Update on mortgage settlement talks

I first mentioned the Bank of America mortgage settlement talks in my Quote of the Week at the end of August, in which I portrayed New York Attorney General Eric Schneiderman as a lonely soldier fighting on behalf of the public versus the banks. Well now it seems that Mr. Schneiderman has some company, no matter what Kathryn Wylde may think about it.

California Atty. Gen. Kamala Harris will no longer take part in a national foreclosure probe of some of the nation's biggest banks, which are accused of pervasive misconduct in dealing with troubled homeowners.

Harris removed herself from talks by a coalition of state attorneys general and federal agencies investigating abusive foreclosure practices because the nation's five largest mortgage servicers were not offering California homeowners relief commensurate to what people in the state had suffered, Harris told The Times on Friday.

The big banks were also demanding to be granted overly broad immunity from legal claims that could potentially derail further investigations into Wall Street's role in the mortgage meltdown, Harris said.

“It has been  a process of negotiating and sitting at a table in good faith, but ultimately I have decided that we have to go our own course and take an independent path. And that decision is because we need to bring relief to Californians that is equal to the pain California experienced, and what is being negotiated now is insufficient," Harris told The Times in an interview.

Harris delivered the news in a letter sent Friday to Iowa Atty. Gen. Tom Miller, who has been leading the 50-state coalition.

Good for her. With California and New York now out of the settlement talks, the whole concept behind the settlement is essentially dead in the water. As Naked Capitalism's Yves Smith writes,

Now that Kamala Harris... has officially abandoned the talks, they don’t mean much, at least from the state side. The departure of such a big state, in population, foreclosure exposure, and Electoral college terms, along with other states (New York, Delaware, Nevada, Massachusetts, Kentucky, Minnesota, likely Arizona) means any settlement has limited practical meaning from the state side and even less credibility. It also considerably raises the odds of other states bolting. And needless to say, this is a major repudiation of the Obama Administration's “let’s sweep foreclosure fraud under the rug” strategy.

Indeed. For reasons known only to him, Iowa AG Tom Miller seems intent on pressing on with this zombie settlement, even though I can't even see why the banks would be interested at this point. The only benefit to the bank was coming from the wide indemnification that such a settlement would provide, and that benefit is now largely gone. Who cares about Iowa and Kansas when California and New York are out of the game? Just try winning a Presidential election while losing CA and NY--the math is pretty tough, even if George W. Bush did pull it off (twice).

At any rate, congrats to the AGs for standing up for themselves in this deal--even if they do end up negotiating their own state-specific banker-friendly deals down the road, it's important to show the federal agencies that backed this thing that the states refuse to let their rights be trampled on. Thank you, Kamala Harris.

[LA Times]  
(h/t Naked Capitalism)

The unseen costs of foreclosure

While I continue to try to avoid talking about the debt ceiling talks and the developing Rupert Murdoch sh*tshow--neither of which I can discuss rationally without getting physically upset--I came across some interesting notes on our nation's foreclosure situation (which I've discussed briefly before here, here, and here) courtesy of NPR.

When you are the nation's largest owner of foreclosed homes, even little things can get expensive fast. Such is the case for mortgage giant Fannie Mae, which as of March 31 had a mind-boggling 153,000 foreclosed homes on its books.

One example — mowing the lawn. Two men swoop in on a foreclosed town house in Lanham, Md., quickly mowing and edging the small front yard. Fannie Mae owns this home, so it's paying for the lawn crew to come every two weeks or so to keep up the curb appeal.

But it's not just this lawn. There are tens of thousands more. Fannie Mae officials won't say how many lawns it's paying to maintain, so we've done some back-of-the-envelope calculations of our own:

Say only half of the homes have lawns, a conservative estimate, that's still more than 75,000 lawns.

153,000/2 [number of lawns]

x 6 (a six-month grass-clipping season)

x 2 (mowing twice a month)

x $40 (a reasonable guess at how much it costs to mow a lawn)

= $36.7 million

Again, this is very rough estimate, but that's a whole lot of money to spend on lawn care.

