A Sword in a Field – Correlation is Not Causation

If you’ve never heard the phrase, “correlation is not causation” before, it’s a concept discussed in every statistics class, and it basically means that even though two independent things can be related to each other, it’s often difficult to determine cause and effect…. whether one is causing the other.  For example…

Consider the undeniable correlation between shoe size and reading skills.  If you were to conduct a study across the country, you’d find that the larger shoe sizes mean better reading skills, but does that necessarily mean that shoe size influences reading abilities in any way?  No, even though there is a correlation between shoe size and reading skills, the obvious reason is that young children who cannot yet read or who are just learning to read have smaller feet.

By adding another independent variable to our study… age… we’d find out that it wasn’t shoe size that was making for better readers, it was age.

Similar correlations can also be seen, such as eating ice cream in this country and the murder rate, both have increased at similar rates over the last 30 years, so does eating ice cream make people want to kill other people?  Let’s at least hope not.

Watch the video below… it’s a scene from Joan of Arc titled, “A Sword in a Field,” which stars Dustin Hoffman as Joan’s inner voice, and is about Joan’s conclusion that the sword she found in a field had been placed there for her by God.  It’s only a few minutes long and it’s great… watch it… then continue reading below.

I’m sure you get the point, but the reason I’m making it is that the same sort of affect is taking place among many in the foreclosure defense movement, and if it continues to grow, it will threaten the movement’s abilities and ultimately its potential for effectiveness.

Here’s an example of the delicate relationship between correlation and causation…

1. I’ve heard that Bank of America is not complying with National Mortgage Settlement.

2. Bank of America is selling off servicing rights.

CONCLUSION: Bank of America is selling off servicing rights in order to get out of having to comply with the servicer standards set by the National Mortgage Settlement.

Recently, the national monitor for the National Mortgage Settlement, Joseph Smith, reported that there have been more complaints filed with his office about Bank of America than any other servicer.  (Wells Fargo came in second, I believe.)

In addition, New York Attorney General Schneiderman recently issued a statement saying that Bank of America has been dual tracking in violation of the National Mortgage Settlement.  So, it’s easy to conclude that Bank of America is failing to comply with the terms of the National Mortgage Settlement to whatever degree.

It’s also a fact that Bank of America has recently sold some significant numbers of its servicing rights to Nationstar, among others, who are non-bank servicers.  So, there is definitely a correlation between number one and two above.

So, it’s understandable why some have drawn the conclusion that one thing is leading to the other.  Bank of America is having a hard time complying or doesn’t want to comply with the new settlement standards, and that means potential liability…. so the bank is getting rid of Master Servicing Rights (“MSRs”) rights by selling them to sub-servicers who are not a party to the national settlement and therefor are not required to comply with the new standards.

However, when you more closely examine the other variables surrounding the situation, it becomes easy to see that the bank’s decision to sell servicing rights could not be simply to somehow avoid compliance with the terms of the settlement.

For one thing, Bank of America selling servicing rights is not just a recent event… the bank has been selling some of its MSRs for well over a year due at least in part to pressure by regulators to reduce its servicing volume… in fact, it started with the OCC consent orders two years ago.

Also, as many might have seen recently in the news, Bank of America is not alone.  One West Bank also recently sold its servicing rights to a non-bank servicer, Ocwen.  But, One West Bank was not one of the five servicers involved in the National Mortgage Settlement, so if the settlement were what’s driving the sale of servicing rights, then why is One West selling off theirs?

The answer is that evading the settlement’s servicing standards is not what’s driving sales of servicing rights by bank-owned servicers to their non-bank counterparts.

What is driving these sales, among other things, is the upcoming migration to the Basel III Accord, a global regulatory standard developed specifically in response to our most recent financial crisis that’s designed to strengthen bank capital requirements by increasing them, and decreasing the amount of bank leverage.  And the introduction of Basel III,which is the third installment of the Basel Accords, has always been scheduled to begin in 2013.

