Robosigning Settlement - You've Been Shafted
February 9, 2012
As reported yesterday, the cost of terminal abrogation of contractual rights in the US is, drumroll, $26 billion. Bloomberg notes:
- $26 BILLION FORECLOSURE SETTLEMENT ANNOUNCED IN WASHINGTON
- FORECLOSURE ACCORD RESOLVES 16-MONTH ROBO-SIGNING INVESTIGATION
- FORECLOSURE ACCORD IS SUBJECT TO APPROVAL BY FEDERAL JUDGE
- FORECLOSURE DEAL PRESERVES U.S., STATE RIGHTS TO OTHER CLAIMS
- FORECLOSURE ACCORD COULD CLIMB TO $40 BLN IF 14 SERVICERS JOIN
And a whole lot of corner offices for America's Attorneys General. As for what the market thinks of this "severe" settlement: BAC +1.2%, WFC +0.6%, JPM +0.4%, C -0.1%. For those who don't understand what just happened, US banks just funded Obama's re-election campaign to the tune of $26-$40 billion.
From the NYT:
After months of painstaking talks, government authorities and five of the nation’s biggest banks have agreed to a $26 billion settlement that could provide relief to nearly two million current and former American homeowners harmed by the bursting of the housing bubble, state and federal officials said. It is part of a broad national settlement aimed at halting the housing market’s downward slide and holding the banks accountable for foreclosure abuses.
Despite the billions earmarked in the accord, the aid will help a relatively small portion of the millions of borrowers who are delinquent and facing foreclosure. The success could depend in part on how effectively the program is carried out because earlier efforts by Washington aimed at troubled borrowers helped far fewer than had been expected.
Still, the agreement is the broadest effort yet to help borrowers owing more than their houses are worth, with roughly one million expected to have their mortgage debt reduced by lenders or able to refinance their homes at lower rates. Another 750,000 people who lost their homes to foreclosure from September 2008 to the end of 2011 will receive checks for about $2,000. The aid is to be distributed over three years.
In other words, got foreclosed on for being unable to make payments? YOU GET $2,000! And that, ladies and gentlemen, is how you buy an election using taxpayer money.
In a moment of surprising clarity this morning (or perhaps driven by simple ulterior motives as his favorite bank may well be unprepared to cover even this moderate cash payment from existing reserves, as we warned back in January) perpetual bank optimist Dick Bove had some harsh words for the now finalized bank settlement, which he called the "mortgage deal from hell".
"Those people lucky or smart enough to stop making payments on their homes may get their loan balances reduced. Other beneficiaries of the agreement may be homeowners who have seen the value of their houses drop below the size of their mortgages. They get a freebie that other homeowners who have paid their mortgages down will not get....Homeowners who made large down payments on their homes or made the terrible mistake to pay down the principal on their mortgages do not qualify. Homeowners who made minimal or no down payments will get the windfall benefit of a lower principal repayment or a cash payment."
And the true bottom line: "There is no sanctity of contracts in the United States. Only fools meet their financial commitments. The non-payers are the truly enlightened." And that is the summary of modern US society in a nutshell, and explains why despite all the deleveraging, inflation still remains a potent threat as the bulk of a household's mandatory continues to be merely discretionary, with everyone else footing the bill. Finally, as Rick Santelli pointed out subsequently, the banks are paying for this settlement using cash proceeds from previous bank bailouts which have not yet been paid out. So to be even more blunt than Dick and Rick -the US taxpayers bailed out the banks, which are now using the balance of said proceeds to pay a settlement which amounts to the tune of $2,000 per every person foreclosed on in the past 3 years, in order to assure their vote for Obama, while in the process trampling contact law, as no longer will anyone in America honor anything printed and signed.
Obama May Lose Anyway As Record Shadow Inventory Looms
While today's foreclosure settlement deal is by some accounts expected to help the housing market, as the foreclosure pipeline is once again unclogged, it is unclear what this will actually do for price discovery and clearing levels when one considers the already untenable shadow housing inventory, which can be summarized simply as follows - excess supply.
It is this overhang that has to clear before there is any hope for incremental demand interest. And since mortgage rates are already at record low levels, and only an MBS QE could do much to stimulate even lower rates (which has its own set of adverse consequences), it is now obvious that from a purely psychological standpoint as long as people expect rates to decline in the future, they will not commit to a new home loan today. What makes it even worse is that the excess inventory has to be literally burned to the ground for regular market clearing to resume. Unfortunately, as the following chart from JPM shows very vividly, the burning will have a long way to go: the most recent shadow housing inventory is now at an all time high.
Think today's action will do anything to help the housing market? Think again - if anything it will simply see the number of foreclosed properties explode. Rather, what it will do, is finally redirect discretionary spending from all the squatters who have lived mortgage free in their houses for years back into mandatory spending such as rent and mortgage bills. For those unclear, recall this post quantifying the benefit of the squatter economy (i.e., non paid rental/mortgage payments going into discretionary spending) - kiss that $50 billion inflow into GDP goodbye. Paradoxically, by trying to fix housing, Obama may have just popped the consumer discretionary bubble, of which the biggest beneficiary is that one certain fruit-shaped company.