The Fourteenth Banker Blog

October 17, 2010

How Do We Judge the Homeowner?

Filed under: Running Commentary — thefourteenthbanker @ 8:21 AM

In the rush to foreclosure, the banks and even government officials have been taking the position that the borrower/homeowners are fully to blame for the situations they find themselves in and that the paperwork technicalities just need to be worked out in order for there to be a just outcome, which is to say, a foreclosure.

Industry executives note that few, if any, borrowers in the foreclosure process dispute the fact that they’re not paying their mortgages. “We’re not evicting people who deserve to stay in their house,” James Dimon, J.P. Morgan chief executive, told analysts Wednesday.

Okay. This seems simple enough. The contract between the bank and the borrower says that the borrower will make their payments and that if they don’t, the bank can foreclose. Assuming the bank did everything right, it can.

We live under the free market paradigm and that is simple free market and contract law cause and effect.

But, what if the borrower was defrauded in either a legal sense or a moral sense at the inception of the contract? That may not make the contract unenforceable, but does it make the enforcement inequitable? Does it erode this moral high ground that lenders are claiming?

Perhaps we need to be more discriminating here.  Some time ago I posted on asymmetrical information in regard to one type of transaction. But suppose that there was asymmetrical information at the time the mortgage was originated? According to Dealbroker, Jamie decided on October 2006 to get J.P. Morgan out of Subprime. According to the article, the JPM team decided that quality control had slipped at the originator level. What might this mean? I suspect “quality control” is a euphemism for rampant fraud. So lets just say that October, 2006 is “Day Zero”

It used to be said that a business person needed a good banker, a good accountant, and a good lawyer. (Now it might be said that a banker needs a good lawyer)  Implied in this is that there is a professional relationship and that the customer depends on the advice of these professionals. Bankers have until recently seen themselves as professionals. In the less heady days of local banking, the President and senior officers of the bank made the loan decisions. One of them generally had a relationship with the borrower. They knew the borrower and had their interest in mind along with the interest of the bank. There was a certain implied fairness at work. The judgement of the banker often accrued to the benefit of the borrower. If the banker though something was a bad deal, they said so. If they thought the borrower was making a bad investment either in general or in relation to their specific circumstances (knowledge, skills, income, liquidity, time horizons…) they would tell them that.

The mechanistic finance models took that away.

So is there any difference in the way we should look at someone who purchased a house on Day Zero minus One versus Day Zero plus One?  Perhaps before Day Zero, the general conditions in the market were that everyone was wrong. Everyone thought prices would continue to rise. Everyone thought the rising prices would mitigate the imprudent loan processes and structures, the no-doc loans, the 97% loans or 120% home equity loans. At Day Zero plus One, that changed. The caution light should have come on and the relationship of the professional banker to the client should have included caveats about the investments that were being made. This is idealistic, I admit.

But, someone should investigate when JP Morgan and every other bank changed their policies in regard to loan to value, income verification, product recommendations to customers, instructions to bankers, incentives to bankers, etc. If banks knew in the Executive suite or the research department that the fundamentals were turning ugly, and still kept making loans and shoving them into government guarantee programs or selling them to investors, then there is no moral high ground. The information asymmetry was used to make more money. In a moral sensibility, the contract should be looked at what it was, a gamble by both parties. If at this point in time the stupidity of the lender has allowed the contract to become unenforceable, then that is the lender’s problem. Too bad, so sad.

Now, none of this absolves the borrower of responsibility for their decision. It just puts the borrower and the lender on a level moral ground and perhaps they find themselves on level legal grounds. If that is the case, the lenders should get off their high horse and negotiate modifications that share the losses between two equally culpable parties.

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29 Comments »

  1. “But, what if the borrower was defrauded in either a legal sense or a moral sense at the inception of the contract?”

    Under what used to be the law, it makes the contract unenforceable against the borrower; there was no “meeting of the minds,” and the lender would have been subject to criminal charges.

    Croak!

    Comment by The Raven — October 17, 2010 @ 8:34 AM | Reply

  2. Absolutely Raven. American’s love to go on and on about just results within the constraints of an utterly adversarial system. The bank will use every dirty trick to make money from a transaction all the while blatting and bleating about their goodness. The employee’s inside the bank or any business institution will complain about the hypocrisy of it all. Most adversaries of the transaction with the bank love the bank until something goes awry. Then the need for an adversarial defense kicks in. We have fightin folks in action. Staying as long as possible with no payment in the fore closing property is an act of survival for a family. Should the parents in their justness put their children into homelessness ?

