The proposed global settlement for mortgage servicer fraud and abuse, put forward by a working group representing all 50 state Attorneys General, received some high-profile dissent on Wednesday. Republican AGs in four states – Kenneth Cuccinelli of Virginia, Greg Abbott of Texas, Pam Bondi of Florida and Alan Wilson of South Carolina – objected to the term sheet that contains the proposed deal, which would reinforce that servicers follow the law, change some aspects of mortgage servicing and potentially create a quota of loan modifications and principal reductions which top servicers would have to meet. The settlement, the quartet said, “appears to reach well beyond the scope of our enforcement role, and, in some instances, far exceeds the scope of the misconduct which was the subject of our original investigation.” And they specifically reject principal write-downs as part of any deal, saying that it creates a moral hazard for borrowers who fail to pay their mortgages. Republican AGs in three other states – Oklahoma, Alabama and Nebraska – have raised their objections to the lead AG on the settlement, Tom Miller of Iowa, as well.
But Republican AGs are not the only ones with concerns about the settlement. Democrats in AG offices across the country find themselves uncomfortable with the deal, in particular the speed with which it is being ushered through the system and the lack of clarity over what claims they would have to relinquish under the deal. The opposition from both sides puts into jeopardy a quick resolution to the investigation, which is being pushed hard by the White House, possibly as a means to kickstart the ailing housing market.
Any settlement was always going to be a tricky business. While all 50 AGs agreed to an investigation, it was launched prior to the 2010 midterms, and a resolution would need the participation of practically all the AGs, including the newer ones who never signed on to the investigation in the first place. The master settlement agreement with the tobacco industry in 1998 eventually got the agreement of 46 AGs, with the other four coming aboard later. That would be similar to the necessary outcome here; to become the official position of the National Association of Attorneys General, at least 38-41 of the AGs would have to sign on. And even that has no binding force to supersede state law.
While the AG investigation was announced last fall, the settlement term sheet arrived with some surprise a couple weeks ago, just prior to a meeting of all 50 AGs in Washington. Democratic AGs and senior staff, who spoke off the record because of Tom Miller’s lead role in the case, said that they only received the term sheet, seen as a first offer to the banks, a couple days before the meeting, and didn’t know until they got to the meeting that it would be a big topic of discussion. And then, not only were the AGs told about the term sheet and the push for principal write-downs to save as many as 3 million homes from foreclosure, they were told they would have to make someone from their offices available full-time to enforce the terms of the settlement. And they were told that all of this would have to come together in a “window of opportunity” over the next 6-8 weeks.
That need for speed seems to be coming from the White House, who by all accounts want to move on a settlement quickly, and to use it as a way to promote economic recovery more than anything. Timothy Geithner said in Congressional testimony last week that all parties would benefit from a quick settlement, because it would relieve uncertainty from the servicers and allow the government to help fix the broader housing market.
This has created a tension between quickly intervening to save millions of homeowners from foreclosure, and doing the kind of investigation that could reveal the full extent of the fraud in the mortgage servicing arena. The investigation hasn’t done much investigating to this point; no subpoenas have gone out and no depositions taken. Instead, the AG working group is mainly going off of consumer complaints and court findings. A major investigation would take months and months and eat up a lot of resources in a time of tight state budgets. The rush to settle, driven by Washington, appears to serve a political function of “doing something” about the housing market, which is rapidly falling apart. But given that there has been no time to thoroughly probe servicer conduct, the result of the settlement could help some homeowners now at the expense of really digging into the sewer of misconduct, which would create leverage over the industry. As of now, it’s impossible to properly assess the value of the settlement against the extent of the fraud and abuse.
“The angle of this being politically expedient, that appalls me,” said Ira Rheingold of the National Association of Consumer Advocates. He saw the settlement as a kind of substitute for HAMP, the program that the Administration created in the first place to deal with the foreclosure crisis, which hasn’t come close to succeeding. “They’re saying, we’ll hold the banks accountable and now let’s move on. But the part of the speed factor I do like is that every day we wait, people are losing their homes. So this settlement should not be done quickly for political expediency, it should be done well. But it should be done quickly, because the longer we wait people are unjustly losing their homes. So there’s a tension there.”
