You Thought the Mortgage Crisis Was Over? It's About to Flare Up Again

from newrepublic.com

AUGUST 24, 2014

By David Dayen @ddayen

WWe are nearly eight years removed from the beginnings of the foreclosure crisis, with over five million homes lost. So it would be natural to believe that the crisis has receded. Statistics point in that direction. Financial analyst CoreLogic reports that the national foreclosure rate fell to 1.7 percent in June, down from 2.5 percent a year ago. Sales of foreclosed properties are at their lowest levels since 2008, and the rate of foreclosure starts—the beginning of the foreclosure process—is at 2006 levels. At the peak, 2.9 million homes suffered foreclosure filings in 2010; last year, the number was 1.4 million.

But these numbers are likely to reverse next year, with foreclosures spiking again. And it has nothing to do with recent-vintage loans, which actually have performed as well as any in decades. Instead, a series of temporary relief measures and legacy issues from the crisis will begin to bite in 2015, causing home repossessions that could present economic headwinds. In other words, the foreclosure crisis was never solved; it was deferred. And next year, the clock begins to run out on that deferral. 

The problem comes from many different angles. First, as the Los Angeles Times reported recently, home equity lines of credit—second mortgages that homeowners took out during the bubble years, essentially using their homes as an ATM—will start to feature increased payments, as borrowers must pay back principal instead of just the interest. TransUnion, the credit rating firm, estimates that between $50 and $79 billion in home-equity loans risk default because of the increased payments, which could add hundreds or even thousands of dollars to payments a month.

Home equity resets will be concentrated in areas most affected by the housing bubble, because that’s where the most lending took place. These are precisely the areas whose economies remain depressed by the housing bust. So many of these borrowers will be unable to afford increased payments, given the continued high unemployment and stagnant wages in their regions.

That’s only one of a number of scheduled payment resets in 2015 and beyond. The government’s Home Affordable Modification Program (HAMP) provided only temporary interest rate relief to borrowers, and after five years, that relief runs out, with interest rates gradually rising about 1 percent each year. Over 319,000 of these rate resets begin in 2015, according to a report from the Special Inspector General of the Troubled Asset Relief Program (TARP). The architects of HAMP expected the economy to recover by now, but continued sluggishness means that the rug could be pulled out from homeowners before they’re ready for higher mortgage payments. 

Many mortgage modifications outside of HAMP were similarly structured as temporary relief, which housing advocates see as a problem. “Many homeowners who fought their way through a broken system and got a modification did not get one that is satisfactory or sustainable,” said Kevin Whelan, National Campaign Director for the Home Defenders League. “One homeowner told me, ‘It’s more like I got a reprieve from a death sentence than a pardon.’” 

All told, research firm Black Knight estimates that two million modificationswill face interest rate resets in the coming years, and 40 percent of those homes remain “underwater,” where the borrower owes more on the house than it is worth. Underwater homes are highly correlated with defaults and foreclosures, and this represents a giant heap of them, which will soon see what is commonly known as “payment shock”—a big reset in their monthly payment. 

Predictably, when the temporary relief fades, homeowners often go back into default. Author Keith Jurow explains that anywhere between 40 and 80 percent of modified loans have re-defaulted over the past several years.

That’s not the only pitfall. As I pointed out in The New Republic last year, mortgage settlements with firms like JPMorgan Chase, Citigroup and Ocwen could impose harm on borrowers. Because the Mortgage Forgiveness Debt Relief Act expired in 2013, and may not ever get renewed, all mortgage relief given to borrowers will get treated as earned income for tax purposes, leaving the borrower with a huge tax bill they are unlikely to be able to afford. The first tax bills reflecting this will come due in April 2015. The most recent settlement, with Bank of America, includes a dedicated fund of $490 million to defray the tax bills. But even Justice Department spokesmenacknowledge that the fund won’t defray all the costs, and that it isn’t large enough to help every affected borrower. So we could easily see some tax-induced defaults as well.

