I’ve ignored the past few breathless reports about an imminent settlement by state Attorneys General and the big banks over foreclosure fraud, because we’ve been hearing the same talk about a settlement for over a year now, and because several states have already dropped out of the talks. But that doesn’t mean a bad settlement with the remaining states may not be inked, one that would indemnify the banks from state-level prosecution for a series of crimes at practically all stages of the mortgage process, in exchange for a relative pittance. Gretchen Morgenson puts more meat on the bones of what’s actually being offered as far as the bank side is concerned, and they would really get off with nary a scratch. Let’s go through it:
Cutting to the chase: if you thought this was the deal that would hold banks accountable for filing phony documents in courts, foreclosing without showing they had the legal right to do so and generally running roughshod over anyone who opposed them, you are likely to be disappointed [...]
As things stand, the settlement, said to total about $25 billion, would cost banks very little in actual cash — $3.5 billion to $5 billion. A dozen or so financial companies would contribute that money.
The rest — an estimated $20 billion — would consist of credits to banks that agree to reduce a predetermined dollar amount of principal owed on mortgages that they own or service for private investors. How many credits would accrue to a bank is unclear, but the amount would be based on a formula agreed to by the negotiators. A bank that writes down a second lien, for example, would receive a different amount from one that writes down a first lien.
$5 billion, at most, spread over a dozen banks, doesn’t even rise to the level of a bee sting. Maybe a gnat bite. Here’s how that plays out: $1.5 billion would go in the form of a $1,500 check to any borrower that lost their home to foreclosure since September 2008. So, a couple months’ rent, thanks for playing, and there’s no demarcation here: you get this if you stopped paying and were foreclosed upon properly (I’m sure there were a few) or if you were evicted wrongly. Then there’s $750 million in penalties to the federal government, and $90 million to state bank regulators. $2.7 billion would go to participating states to finance legal aid, housing counselors and the like. I’m a fan of mediation as a step to end the foreclosure crisis, but this isn’t mandatory mediation, just a resource for borrowers (and whether or not they’ll know it exists is an open question).
Then you have the $20 billion for principal-reduction loan modifications. We heard that refinancing of bank-owned underwater loans would be part of this as well, but maybe that’s combined with this principal reduction. Apparently this would only be for bank-owned or bank-serviced loans (ones held by private investors) as well; borrowers with Fannie and Freddie-held loans wouldn’t qualify for principal reduction under the settlement. That excludes quite a bit of the market, perhaps the majority of it. FHFA announced a refi plan for those Fannie and Freddie loans this past week, and there may be a principal paydown plan in the works. But there’s a certain arbitrary nature to the whole thing, as the entire housing market isn’t implicated in the settlement.
The biggest issue here is that banks have shown no interest in the past of actually holding to any settlement terms. That’s the whole point behind Nevada AG Catherine Cortez Masto’s lawsuit against Bank of America. Nevada and many other states reached a settlement on loan modifications on Countrywide mortgages, and BofA just didn’t do them. The $8.7 billion in modifications promised in that deal, negotiated by Illinois and California, never materialized. In fact, as Masto showed, BofA abused the borrowers who were owed modifications. So here come many of the same AGs back to reach another settlement with BofA, and other banks, on more loan mods. Who’s to say the banks will actually give them? They haven’t before!
Furthermore, who’s to say the banks won’t credit themselves with modifications they would have done anyway without a settlement? Who’s to say they won’t put into the settlement mods they’ve done previously? Who’s to say these won’t be temporary mods, like HAMP mods are, which won’t help borrowers avoid default?
Here’s just one more example from past experience. You may have heard about the Halloween party at a foreclosure mill law firm where employees dressed up as homeless people and foreclosed borrowers. That shows you the sickening mindset at work here. But did you know that Stephen L. Baum, the law firm in question, just reached a settlement with the Justice Department over its fraudulent practices for a paltry $2 million? (New York AG Eric Schneiderman, by the way, is investigating Stephen L. Baum, not settling.) Do you think Baum, or any of the banks it routinely represents in foreclosure cases, should be expected to direct a settlement in the best interest of the homeowner?
As Yves Smith points out, the numbers on how cheap the banks are getting off, compared to other lawsuits and settlements by AGs doing their job like Masto and Delaware’s Beau Biden, are pathetic:
Let’s look at the damages sought by Nevada attorney general Catherine Masto in her second amended complaint against Bank of America: civil penalties of $5000 per violation, or $12,000 for elderly or disabled borrowers. An individual loan can, and likely does, have multiple violations. The suit also seeks restitution, costs for wrongful foreclosures, plus the cost of damage to municipalities and homeowners from unnecessary vacancies. Note that an AG victory on the issue of wrongful foreclosure would pave the way for private lawsuits, and here the damages would be massive, particularly if state law or precedent allows for penalties (as we’ve noted, Alabama has statutory tripe damages for wrongful foreclosure, and recent rulings have had applied penalties in excess of nine times).
And what did Masto get from a different servicer, Morgan Stanley’s Saxon? The settlement is estimated to average somewhere between $30,000 and $57,000 per borrower. And the basis of action wasn’t erroneous or fraudulent foreclosures, but deceptive practices in mortgage lending and securitization.
Look at the MERS compplaint filed by Delaware AG Beau Biden. He’s suing MERS over deceptive practices, at $10,000 per violation. It’s quite possible that he may find more than one violation per mortgage. And I would imagine that success against MERS would pave the way for actions against servicers who relied on MERS in the face of knowledge of its deficiencies.
Indeed, in this AG settlement, Morgenson reports that the banks would be released from liability for actions involving MERS. That flies directly in the face of Beau Biden’s lawsuit and New York AG Eric Schneiderman’s recent subpoena of the company.
That’s the only information Morgenson gives about the liability release in exchange for this nothingburger of a penalty. Obviously, Biden, Masto and Schneiderman wouldn’t sign on, and Massachusetts AG Martha Coakley said she would not involve herself in anything that indemnified MERS. AG’s in Nevada, Minnesota and California had broken off from the settlement as well, but there’s a lot of talk that CA’s Kamala Harris is being wooed back, under extreme pressure from the Obama Administration. If she joined, that might be enough for the AGs to claim credibility, though at least some investigations would continue.
But the credibility of the liability releasers signing onto this dreck would be shot. This is a sellout of a deal, by all indications. Banks who have been on the receiving end of trillions in bailout money and emergency lending help would receive get-out-of-jail free cards for multiple crimes, without even so much as an investigation by the state and federal regulators handing out the pardons. In exchange they’d throw a few pennies to borrowers and promise to do loan modifications they haven’t troubled themselves with doing under prior settlements. The tell here is that you’re hearing almost nothing from Republican AGs, previously ideologically opposed to principal reductions or penalties of any kind, about dropping out of the settlement. Clearly the banks got to them and told them not to mess with a good thing.
Any Democratic AG who signs onto this might as well turn in their badge as a law enforcement official. And obviously the Obama Administration, pushing this whitewash hard, has absolutely no interest in the rule of law.
…Yves believes that AGs in Oregon, Washington, Arizona, and Colorado may bolt. Oregon’s AG is a Democrat; the other three are Republicans. Washington’s Rob McKenna is running for Governor, and his Democratic opponent Jay Inslee has been hammering him on this issue. Needless to say, whatever state you’re in, I recommend you call your AG and tell them to reject this pathetic deal, and do their job of investigating the banks.