mortgage contract rather than on title to the property.  (The power of eminent domain applies both to real and to personal property rights.)  Title would then remain with the homeowner.  The county would just have a secured interest in the property, putting it in the shoes of the bank.  It could then renegotiate reasonable terms with the homeowner, something banks have been either unwilling or unable to do.  They have to get all the investor-owners to agree, a difficult task; and they have little incentive to negotiate when they can make more money on fees and credit default swaps on contracts that go into default.

Settling with the Investors

What about the rights of the investors who bought the securities allegedly backed by the foreclosed homes?  The banks selling these collateralized debt obligations represented that they were protected with credit default swaps.  The investors’ remedy is against the counterparties to those bets — or against the banks that sold them a bill of goods.

Foreclosure defense attorney Neil Garfield says the investors are unlikely to recover on abandoned and foreclosed properties in any case.  Banks and servicers can earn more when the homes are bulldozed—something that is happening in some counties—than from a sale or workout at a loss.  Not only is more earned on credit default swaps and fees, but bulldozed homes tell no tales.  Garfield maintains that fully a third of the investors’ money has gone into middleman profits rather than into real estate purchases.  “With a complete loss no one asks for an accounting.”

Not only homes and neighborhoods but 400 years of property law are being destroyed by banker and investor greed.  As Barry Ritholtz observes, the ability of a property owner to confidently convey his property is a bedrock of our society.  Bailing out reckless financiers and refusing to hold them accountable has led to a fundamental breakdown in the role of government and the court system.  This can be righted only by holding the 1% to the same set of laws as are applied to the 99%.  Those laws include that a contract for the sale of real estate must be in writing signed by seller and buyer; that an assignment must bear the signatures required by local law; and that forging signatures gives rise to an actionable claim for fraud.

The neoliberal model that says banks can govern themselves has failed.  It is up to county governments to restore the rule of law and repair the economic distress wrought behind the smokescreen of MERS.  New tools at the county’s disposal—including eminent domain, land banks, and publicly-owned banks—can facilitate this local rebirth.

The Cruelest Tax of All

 by

The zero-interest-rate policy deserves closer scrutiny. Would a saver willingly agree to an economic environment of zero interest rates? Certainly not. Would a debtor prefer a zero interest rate? Absolutely. The saver and the debtor would, under normal, willing-economic-participant conditions, negotiate a "price" for the use of money saved. That price for the use of funds is interest.

The central bank enters the negotiation between saver and borrower, and by counterfeiting money it destroys the negotiating base of the saver. Counterfeiting money through policies of unlimited liquidity provision is a "price control" over interest rates, instituted to force interest rates down and eventually spiral them downwards out of control to zero. The interest income of the saver is eventually taxed to extinction at zero interest rates.

It is basic economic theory that price control actually reduces the availability of the item subject to the control. It should therefore come as no surprise that available credit is falling despite unrestrained liquidity provision at zero interest rates. Banks have no direct cost implication when they hold funds at zero (apart from opportunity cost). Thus there is no direct cost penalty for doing nothing.

Not exploiting a lending opportunity in a high default-risk environment, where the margin between a zero-interest cost of funds and the lending rate is insufficient to protect bankers against default risk, is an entirely rational choice for bankers. While the intended consequence is to increase the availability of credit, the ultimate "zero-rate" intervention actually reduces credit availability. One wonders how significant this unintended consequence would be in the absence of Cash for Clunkers, the now-expanded subsidy policy for housing purchases, and the constant Fed, Treasury and Federal Housing Finance Agency support for Freddie Mac and Fannie Mae. We shall find out when fiscal deficits can no longer fund such excesses.

Savings will migrate to term assets for meager interest income but that income has more to do with a term premium than with interest, the cost for the use of funds. The stated policy is to start the yield curve at zero and to use all the influence and tools of the Fed to apply downward force on the slope of the yield curve. No one has any moral standing to defend any policy that dispossesses the interest of the saver; however, the indiscriminate redistribution of this interest tax is exceptionally unjust.

"The central bank enters the negotiation between saver and borrower, and by counterfeiting money it destroys the negotiating base of the saver."

The normal standards for a tax are that it must be fair and it must be evenly distributed. The "for the public good" argument is that tax may be levied disproportionately usually with reference to some wealth measure. In simple terms, the rich must pay more and the poor must pay less.

The tax of a zero-interest-rate policy fails dismally when it is tested against this framework. There is no discrimination in taxing savers' interest. All savers are taxed by a zero interest rate. Some savers, usually the wealthier and more sophisticated savers, can institute countertax measures and are able to avoid or escape the zero-interest-rate tax to some extent. Most savers can't, and they fund the redistribution and subsidies to the borrowers.

Indiscriminate principles are applied in allocating the interest subsidy. Its distribution is not monitored fairly and equitably in the interest of society. The recipients are random borrowers, selected with no reference to the wealth, income, or other discerning standards that would normally apply. It is appropriate to ask by what standards society decides that a homeowner who bought a property priced beyond his means must be subsidized by a pensioner who had saved to survive the income drought of old age? Why must a big bank have access to zero or near-zero cost of funds to carry all those losses making loans while an ordinary saver can no longer afford his child's tuition?

The zero-interest-rate tax strips the interest income from savers and hands it to government, and morally justifies this as stimulating the economy through deficit funding. The justification is that it is of no use to run up huge deficits if it involves paying a high interest rate. Strip the interest and hand it indiscriminately to over-extended borrowers, many of whom used the borrowings to speculate on asset inflations. Strip the interest and hand it to the banks to "repair" their balance sheets and to "carry" the bad debts. Strip the interest and hand it to the developers who overinvested in property, capacity, or trading. Strip the saver of interest to fund the carrying of compounding, unliquidated losses.

How totally one-sided! Rip off the savers and give to the borrowers. Not even the socialist dictate that everybody should contribute according to ability and receive according to need can contain the injustice of a zero-interest-rate-policy tax. Surely nobody can have a zero need and a 100 percent obligation to contribute. Neither can anyone claim 100 percent contribution from savers against a zero contribution from borrowers (the bank margin excluded).

 
 

It is not fair, moral, or just for central banks in their quest for self-preservation to strip savers of their income. The phrase, "interest rates will remain at zero for longer" simply means the imposition of hardship on the saver for longer. Placing the weight of the interest-tax burden on a small and responsible portion of society is self-serving behavior by central bankers who have the encouragement, support, and consent of central government.