One way you can judge whether the latest foreclosure fraud trial balloon is legitimate or just more talk is from the reaction by public officials who oppose a settlement. The indications are they’re taking it seriously. But they’re also making some great points about why it needs to be shut down.

First, Sen. Maria Cantwell (D-WA) delivered one of the best letters on the issue that I’ve seen, asking the Justice Department to fully investigate “fraudulent” (she used the word) foreclosure practices before settling with the largest banks. I’ll put the whole letter on the flip, but here’s a great excerpt:

Large financial institutions helped inflate the housing bubble through tranching and securitizing mortgages at a frenetic pace while disregarding mortgage and foreclosure laws. Collecting fees from issuing mortgages then selling to investors securities backed by these mortgages allowed the largest financial institutions to pump up profits and home prices, while dumping any potential losses on homeowners, taxpayers, and investors. When the housing bubble burst taxpayers were forced to bail out the largest financial institutions. It is estimated that the federal government disbursed over $4.7 trillion to financial institutions, and guaranteed an additional $13.87 trillion, during the financial crisis.

Without a thorough investigation, it is impossible to truly estimate just how pervasive the defects in the foreclosure and securitization process are. Continued reports of wrongful foreclosures, forged documents, and an inability of servicers and banks to prove chain of title and the legal right to foreclosure, raises the very alarming possibility that these defects were endemic to the mortgage servicing industry across the country. The sheer magnitude of the potential fallout from these defects demands that we undertake a full investigation to uncover the true scope of wrongdoing before providing blanket immunity to the perpetrators.

Describing the housing bubble as a “pump-and-dump” scheme has the benefit of being both perfectly clear and perfectly accurate. Cantwell is also the first federal official I can find to say that “the Mortgage Electronic Registration System should be dissolved and shut down.” The letter displays a facility with the issue that is sorely lacking among many public officials.

There are politics in this action as well. Cantwell hails from Washington, where the Attorney General, Republican Rob McKenna, is running for Governor next year. Rep. Jay Inslee, the Democratic challenger, has used the foreclosure fraud settlement repeatedly as a wedge issue, demanding that McKenna break from the settlement and protect the interests of Washington homeowners. Cantwell is carrying through in the same vein here. McKenna is on the foreclosure fraud executive committee, so forcing him to back off the deal would be powerful.

The next indicator is that some powerful coalitions are forming to pressure Attorneys General in their states not to accept a flawed settlement without an investigation. Some Democratic lawmakers in California have pressured AG Kamala Harris on this issue, along with a coalition called Californians for a Fair Settlement. I don’t love the framing of “fair settlement,” because the investigation must come first. But considering that nothing to which banks will agree could ever possibly be described as “fair,” I’m willing to go with it. And ‘fair settlement” groups have popped up elsewhere across the country. Nevadans for a Fair Settlement sent this release:

Carson City and Las Vegas, NV – As millions of homeowners continue to suffer from the dire consequences of the housing crisis, a significant group of community organizations, homeowners and labor unions announced the launch of “Nevadans for a Fair Settlement.” The coalition is comprised of several organizations throughout the state including Culinary Workers Local 226, the Las Vegas Foreclosure Task Force, NAACP (Reno-Sparks Chapter), Nevada Immigrant Coalition and PLAN to oppose the current direction of the multi-state foreclosure settlement being driven by the Obama Administration and state attorneys general from across the country [...]

Clark County Commissioner Chris Guinchigliani said “It is premature to sign an agreement before there is a full investigation into the foreclosure crisis by the administration. It is also premature considering Attorney General Cortez Masto’s ongoing investigations.”

And similarly, here’s Pennsylvanians for a Fair Settlement.

Harrisburg, PA – As millions of homeowners continue to suffer from the dire consequences of the housing crisis, a significant group of labor unions and community organizations announced the launch of “Pennsylvanians for a Fair Settlement.” The coalition comprised of nearly a dozen groups, including Pennsylvania AFL-CIO, ACTION United, and Philadelphia Unemployment Project to oppose the current direction of the multi-state foreclosure settlement being driven by the Obama Administration and state attorneys general from across the country.

