Whatever shallow hopes remaining that the 50-state Attorney General investigation into foreclosure fraud would yield anything meaningful has been dashed by this leak of the latest settlement terms, which eliminate mandated principal reductions as a penalty.
After months of stalemate, the state attorneys general have proposed new terms to the top five mortgage servicers that drop some controversial provisions of their first attempt at a settlement, including a push to force banks to reduce principal on thousands of mortgages.
The new offer, which was expected to be discussed at a meeting between the two sides on Tuesday, moves them closer to a final agreement, but does not detail how much state AGs are seeking in penalties for servicing issues uncovered by federal and state regulators.
Banks have privately said that they will not agree to a fine above $10 billion — far below a discredited $20 billion figure floated in the press two months ago — arguing that regulators have not provided evidence that servicing problems led to wrongful foreclosures.
The AGs are considering using whatever money they receive from banks to start a “cash for keys” program to help troubled borrowers move out of their homes and speed the foreclosure process by providing them cash incentives to leave. The funds are also expected to be used to promote mortgage counseling and offer some forebearance to troubled homeowners.
Just to define terms, forbearance essentially delays the foreclosure process by holding back payments. The borrower may not have to pay the mortgage for a couple months, but that money doesn’t go away, it just gets tacked on to unpaid principal balance. In the end, the servicer makes MORE money off a forbearance, because they are paid according to a percentage of the principal balance.
Principal reductions may not have been a total panacea to the foreclosure crisis, especially if they were spread out over 3 million borrowers with $30 billion in funds. But principal mods are consistently more durable than any other kind of loan modification. And when choosing between principal mods and basically nothing, which is what the term sheet looks like now (cash for keys??), obviously the former is preferable.
There are other minor aspects added to the term sheet: borrowers rejected for a permanent mod in HAMP would get to reapply (even though many have lost their homes in the process), expansions of the Servicemembers Civil Relief Act, disclosure to borrowers of their options prior to foreclosure and a new guarantee on documentation on the mortgage transfer and the note (basically an assurance that the securitization was legal). But if the banks were able to knock out principal reductions so easily, it’s hard to hold out hope that anything meaningful will stay in this settlement, either.
That last one, assurances on the accurate transfer and endorsement, may not add up to everything advertised, notes Yves Smith:
The servicers are not going to want to assume responsibility for certifying events beyond their control. It was the originators and the trustees that were responsible for making sure that the securitization was done properly, and the liability for the failure to form the securitization probably rests most heavily on the trustee, who provided multiple certifications that they got all the assets (forgive my being approximate in my use of legal terminology, but conceptually this is accurate).
This ask sounds troublingly like it is setting the stage for a broad waiver of liability for mortgage abuses, a step we have roundly opposed. No one has any business giving broad waivers when they don’t know what bad conduct they may be forgiving. And the ample evidence of abuses in the improper application of payments and the use of junk and pyramiding fees suggests there are a lot of bad practices the servicers would love to have forgiven before anyone can attach a dollar tag to what they really are worth.
As I’ve said, it’s time to give this investigation a decent Viking funeral. The penalties keep shrinking, while the scope of the potential waiver of liability keeps broadening. The banks don’t seem interested in even this watered-down settlement, unless they clean up all their legal claims in one sweep. And many AGs don’t want to give up all that liability, especially given that there’s been no investigation in this “investigation” about the extent of the abuses.
That’s the reason why there’s not going to be a settlement, by the way. Without the knowledge on both sides of the scope of the abuses, via an investigation of the facts, the AGs are just making a guess. And the banks can bluff their way out of that, secure in the knowledge that the opposition doesn’t have the information to make a credible ask.
Once again, we’re going to have to look elsewhere for justice and accountability in foreclosure fraud.