This tension became very clear in discussions with the AGs who would have to implement and honor this settlement. The prospect of saving millions of homes from foreclosure is appealing, but the potential for having to waive consumer protection statutes in their states is certainly not. Troublingly, there’s been very little indication from Miller and the AG working group on what they would have to give up in this exchange. That raises the spectre of a final agreement that legally indemnifies the banks while providing too little support to homeowners, just enough to make a big press conference full of back-patting about helping the little guy. But in the aftermath, states with strong consumer protection laws could be potentially unable to bring a lawsuit for servicer fraud or abuse.
I keep saying “potentially” here because it’s not explicit in the document, perhaps intentionally so. The document represents a first offer, one that the AG working group expected the banks to respond to with a counter-offer. So the working group may have wanted to leave those terms blank to see what the banks would want in exchange. Instead, the banks leaked the term sheet to the press, Rheingold believes, to turn it into a political stories and let their allies in Congress beat up on the AGs. “The AGs said, here’s in good faith our opening salvo, and the next day it’s in American Banker and Richard Shelby is saying, how dare we regulate the banks who destroyed our economy!” Rheingold said. “The banks are making this an inside the Beltway debate.”
But if the lack of clarity on waiving of claims was meant to draw out the banks, it mainly led to confusion among the AGs over what they would give up. Eric Schneiderman, the Democratic AG of New York, has already said that he wants to do further investigation of servicer abuse, and didn’t want to give up the ability to move forward on that.
“If they release on robo-signing, OK. That’s the last symptom of a completely broken system. It isn’t the problem, it’s the end result of a problem,” said Rheingold. “But if they’re releasing all these claims that have nothing to do with deal, it’s unacceptable.”
In addition, a settlement that only leads to principal write-downs and some modest changes to the servicing model would not address the massive potential chain of title problems at the heart of foreclosure fraud, as Abigail Field pointed out in a brilliant recent piece. The current clouded title problems are already dragging down the housing market in key states where court ruling have put those issues in the spotlight. This settlement does nothing to ameliorate that.
And then there’s the issue of merging these state and federal investigations, resulting in a settlement driven by the White House, which seems to achieve more political aims than accountability for crimes. I asked Debra Bowen, the Secretary of State of California, whether she would accept the federal government commandeering a state investigation in this fashion. “I didn’t have a federal government interested in anything I cared about when I started,” she replied. “When I brought suit against ES&S over their electronic voting machines, I got a $2.3 million settlement. And as important as the money was the message that we’re going to go after you if you break the law.” That would be put to the side in this settlement term sheet in favor of helping homeowners, a attractive proposition (if properly enforced) but something different than accountability.
Attorneys General who I talked to for this story had their doubts over whether they could ultimately reach agreement. There are a lot of perspectives on the issue that make it difficult to reach consensus, and in addition the murky nature of what would be waived presents a host of problems. Republican lawmakers are pushing for a total whitewash, and community groups want to push the AGs to really go toe-to-toe with the banks instead of giving in. There isn’t much middle ground here.
AGs typically don’t like to constrain themselves, especially on headline-grabbing lawsuits against the big banks. They could go their own way on state-based investigations and sue banks for fraud individually, fulfilling their consumer protection role, rather than joining in an ultimately unsatisfying and difficult to administer settlement. In just one case this week, a jury awarded a GI $20 million in a case where Coldwell Banker was accused of mishandling the man’s automatic monthly mortgage payment while he was on active duty overseas, improperly reporting him to credit bureaus with a serious delinquency, and then failing to correct the error. This was a standard servicer abuse case, just one of maybe millions, and it netted $20 million. Just 1,000 cases of this type would equal the $20 billion thrown around as a possible settlement number.
