There seems to be a prevailing denial in the banking and mortgage industry that refuses to see the enormous problems weighing down the housing industry. For whatever reasons, the mortgage and banking complex is continually compelled to "resolve their issues" internally and stone wall any efforts to obtain accountability from the outside world. This closed group mentality is what has lead to the killing of the American Golden Goose that has been the housing market. The rampant fraud and corruption within this trillion dollar cocoon has cost countless individuals and families their meal ticket to a comfortable future. Yves touches on several of the issues confronting the economy and the housing market in the following commentary while detailing many of the tendencies of the industry that have lead to this continual denial of reality.
Yves Smith article from Naked Capitalism after her attendance at the AmeriCatalyst Conference in Washington.
Wednesday, November 9, 2011
Denial in the Mortgage Industrial ComplexThis is Naked Capitalism fundraising week. Over 525 donors have already invested in our efforts to shed light on the dark and seamy corners of finance. Join us and participate via our Tip Jar or read about why we’re doing this fundraiser and other ways to donate, such as by check or another credit card portal, on our kickoff post and one discussing our current target.
I just came back from the AmeriCatalyst conference in Austin, which was a packed two days focused on the state of the housing and securitization market. The panels were very informative, and it was also good to see some of the people I’ve read or heard about, in particular the leading analyst, Laurie Goodman of Amherst Securities. She gave a talk that where she went through a very persuasive (and conservative) analysis that there are 8.3 to 10.3 million more foreclosures baked in given how underwater borrowers are. And she had some striking bits of information. One is if you take out the homes where no one has made a mortgage payment in a year or more, homeownership in the US is 61%. In addition, Judge Annette Rizzo discussed a successful program she had developed in Philadelphia to do remediation. The success rate on modifications that come out of her court is 85% after 18 months.
I had quite a few people come and commend me on my comments. I think the main reason was that the viewpoint presented on this blog, that there are deep seated problems resulting from chain of title issues, and that servicers have engaged in a lot of abuses, was sorely underrepresented. I don’t blame the organizer, Toni Moss, who has an exceptionally well thought out and prepped effort; I think this reflects the nature of who has expertise in this industry. The overwhelming majority of knowledgeable people will be insiders, and whether they can admit it to themselves or not, their first loyalty will be to their meal ticket. Put it another way: why would you have to go outside the industry to find someone (and a blogger to boot) to raise issues that come directly out of recent court decisions and the gridlock in foreclosure courts if you could find people with institutional credentials? (In fairness, there were other skeptics, such as Adam Levitin and Josh Rosner, but that was a minority viewpoint).
But I don’t mean to accuse the panelists or industry defenders of mendacity. Instead, it has much more to do with both loyalty to their industry, and a distressing lack of understanding of the legal issues involved. By happenstance, I’m reading a book by an award-winning academic psychologist, David Tuckett, Minding the Markets, and it includes a good summary on the state of the art on group processes. As W.R. Bion wrote,
I know of no experience that demonstrates more clearly that a basic assumption group experience is active [colloquially known as groupthink] that ‘the dread with which a questioning attitude is regarded’ and particularly towards the group itself.I’ve been in conference in the past where denial was a palpable subtext, in particular, the 2008 Milken conference, which took place the month after Bear Stearns collapsed. There was a whistling in the dark quality to it, but there was also aggressive enforcement of a “ne’er a bad word will be said” policy (see here and here for details).
By contrast, here the hope was to mix it up a bit, yet there was a lot of unanimity. For instance, the six members of one panel were asked where housing prices would be a year from now. One said they’d bottomed, one said they’d bottomed but would bump sideways for a very long time. The others projected very modest declines (with the usual caveat that real estate is local), typically 2%, with the maximum 5%. Given how far housing prices have fallen, it would not seem crazy to expect things not to deteriorate much further. But given the severity of the chain of title mess and the high odds of a European banking crisis, which would wind up impacting the US economy, I found it telling that no one was willing to hedge their views with a consideration of a downside scenario.
But the biggest undertone was the “borrowers are deadbeats” meme. In the first panel I was one, one of the other speakers went on about borrower fraud in the widely criticized HAMP program. I had trouble containing myself in my response. Each table in the audience had a keyboard that allowed comments and questions to be displayed (both to people at the table and the speakers (a clever way to direct the texting temptation into the conversation). In a later panel I was on, on litigation, there were a lot of “shoot the messenger” remarks (among other things, I was accused of being an anarchist, and it was also interesting to see how some of my remarks were either distorted or misunderstood. For instance, I made a general remark about the use of allonges (a preferred form of fabrication to solve the little problem of failure to conveyu the mortgage notes as required on time), and a written comment charged me with being wrong about Kemp v. Countrywide, when I had just mentioned that case for a different reason). It was pretty clear that the American Securitization Forum party line, that these were mere errors or sloppiness, is widely shared. Too few are willing to accept the point made by Levitin:
To raise the “it’s just paperwork” argument in the context of securitization, however, is unreal. Securitization is all about legal fictions and paperwork. Why on earth would anyone every bother with the complex legal structures of securitization (typically involving two shell entities) other than to take advantage of legal fictions?So it isn’t surprising that a lawyer who represents investors made an impassioned plea for servicers to wake up and smell the coffee, that he’d rather work with them and negotiate a deal, but he was too often left with no other option than to sue. And that means that this battle will continue to play out in the courtroom.
As I’ve noted in other venues, securitization is the legal apotheosis of form over substance, and the basis on which this is legally tolerated is the punctilious observance of formalities. Failure to do so can result in a securitization failing to be bankruptcy remote or to lose its off-balance sheet accounting status or lose its pass-thru tax status, any of which are disasterous. Securitization deals were so heavily lawyered precisely because the paperwork matters. They aren’t like a sale of a used sofa over Craigslist.
The “it’s just paperwork” argument quickly proves too much. Is the borrower’s signature on the loan “just paperwork”? How about a co-signor’s? If it’s just paperwork, why bother to have the borrower or co-signor sign, especially as it can create federal Equal Credit Opportunity Act issues when a spouse is involved.
READ the complete article here at Naked Capitalism