Jon Walker has already touched on Shahien’s article, and Yves Smith’s response to it, about the tens of billions of dollars banks saved by having their servicers cut corners in their mortgage operations. I’m coming late to the party so I’ll just let their stories lie without further analysis. Similarly, Yves has some analysis of the banks’ counter-proposal to the AG term sheet, which apparently will come in a negotiation today. They’re offering:

The 15-page bank proposal, dubbed the Draft Alternative Uniform Servicing Standards, includes time lines for processing modifications, a third-party review of foreclosures and a single point of contact for financially troubled borrowers. It also outlines a so-called “borrower portal” that would allow customers to check the status of their loan modifications online.

But the document doesn’t include any discussion of principal reductions. Nor does it include a potential amount banks could pay for borrower relief or penalties.

In other words, they promise to follow the law and adopt some of the ideas they already have agreed to in other contexts (Bank of America signed off on ending dual track and a single point of contact a month ago), as long as the regulators hold them harmless for past misdeeds.

Yves thinks that the play here by the banks on third-party review is to move illegal foreclosures where the chain of title is in question out of the courts and into this arbitration process, stripping due process protections for homeowners. I don’t find myself equipped to agree whether that’s going on here, though one would hope that would be summarily rejected. [cont'd.]

However, even if the banks somehow get the borrower complaints out of the judicial process, I don’t see any way they can get the same deal with investors in mortgage-backed securities. And remember, investors and borrowers are pretty well aligned here. They both want modifications and not foreclosures. The difference is that the investors have the means to fight the banks and servicers on this point, albeit in a way that maximizes their self-interest. Typically, this means that, if enough investors get together to file a complaint, they will try to force repurchases on the banks who sold them soured mortgage-backed securities under false pretenses or failed to convey the mortgage and the note to the trust. And while we haven’t seen a flood of those cases, an important milestone has been reached.

JPMorgan Chase & Co (JPM.N) could be forced to repurchase thousands of home equity loans, after a judge ruled in favor of a bond insurer that argued it could build its case based on a sampling of loans.

The ruling against EMC Mortgage Corp, once a unit of Bear Stearns Cos, comes amid many lawsuits seeking to force banks to buy back tens of billions of dollars of mortgage and other home loans that went sour. JPMorgan bought Bear Stearns in 2008.

Syncora Guarantee Inc now can pursue claims concerning the entire 9,871-loan pool that backed a securities issue, according to the ruling late Friday from U.S. District Judge Paul Crotty in Manhattan.

The ruling lowers the hurdle for insurers trying to prove they were deceived by banks, and increases the potential that banks could be forced to buy back more loans.

This is not an investor claim as much as an insurer claim, but it’s the precedent which has value. If investors can now take a sample of a loan pool and make their case based on that, it opens up the banks to a lot more exposure on this front.

The banks have other problems. As the foreclosure mills come under scrutiny, they are privy to a lot of information that can hurt the banks, and may try to bargain for their lives. In this case, foreclosure mill Ben-Ezra & Katz is essentially holding Chase foreclosure documents, including notes, for ransom.

Chase Home Finance has filed a federal lawsuit against its former legal counsel, Ben-Ezra & Katz, accusing the firm of refusing to hand over foreclosure case files that contain over $400 million worth of original notes and mortgages “without which Chase will be unable to proceed with any of the pending cases.”

In the 11-page lawsuit filed Friday in federal court in Fort Lauderdale, Chase asked for a temporary restraining order and permanent injunction ordering the firm to return the files and pay Chase an unspecified amount of damages.

During its two-year contract with Chase, the law firm handled thousands of foreclosures throughout the state. According to the lawsuit, the contract requires the firm to immediately transfer case filees when the contract ends. Chase has made “repeated demands” for its files but “Ben-Ezra has not returned or released any of the Chase files.”

“Ben-Ezra refuses to release the Chase Files because it claims that it is owed over $5 million in fees and costs,” according to the lawsuit. Although Chase disputes the amount it owes the firm, it has offered to post a $2.8 million bond as security.

Now THAT could get interesting. The foreclosure mills are bottom feeders, and they have possession of a lot of incriminating material.

None of this is specifically geared to the homeowner per se, but trouble for the banks doesn’t have many other remedies than resetting the mortgage market and abiding by what the investors have demanded, namely deep principal mods. These lawsuits will take time and a lot of effort, but the AG settlement has basically no bearing on them. So the banks cannot wish away their exposure.