Yes, it is. And then there's the costs that aren't necessarily "out-of-pocket" costs like basic curb-appeal maintenance, but will certainly cost Fannie Mae (and other owners of foreclosed properties) money in the long run.

As huge numbers of foreclosed homes continue to work their way through the real estate pipeline, another problem is blossoming — mold.

In most homes, as residents go in and out and the seasons change, natural ventilation sucks moisture up to the attic and out through the roof. It's called the "stack effect." And in many parts of the country, it's driven by air conditioning in the summer and heat in the winter.

But no one is going in or out of most foreclosed homes — regardless of climate — and the effects can be devastating.

In some states, it's estimated that more than half of foreclosed homes have mold and mildew issues. Realtors across the country say they're seeing the problem in everything from bungalows to mansions.

Yikes. Even in a small home, remediation of mold and mildew problems can cost thousands of dollars, if not making the home completely un-sellable.

Many banks and bank-like institutions (like Fannie Mae) are making what they think is a "prudent" investment decision, holding onto foreclosed properties at their distressed prices in hopes of a real estate turnaround that will enable them to avoid realizing major losses. But the longer that turnaround takes to happen (and frankly, it may never happen), the more of these sorts of costs those institutions will start to incur. And that, perversely, can turn a modest loss into a somewhat devastating loss.

It always costs money to hold property, and it doesn't seem like the holders of foreclosed properties are fully prepared to take on those costs. That could be a big problem for them in the long run, and could end up costing them much more than just simple investment depreciation.

[NPR]
[NPR]

Important foreclosure update (hooray!)

In yesterday's post about the foreclosure mess, I made a brief late note to keep an eye on the Massachusetts Supreme Court case (the so-called Ibanez case) regarding the validity of certain foreclosures. I wrote:

Keep an eye on this case in the Massachusetts Supreme Court, which could potentially void certain foreclosures and score a "win" for homeowners' rights in this mess. We can't allow our rights to be trampled in order to ensure short-term economic (and housing market) stability. The rule of law and due process must be preserved at all costs, period; let's hope that's what happens here.

It seems that my prayers have been answered, and quickly at that.

US Bancorp and Wells Fargo & Co. lost a foreclosure case in Massachusetts’s highest court that will guide lower courts in that state and may influence others in the clash between bank practices and state real estate law. The ruling drove down bank stocks.

The state Supreme Judicial Court today upheld a judge’s decision saying two foreclosures were invalid because the banks didn’t prove they owned the mortgages, which he said were improperly transferred into two mortgage-backed trusts.

“We agree with the judge that the plaintiffs, who were not the original mortgagees, failed to make the required showing that they were the holders of the mortgages at the time of foreclosure,” Justice Ralph D. Gants wrote.

Wells Fargo, the fourth-largest U.S. lender by assets, dropped $1.10, or 3.4 percent, to $31.05 at 11:41 a.m. in New York Stock Exchange composite trading. US Bancorp declined 28 cents, or 1.1 percent, to $26.01.

The 24-company KBW Bank Index fell as much as 2.2 percent after the decision was handed down.

Claims of wrongdoing by banks and loan servicers triggered a 50-state investigation last year into whether hundreds of thousands of foreclosures were properly documented as the housing market collapsed. The probe came after JPMorgan Chase & Co. and Ally Financial Inc. said they would stop repossessions in 23 states where courts supervise home seizures and Bank of America Corp. froze U.S. foreclosures.

This ruling is almost certain to be appealed, but that's hardly important. With this decision now on the books establishing precedent, you can reasonably expect a flood of similar "wrongful foreclosure" lawsuits to be raised around the country.

Other states' courts obviously do not need to agree with, honor, or abide by the Massachusetts decision, but the precedent is no less important. The banks are in for a very serious sh**storm, and a well-deserved one at that. It doesn't matter if the homeowners in question were in fact in default on their mortgages (and in this case, they were). The rule of law and due process is what matters, and it must be protected.

