Yves Smith wrote the best explanation of the mortgage mess in 1000 words or less, and to her great credit got it published in the New York Times. It absolutely cannot be improved upon – it sums up the last several years of breaking the mortgage market, leading up to the current crisis, beautifully. (I’d add that Smith shares my view that a fundamental solution to this problem involves principal reductions.)
The question remains how to get from Point A to Point B – how to get the banks to agree to principal modifications which are not in their financial interest. At least, they don’t believe this now, because they are confident of a federal bailout or some other intervention to prevent accountability for their crimes. But Joe Nocera, who’s been pretty good on all this, sees hope in the 50 state Attorneys General investigation happening now.
Unlike the feds’ tepid efforts, this will be a serious investigation, led by a handful of assistant attorneys general who’ve worked together for years, and who see this as their chance to finally do something for beleaguered homeowners. They’ve got resources, subpoena power and a justifiable suspicion that the robo-signing shenanigans are just the tip of a very ugly iceberg.
And best of all, they have a very clear idea of what they are trying to accomplish. They don’t want to merely reform the foreclosure system (though that would be nice, wouldn’t it?). Nor do they particularly want a big financial settlement, which would be meaningless for a giant like Bank of America.
Rather, they hope to use their investigation as a cudgel to force the big banks and servicers to do something they’ve long resisted: institute widespread, systematic loan modifications. “Instead of paying a huge fine,” Mr. Miller posited to me the other day, on his way to an election rally, “maybe have the servicers adequately fund a serious modification process.” Getting the banks and servicers to take loan modification seriously is another in a series of areas where the Obama Treasury Department has failed miserably.
Nocera pretty thoroughly documents one potential roadblock to this effort – the ability for the feds to pursue pre-emption. Many AGs wanted to do more to stop the predatory lending during the housing bubble, but federal regulators essentially shut them down. AGs still pursued – and secured judgments against – some subprime operators that weren’t allied with national banks, like Household Finance and Ameriquest, but in general they were neutered.
There are differences this time. First of all, consumer financial protection laws have been rewritten by Dodd-Frank, and there are taller hurdles now for pre-emption. Second, foreclosures are almost exclusively governed by state laws, so the Office of the Comptroller of the Currency cannot intervene in the same way. Nocera also claims that times have change and federal regulators wouldn’t dare intervene on the side of the banks, but I don’t agree with that. Shamelessness is not exactly in short supply.
But incredibly, Nocera fails to mention the simple fact that a substantial number of the Attorneys General leading the investigation may not have the same jobs after Tuesday. This includes Tom Miller, the well-respected Iowa Attorney General leading the probe.
Thankfully, we are starting to see signs that taking a hard stand against the banks is right on the policy and the politics. For example, Miller appears to be pulling away from former Steve King chief of staff Brenna Findley, with a 45-34 lead in the latest Iowa poll. With big leads for Republicans at the top of the ticket, anything’s possible, but Iowans appear to be splitting their ticket for Miller.
Another case in point: Ohio Attorney General Richard Cordray. He has been fantastic in this crisis, suing GMAC mortgage for fraud and, more recently, cutting off the banks’ efforts to simply substitute documents with the courts in their foreclosure operations.
In two letters released Friday, Attorney General Richard Cordray criticized a number of banks and loan-servicing companies, including Wells Fargo & Co.; Ally Financial Inc.’s GMAC Mortgage; Bank of America Corp.; and J.P. Morgan Chase & Co. Mr. Cordray said the banks are trying to paper over fraud committed in foreclosures with temporary fixes that don’t address underlying problems in the banks’ practices.
“It is not acceptable for a party who believes they submitted false court documents to merely replace those documents. Wells Fargo and any other banks are not simply allowed a ‘do-over,’” he wrote in the letter to Wells. The other letter was sent to Ohio judges, who were asked to notify Mr. Cordray when banks file substitute affidavits….
“The banks are committing fraud on the court, essentially perjury, and then saying ‘Whoops! You caught me! Here’s some different evidence and use that instead,’ ” Mr. Cordray said in an interview Friday. “I know a lot of judges are not going to take kindly to that.”
Cordray was down to Republican former Senator Mike DeWine according to independent polling in the beginning of October. But in the month since, the foreclosure fraud scandal has burst wide open, Cordray has taken a leadership role, and thelatest polling from the Columbus Dispatch shows Cordray up 50-44. Much like Miller, on Election Day Cordray could end up as the last statewide Democrat standing (although Ted Strickland is closing strong in the Governor’s race).
All of which suggests that the banks are incredibly unpopular, and Attorneys General across the country who hold them accountable will be rewarded at the polls. However, these races are still close, as are several others around the country, and the overall dynamic of the investigation could still change.