Treasury’s Prime Directive: Protect the Banks
posted by Frank Pasquale
Adam Levitin has been one of the most courageous and compelling commentators on the financial crisis. So it’s not much of a surprise to see this report on his latest testimony before the Senate Banking Committee:
First off, he lamented the fact that we have been holding hearings like this since 2007. “Every year we have another set of hearings, and you can add 2 million foreclosures” to the bottom line. Nothing gets fixed, despite all kinds of documented evidence that the banks and servicers have committed fraud. Levitin’s position is that the servicers should be banned from the loan modification business entirely, because they don’t have any interest in it except as a profit-maximization scheme, and they have massive conflicts of interest that cut against doing right by the borrowers (and even the investors for whom they work).
Levitin said that we don’t have the full data sets from the servicers, or any comprehensive data to see whether there is a full-on crisis of unclear title and improper mortgage assignment. In other words, we don’t quite know the full extent of the problem. Levitin said, essentially, “The federal regulators don’t want to get info from servicers, because then they’d have to do something about it.” They don’t want to recognize the scope of the problem because it would require them to act. And Levitin in particular singled out the Treasury Department. “The prime directive coming out of Treasury is ‘protect the banks’ and don’t force them to recognize their losses.”
While I’m sure the FCIC will issue a nuanced report on the web of causes behind the foreclosure crisis, Levitin sees the spider. It looks like courts are beginning to identify it, too. As Kate Berry reported in the American Banker,
Countrywide, the mortgage giant that’s now part of Bank of America Corp., routinely didn’t bother to transfer essential documents for loans sold to investors, an employee testified. The testimony — which a New Jersey bankruptcy judge cited in dismissing a B of A claim against a debtor — could complicate attempts by the company to foreclose on soured loans that Countrywide originated and sold in better times.
The B of A employee’s admission that the lender customarily held on to promissory notes could also undermine the industry’s position that document transfers to securitization trusts are fundamentally sound. O. Max Gardner, a North Carolina consumer bankruptcy lawyer who was not involved in the case, called the testimony “a major problem” for B of A, which acquired Countrywide, the country’s largest servicer of residential mortgages, in 2008. “These original notes were supposed to be transferred and delivered all the way up the line and for this witness to admit they were never transferred is pretty amazing,” Gardner said. “I’ve never see this admitted anywhere.”
I guess there’s a reason why so much financial activity nowadays goes on in the “shadow banking system.” And as Gillian Tett notes, what’s more worrisome is the role of the “shadow, shadow banking” system propping it up:
[M]any things about the modern financial system remain mysterious – even today. On the edges of [their diagram of the extant shadow banking system], NY Fed economists list all the government programmes that have supported the system since 2007 (and, in effect, replaced shadow banks when they suffered runs). This “shadow, shadow bank system” – as it might be called – looks complex and baffling too. And in practical terms, the sheer breadth and complexity of that box makes it hard to know what will happen if – or when – government aid disappears.
Commentators on the left and the right realize the magnitude of the problem. Perhaps Levitin will help the “sensible middle” connect foreclosure fraud, systemic risk, and a struthious Treasury Department.