There’s more. Analysts like mortgage servicing veteran Lynn Effinger believe that the foreclosure backlog, most prominent in states that require a court ruling to foreclose, will finally unclog in the coming years. “Many of these loans and their associated properties will emerge from the shadows late this year and early in the next,” Effinger writes. 

This may already be happening. Despite the mostly rosy statistics, foreclosure activity did rise 2 percent from June to July after months of reductions, a potentially troubling omen of things to come. Activity jumped 66 percent in Houston and 10 percent in Los Angeles, and foreclosure starts jumped a whopping 128 percent year-over-year in Nevada. 

It’s hard to predict just how many additional foreclosures will spring from this scenario: It depends on a number of factors, including whether banks respond to a default wave with additional relief. With two million rate resets, however, and a foreclosure backlog in the hundreds of thousands if not millions, some percentage of those loans will fail. And the fact that harder-hit areas like Nevada and Los Angeles are already seeing a spike is not a coincidence. “It could be bad news in some areas where these are concentrated,” said economist Dean Baker.

Foreclosures ravage communities and hurt the broader economy. They typically lower home prices in a neighborhood, and can even hurt consumer spending and other economic indicators. The same communities that bore the brunt of the crisis the first time around may now experience a second, delayed wave. 

This didn’t have to happen. Loans originated since the crisis haveperformed exceptionally, although efforts to artificially change credit scoresto juice riskier lending could change that. This is mostly about the failure to properly fix the crisis when the fire was burning. Obama Administration officials were primarily concerned in their relief efforts with “foaming the runway” for the banks, spreading out foreclosures so they could be absorbed more slowly. That’s why they resorted to fleeting solutions of dubious quality rather than principal reductions, proven as the most effective way to prevent foreclosures. “Getting write-downs was a far more permanent solution than temporary interest rate reductions,” said Dean Baker. 

Kevin Whelan of the Home Defenders League believes principal reduction remains a good alternative to prevent the destruction that would accompany a second wave of foreclosures for hard-hit communities. “It’s long overdue but not too late for various parts of the Administration to make much more of this happen,” referring obliquely to Fannie Mae and Freddie Mac, which own or guarantee the majority of the nation’s mortgages and have still not agreed to principal reduction as a foreclosure mitigation strategy.

A second foreclosure spike could stunt the housing recovery and really smash communities just rising from the ashes of the crisis. Permanent solutions could have been explored when it counted to prevent this from occurring. Now we’ll have to hope things don’t go as badly the second time around.

Investors Profit From Foreclosure Risk on Home Mortgages

from nytimes

By MATTHEW GOLDSTEIN

 AUGUST 13, 2014 8:10 PMAugust 14, 2014 10:36 am

Photo

Banks are big sellers of nonperforming mortgages, as is Freddie Mac, the giant mortgage finance company.CreditSpencer Platt/Getty Images

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Rises in housing prices have been profitable to private equity firms and institutional investors that bought foreclosed homes to flip them or to rent them out. Now the recovery in housing is fueling a niche market for newly minted bonds that are backed by the most troubled mortgages of them all: those on homes on the verge of foreclosure.

And it is not just vulture hedge funds swooping in to try to profit from the last remnants of the housing crisis. The investors making money off these obscure bonds — none are rated by a major credit rating agency — include American mutual funds. And one of the biggest sellers of severely delinquent mortgages to investors is a United States government housing agency.

The demand for securitizations of nonperforming loans illustrates Wall Street’s never-ending hunt for higher-yielding investment opportunities. The market also reflects in part an effort by regulators to close a chapter on the housing mess.

For mutual funds and other institutional investors, the appeal of these bonds is obvious. They have yields of about 4 percent and pay out quickly — often in just two years — if the foreclosure process on the loans in the portfolio goes smoothly. The yields look enticing compared with the current 2.42 percent yield on a 10-year Treasury note.