    When I borrowed from my local banker, I knew the fellow. I owed him and his bank. Debts in the human mind are personal when you get down to it. Now, who would I owe but a system of speculators who do not know I even exist. Yet, I am supposed to be wonderful about my duties to nothing when nothing acknowledges no wonderful duties to me.

    Apparently, the bulk of the mortgage foreclosures today are the result of mutual grifting between the parties. Two parties that now despise each other. One side is real humanity. The other could be thousands of profit seeking entities with passive human investors that do not even know or care about the debtor. They are now solely interested in the mass cash flow of the debtor’s effect on the market value of their multiple hypothecations. How can $1.4 trillion in actual subprimes get derived into $14 trillion in various securities where market value is the consideration as was discussed here?

    Might the bigger aspect of all this be the destruction of the social system by the structures created by big finance? Jamie Dimon wants to be considered as a human but does not want to extend the same to the debtors. Indeed there was not a meeting of the minds. The banks naturally can screw the law while they piously insist on the adversary respecting the law. The citizen has done the same too.

    What might come out of this mess is that most of the mortgages may have had the mortgages separated from the note. Under US law, as discussed here, that extinguished the mortgage . The note no longer is secured and the owners own the home outright. It would be incumbent on the creditors then to only pursue the note and all non exempted property of the debtors. Most states though have a homestead exemption requiring the creditors to pay over the exemption to the debtors. Of course, the creditors will claim transfer of the mortgage to say MERS was not a real transfer if such a claim were made.. invalid. If other claims were made, the creditors would claim the MERS type transfer was valid.

    The banks made big mistakes and deny their ” personal responsibility” while claiming ” personal responsibility” is just on the adversary.

    Comment by Jerry J — October 17, 2010 @ 11:55 AM | Reply

  3. Just for the hell of it, here is the Supreme Court case about the Note and Mortgage being linked . Separate the mortgage and it dies.

    http://supreme.justia.com/us/83/271/case.html

    The banks want the debtor to live with the consequences of their acts. Certainly, populist America will insist on the banks living with the consequences of their acts. This case says millions of notes lost their attached security device. So, as a consequence, the banks pursue the note and all non exempt assets of the debtors.

    Comment by Jerry J — October 17, 2010 @ 12:11 PM | Reply

  4. Today’s post is an example of why I read this blog. An interesting and insightful addition to the thinking about the fraud by the banks.

    The history we are living through is amazing, educational, and scary.

    Comment by Eric W — October 17, 2010 @ 12:56 PM | Reply

  5. “mutual grifting.” No. Not mutual. The banks were far and away the more responsible. In some cases, entirely so; in many others, largely so. In personal banking, the bank has historically had what is called a “fiduciary relationship” with the client: because the banker knows so much more about banking than the client, it is legally expected that the banker will act in the client’s interest, as well as its own. Many mortgage-writers, obviously, have abandoned this responsibility, and unless the law is ignored by the courts, or rewritten by the various legislatures they are liable for, at least, the consequent losses.

    Beyond that, the mortgage banking system used to have some slack in it; banks have an incentive to cut slack for borrowers on hard times. It is simple arrogance to suppose that bankrupting and rendering homeless huge numbers of people will make a profit for the mortgage holders; any individual gains are likely to be canceled out by systemic losses. It does, however, make money for the foreclosure mills, and the various people involved in the transactions. I suppose there are some lenders who believe they will make money from selling or renting the foreclosed properties, though they don’t seem to be doing much of that, but fraud clouding the titles of the properties and the overall depression to which this contributes make this very unlikely.

    Comment by The Raven — October 17, 2010 @ 1:01 PM | Reply

    • I often wonder if ” fiduciary responsibility” exists very much any more. Certainly , it does not exist much in banking . How is such a concept returned to commercial transactions? Right now, the big bankers should be claiming they are acting in a fiduciary capacity for their depositors. That responsibility is to collect the Note and interest to avoid the collapse of the bank that puts the depositor at a loss. That is true even for FDIC accounts because the FDIC simply stands in the stead of the depositor. So, the bank employees , as a group fail a dual fiduciary responsibility if they make bad loans on a legally compromised basis.

