Dave Dayen Does Great Job Describing “Government Cowardice” and Donovan’s Complicity “Selling” the National Mortgage Settlement



What a nice way to wake up the other morning… David Dayen, who describes himself as “a lapsed blogger, now a freelance writer,” writing on Naked Capitalism, did a brilliant job covering the most salient details of the “Final Crediting Report” on the National Mortgage Settlement (“NMS”), released last week by the settlement’s national monitor, Joseph Smith.

Not surprisingly, Smith’s report claimed that the five banks involved in the settlement have at this point, more than fulfilled their obligations related to providing financial relief to consumers.   According to Smith, the gross amount of relief they provided was over $50 billion, with “more than 600,000 families received some form of relief.”

Dayen’s article explains that, per the terms of the settlement, Wells Fargo, JPMorgan Chase, Bank of America, Citi and GMAC/Ally/Residential Capital, were to provide $20 billion in “credited relief,” a term that pertains to the somewhat involved “crediting process,” used to calculate the net dollar amount of relief actually provided.  For example, reducing principal on first liens resulted in dollar for dollar credit, as opposed to wiping out second liens over 180 days delinquent, which meant servicers would receive credits of just 10 cents on the dollar.

But, as Dayen’s article points out, regardless of the financial gyrations that turned $50 billion into $20 billion, only 83,000 homeowners received first lien principal reductions, a figure that he says represents 90 percent fewer than was promised by the Obama Administration, and specifically by HUD Secretary Shaun Donovan when he claimed that a million homeowners would receive such relief under the settlement’s terms.

Dayen poured through the numbers in Smith’s report, a task that I simply could not bring myself to even contemplate let alone complete, and as I would have bet any amount of money on, he found that Smith’s claim that some $50 billion in relief was provided, to be “wildly inflated.”  And since we’re talking about an article posted on Naked Capitalism, the only thing I can think of to say in response is, “Quelle Surprise!”

As just one example of this exaggeration, Dayen points out that $12 billion of the $50 billion was in the form of waivers on deficiencies granted in non-recourse states, which is along the lines of rewarding Capital One for forgiving credit card debt discharged in a Chapter 7 bankruptcy.

Dayen spending the time to go through the numbers in Smith’s report and then writing about what he found was truly an important public service, because I’m not at all sure anyone in the mainstream media would have… ever.  Maybe someone would have eventually, but maybe not.  Everything I’ve seen published to-date basically echoed whatever Smith said in his P.R. firm prepared remarks, such as…

“I am happy we have gotten where we are and achieved this milestone in terms of consumer relief,” Joseph Smith, monitor of the National Mortgage Settlement said. “It was done in a shorter period of time than I could have hoped for and provided a lot of relief to a lot of families.”

“The settlement parties negotiated a strong agreement that allowed me to implement a rigorous review process, keeping the servicers accountable to their obligations and, I hope, inspiring confidence in the government parties and the public that the servicers in fact satisfied their consumer relief and refinancing obligations,” he added.

And, remarks such as the following made by Brena Swanson writing for HOUSINGWIRE

“As a result, the office found that this bipartisan settlement among 49 states, the federal government and mortgage servicers resulted in an unprecedented amount of consumer relief.”

“… Smith explained he was impressed that rather than the banks only helping a few borrowers and throwing others back, the servicers claimed credit for all of them, causing a lot more relief to be provided than what was required.”

So, on one side of the proverbial coin we have “more relief provided than what was required,” and thanks to Dayen’s work, on the other we have 90 percent fewer homeowners receiving assistance than promised by HUD Secretary Donovan.  We have Smith making reference to some $50 billion in gross relief, while Dayen shows us that $12 billion of that number was entirely meaningless.  And we have Smith’s report showing 600,000 families receiving some form of relief, standing in stark contrast to the 83,000 families that received principal reductions according to Dayen.

Now, it’s worth mentioning that no one was impressed by the settlement’s terms from its earliest beginnings.