So far this year, there have been 28 deals backed by $7 billion worth of nonperforming loans sold to investors, according to Intex Solutions, a structured finance cash-flow modeling firm. Last year, Intex said, there were 72 deals backed by $11.6 billion worth of nonperforming loans.

Regulatory records show that over the last two years mutual funds either offered or advised by firms like JPMorgan Chase, SEI Investments, Weitz Investments and Edward Jones have been buying unrated bonds with names like Bayview Opportunity Master Fund IIa Trust NPL, Kondaur Mortgage Asset Trust and Stanwich Mortgage Loan Trust NPL.

The market for these bonds is still small when compared with the heyday of the mortgage-backed securities market before the financial crisis. But the demand is expected to grow as institutional investors search for yield, and analysts estimate that there are still some $660 billion worth of delinquent mortgages in the United States. The trade publication Asset Backed Alert recently said that bond deals worth $4 billion to $5 billion were in the works for the second-half of the year.

“These are very short-duration bonds, which really operate as liquidation trusts,” said Ken Shinoda, a mortgage backed securities portfolio manager with DoubleLine Capital, which has reviewed but not yet invested in unrated bonds of nonperforming loans.

Representatives for some of the mutual funds that have invested in these securities say so far these bonds have paid out as anticipated and the risk of loss is low because their funds’ relative exposures are small.

Carlene Benz, a JPMorgan spokeswoman, said in an emailed response that the bank’s portfolio managers were comfortable investing in these unrated bonds because they have a “short duration yet provide yields higher than many longer duration assets.”

John Boul, a spokesman for Edward Jones, said unrated investments accounted for a small percentage of the firm’s bond funds. He added that the firm’s bond fund was managed by outside advisers, including some at JPMorgan.

For the investment firms, hedge funds and private equity firms buying the distressed mortgages and packaging the bonds, securitization is way to finance their operations and cash in their investments.

The catalyst for the emergence of this unusual market was a decision by the Housing and Urban Development Department to begin selling some of the most severely delinquent mortgages guaranteed by the Federal Housing Administration to avoid losses to United States taxpayers. Since 2010, HUD has sold 101,290 soured home loans with a combined unpaid balance of $17.6 billion in more than a dozen auctions, and more distressed sales are planned.

Recently, Freddie Mac, the giant mortgage finance firm that operates under government control, also got into the act when it sold $659 million worth of troubled mortgages. Banks are also sellers of nonperforming mortgages.

Institutional investors are especially drawn to the Housing and Urban Development auctions because these nonperforming loans, which are spread across the United States, can be purchased for between 60 cents and 70 cents on the dollar of the unpaid principal. The list of investment firms buying HUD loans includes firms affiliated of the Blackstone Group, Oaktree Capital Management, Lone Star Funds, Angelo Gordon & Company, the Kondaur Capital Corporation and Pretium Partners.

The most recent auction in June attracted bids from 27 institutional investors, about double the number of bidders for a similar auction of soured mortgages a year ago. The HUD loan sales have gained favor with some institutional investors that were buying foreclosed homes because there are now fewer good-quality properties to be had after a rush of distressed home buying.

The government housing agency has set up its loan sale program to encourage the private buyers to rework the mortgages and make them more affordable so the borrowers can start making payments again. But given that most of the borrowers have not made a single mortgage payment in two years, the agency has assumed that most of the loans will end up in foreclosure. In many cases, foreclosure proceedings were already well underway even before the mortgages were sold at auction.

The housing agency contends that even if a small percentage of the loans are reworked in a way that avoids a foreclosure or permits a borrower to gracefully exit a mortgage without being burdened with additional debt payments, it’s a good outcome.

Biniam Gebre, a general deputy assistant secretary at HUD, said, “While the primary objective of the note sale program is to minimize losses to F.H.A.’s insurance fund, and ultimately to taxpayers,” it was also providing “an opportunity for borrowers with no alternatives” to avoid foreclosure.