Rheingold has an idea of how this should proceed. “The AGs went into this thinking, we have these complaints, before we do investigation that would take months, can we sit down and work with the federal folks and come up with a plan that we think will work,” he said. “What the AGs need to do, is say to the banks, here’s our offer, take it or we will investigate you and you know what we’ll find. The threat has to be, you don’t take this deal, all bets are off.” Just looking at the Federal Reserve denying Bank of America a larger dividend payment, in large part because they cannot even calculate the risk to their mortgage portfolio, shows you that there’s a tremendous amount of potential liability here, especially if coupled with a full investigation.
“There are a lot of snakes under those rocks,” Rheingold concluded. “The banks know full well that it will get ugly for them.”





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I guess the banks are waiting for Treasury and their Congressional friends to come in and save them somehow. What a mess. Hope the homeowners have a few friends among the AGs who will hang tough.
I find it extremely disheartening that most AG’s want to persue an agreement without investigating. They have wasted so much time pretending that they were investigating and now we find that they were not. I don’t know why I bothered to vote for Tom Miller. What a disapontment!
really, really good explanatory reporting – thanks
I voted against him. I also sent his office a copy of Yves Smith’s criticism of his role in this coverup of massive fraud.
He replied he was glad to read the article but answered none of the substantive questions.
This is another merry dance led by the fools in the white house led by head jester Barry.
This is an excellent report, disheartening as hell but excellent reporting. Thanks.
Another sham pushed by the white house to hide the misdeeds of those who created this mess. The lack of accountability is what led to this mess in the first place and will only ensure that it happens again. Obama’s house of card will one day collapse and we will all be paying the price.
The Banks got the $31 billion fine turned into a “principal reduction estimate”, and then complained to the GOP about the idea of a fine – wanting a go and do not break the law again agreement result only.
So they have GOP AG’s claiming a fine via principal reduction would be a moral hazard.
OK – lets go back to a cash fine. And let HAMP due via regulation the principal reduction – it was always the better option – but Obama wanted to kiss some more corporate butt and we got the “settlement via promise to restructure” so as to avoid the charge that his federal gov was actually issuing a tough regulation.
Anytime Timothy Geithner and settlement are mentioned in any article, the alarm bells should be clanging off the wall.
This administration is a disgrace from Obama,to Geithner,to Holder, to Daley, and on and on we go.
#FAIL
I think that the AGs, individually rather than as a group, are the last, best hope of any accountability for the misery of a crippled economy. The beltway/Wall St. complex has capitulated almost completely to the financiers, and even the modest reforms on offer (swipe fees, CFPB) are in trouble.
Ideology and self-interest (Republicans the former, Democrats the latter) has created a fact-free public discourse. Bank presidents rail about moral hazard without a hint of irony. Irresponsible home-owners are blamed for their own misfortune, while “responsible” Americans are pitted against those who are suffering. Bankers are encouraged to heal their balance sheets by completing the job of stripping wealth from the middle class.
The housing bubble was created for the enrichment of the few, and it created artificial, unsustainable housing valuations. It wasn’t an accident or the normal vicissitudes of a market. Those whose houses are under water deserve to have their mortgages revalued to subtract the worst effects of the bubble, and banks and investors should share in the pain of the correction. Any moral hazard for individuals pales in comparison to that created by the implicit guarantees our biggest banks enjoy. (Most over-leveraged house flippers and those whose income simply cannot support home ownership will, or have already been, wiped out.)
While the term sheet might help some people currently in trouble, it does nothing for those already unjustly foreclosed upon or those whose problems stem from outright fraud. At this point we can only guess how many families this entails. Without real investigations and legal action, the victims, the investors and home owners, bear the brunt of the pain. At this point the perpetrators of the greatest scam in living memory are getting off unscathed while urgently needed reforms are left undone, paving the way for the next bubble catastrophe. (Commodity markets anyone?)
Wall St. gambling with your house and health care is bad enough, but gambling on food and energy is already beginning to spawn a tragedy of a whole different magnitude.