The truth is that when the settlement’s terms were announced, I could barely bring myself to care about the obvious inadequacy of the dollar amount involved.  And I said as much at the time in my article posted on February 12, 2012, titled: “The Good, the Bad and the Ugly in the Mortgage Settlement.”

“According to Shaun Donovan at HUD, the settlement agreement is supposed to help one million households by reducing their loan balances.  The word on the street is that it’s going to help 500,000 homeowners, half the number claimed by the Obama Administration but still a figure I find to be… well, both nutty and chewy.  There’s no way is there is enough money in this settlement to do all that much for anyone.”  

And also, “… there’s not enough money in this country to make right what has happened to homeowners at risk of foreclosure over the last few years.”

In addition, at Yves’ request, I also cross-posted Yves Smith’s piece on the settlement on February 9, 2012, “The Top 12 Reasons Why You Should Hate the Mortgage Settlement,” which made abundantly clear her position on the sell-out’s… I mean the settlement’s terms.

Dayen saw the same things we all did at the time, but as he put it last week, after reviewing Smith’s final report, I thought the numbers would be ugly, but not THAT ugly.”

What compelled me to write about Dayen’s coverage of the story, however, was that he spent more time criticizing the administration’s handling of the whole affair, and less time bank bashing than I would have expected.  For the most part he laid the blame for the settlement’s inadequacies squarely on the Obama Administration and on the state attorneys general, which is where it belongs, as far as I’m concerned.

I think it’s safe to say that Dayen and I diverge on this point to some degree.  For example, he refers to, “an example of how the banks gamed this crediting system.”  To me, it’s not about banks “gaming” anything… they just did what was in their best interests within whatever the agreed to system allowed them to do.

Now, I know that whenever I say something like that, there are a certain number of people that react by saying, “Ah ha!  You’re defending the banksters, you must work for the banks, etc. etc. etc.”  So, I want to be clear this time how entirely off base that sort of interpretation of what I’m saying really is.

You see, I spent all of 2009, 2010, 2011 and 2012, attacking banks for everything that went wrong, but it’s 2014… and I’m frankly tired of blaming banks for being… what’s the word I’m looking for… hmmm… oh yeah… BANKS.  I’m tired of blaming banks for acting like… banks.

It’s no different than the way I feel about HAMP and the new servicing standards.  It’s a federal program… shouldn’t the federal government be responsible for doing some overseeing?  I’m not saying that anyone should be happy with the banks for their handling of anything, but they’re banks and in reality is that they’re responsible to their shareholders.  No one elected Goldman Sachs or JPMorgan to ensure fundamental fairness in this country.

It’s not like EVERYONE doesn’t know about the problems with servicers and foreclosures that have existed at least since the program’s inception in 2009.  As far as I’m concerned, if the government allows it to go on, then it must be okay with those in charge… and they ARE the people that were elected to ensure fundamental fairness in this country.

At this point in the crisis, I just don’t see the point in blaming banks for doing what our government clearly allows them to do.  I mean, look at what Smith’s report said about how pleased he is with how everything went… you don’t get a better report card than that, do you?  So, what else should the banks have done?  They got the equivalent of straight As doing what they did.

So, I liked the fact that Dayen’s article held Secretary Donovan and therefore the administration accountable for yet another example of dramatically over-promising, while making under-delivering a dramatic understatement.  As Dayen put it…

“Needless to say, we’re used to the Obama Administration falling far short of their goals for homeowner relief, whether because of a lack of interest or a desire to foam the runway for the banks or whatever. Even still, the level of duplicity is breathtaking.”

I haven’t bothered to look for myself, mostly because Dayen did such a thorough job, but as he puts it, “Frustratingly and probably by design, the crediting reports do not break down those numbers; you have to go into the individual court reports for each bank.” 

And that is just totally par for the course for any reporting on this topic… it’s generally just one or two steps shy of being hieroglyphics.  He goes on to explain the various categories involved just to determine principal reductions.