      Comment by Jerry J — October 17, 2010 @ 4:29 PM | Reply

  6. On further reflection, I think one of the problems here is that the conventions of speculative banking came to dominate, without anyone the wiser until it was far too late, personal banking. It is a long standing Hayekian/Chicago School argument that these conventions were in fact the same, and the differences were only superficial. Experience continues to prove this wrong.

    Comment by The Raven — October 17, 2010 @ 2:02 PM | Reply

  7. As Bogle said: ENOUGH.

    Thank you for what you’re doing, and I appreciate your blog and your “anonymous” wisdom. Thank you for being different. Hopefully you’re not slinking around Goldman Sachs as some lowly rep feeding all the comments to the Bank of International Settlements’ secret international shadow army of comment killers. (Humor me, I’ve lost everything because of big banker assholes, and now I’m gonna give them a piece of my mind.)

    I hope you watch the video I made commenting about all this financial “wizardry” gone awry because it is exactly how MOST Americans feel right now about those in the “Ruling Class,” the east coast establishment, the financial and Washington lobbying elitist assholes, et al, etc.

    I genuinely want to know what YOU think of my comments AND my video because the ONE entitlement we DO have is the Truth (it may not be written in stone or in law, but dammit SOMEBODY’S got to insist upon it and that might as well be me since everyone else is far too greedy and cash-hungry). Telling the truth is NOT in our Bill of Rights, and frankly, the British Press seems to be doing okay by demanding actual fact checks and far less (if any) “copywriting” tricks and traps of clever linguistic “words of art.”
    My music video (made with all American workers) is here: http://www.DavidScotland.com and you may also see it on YouTube at: http://www.youtube.com/TheDavidScotland1

    Thank you very much for allowing me to rant, I want to believe that there are some bankers out there who are different, ethical, and trustworthy. I’m counting on YOU to help change the tide. As someone with Asperger’s Syndrome who can’t stand lies, why can’t “you people” (and, yes, I DO mean that as an insult) tell the truth? Why the lust for power — do you think so little of yourself and others to begin with? Are you people that LOW in self-regard and self-worth that you prey on others to get your jollies? Unbelievable.

    No apologies whatsoever,
    David Scotland, Creator/Performer of the MONEY song and music video
    http://www.DavidScotland.com
    http://www.youtube.com/TheDavidScotland1

    Comment by David Scotland — October 17, 2010 @ 3:43 PM | Reply

    • David, we’re almost as stuck as you. We chose a profession, have spent decades in it and at this point our resume doesn’t allow us to do anything else. And yes, we need to pay bills just like everyone else. Also, we’re not wall street bankers, we’re main street bankers who’ve been colored with wall street colors.
      Some of us know it’s not going to work, but until the 800 pound gorillas on the street are well and alive, there’s not much different in the name of banking that can happen.
      We need a new kind of investor to change this game, one who clearly understands that days of fast buck don’t and can’t last forever. And that a return of 8-10% is actually a very good long term return which can be easily delivered without any cheating or shananigans.
      There are lots of good bankers on the street today, there are no good banks to employ them. Most banks are same old $!@& just a different color.

      Comment by Vocalbanker — October 17, 2010 @ 10:55 PM | Reply

      • That “new kind of investor” won’t arrive until we lose the “the sole duty of a corporation is to maximize shareholder value” mantra. And bury Ayn Rand, once and for all.

        They say everything runs in cycles. Maybe this period of uber-greed is the natural reaction to the anti-materialism of the 60s. Turns out we were right to be wary of the military industrial complex, as President Eisenhower warned. We forgot the painful lessons of the Great Depression. By the early 80s, bumper stickers no longer said, “Make love,not war”, they said, “He who dies with the most toys, wins”. ‘Nuff said.

        It would also be helpful if MSM would quit equating the health of the Dow with the health of the economy, fer cryin’ out loud. If you ask John Q. Public what differentiates a Wall St. banker from a Main Street banker, he’d be hard pressed to say. And even the Wall St. houses aren’t what they once were – they don’t use their own, personal money to take huge risks – they use shareholders’.
        And I do not, as I was once accused of doing, “hate rich people”. I just have a problem with trampling everyone in your path on your way to the top.