The agency, he added, has no problem with the private buyers finding ways “to securitize and bring private capital into the mortgage market” as long as it doesn’t detract from the program’s goals.

Before the end of the summer, the buyers of these HUD loans are supposed to file the first of several periodic reports outlining their ability to either rework the mortgages or foreclose on the properties. Representatives for several investment firms declined to discuss their performance figures before the reports are submitted to HUD.

Some firms that have sold bonds backed by nonperforming loans said they were also working on putting together securitizations of once-distressed loans that had been reworked or made to be “reperforming” in the parlance of Wall Street. Reperforming loans are ones in which the overall debt owed by the borrower has been reduced or the monthly payment cut to a level the homeowner can afford. Some of these reworked loans have been included in a number of the nonperforming loan deals as well.

But a review of some of the early pools of delinquent loans bought by the investment firms from HUD suggests that the percentage of reworked loans is likely to be small.

An analysis of 633 soured mortgages purchased by Kondaur Capital from HUD in June 2013 found that just over 20 percent were already in the foreclosure process at time of the sale. The analysis of local property records by RealtyTrac, a firm that monitors housing sales and foreclosures, also found that since the sale about 33 percent of the homes in that pool were subsequently sold, most likely either in a foreclosure, a short-sale or a deed in lieu of foreclosure — a transaction where a borrower essentially forfeits the rights to a property.

HUD’s bidding rules bar buyers from bringing a foreclosure action for at least six months after the auction process is completed. An official with Kondaur Capital, a firm based in Orange, Calif., declined to comment.

Still, rating agencies, which are largely reluctant to get involved in reviewing nonperforming loan deals, are gearing up to review bonds that are backed by reperforming mortgages. The thinking is that as the economy and housing markets continue to improve, the ability of delinquent homeowners to start making payments on a more affordable mortgage will rise.

In anticipation of a new wave of securitizations, Fitch Ratings just this week published a proposal for its criteria for rating mortgage securities backed by reperforming loans. It has asked players in the market to provide feedback on its proposal by mid-September.

“The absence of a rating hasn’t been an obstacle to these deals so far,” said Michele Patterson, a senior director with Kroll Bond Rating Agency, which like Fitch has begun reviewing how it might rate reperforming mortgage deals. She said some “some issuers may be looking for a rating to diversify their investor base.”

A version of this article appears in print on 08/14/2014, on page B1 of the NewYork edition with the headline: Delinquent Mortgages Attracting Investors.

You Don’t Know What ‘Libertarian’ Means

from talkradionews

If you want to know what libertarianism is all about, don’t ask a libertarian, because most of them don’t know. A new poll from Pew Research found that only 11% of those surveyed who identified themselves as libertarian were correctly able to identify the very basic meaning of libertarianism as “someone whose political views emphasize individual freedom by limiting the role of government.” Even though that’s often an oxymoron, that’s what libertarians say, and their followers apparently don’t know it.

Weirdly, that same poll found that 41% of libertarians believe that the government should regulate business, 46% of libertarians believe that corporations make too much profit, and 38% of libertarians believe that government aid to the poor is a good thing.

Similarly, of the so-called libertarians polled, 42% believe that police should be able to stop and search people who “look like criminals,” and 26% think “homosexuality should be discouraged.”

What happened to limited government and more individual freedoms? Basically, people in America who call themselves libertarians have absolutely no idea what libertarianism is really about.

So, let’s go over it for a second. Back in 1980, David Koch, one half of the Kochtopus, ran as the Libertarian Party’s vice presidential candidate. And the platform that he ran on back in 1980 provides a great summary of what libertarianism is really about.

First, libertarians want to “urge the repeal of federal campaign finance laws, and the immediate abolition of the despotic Federal Election Commission.” In other words, they want to make it as easy as possible for corporations and wealthy billionaires to flood our democracy with corruptive cash and buy even more politicians. They want Citizen’s United on steroids – and then some.

