The buzz has advanced on a looming settlement in a series of federal investigations into mortgage servicers and foreclosure practices. And now we’re seeing the issue play out in the media. The New York Times today frames it as an inter-agency scrap:
Even as state attorneys general and regulators in Washington approach the end of their investigation into abuses by the nation’s biggest mortgage companies, deep disputes are emerging over how much to punish the banks as well as exactly who should benefit from a settlement.
The newly created Consumer Financial Protection Bureau is pushing for $20 billion or more in penalties, backed up by the attorneys general and the Federal Deposit Insurance Corporation.
But other regulators, including the Office of the Comptroller of the Currency, which oversees national banks, and the Federal Reserve, do not favor such a large fine, contending a small number of people were the victims of flawed foreclosure procedures.
Couple things on this. First of all, this does feel like a global settlement, even though the head of the state AG investigation has insisted that they would not necessarily sign on to whatever the feds decide. Perhaps if OCC gets their way, the state AGs would break off, but it sounds like they’re working very closely with the CFPB and the FDIC on this.
Second, I agree with Adam Levitin: the presence of the CFPB tilts the balance in what would otherwise be a bunch of bank-servicing regulators figuring out how they could best serve the banks. “The CFPB means that there is a voice at the table advocating consumer interests, not bank interests. That’s a hugely important counterweight to OCC,” Levitin says, and he’s right.
Third, the dispute will probably get settled by Treasury, which should make everyone shudder, although FDIC managed to get servicing standards into risk retention requirements and seems pretty crafty in these inter-agency spats.
Fourth, what happens to this pile of money? Who gets a claim on it? WaPo floats that it would go toward a system of “quotas that would force the firms to modify a specific number of mortgages for distressed borrowers.” These might be industry-wide, or parceled out by servicer depending on the level of abuse and percentage of overall loans they hold. This could (and frankly, should) include principal reductions. But it’s a little misshapen at this point, as it’s still unclear who would get the modifications. All underwater borrowers? Loans in delinquency? And what about those who have lost their homes fraudulently?
Fifth, and relative to that, who controls this new principal reduction process would be key. By all accounts it would be involuntary, rather than the voluntary process of HAMP, but Treasury has basically failed to take action to address the failures in HAMP, and I have no confidence that they would take action to address whatever failures occur here. And even a mandate for loan modifications can go awry:
But forcing the banks to reduce the principal on distressed loans could pose its own problems. Some people familiar with the discussions are concerned that if banks are required to meet a loan quota, they would put the top priority on modifying mortgages for borrowers who need relatively little help. By doing so, the banks could limit the losses they face in reducing the principal on loans.
“It creates some potential strange choices for the servicers,” one source said.
Not if there’s a competent, non-captured force overseeing the process. But who would that be?
Sixth and most important, even if the CFPB and FDIC manage to get their way, imposing a higher fine on banks and servicers, and creating a new set of standards for modifications, it will ultimately be incomplete if nobody goes to jail. It sets a precedent for no deterrent for massive fraud. And that’s apparently the standard here:
While regulators worry about how punitive any eventual settlement should be, lawyers and other advocates for the foreclosed who were hoping for criminal charges are set to be disappointed.
That sanction, everyone seems to agree, is off the table. In testimony in December about the improper foreclosures by banks, Daniel K. Tarullo, a Federal Reserve governor, floated the notion of imposing fines on individuals found responsible for violations or banning them from banking, but officials involved in the talks said this idea had not gotten much traction either.
“The fact is, when the banks prepared their foreclosure paperwork for the courts, they lied about the credentials of their witnesses,” said Thomas Cox, a Maine lawyer who works with foreclosure assistance groups. “Criminal sanctions would act as a deterrent.”
So ultimately, this is a shadow play. There will be a big fight over it as the dollar amount is determined. The banks will howl about the unfairness of it all, and how they are being forced to reward deadbeats. And there will be some wrangling here and there. But the real point is that the banks systematically broke the housing market, lied to courts of law over and over with improper mortgage assignments, forgeries and counterfeits, cheated borrowers and forced them to lose their homes, and won’t see any criminal sanction for it.