        Comment by Sandi — October 19, 2010 @ 2:10 PM

    • I watched your video and browsed your site. You are a gifted artist. I’m curious about how you found your way to this site. Not normal fare for artistic types. We have more in common that you may realize though. The video is great and it captures the “feel” of this whole crisis. I like your painting and would like to see more of it. As far as comments go, all comments are welcome. It is not clear if you lost your house and car because of medical bills or for some other reason, or perhaps you were defrauded by some along the way. I would be curious to hear more so I know how to respond.

      Comment by thefourteenthbanker — October 18, 2010 @ 12:00 AM | Reply

    • Really enjoyed the video – dead on, mate.

      Comment by Sandi — October 19, 2010 @ 2:17 PM | Reply

  8. & a final note here. I think the whole point of fiduciary responsibility is that information always has been asymmetric in consumer and small-business banking. The banker always knew more about banking and accounting than most clients which, after all, is what you would expect. Fiduciary responsibility is one response to this; every entity for itself is another. But “every entity for itself” eats its own tail. If consumers know that there is no way to get a good deal, they will avoid dealing and cheat when they can, and this can only lead to a smaller and riskier consumer loan market.

    Comment by The Raven — October 17, 2010 @ 5:38 PM | Reply

  9. 4closurefraud.com is linking a piece from Business Insider about the exposure of Bank of America to legal problems of foreclosure fraud. They also have a discussion via BI that there is zero chance the Congress and Obama will allow massive bank failures or asset losses over legal technicalities. Their view is that the rump Congress will pass a law signed by Obama that retroactively cures everything. Assuming this happens there will be immediate litigation by fifty state attorney generals put on the spot. This put’s the entire issue into the Supreme Court on some kind of an expedited basis.

    OK, politically. Might their be such a convulsion in the elections that the Republicans gain control of both the house and Senate? The Senate with 61 Republicans? If so, such an act would be a political disaster for the Democrats. Yet, systemically , the politicians dare not set up the failure of the big banks from this issue.

    Then, the SC would be presented with the ultimate case on prospectively deeming a past act under past law going forward on a basis different than the law contemplated when the contract was made. This is applied to a long term contract under the law when the contract was entered into. The USG is famous for ” deeming” acts different than contemplated by the parties with law changes. Here long standing law, going back long before the US even existed is repealed going forward to the benefit of a now despised party.

    We are in for a very hot time if such an act is attempted.

    Comment by Jerry J — October 17, 2010 @ 8:39 PM | Reply

    • Here is an interesting piece by Megan McArdle of the Atlantic.

      http://www.businessinsider.com/megan-mcardle-foreclosuregate-2010-10

      Comment by Jerry J — October 17, 2010 @ 9:02 PM | Reply

    • It’s not a technicality, you know. If the administration abrogates property and contract law that has stood since before the founding of the Union, there will be hell to pay. I’m not even sure it’s constitutional for the Federal government to do so, since this is mostly state law. What a mess!

      I don’t think the Republicans will come to power over this, and there’s scarcely enough time to affect the 2010 elections. If the Administration does something, I hope they show some sense on this. It’s hard to say what the R’s will do, faced with such a blatant abrogation of the laws they claim are central. The tea partiers are not likely to take any attacks on property rights lying down.

      Comment by The Raven — October 17, 2010 @ 10:11 PM | Reply

      • I agree the Republican’s will not come to power over this issue. But consider this. The whole bank fraud issue over foreclosures has reignited with a vengeance 16 days before the election. It may well sshift a few seats more than expected though through rage being pushed over the top with some marginal voters.

        Personally, I cannot see how the Congress in a rump session could no much since virtually all real estate law is a state matter. The property resides in the states and this is a union of sovereign states legally. Yet, I am intrigued that Congress will try some quarter baked crap between the election and the end of this Congress. The litigation will be fearsome and on many fronts. I cannot see how any new Federal statute would prevent panics from erupting. Panic has been the name of the game since confidence in the financial system was blown away in the last three years.

        Real Estate law is the one area where the reserved rights to the states amendment to the Constitution has great practical as well as political viability.

        Besides, what the hell could the Congress do in an eight week session under color of such complexities that would not be almost as laughable as Paulson’s first TARP bill?