Next up, libertarians “favor the abolition of Medicare and Medicaid programs.” Instead, they want to privatize healthcare in America, so that their billionaire friends in the healthcare industry can get even richer, while working-class Americans are getting sicker and sicker. In fact, a 2012 analysis by Citigroup found that insurance company stocks would skyrocket if Medicare alone were to be privatized. And Big Pharma would experience a revenue and profit boom, too.

Just look at America’s experiences with Medicare Part D. A report released by the House of Representatives back in July of 2008 found that, two years into the Medicare Part D experiment, American taxpayers were paying up to 30% more for prescriptions under the privatized part of the program. And thanks to Medicare Part D, between 2006 and 2008 alone, drug manufacturers took in an additional $3.7 billion that they wouldn’t have gotten through drug prices under the public Medicaid program.

Meanwhile, the 1980 libertarian platform also says that libertarians “favor the repeal” of an “increasingly oppressive” Social Security system. They want to abolish Social Security, screw over working-class Americans, and take all the money that would go towards Social Security and invest it in Wall Street, so that their wallets can get even bigger. There’s over $2.5 trillion sitting in the Social Security Trust Fund right now. Imagine how much money the libertarian banksters could make skimming even a fraction of a percent off the top of that every year.

Similarly, because libertarians want to hold on to their money and get even richer, they also “oppose all personal and corporate income taxation, including capital gains taxes.” They don’t want to have any responsibility for society. Screw society! Naturally, libertarians also think that “all criminal and civil sanctions against tax evasion should be terminated immediately.”

According to Demos, in 2010, tax evasion cost the federal government $305 billion. Imagine what America could have done with that $305 billion. But, if you’re rich, you shouldn’t have to pay any taxes under libertarianism.

Next up, libertarians want to repeal laws that affect “the ability of any person to find employment, such as minimum wage laws.” In other words, “Screw the workers! We’re the billionaires and we don’t give a damn about workers!” According to the 1980 platform, libertarians are also for the “complete separation of education and the state” and think that “government ownership, operation, regulation, and subsidy of schools and colleges should be ended.”

Who cares about Thomas Jefferson and the University of Virginia, or Abraham Lincoln’s land-grant colleges? Screw public education! Poor people don’t need to know how to read! Only rich people should be going to college, and billionaires can pay for their own kids’ education!

And when they’re done attacking public education in America, libertarians want to abolish the Environmental Protection Agency. After all, pollution can be so profitable. And who cares if a few million people get asthma or die of cancer? They’re not rich people! Screw them. A 2010 study found that between 2005 and 2007, around 30,000 hospital trips and emergency-room visits could have been avoided in California alone if federal clean-
air standards had been met. Instead, those visits led to approximately $193 million worth of health care expenses for the American people. Guess who benefited from that $193 million?

Similarly, the 1980 platform makes it clear that libertarians also want to get rid of the Department of Energy, and close down any government agency that’s involved in transportation. No more standards for our roads, no more standards for our railways, no more standards for our airlines. Turn it all over to the billionaires. They can run it all and make a buck while they’re at it!

And libertarians want to privatize our public highways and turn them all into toll roads too. So, if you want to drive to work you have to pay the Koch Brothers!

Libertarians also want to do away with the Food and Drug Administration and the safety standards that agency imposes, so that Big Pharma and Big Ag can make even more money, while you and I are forced to deal with the consequences. Billionaires don’t have to worry if their food is safe. They can own their own farmland, and hire their own cheap labor to work it!

Along those same lines, the 1980 platform says that libertarians want to get rid of the Consumer Product Safety Commission. After all, if a kid is choking to death on some badly made cheapo toy, it’s almost certain that it’s a poor or working-class kid. One less moocher!