The numbers are further cut up in fairly odd ways – there are different types of first-lien mortgage modifications listed, including “Principal Forgiveness,” “Forbearance Forgiveness” (well which is it, forbearance or forgiveness?), “Federal Program Forgiveness,” “Conditional Forgiveness” and “180 Days Past Due with Forgiveness.”

Yeah, well I’d have to say that it’s not just probably by design… it’s got to be flat out engineered into the whole thing from the ground up.  If they wanted to make it easy to understand they could have… I’m pretty sure someone involved knew the difference between transparent and opaque.

Dayen explains that the 600,000 borrowers who Smith said were helped with “some form of relief,” included transitional funds, short sales, deed-in-lieu, deficiency waivers, forbearances, anti-blight actions, refinancing… and, of course, the 83,000 principal reductions he was able to identify by making a few assumptions and doing the math.

The data was apparently so difficult to wade through that his number is almost certainly not exact… but I would agree that it’s at least in the ballpark.  And since Dayen’s overriding point is that the number of principal reductions turned out to be 90 percent lower than the one million promised by HUD Secretary Shaun Donovan, Dayen’s math is certainly close enough to support that claim.

His article does explain his assumptions and how he got to the 83,000 number in detail, but rather than my trying to explain it, here’s a link to his article for those want the details on how it was done: Just 83,000 Homeowners Get First-Lien Principal Reductions from National Mortgage Settlement, 90 Percent Less Than Promised.

Finally, the other point on which Dayen and I seem to disagree involves the banks receiving credit for extinguishing second liens, which he refers to as “worthless.”  As he puts it…

“… to pay a penalty for misconduct, Bank of America mostly did what it would have normally done anyway in its course of business, facilitating short sales and extinguishing worthless second liens.”

Again, if that’s what the settlement allowed, then it’s hard to fault Bank of America or any of the others for doing that which they were allowed, and even praised for doing.

And, as I mentioned in paragraph three of this article, for extinguishing second liens over 180 days delinquent, servicers only received credits of 10 cents on the dollar, so in exchange for erasing a $100,000 second lien, Bank of America would be looking at just $10,000 in credits that would go towards their total, which as I recall was something like $9 billion.

But, further, on the “worthless” nature of second liens… while I understand Dayen’s point, referring to these liens as entirely worthless, at least in many instances, is going a bit too far.  As consumer bankruptcy attorney Max Gardner explains: “Chapter 7 will cancel the personal debt on the note, but not the lien on the real estate.” 

So, having your second lien extinguished does provide some benefit to the borrower, because were the borrower to sell the home at a price above the amount needed to satisfy the first lien, the holder of the second would be in line to receive whatever proceeds remained.  Max also explains that in a Chapter 13, an underwater second lien can be cancelled, but only once the borrower “completes the plan and secures the discharge.” 

It’s a fairly minor point, to be sure, and certainly not one worth dwelling on for the purposes of this discussion.  The question is really whether the servicers should have been given a small amount of credit for extinguishing a lien with a small amount of real value.  Looking at the larger picture, It seems reasonable to me… Dayen disagrees.

But such minor disagreements notwithstanding, Dayen’s article is still an outstanding piece of work that I very much appreciated.  It saved me from having to read Smith’s final report, and he wrote it in such a way that I think it represents the perfect epilogue for the play that began with the initial investigations and concluded with the National Mortgage Settlement.  Even if someone knew nothing of what has transpired, reading Dayen’s article would provide enough context and detail to paint an accurate picture of this American tragedy and travesty.

And he closes his article so well that I wouldn’t even want to try to write my own ending.  He says…

“So in effect, the book has closed on the National Mortgage Settlement, one of the most shockingly awful examples of government cowardice and corruption in recent American history.”

Very well said indeed.


Mandelman out. 


P.S. I don’t know where you can read David Dayen, except occasionally on Naked Capitalism, but you can follow him on Twitter Here: Follow David Dayen.

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