        If the present Congress has massive turnover in the next Congress a lot of the survivor’s will at least lay low. Maybe even keep the bill from a vote in both the House and Senate?

        The next Congress might be forced by circumstances ( Panics) to consider such a bill in context of massive misgivings by the populace.

        Comment by Jerry J — October 17, 2010 @ 10:29 PM

      • The indefatigable David Dayen over at FDL, has a summary of the mess, with links to law review articles. The banking industry built a national electronic title records system without legal authority to do so, or any government oversight. 60% of the mortgages in the USA–60 million titles–are in that system and there is no state paperwork which identifies the owners of that property, which means that all those titles are in question. 60 million titles.

        Ever feel your stomach dropping as you go into a really steep dive?

        http://news.firedoglake.com/2010/10/17/mers-y-mercy-me-the-sewer-drain-at-the-bottom-of-the-housing-market/

        Comment by The Raven — October 17, 2010 @ 11:22 PM

  10. Minor correction: the mortgage holders, not the titles, are identified by MERS, Mortgage Electronic Registration System corporation. MERS is itself identified as the mortgagee of record in those records. The MERS databases, like all large databases, contain errors, and there does not seem to be an adequate audit trail in those systems to correct those errors. Even if there were an audit trail, it’s not clear what its legal validity is. MERS can identify the mortgagee of a particular piece of property is some person or organization, but that claim currently does not seem to be legally valid.

    Comment by The Raven — October 18, 2010 @ 12:32 AM | Reply

    • A few actual mortgage transfer documents, including the Obama’s , were copied on line and linked here. The actual mortgage ONLY was transferred to MERS as Nominee of the real owner. The very big question then is ” Was the Mortgage separated from the Note? If so, the mortgage is extinguished . This seems eminently reasonable because if some ” owner” of the security instrument, the mortgage, could not foreclose the security interest without a claim of a debt being legally due the owner . Someone else owns the note and right to being paid off.

      So, just what is a Nominee transaction? They own the Mortgage , in the stead of the owner as part of an agreement to reconvey. Ownership was transferred and the connection to the Note was separated thus extinguishing the mortgage security device. Some very big legal pro’s must have opined that a Nominee/ Nominor transaction does not separate the note from the mortgage. It would seem to me that the banks would have to argue that Nominee relationship is a sham for purposes of preventing separation of title to the mortgage from title to the note.

      So if things do not work out.. a sham is perfectly permissable to big finance?

      Comment by Jerry J — October 18, 2010 @ 11:47 AM | Reply

  11. Zerohedge is reporting the Wells has established a process for “put backs”. Don’t hold your breath Wells will fight this tooth and nail. http://www.zerohedge.com/article/wells-fargo-prepares-tsunami-loan-repurchase-demands

    Comment by ella — October 18, 2010 @ 9:40 AM | Reply

  12. Getting back to judging homeowners. As 14th suggests , some discrimination is really needed here. Does a homeowner need a good accountant and lawyer to take on a home purchase? What I do know is that the bulk of the publically available information about buying a home or speculating in a home is not very reliable. Why is it a subject of moral questioning if someone assumes that continued refinancing is required to pay back a loan? After all, every government does just that. Roll over and borrows more and more on the citizen assumption they are not a sovereign. Virtually all investment banks and their SIV’s invested very long on an increasing market value assumption by financing exceedingly short term. Even more to the point, much of finance invested long and borrowed overnight using repos and such. Every big bank holding company tended to do the same . They shopped around daily for overnight money. Even before deposit insurance, every bank borrowed on a demand basis and could not pay off during a run.

    Is there a double standard here?

    Certainly, few understand financial statements and few understand business cash flows. There is a perfect example in an AP piece today titled ” Citigroup earns $2.15 B as failed loans decrease”. The article says ” Almost all of the profit came from dipping into funds that Citi previously set aside to cover bad loans”. Citi set aside no funds whatever. Citi in previous periods recorded aloss accrual far greater than they later say they need. This was a mere bookkeeping entry. Debit … Estimated Unrealized Loss on Loans Expense. Credit… Reserve for loan losses. ( A liability estimate customarily offset against the asset class where the future REALIZED loss is expected to be.) Well, the actual loans losses were never realized at all and the rounded $2 bn of loans continued to generate collected interest income all during the time they were estimated to be unrealized losses.