The 1980 libertarian platform also called for the repeal of the Occupational Safety and Health Act. Right. Workers don’t need protections. Employers can just be trusted to keep their employees who are working for minimum wage safe.

Finally, libertarians “oppose all government welfare, relief projects, and ‘aid to the poor’ programs,” claiming that these programs are, “privacy-invading, paternalistic, demeaning, and inefficient.” Or, in other words, turn poverty over to the rich people. After all, they’ve always done such a great job taking care of poor people…

And, while it wasn’t explicitly in the 1980 platform, who can forget that libertarians are also opposed to the Title II of the Civil Rights Act which, “prohibits discrimination because of race, color, religion, or national origin in certain places of public accommodation, such as hotels, restaurants, and places of entertainment.”

To add insult to injury, they’re also opposed to Title VII of the Civil Rights Act, which prohibits employers from discriminating based on race, color, religion, sex and nationality. Who needs civil rights anyway?

Clearly, Libertarianism is not what most Americans think it is. From wanting to privatize healthcare, to doing away with federal agencies and eliminating minimum wage laws, libertarianism put the interests of billionaires and the wealthy elite first, and the interests of everyone else dead last. And I do mean dead.

Now, ask yourself, is that the America you want to live in? I sure don’t…

European Central Bank hires BlackRock for advice

from fiercefinanceit.com




August 28, 2014 | By Renee Caruthers

The European Central Bank (ECB) has hired BlackRock Solutions to help design and implement a potential asset-backed securities (ABS) purchasing program. The final decisions on the design of an ABS purchasing plan will be made by the ECB's governing council and the ECB will be responsible for carrying the plan out.

BlackRock Solutions is the advisory arm of BlackRock, the U.S. asset manager. The value of the contract was not disclosed and safeguards against conflicts of interest were built into the agreement, according to an ECB spokesman.

The ABS purchasing plan would be aimed at easing credit conditions in Europe. ECB president Mario Draghi said last week that the bank was "fast moving forward" with preparations to buy the securities, according to an article from theFinancial Times. He feels that the central banks' purchase of ABS would create more demand for securitizations and might encourage lending to credit-starved businesses.

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Just one day before the announcement of the contract with BlackRock, Draghi warned about low inflation in Europe while speaking at Jackson Hole, and he said the ECB would have to use "all available instruments" to stave off the threat of deflation, according to an article from Bloomberg.

London banker Dipesh Mehta, director of securitization research at Barclays, viewed the contract as a positive, during an interview with Bloomberg, but had questions about the ECB's potential move toward quantitative easing that the purchases would signal.

"Hiring an adviser who knows the ABS market and has experience investing in it before, during and after the crisis is clearly positive," Mehta said. "However the appointment in itself is simply another step on the path toward QE. It is the format of QE that is key, with many questions to be answered on what bonds to buy and how to do it without jeopardizing the existing investor base."

Brian Beades, a spokesman for BlackRock, declined to comment on the contract with Bloomberg. BlackRock Solutions has held similar advisory roles for other central banks in Europe since the financial crisis. It has consulted to both the Bank of Greece and the Bank of Ireland.

For more:
- read the Financial Times article
- read an article from Bloomberg on Draghi's remarks and another on the BlackRock deal
- read the Reuters article

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Banksters win again: BoA settlement with US govt allows Wall St fraudsters to 'act with impunity,' critics say

from rt.com

While the US government touted its “record” settlement reached this week with Bank of America for mortgage fraud that helped fuel the 2008 recession, the details of the agreement indicate yet another slap on the wrist for an offending Wall Street titan.

Bank of America agreed to a $16.65 billion settlement with federal authorities for selling toxic mortgages and misleading investors, the US Justice Department announced Thursday.

“This historic resolution - the largest such settlement on record - goes far beyond ‘the cost of doing business,’” Attorney General Eric Holder said in a statement.

