I enjoyed the 60 Minutes story last night on the mortgage mess, because it actually went beyond robo-signing and touched on some of the more fundamental ways in which banks have committed fraud on state courts. Sheila Bair, in suggesting that individual homeowners could be paid off as a make-good for this trouble, and also suggesting that the banks could somehow cure this problem if they put enough time and effort into this, either displayed a misunderstanding of the issues or a not-very-credible recitation of the Administration line. In fact, some of these things cannot be fixed retroactively. The individual homeowner would have to give up due process rights for a cash payout that would result in them leaving their own home, and I simply don’t know who would agree to such a setup in the real world.

Bair is right that this situation is getting away from the banks in the state courts. More and more cases are being overturned because ownership cannot be proven. This was supposed to be the pressure point that would force the banks to the bargaining table, to negotiate a settlement with state Attorneys General that would increase loan modifications and stop the record level of foreclosures. But banksters are nothing if not confident. They clearly believe they can weather this storm, and won’t settle with regulators on anything that involves a penalty. That’s the right move for them, since state Attorneys General cannot make banks immune to individual homeowner claims. AGs can release claims over consumer protection violations and fraud on state courts, but they cannot indemnify the banks completely. So the banks would rather engage in a PR maneuver to prove that they are now complying with the law. That’s what the federal enforcement order, coming primarily out of the banks’ favorite regulator at the OCC, allows them.

Frustrated by the lack of progress with a global settlement between the 50 state attorneys general and the top mortgage servicers, federal banking regulators are expected to move forward with their own enforcement actions against 14 servicers as early as next week.

The cease and desist orders are expected to establish best practices for the servicing industry, including new documentation verification procedures, oversight from third parties and additional legal counsel, limitations for dual tracking foreclosures and modifications simultaneously, and a comprehensive look back to uncover prior mistakes.

If this sounds like the banks’ counter-offer in the AG settlement talks, that’s because there’s almost no difference. As Adam Levitin says, this is a “regulatory equivalent of a Potemkin village”. The banks would again run the show on compliance almost totally.

The C&D order basically tells banks to set up lots of internal procedures and controls within the next few months and then to tell their regulators what they have done. The reporting on these internal controls to the regulators will be non-public (like all safety-and-soundness review issues), so it will be impossible to judge whether the controls are adequate and whether the regulators are being sufficiently demanding. The result, I suspect, is that in a few months the bank regulators will declare that everything is fine [...]

By far the most interesting bit in the draft C&D order is the bit requiring the banks to engage independent foreclosure review consultants to review “certain” foreclosures that took place in 2009-2010. There is no specification as to which foreclosures are to be reviewed or precisely what the standards for review are. But that’s all kind of irrelevant. Who do you think the banks are going to engage to do these reviews? Someone like me? Not a chance. They’re going to find firms that signal loud and clear that if they get the job, they won’t find anything wrong. It’s just recreating the auditor selection problem, but without even the possibility of liability for a crony audit.

The regulators themselves have audit teams inside the banks, so the idea that they’d outsource this function smacks of a whitewash. This is essentially pretend regulation. Even former Treasury official Michael Barr says in the American Banker article that the enforcement order amounted to, “We promise to run our shops as if we were serious financial companies, and treat our customers as if they were our customers.” And then the banks can use this to prove that they are complying with the law, and to hold off any AG settlement by denying the need for further punishment, or at least not any above and beyond the enforcement order. They know that actual enforcement by individual AGs will take years, and while it could get very costly for them, they’re willing to take their chances. Their goal all along has been to stall.

But all of this is kind of happening on a parallel track to the business we saw in the 60 Minutes report. Individual homeowners can still fight to save their homes by proving fraud to the courts. Banks have a lot of legal muscle in those cases, in particular more money to drag them out. It will be a long, slow road to accountability and not always successful. But maybe enough judges will get fed up with the mockery being made of their authority by banks who think they can get away with it. We’ll have to see, because the federal enforcement order sure won’t cut it.