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.”