(4 pm. – promoted by ek hornbeck)
President Obama announced that millions more underwater homeowners can take advantage of a refinancing program if their loan is owned or guaranteed by Fannie Mae or Freddie Mac. But, there are shortcomings, helpings banks more than homeowners by eliminating liability associated with the origination of the mortgage, including putback liability. From Yves Smith who asks why Obama is bothering to do this:
First, Obama is addicted to the appearance of Doing Something, regardless of whether it is productive. A clear sign is the apparent failure to investigate why HARP was a dud.
Second, this is a sop to the banks, because a refi ends any liability associated with the origination of the mortgage, including putback liability. Now that would seem to be a big “get out of jail free” card for banks engaged in putback litigation. But the reason this is not as nefarious as it might seem is that current mortgages aren’t the big bone of contention in putbacks (even if the originator lied, the borrower is paying, so there are no damages). But it would also end any chain of title issue on that mortgage
At Huffington Post, Zack Carter gives a more detailed explanation:
The newly expanded program would expunge legal liabilities associated with mortgages refinanced through the program for the original lenders of the mortgages. Each time a bank sent a loan to Fannie and Freddie, it certified that the loan met Fannie and Freddie’s safe lending criteria. But many loans sent to the mortgage giants did not, in fact, meet those criteria. Currently, when borrowers default on those ineligible loans, the mortgage giants can “put back” the resulting losses onto the banks that pushed the loans.
Under the modified plan, “put back” liability at banks will be erased for any underwater mortgage that is refinanced through HARP, eliminating Fannie and Freddie’s ability to sack lenders with losses in the event that the mortgage does not pan out.
If borrowers go through HARP, but decide after several months that the modest monthly savings do not outweigh owing tens of thousands of dollars more than their home is worth, taxpayer-owned Fannie and Freddie will have to take the full loss. Even if the original loan was sent to Fannie and Freddie with false or fraudulent guarantees from the bank – promises that may directly be tied to the borrower’s current financial problems – banks will be immune from liability. Fannie and Freddie plan to charge banks “a modest fee” to extinguish this liability, but the administration has yet to determine what that fee will be.
Partial transcript below the fold
Professor William Black of the University of Missouri, Kansas City and Zack Carter of the Huffington Post join Dylan Ratigan to discuss the problems of Obama’s mortgage program
Black: The numbers are considerably worse that what you showed. The figure of 12 million is actually how many housed are underwater by 125% not 100%.
Politically no one is interested in solving this problem. You have to force very large banks to recognize losses that are already on the books, that thye;ve buries with accounting tricks.
We extorted the Financial Accounting Standard Board to change the rules so the banks wouldn’t have to recognize the losses, unles and until, they actually sold the place. So they ar sitting on a shadow inventory of millions of homes . . .[
Part of the story is massive fraud in the sale of collaterized debt obligations. A federal agency has sued 17 of the largest banks, claiming they engaged in endemic fraud and that there’s a paper trail establishing that they knew their actions were fraudulent, and there are still no indictments from the federal level. So it’s left to the states and I would add to your honor roll the California Attorney General, Harris, who I applaud in that column because she withsrew from the state settlement which is being pushed by the Obama administration to create an utter scandal where we are going to make crony capitalism official. Tha want, and apparently think, thay are going to get immunity from the underlying fraudulent laons by givingm what is for them, from their standpoint, chump change.
Zack: When a bank makes a loan to a borrower, it then typically takes it to Freddie Mac and Fannie Mae and say, can you buy this loan or guarantee it against losses for us? Whr it takes that loan to Fannie or Freddie, it says it has certain characteristics, it a safe and affordable loan for the buyer taking it on. If it doesn’t meet those characteristics, when the loan defaults, they can take it back and say, you’ve got to eat this loss. That ability to push back those losses on the bank goes away with this program. So we don’t know how many loans are going to be picked up by the program, we don’t know how many of them were misrepresented. But there is clearly a potential for a significant amount of upside for the big banks in the way the program is structured
Ratigan: Why would any sitting president of the Unites States – I don’t care who the president is, I don’t care what the political party is – work in any way to prevent honest liability for criminal – potential criminal action.
Black: It is incomprehensibly disgraceful. It is a violation of the oath of office. It is a destruction of America. And the only thing I would add, Zack is absolutely right, except we do know something about the percentages of fraud in these loans and they are enormous, starting in the range of 50% and simply that they were found in a paper review without an investigation . . .
Where you look at a sample and see the fraud are so obvious, that with no investigation you can see it’s fraudulent.