According to Fitch just last week:

“The decision by many banks to reduce or exit sub-prime and distressed mortgage servicing in part reflects regulatory risks faced by these institutions in the migration to Basel III, where the maximum value of MSRs a bank can count toward Tier I capital is effectively 10%. As a consequence, banks approaching the thresholds will likely reduce their servicing assets to take into account the deduction from capital.”

So, while the valuation methodologies of servicing rights owned by regulated banks have changed and the capital requirements are now more burdensome, the non-bank servicers are not subject to the new banking regulations found in Basel III.

There are other factors that would support Bank of America’s decision to sell some of its servicing rights, not the least of which is that this past year, Bank of America has reported losses of $1 billion in a quarter resulting from its servicing operations.  It’s not hard to understand when you consider that over the last few years, the bank has hired 50,000 new employees to handle the unprecedented volume of homeowners seeking assistance with their mortgages, and that has got to play havoc with any businesses cost structure.

And all of that having been said, it’s also worth noting that even after Bank of America is done selling servicing rights, it will still be among the largest bank-owned servicers of residential mortgages in the country, which means it will STILL be servicing a whole lot of loans that are subject to the terms of the National Mortgage Settlement.

And I realize that a recent report by the settlement’s monitor showed Bank of America as having the most complaints filed with the national monitor for the settlement, but that’s not simply a reflection of the servicer’s capability, it’s also because the bank has been servicing many more delinquent loans than any other servicer.

Now that you know about all of these other factors that exist, does it still seem likely that the reason Bank of America is selling off servicing rights is so that it doesn’t have to comply with the terms of the National Mortgage Settlement?

The real point here…

My point is that it’s very easy to misinterpret correlation as being causation… when it’s not.

These past five years since Wall Street imploded and spawned the global financial crisis a whole lot has happened in this country… and not a whole lot of it has been clearly explained or even disclosed.  And that makes for a climate in which people can more easily draw erroneous conclusions.

Lately, I’ve had conversations with several homeowners who thought that credit default swaps paid off their mortgages.  They heard about investors buying credit default swaps as a way of betting against the loans inside a given mortgage-backed security or collateralized debt obligation.  And they also saw the government bailout Wall Street… and then the AIG bailout result in tens of billions being paid to Goldman Sachs, along with the other usual suspects.

So, when they heard that credit default swaps had paid off their loan, in light of everything else that had transpired, it seemed eminently plausible… even if it wasn’t.   I reminded those I spoke with that, in the case of a credit default swap, it wasn’t necessary to own the bonds you were betting against…. so why would you want to own loans that you were essentially betting would default.

Remember Senator Carl Levin questioning Lloyd Blankfein a couple of years ago?  He was chewing out Goldman’s CEO for “selling the shitty deal,” and then betting on it to fail.  Goldman didn’t get in trouble for KEEPING the shitty deal… it was selling it that angered Sen Levin.  So, since Goldman wouldn’t have owned the bonds, it stands to reason that the payments the firm received as a counter party in a credit default swap, wouldn’t have paid off loans inside the bonds they didn’t own, right?

Others have correlated other things they’ve seen or heard, only to find connections that aren’t there or make assumptions about facts… that aren’t facts.  Truth be told, it’s easy to do.

It’s easy to misinterpret something about this crisis.  But, it’s important that we try to guard against that happening whenever possible for all sorts of reasons, not the least of which is that being wrong means wasting time that could be spent on something potentially productive.   I can’t tell you how many homeowners I’ve spoken to with plans to litigate based on causes of action that have never prevailed, and at the same time overlooking other strategies with a much greater chance of success.

We are dealing with a true crisis, and I would even say a major crisis.  Nothing about fighting foreclosure is easy, there are no easy answers, but you can find out what’s real and what isn’t by Googling everything and  at least triple checking what you hear, talking to as many different experts as possible, and reading as much as you can find on whatever the subject is.

And it helps to remember that something you’ve found could just be a sword in a field.

Mandelman out.