“Under the terms of this settlement, the bank has agreed to pay $7 billion in relief to struggling homeowners, borrowers, and communities affected by the bank’s conduct. This is appropriate given the size and scope of the wrongdoing at issue,” Holder added.

Yet the $7 billion in “relief” is considered a "soft money" fine, in which the bank will reduce some homeowners' mortgages. Very few homeowners are eligible for the refinancing pursuant to the settlement, AP reported. Those who are eligible may need to wait years to see any settlement aid, as payouts will be ongoing through 2018.

Those already in the hole following a lost home due to foreclosure or a short sale - when a lender takes less money for a home than what the borrower owes - are unlikely to benefit from the terms of the settlement.

Outside of the $7 billion for consumers, the Bank of America settlement includes a $5 billion cash penalty and $4.6 billion in remediation payments. Large portions of the deal will be eligible to be claimed as business expenses, allowing the mega-bank to treat them as tax write-offs.

The Bank of America settlement includes the appointment of an independent monitor to review the consumer relief portion of the agreement. It is yet to be determined when the monitor will be named.

The deal echoes similar agreements the government reached with other Wall Street players such as JPMorgan Chase and Citigroup for crimes committed surrounding the recent economic recession.

JPMorgan Chase came to a $13 billion settlement in November. The $4 billion supposedly offered to homeowner relief has yet to benefit many in need, according to the advocacy group Home Defenders League. Citigroup reached a $7 billion deal with the government.

Critics of these deals have blasted the US government for its ongoing, lax attitude regarding mass crimes committed by powerful banks that, they say, are not adequately punished for wrongdoing.

“[T]he latest round of settlements deals with misconduct that even though the banks are getting off on the cheap again, the underlying abuses don’t strike at the heart of the too big to fail mortgage securitization complex,” said Yves Smith at Naked Capitalism.

“So the [Obama] Administration can feign being a little more bloody-minded. Even so, the greater and greater proportion in recent deals of funny money relative to real dough show that this is simply another variant of an exercise in optics.”

No senior bank executive has faced criminal charges following the mortgage crisis. Without significant retribution for banks and executives that knowingly passed off fraudulent mortgages, Wall Street players will continue to act with impunity, argued Dean Baker, economist and director of the Center for Economic & Policy Research.

"Knowingly packaging and selling fraudulent mortgages is fraud. It is a serious crime that could be punished by years in jail,” Baker wrote. “The risk of jail time is likely to discourage bankers from engaging in this sort of behavior."

William D. Cohan, a former senior mergers and acquisitions banker, wrote in the New York Times that, not only has the government barely punished those on the hook for Wall Street crimes, the Justice Department has also offered “sanitized” versions of events that led up to the crimes in its accounts given to the public following investigations.

“The American people are deprived of knowing precisely how bad things got inside these banks in the years leading up to the financial crisis, and the banks, knowing they will be saved the humiliation caused by the public airing of a trove of emails and documents, will no doubt soon be repeating their callous and indifferent behavior,” Cohan wrote.

Bank of America resisted the settlement at first, claiming nearly all bad mortgage securities under scrutiny came from Countrywide and Merrill Lynch. Both firms were purchased by Bank of America amid the 2008 financial crisis.

A federal judge in Manhattan ruled in a separate case that Bank of America was liable for the pre-merger mortgages, issuing a penalty of $1.3 billion. The ruling pushed the bank to agree to the settlement. Bank of America CEO Brian Moynihan said Thursday that the deal is "in the best interests of our shareholders and allows us to continue to focus on the future."

Meanwhile, consumers advocates said the faulty mortgages will continue to haunt homeowners and their own vision of the future.

"It is hard to see how these settlements provide relief commensurate with the harm caused," said Kevin Stein, associate director of the California Reinvestment Coalition, according to AP. "Countless families and communities have been devastated by predatory loans that should not have been made."

Following Thursday's announcement of the settlement, Bank of America’s stock rose more than 4 percent.