    Say this estimate reduced 2008 profits by $2 Bn. The interest rate is 5 % and during the two year interim period Citi collected $100 million in interest . Now they pick up income of $2 B.in 2010. Cumulatively , the 2008 loss and income pick up in 2010 offset to zero. They still collected interest cash flows of $100 bn. ( Plus any loan amortizations ignored here.)

    Later on the article says ” Citi is well positioned to participate in a credit quality clean up in the U.S….” Guys like John Paulson understand the cash flow that stems fropm buying others loans at a huge discount and simply collecting them until maturity or sale at a far higher price. Example. Loan Star Fund bought around $38 B of loans for $7 B from Merrill during the debacle two years ago. If these loans generate interest over 10 years at 5 % plus amortization Lone star potentially collects $57 B. After it is all over lets assume Lone Star collects 60 % or $34 B. Lone Star makes a cash profit of $ 27 B. That is a 10 year profit of 385%. Um, that is not much, on the surface, considering the risk increase from the foreclosure problem. Or is it? Ha Ha. What If Lone star can successfully put back to the originators half of their losses or 20 % . Assume it is all principle here . 20 % of $38 Bn or almost $8 bn and quickly up front. That increases the total profit in this example to $35 bn an average of 500 % over ten years front loaded. This is a contrived example.

    With such speculation possibilities, I certainly would spend a great deal of money insuring justice is rendered in a foreclosure crisis if I could force put backs as a result. The American financial sewer has many stories and this is just one possibility. And, American’s have been known to kill each other over gym shoes.

    Comment by Jerry J — October 18, 2010 @ 4:40 PM | Reply

  13. Interesting day today to say the least on the bad mortgage front. Bloomberg and others are carrying articles that them Federal Reserve Bank of New York, Black Rock and others are trying to force massive mortgage repurchases from Bank of America/ Countrywide. Met Life and others are doing the same in a different form.

    The real specifics have yet to come out in any detail but the mass put back efforts by sucker purchasers is underway.

    Comment by Jerry J — October 19, 2010 @ 5:40 PM | Reply

    • It seems more major players are going after Bof A put backs of Countrywide originated mortgages . Pimco, Federal Reserve Bank of New York, Metlife, Fortress Investment, Fannie Mae and Federal Home Loan Banks. They are apparently jockeying around to force Countrywide to take back the mortgages.

      Now it gets very interesting for me. I have not done a detailed look into the Countrywide acquisition by Bof A. But I assume they acquired Countrywide as a wholly owned subsidiary. The deal would have been a straight B Reorganization or B of A stock for Countrywide Stock with Countrywide surviving as a separate legal entity. B OF A would not have imported the Countrywide risk into their own corprate entity. Or were they that careless? This leads me to the simple question . Why not abandon Countrywide entirely by putting it into separate bankruptcy. Under these circumstances why not tell the FDIC to go fly a kite if they do not agree? Why kill the whole thing over a subsidiary? The FDIC has to be in a deep quandry here too? Do these people in government have no forward contingency moves? They could have forced B Of A to do some of this behind the scenes rather than a bizarre full blown street fight.

      14th , what do you think?

      Comment by Jerry J — October 19, 2010 @ 9:45 PM | Reply

      • My recollection is there was talk about that issue at the time of the acquisition but they had to offer some sort of full faith and credit of B of A, perhaps to drive borrowing costs down or to be allowed to inject funds from insured deposits. Not sure. The $7B write off of goodwill for the change in future debit card revenues smells like funny bookkeeping to me but no time to research yet. I also wonder if there is Countrywide goodwill to write off. TCE is under 5% which is why Credit Default Swaps are double JPM.

        Comment by thefourteenthbanker — October 19, 2010 @ 11:21 PM

      • 14th, I remember that kind of talk too. But, who would be the parties receiving the full faith and credit assurances? It would make no difference to the Countrywide shareholders receiving B of A stock. If it were the FDIC , the Comptroller or other financial arbiters , then they should kick in too. As I remember it the deal was somewhat of a shot gun deal behind the scenes.

