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Why the Banks are Thrilled That the Media and the Obama Administration Have Failed on the Foreclosure Crisis

Stressed homeowners twist in the wind as home values, and the economy, continue to stagnate.

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So the real issue here was one we’ve stressed all along: servicers were set up to foreclose, and they make money from foreclosing. They are not set up to do mods and don’t feel they are paid enough to do them. The Administration has finally decided to bribe them enough to get them to take interest, but this is still too little, too late. By contrast, the Administration had tons of leverage and could easily have made it clear they would make their lives miserable if they failed to do what it took to do to give more mods to viable borrowers. (The banks have a weak argument that they might have been sued by investors. The reality is investors have been remarkably unresponsive despite being on the wrong end of tons of abuses).

The biggest way they could have messes with the servicers was by threatening to enforce REMIC rules. REMICs, or real estate mortgage conduits, get pass through treatment (meaning the trust itself is not taxed, only the investor in it is when income is received). Among the requirements are that they be passive, which among other things meant all the mortgages had to be in the trust as of a specified date not long after trust closing. In addition, only performing loans can go in a REMIC. We’ve since learned that many if not most mortgages in the post 2004 securitizations weren’t conveyed to the trusts properly, and the servicers have taken to trying to convey defaulted loans into the trusts in order to foreclose. The penalties for prohibited acts under REMIC is a 100% tax on income. As we wrote in 2011:

"Knowing of this background, in the blogger meeting with Treasury last August, when someone we will euphemistically call as senior official argued that the Treasury had little power over servicers, I objected, and said it depended on whether they construed of their power narrowly or broadly. I pointed out that a Pacer scrape on foreclosure filings would find thousands of violations of REMIC rules that were subject to punitive charges, and that that was an important leverage point to bring the industry to heel. (Yes, this is an example of using tax as a tool of policy, as opposed to merely enforcing the rules……that was by design). He sidestepped the reference to REMIC both in my initial question and follow up.

Steve Waldman, who was also at the session, was as skeptical of the exchange as I was. From a message last August:

Re REMICs: The reaction to your probing was very suspicious.

It’d have been one thing if he’d said they hadn’t looked into the issue. But that wasn’t how he responded. He started talking about how he’d had his staff “look for leverage”, against servicers I think, but found there was nothing there. In other words, he didn’t want to leave the issue open. He wanted to neutralize it.

One possibility is that the truth is face value, but I doubt it. After all, we’d just had staffers describe using the government’s leverage in creative ways to protect taxpayers or serve other public purposes as “extra legal”. Yet here was [the senior official] apparently on a fishing expedition for leverage, no doubt desperate to persuade servicers to facililitate mods to help homeowners. Yeah. Right.

If I’m not misunderstanding you, your core point is that the paperwork on many boomtown mortgages is invalid, and therefore various sorts of transactions, from foreclosures to bundling into REMICs, cannot be legally done, at least not without a lot of expensive research and recertification. In other words, your line of thinking would put a question mark beneath the value of a whole lot of bank assets. That would obviously not be in the national interest according to Treasury. So of course they’ve already looked onto the story and there’s nothing to it.