I hope the AGs deep-six this deal so a few of them can do the job abdicated by the leaders to whom it was entrusted.
The whole settlement, and the Administration’s method of dealing with problems in other areas, is like spraying Febreze on a big steaming pile of shit. It may mask the odor for a while, but it does nothing to get rid of the steaming pile of shit itself.
This seems to be a place to ask. I was wondering if anyone might be able to help me understand or comment: My elderly mom was called last April by her mortgage holder (a LARGE west coast BANK previously headquartered in NC). She was asked if she would like to see if she could reduce her mortgage payment by refinancing under something to do with the TARP program. She told them that she would like to try.
Pertinent facts: She had been married (for the second time)in the late seventies to a guy who deserted her and eventually filed for divorce which was granted in California in 1985. In 2004 she bought the property in question after moving back to NC from an adjoining state. In 2009 she legally changed her surname back to match her children rather than that of her stepchildren(it made for less confusion in our medium sized city). Her income is derived from a relatively (very) small trust fund administered by the wealth management division of the same bank which had originally been at a bank bought out by the NC bank which had been bought out by the LARGE west coast BANK.
After two months of faxing the mortgage holder everything they asked for they told her that they couldn’t proceed. The reason was because she didn’t supply them with the property settlement from the divorce. She had already told them that it was an absolute divorce with no property settlement.
In January we were notified that her trust fund was now managed by the consolidated LARGE BANK. The letter said to be sure to ask if they could help us in any way. So I decided, with my mom’s permission, to ask for some help about why her refi didn’t go through. They were of no help! I was sent through a typical telephone maze.
But I noticed a new office of the LARGE BANK Home Mortgage Co. in my neighborhood. So I entered and inquired as to why she was denied a refi on the basis of being unable to provide a document which didn’t exist. Now I must admit that I can be very snarky in dealing with matters such as this. The smirking lady said she’d call my mom. Two days later she did and made small talk. She said she’d call back but never did. That was Jan 27th.
So in mid March I went by again. Of course the friendly lady was too busy to see me without an appointment but said she’d call me back. After a week of not being called back I went by again and insisted on being told what was up.
I was told that they didn’t have the docs in that office. I insisted she look on the computer. She did, but I was told that she couldn’t understand it anymore than me from the docs on the computer. So I insisted that she call someone and have them explain it to her. She did. Then she explained that the whole problem was the name change thing was what held it up. That the attorney couldn’t rectify the name on the application with the name on the deed. I asked her why they didn’t just ask my mom about the discrepancy. She responded that the folks on the phone aren’t paid much and wouldn’t know to ask. She said that if I could just get her the name change document she could try to get the refi reinststed. So when I went to get the doc from my mother, it had with it a fax cover sheet indicating that they had gotten it early in the process.
Now being the conspiritorial theorist that I can sometimes be, I have to guess that the LARGE BANK really didn’t want to do a refi. At first I thought it might be that the LARGE BANK collected TARP funds for merely trying refis. Now I wonder if her mortgage was bundled in more than one security (I had heard that it happened more than once). It was a smallish house in a great neighborhood, not at all over appraised(I sold it to her for a loss). She had A+ credit and guarranteed income. It would seem to me to be good candidate for that type of hanky panky. Does the LARGE west coast BANK have a track record of that sort of thing? Comments?
Like radiofreewill yesterday, your comment is definitely a keeper.
May I quote from it with attribution?
Do you happen to read at nakedcapitalism? I have ECONNED on the shelf and reread it along with DISASTER CAPITALISM whenever I think I am going crazy.
Write-downs of principal create a moral hazard for borrowers? Guffaw, guffaw, guffaw. I’d be on the floor laughing if the widespread abuses of lenders and servicers were not inflicting such needless tragedy and expense on tens of millions of Americans. Texas, Virginia, Florida and So. Carolina? Reliably GOP every one.
Quaintly, investors in the gazillion dollars worth of junk securities that are “collaterized” with these mortgages would like to see write downs, too. So would governments that really wanted to know how insolvent some of the world’s biggest banks really are and what should be done about it.
