On Tuesday, the Department of Justice announced it had reached a deal with Deutsche Bank to settle a crisis-era mortgage case. Under the terms of the agreement, the bank said, it would pay a civil monetary penalty of $3.1 billion and provide $4.1 billion in consumer relief.
By Andrea Riquier | MarketWatch | http://on.mktw.net/2wKgX7e
The consumer relief portions of big bank settlements have drawn criticism from consumer advocates, who say banks try to claim settlement “credit” for steps they’d be taking anyway, like home loan modifications, rather than initiating new programs.
But Deutsche Bank DB, +1.26% has no residential mortgage lending or servicing operations in the U.S., meaning that even such steps, which most consumer advocates say don’t go far enough, aren’t possible.
A Deutsche Bank spokeswoman declined to comment for this story. Bloomberg News has reported that the bank was considering lending money to private equity firms and hedge funds, many of whom have been aggressive buyers of delinquent mortgages from the government. (Deutsche Bank declined to comment for Bloomberg’s story as well.)
“The devil himself couldn’t have thought up a better end run around the settlement,” Lisa Epstein told MarketWatch. Epstein, a former nurse, became one of the country’s leading, if less-known, authorities on the complicated chains of ownership and paperwork that surround mortgage lending when she spent years fighting the foreclosure on her home. She was profiled in author David Dayen’s book Chain of Title and left nursing to work on consumer protection issues full-time.
Epstein believes Deustche Bank, as trustee for securities on groups of mortgages, should direct the servicer of any of those mortgages that are distressed to modify them to fair market value. “If the property is abandoned, Deutsche could rehab and sell at fair market value to local police, firefighters, and teachers — people who participate in the community but don’t make the greatest salaries — and cover any deficiency so there’s no realized loss to the bondholders,” she told MarketWatch.
But some consumer advocates think it’s time for banks to take steps beyond just modifications. Julia Gordon is executive vice president of the National Community Stabilization Trust, a nonprofit that tries to address the problem of vacant and abandoned properties and the blight that often surrounds them.
As part of its settlement, Bank of America BAC, +2.39% donated nonperforming loans on the most distressed, and usually vacant, properties, to the Stabilization Trust. If Deutsche Bank wants to do the same on any notes for which it’s the trustee, Gordon said, it’s vital that such donations be accompanied by money to offset the cost of rehabilitating them. “That decaying property is going to cost us money,” she said.
But there’s another important step beyond striking a partnership with her organization, Gordon said. As MarketWatch has reported, the government has tried to encourage nonprofits to participate in its massive auctions of delinquent mortgages, but only one has access to the kind of equity financing necessary for such huge undertakings.
“They should provide low-cost financing to nonprofits to purchase [non-performing loans] from HUD and GSEs,” Gordon said. “To be clear, this financing would still provide the investor with a healthy return, just maybe not the mid-teens returns they are looking for in the open market.”
Providing financing to nonprofits would accomplish multiple goals, Gordon said. It would get severely distressed mortgages off the government’s books, protecting taxpayers and even providing the government a little cash. It would quell the complaints from progressives that the same Wall Street investors who helped crater the housing market a decade ago are now profiting from the distress of Main Street homeowners. It would garner a small cash stream for Deutsche Bank if it was structured as a loan rather than a grant.
And perhaps most importantly, Gordon said, “it gets housing stock back into the hands of people who’ll put it to productive re-use.”