I don’t know if Gretchen Morgensen’s story on the backroom attempts at arm-twisting to get Eric Schneiderman to play ball with the foreclosure fraud settlement, and drop his efforts to actually investigate the depths of the abuse, should come as a surprise to anyone. I think we can actually be happy that it’s being made explicit and public, however, because the leak is certainly not coming from the Obama Administration, who look pathetic in this telling, completely in the pockets of the likes of “we’ll help you out” Bank of America.
Eric T. Schneiderman, the attorney general of New York, has come under increasing pressure from the Obama administration to drop his opposition to a wide-ranging state settlement with banks over dubious foreclosure practices, according to people briefed on discussions about the deal.
In recent weeks, Shaun Donovan, the secretary of Housing and Urban Development, and high-level Justice Department officials have been waging an intensifying campaign to try to persuade the attorney general to support the settlement, said the people briefed on the talks [...]
Mr. Donovan and others in the administration have been contacting not only Mr. Schneiderman but his allies, including consumer groups and advocates for borrowers, seeking help to secure the attorney general’s participation in the deal, these people said. One recipient described the calls from Mr. Donovan, but asked not to be identified for fear of retaliation.
Donovan did not deny the discussions when asked by Morgensen. He said, “Eric and I agree on a tremendous amount here. The disagreement is around whether we should wait to settle and resolve the issues around the servicing practices for him — and potentially other A.G.’s and other federal agencies — to complete investigations on the securitization side. He might argue that he has more leverage that way, but our view is we have the immediate opportunity to help a huge number of borrowers to stay in their homes, to help their neighborhoods and the housing market.”
This is the speed versus accuracy argument that has been at the heart of the debate about the foreclosure fraud settlement since at least March. Tim Geithner made this explicit at that time, saying that “all parties will benefit” from a quick settlement. Needless to say, that was five months ago, so not only has the speed side of the argument lost on this point, but the five months they spent saying we need a quick settlement could have been spent undergoing a real investigation on a parallel track. But that would require a federal government which actually wants to know how much systemic fraud occurred in the mortgage industry over the past decade. They clearly don’t.
They also don’t want to “help homeowners,” or rather they want to say they are, while doing the least disruptive actions possible. They already have the ability to aid borrowers with loans under the control of Fannie and Freddie with deep principal mods or refis. In fact, the same day that NYT prints this article about HUD bullying Schneiderman, they have an unsigned op-ed calling for the GSE option:
The administration needs better ideas. It can start by working with Fannie Mae and Freddie Mac, the government-run mortgage companies, to aggressively reduce the principal balances on underwater loans and to make refinancing easier for underwater borrowers. If the president championed aggressive action, and Fannie and Freddie, which back most new mortgages, also made it clear to banks that they expect principal reductions, the banks would feel considerable pressure to go along [...]
Another solution would be for Fannie and Freddie to ease the rule for refinancing underwater mortgages for borrowers who are current in their payments. The lower payments on refinanced loans would help to prevent defaults and free up money for borrowers to use for paying down principal or consumer spending.
So “helping a huge number of borrowers to stay in their homes” doesn’t hinge on a global settlement that indemnifies the banks for criminal behavior. In fact, it would impede it, by selling out cheap, with amounts that would not help the large majority of struggling borrowers.
Furthermore, positing Schneiderman as the entire hangup for “helping a huge number of borrowers to stay in their homes” is fallacious. Try as the Administration might to fashion a settlement which would inevitably be broadly favorable to the banks, where they give a pittance toward mortgage relief in exchange for a full release of liability, it ain’t happening. And Schneiderman is not alone in his objections.
“They wanted to be released from everything, including original sin,” said a U.S. official involved in the discussions. The legal protection sought by the banks included loan origination; securitization and servicing practices; fair-lending procedures; and their use of the Mortgage Electronic Registration Systems, an industry-owned loan registry that often acts as an agent for owners of mortgage loans, people familiar with the discussions said.
“The reason the banks would settle or pay anywhere near $20 billion to $25 billion is to get this behind them,” said one person familiar with the banks’ thinking. “There’s no reason the banks would pay that amount of money and leave their flank exposed.” [...]
“Those of us at the table…have maintained this investigation is about robo-signing and loss-mitigation problems,” Illinois Attorney General Lisa Madigan said in an interview. “The release should be narrowly drafted to cover those issues.”
As she says here, Madigan is one of the chief negotiators, and she’s objecting to the banks’ terms; she later says “We in Illinois have made it eminently clear every time we talk about releases that we are not releasing fair-lending claims.” There is no settlement to be reached, and certainly not one that stubborn ol’ Eric Schneiderman is holding up. And if the liability is limited, the penalty price tag will go down. Given that $20-$25 billion is already insufficient, a smaller deal for limited liability would have almost no function whatsoever as foreclosure mitigation, and would just be a tiny buy-off to get some legal troubles behind the banks.
The White House must think that if they can get Schneiderman, the AG with the most leverage over the talks by virtue of New York’s important position with respect to mortgage securitization, to bend, they can roll the rest as well. The WSJ article says that federal officials have a Labor Day target date for a settlement, and that they’ll continue “outreach” to all AGs. I bet they will.
The banks want at least 40 states signing off on this settlement before they agree to it. I can think of at least 10 AGs right now who wouldn’t agree to the broadest terms. Democrats Madigan, Schneiderman, Delaware’s Beau Biden (the VP’s son, who has joined Schneiderman on his intervention into the Bank of America settlement with investors over mortgage backed securities), Massachusetts’ Martha Coakley and Nevada’s Catherine Cortez Masto are on the record against a broad liability release in one way or another, and others like Washington’s Rob McKenna (R), Colorado’s John Suthers (R), California’s Kamala Harris, and even Utah’s Mark Shurtleff (R) and Michigan’s Bill Schuette (R) have active investigations or lawsuits on this issue. That’s an incomplete list off the top of my head. And if you add Republican anti-government types who don’t want to see any monetary penalty at all, you might not get to 25 in favor.
I’m glad that Schneiderman and his allies are blowing the whistle on this through the media. And he hasn’t wavered an inch. He has some very good people working with him on investigations, including the Congressional Oversight Panel’s Damon Silvers.
As a postscript, this is just shameful:
The lawsuit angered Bank of New York Mellon, and as Mr. Schneiderman was leaving the memorial service last week for Hugh Carey, the former New York governor who died Aug. 7, an attendee said Mr. Schneiderman became embroiled in a contentious conversation with Kathryn S. Wylde, a member of the board of the Federal Reserve Bank of New York who represents the public. Ms. Wylde, who has criticized Mr. Schneiderman for bringing the lawsuit, is also chief executive of the Partnership for New York City. The New York Fed has supported the proposed $8.5 billion settlement [...]
Characterizing her conversation with Mr. Schneiderman that day as “not unpleasant,” Ms. Wylde said in an interview on Thursday that she had told the attorney general “it is of concern to the industry that instead of trying to facilitate resolving these issues, you seem to be throwing a wrench into it. Wall Street is our Main Street — love ’em or hate ’em. They are important and we have to make sure we are doing everything we can to support them unless they are doing something indefensible.”
I’ll just let that inversion of the rule of law speak for itself.