        Putting on my outside the box hat for B of A, I would look into a straw gift of Countrywide. Set up a charitable trust with enough money to pay insiders and gift Countrywide to the Charitable Trust as a Charitable Contribution. Do it very fast and ignore the regulators. Make them force it’s undoing if they are dumb enough to dare. Countrywide then is outside the B of A consolidation. My guess is that there would be considerable discontinued operations income from deconsolidation with which to offset any intercompany write off’s. Before that though, I would settle up with assets cherry picked from Countrywide to the greatest extent possible. This would be on a pig basis not a hog basis. If the Regulators do not like it they can suffer and pursue their remedies if they like. After all, it is now about to be confirmed that the regulator institutions are going totally adversarial if FRB is trying to put back a lot of the content of their Maiden Lane Ventures. I do not blame FRBNY and the others involved because they are acting within the system idea constructs they run. We can also observe that policy of the state is too fragmented to even pretend to be effective. Add in the political concerns of a very angry electorate that wants an adversarial result too. B Of A is on it’s own here and would look at all angles even those of their internal Tom Hagen’s.

        I see reignited panics coming. If you have a nest egg and it is within the banking system you are at risk and must consider the despicable choices forced on participants in chaotic situations inside a really crooked system. Good grief, you cannot even go to the mattresses with currency. There is barely $3000 per capita of currency outstanding and at least half of that circulates outside the country, is in bank vaults or is in corporate imprest cash systems for making change. Currency shortages would be immediate and think of the citizen angst if the ATM’s run out when they are going to the mattresses. Unissued currency stocks at the FRB’s are less than $1000 per capita. Consequently, the government would force acceptance of cashiers checks instead of currency withdrawls.

        Oh my, this can progress ever nastier unless a coordinated national solution is found and forced into place by the state. Two weeks from now the voters will have decided on absolute hands off choices being their orders from the electorate if polls are correct.

        Comment by Jerry J — October 20, 2010 @ 12:05 PM

      • There is a little twist to Countrywide I researched out this afternoon . Countrywide Financial , Inc was acquired by BofA exchanging .1822 shares of it’s own share for each share of Countrywide Financial. Thus, B of A, the Bank Holding Company aquired Countrywide and all it’s subsidiaries. Obviously, we had a B Reorganization. However, on April 27, 2009, Countrywide Bank FSB ( A subsidiary of Countrywide Financial , itself a subsidiary of Bof A merged into Bank of America FSB. Thus , Countrywide Financial has been shorn of it’s FSB and Bof A, the BHC directly owns the entire FSB operation by a statutory merger or A Reorganization. Obviously, Countrywide FSB must have originated most of the loans sold upstream to the GSE’s and Wall street where the mortgages went into securitization.

        B of A now risks it’s entire savings bank charter operations. Shopping for a regulator might now really be a backfire that blows out the engine.

        Comment by Jerry J — October 20, 2010 @ 8:16 PM

  14. If “the borrower was defrauded.” as you suggest, how can you go on to suggest that “It just puts the borrower and the lender on a level moral ground and perhaps they find themselves on level legal grounds.” That seems contradictory. If the borrower suspects he is the victim of fraud, in a climate where there is a high probability of his being right, what is his obligation? Remember, the terms he is being expected to meet are part of the fraud. I’m not saying that the borrower has no longer any obligations, but that they certainly need to be renegotiated with the help of the courts and the relevant government entities.

    Comment by priscianus jr — October 20, 2010 @ 12:26 PM | Reply

    • I suppose if there were fraud on both parts, it would put them on level. For example, if the homeowner intentionally misstated their income. Part of the problem here is that it is difficult to generalize when every circumstance is unique. That’s why I put the question “what if?”.

      There happens to be a good article today on Huffington which describes some of the types of fraud.

      http://www.huffingtonpost.com/2010/10/20/nine-stories-the-media-is_n_769620.html

      I suppose when I ask the question, “how do we judge the homeowner”, it was rhetorical and I hope the food for thought would cause people to answer, “we don’t”. There is not enough information to demonize millions of homeowners. It is safe to say though that the home buyers, generally speaking, would have been the least subject to professional standards of any of the parties except the sellers. Realtors, bankers, loan originators, appraisers, rating agencies, underwriters, etc… would all have professional education and standards.

      Comment by thefourteenthbanker — October 20, 2010 @ 7:38 PM | Reply


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