What Bank of America Did to Warrant a $17 Billion Penalty

from time

• Jacob Davidson @JakeD
 

4:41 PM ET

It's the biggest settlement ever between a corporation and the U.S. government. Here's what it reveals about how bankers inflated the housing bubble.

Bank of America hasagreed to pay $16.65 billion dollars in penalties—the largest settlement ever between the U.S. government and a private corporation—for its role in the financial crisis. As Attorney General Eric Holder said Thursday morning, the payout will help “hold accountable those whose actions threatened the integrity of our financial markets and undermined the stability of our economy.”

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So what did Bank of America actually do? As part of the settlement, the Justice Department has issued a 30-page “Statement of Facts,” signed by the bank, detailing the actions Bank of America is paying for today. The document includes events that took place at Merrill Lynch and Countrywide, which Bank of America later acquired. It’s full of e-mails and statements from employees and executives, which often make for infuriating, if sometimes grimly funny, reading.

Here’s what happened. In the years leading up to the financial crisis, Bank of America and Merrill Lynch sold various securities based on home loans. If the buyers paid their loan back, investors made money, but if too many defaulted, investors lost. To make sure investors knew what they were getting into, the two companies were required to report to investors on how safe these loans actually were.

The problem? Both BoA and Merrill, the statement says, knew with increasing certainty that many of their loans were troubled or at least likely to be risky, and didn’t fully disclose this.

At Merrill, one consultant in the company’s due diligence department complained in an email:

[h]ow much time do you want me to spend looking at these [loans] if [the co-head of Merrill Lynch’s RMBS business] is going to keep them regardless of issues? . . . Makes you wonder why we have due diligence performed other than making sure the loan closed.

The Merrill email pales next to the almost-cartoonish cynicism on display in some Countrywide emails. In addition to selling mortgage-backed securities, Countrywide was on the front lines giving mortgages to home buyers. Justice Department documents suggest that the company increasingly offered loans to almost anyone who walked in the door. What mattered was whether the loan could later be sold to someone else. Wrote one exec:

My impression since arriving here, is that the company’s standard for products and Guidelines has been: ‘If we can price it [for sale], then we will offer it.’

In an email from 2007, another executive reflected that:

[W]hen credit was easily salable… [the desk responsible for approving risky loans] was a way to take advantage of the ‘salability’ and do loans outside guidelines and not let our views of risk get in the way.

Because why should a mortgage company care about risk?

But what makes Countrywide special isn’t just that they gave out a lot of bad loans, it’s that they sold those bad loans to others while keeping the good ones for themselves. In a 2005 email, the Countrywide Financial Corporation (CFC)’s chairman—not named in the statement, but it was Angelo Mozilo—wrote that he was “increasingly concerned” about a certain adjustable rate loan. He feared that the average borrower was not “sufficiently sophisticated to truly understand the consequences” of their mortgage, making them increasingly likely to default. He wrote:

…the bank will be dealing with foreclosure in potentially a deflated real estate market. This would be both a financial and reputational catastrophe.

So what did Countrywide do about it? Sell the products on the secondary market, and keep only the mortgages given to more qualified buyers. According to the settlement document, Countrywide’s public releases “did not disclose that certain Pay-Option ARM loans included as collateral were loans that Countrywide Bank had elected not to hold for its own investment portfolio because they had risk characteristics that [Countrywide Financial Corporation] management had identified as inappropriate for [Countrywide Bank].”

In another email, this time from 2006, CFC chairman Mozilo explicitly spelled out this policy to the president of Countrywide Home Loans, writing:

important data that could portend serious problems with [Pay- Option ARMs]. Since over 70% have opted to make the lower payments it appears that it is just a matter of time that we will be faced with a substantial amount of resets and therefore much higher delinquencies. We must limit [CB’s retained investment in] this product to high ficos [credit scores] otherwise we could face both financial and regulatory consequences.

What do you know? Looks like those “financial and regulatory consequences” happened anyway.