The only (and I do mean the only) thing that ultimately separates first-world economies from third-world economies over the long run is viable protection of property rights. For more on that point, I encourage you to read here; the gist of it:

• Not only will a weakened structure lead to a consequent lack of trust in the legal property system, which further encourages informal market activity (black markets), but it also negatively influences investment decisions by an investor or multinational interest for fear of a lost return.
• The degree to which intellectual property is protected also highly influences a country's inventive character as it shapes the flow of innovative ideas and products that are developed, which in turn affects creative and economic wealth.

In essence, if people don't have legitimate reason to believe that they will own (and continue to own) the fruits of their labor, they will be less likely to produce any fruits at all. They'll be even less likely to engage in any type of research and development activity that leads to innovation, lest they invest heavily in a new technology and then see it stolen from them (whether by other individuals, corporations, or the government) before it can become profitable. This is the essence of U.S. patent law.

Housing rights are the most fundamental of all property rights--chip away there, and you'll undermine the economy at large. We can't afford to trade short-term economic stability for long-term economic viability. That's why this ruling is so important.

[Bloomberg]

A summary of the foreclosure mess

I've stayed largely quiet on the foreclosure mess to this point, in large part because it's sort of hard to know where to start. So many people have taken so many liberties with the lending and foreclosure process that the result is just a head-shakingly labyrinthine disaster area that casts significant doubt on the health of our housing market going forward.

So rather than try to catch up with a ridiculously long blog post enumerating all the ins and outs of the situation and my feelings about them, I'm going to instead post this presentation from the Florida Attorney General's Office. It's both comprehensive and easy to understand, and it lays things out in a very clean way. The first 25 pages or so are essentially background, and it's followed up by significant evidence of fraud and other unethical or criminal behavior. Interesting and important stuff.

Foreclosure Report From Florida AG

The next step, of course, is actually prosecuting some of these cases in meaningful ways, something that AGs in many states have thus far been reluctant to do. In many cases, their reluctance has stemmed from political pressure--politicians and companies alike (not to mention certain individuals) have a lot to lose from a "double-dip" in housing that proper prosecution of this fraud might cause, and they've shown that they are willing to go to great lengths to avoid it. But you can't allow these sorts of crimes to persist simply because you're afraid of the economic effects of stopping them--remember, that's in large part how we got into this mess in the first place.

Keep an eye on this case in the Massachusetts Supreme Court, which could potentially void certain foreclosures and score a "win" for homeowners' rights in this mess. We can't allow our rights to be trampled in order to ensure short-term economic (and housing market) stability. The rule of law and due process must be preserved at all costs, period; let's hope that's what happens here.

[The Big Picture]

Fun with Google Maps

Google is always creating new things to play around with (Picasa, Google Earth, Google Translate, etc, etc, etc), and Barry Ritholtz over at The Big Picture has discovered a little-known feature within Google Maps that's definitely good for some time-wastin'.

Apparently there is a "real estate" function within Google Maps that allows you to search for available properties in a given neighborhood. One of the filtering parameters is "Foreclosures", which then enables you to see how many foreclosed homes there might be in an area. So, yeah... yikes. Anyone wanna move to Miami?

There's more on Barry's post, and you can go over to Google Maps and kill plenty of time playing around with your own neighborhood (or, if you're into chart porn, just check out Detroit...). Interesting and sort of scary at the same time.


[The Big Picture]

Stewart does my job for me again

I've avoided discussing the foreclosure mess here so far, in large part because I can't figure out where to start. There is so much here to rant about that I really don't know how to begin discussing it, besides spewing an expletive-laced tirade that would do the 2006 version of me (angry floor trader) proud.

So, as I often do, I'm turning this one over to Jon Stewart, because he's just better at sarcastically expressing anger without all the cursing. For the record, the fact that even he can't discuss the topic without resorting to expletives shows just how f*cked up this whole situation is. Without further ado, take it away Daily Show...

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
Foreclosure Crisis
www.thedailyshow.com
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