As Yves Smith repeatedly points out, no settlement can be fair if it hasn’t been preceded by adequate investigation that documents and publicizes the crimes and excesses a settlement is meant to resolve. This is another Queen of Hearts exercise, here intended to hide rather than elucidate those crimes and excesses.
Those continue to harm borrowers and the financial system. They continue to hide the true financial ill-health of the TBTF banks. Since they are so unhealthy, but heavily insured by their government, they will continue to seek the world’s most expensive care, paid for taxpayers whose government less and less represents their interests, and they’ll get it.
It’s a cinch the AG’s in Texas, Florida, So. Carolina and Virginia won’t launch investigations of banking malpractice. What about those in NY, MA, CA, OR?
Thanks for this. It seems the individual homeowner is going to need protection from his state and hopefully an attorney who can take on the crimes that were committed. If Kamala Harris caves either to Obama or this group, I will be disappointed in her. Typical to create a sham solution to help a few homeowners; settle a small amount of money on the states; sweep the mess under the rug and let those tossed into the streets fend for themselves.
That was the question I posed to Tom Miller from here in Iowa.
What answer did I get? Crickets…
No problem. I’ve just finished: 13 Bankers (Simon Johnson); All the Devils are Here (Joe Nocera); and Griftopia (Matt Taibbi). I’ve yet to get to the two you mention, but you have to pace yourself, lest the desire to move to an open-carry state gets you into trouble.
I’ve got 13 Bankers on the shelf as well and have Griftopia on order.
There’s great conversation here at the lake. Thanks for the reply.
So here we see the Obama Administration running interference for the fraudster banks; in particular, pushing an outright coverup of their crimes by preventing an investigation under cover of helping a few in-trouble homeowners. The same thing could be accomplished with a foreclosure moratorium.
It isn’t usually mentioned, but the overhang of fraudulent foreclosures damages the market from the buyer’s end, too. We’re actually looking at getting back into the housing market; literally at the moment, we’re looking at a “bank-owned” building that looks like a good deal. But we have to wonder whether the bank – don’t know which one, yet – really has a clear title. We can make sure we have title insurance; but how many title companies will be in trouble if it turns out there are a huge number of doubtful sales out there? That duplex might stand empty, deteriorating, for a long time.
This is exactly what the Republicans mean by “uncertainty” damaging the market – and they’re making it worse, by opposing a real investigation. It’s a reminder of something my father told me: a culture of honesty is worth real money. When it breaks down, which is more the norm than the exception, doing business becomes much more expensive and difficult. We really shouldn’t buy that place without paying a real estate lawyer – who might be just as blind here as we are.
As a potential BUYER, I vote for a real, thorough investigation, and lots of handcuffs all around. Let some petty dope dealers out of prison and put crooked bankers and politicians in their place. That way the cells might serve a useful purpose.
When the corruption reaches all the way to the top, as it plainly does, we’ve moved to the 3rd World. Our income disparity is now WORSE than a lot of 3rd-world countries, and getting worse.
Oh come on, David.
“That need for speed seems to be coming from the White House, who by all accounts want to move on a settlement quickly, and to use it as a way to promote economic recovery more than anything. Timothy Geithner said in Congressional testimony last week that all parties would benefit from a quick settlement, because it would relieve uncertainty from the servicers and allow the government to help fix the broader housing market.”
“The rush to settle, driven by Washington, appears to serve a political function of “doing something” about the housing market, which is rapidly falling apart. But given that there has been no time to thoroughly probe servicer conduct, the result of the settlement could help some homeowners now at the expense of really digging into the sewer of misconduct, which would create leverage over the industry. As of now, it’s impossible to properly assess the value of the settlement against the extent of the fraud and abuse.”
To the administration, the burying of the banks’ misconduct is the most important feature of this settlement … that’s what they do – cover for the bankers – and that’s who they serve above everyone else … and anything besides that is secondary.
Z