“We cannot accept a settlement without a full investigation and a commitment to ensuring that the terms are commensurate with the damage done to homeowners and workers across America” said Frank Snyder, Secretary-Treasurer of the Pennsylvania AFL-CIO.

You can see the pattern emerging. The fair settlement groups, especially as they broaden their coalitions, have the opportunity to really hammer AGs who dare to sign on to any settlement, and could even reverse the courses of some of them. I’m not convinced there’s a settlement on the horizon, but certainly this public pressure can ensure that.

I’ve put the Cantwell letter below.

December 15, 2011

The Honorable Eric Holder, Jr.
U.S. Department of Justice
950 Pennsylvania Avenue, NW
Washington, DC 20530-0001

Dear Attorney General Holder:

I write regarding the ongoing settlement talks between state attorneys general, federal fraud regulators, the White House, and large financial institutions over alleged illegal foreclosure and mortgage servicing practices and abuses.

I am concerned that recently reported settlement proposals will effectively absolve these financial institutions of substantial civil and criminal liability in one of the largest alleged fraud schemes during the financial crisis. Specifically, I am concerned that the proposed settlement includes a release from liability that may be far too sweeping, does not adequately compensate victims, does not require enough of banks to reform the system that led to the crisis in the first place, and is being made before all the facts are known and without the backing of a full inquiry into the size and scope of the alleged fraud.

Large financial institutions helped inflate the housing bubble through tranching and securitizing mortgages at a frenetic pace while disregarding mortgage and foreclosure laws. Collecting fees from issuing mortgages then selling to investors securities backed by these mortgages allowed the largest financial institutions to pump up profits and home prices, while dumping any potential losses on homeowners, taxpayers, and investors. When the housing bubble burst taxpayers were forced to bail out the largest financial institutions. It is estimated that the federal government disbursed over $4.7 trillion to financial institutions, and guaranteed an additional $13.87 trillion, during the financial crisis.

Without a thorough investigation, it is impossible to truly estimate just how pervasive the defects in the foreclosure and securitization process are. Continued reports of wrongful foreclosures, forged documents, and an inability of servicers and banks to prove chain of title and the legal right to foreclosure, raises the very alarming possibility that these defects were endemic to the mortgage servicing industry across the country. The sheer magnitude of the potential fallout from these defects demands that we undertake a full investigation to uncover the true scope of wrongdoing before providing blanket immunity to the perpetrators.

I am also concerned that reports of a settlement in the range of $20 billion, as recently reported, may not adequately compensate the victims of the foreclosure crisis. As a result of the pump-and-dump scheme perpetrated by the nation’s largest banks that inflated – and burst – the housing bubble, an estimated 14 million Americans are underwater, owing $700 billion more on their homes than those homes are worth. A $20 billion settlement is woefully inadequate to compensate the wrongfully evicted or homeowners struggling to stay in their homes. Much more should be required of banks to provide meaningful help underwater homeowners and compensate foreclosure fraud victims.

A settlement with mortgage servicers must also require reforms to ensure such abuses do not happen again. The goal of servicing mortgages must be accuracy and adherence to the law, not expediency and corner-cutting. Confidence must be restored that proper transference of notes and mortgages was followed and clear chains of titles are available for all mortgages. Until then, the burden of proof must be on financial institutions to prove that they have the legal authority to foreclose. The Mortgage Electronic Registration System should be dissolved and shut down, and the shortcut that allowed banks to avoid hundreds of millions, if not billions, in local fees to local registrars of deeds be closed off. It is critical that large banks not be allowed to shirk their tax obligations to local governments. A settlement in this case must compensate state and local governments for taxes and fees which were owed but not collected.

The crisis in our housing and financial markets has shaken the confidence of the American people in our financial system and in government. Holding banks accountable for abusive and fraudulent practices, while compensating damaged homeowners, wrongfully evicted, local governments, and defrauded investors is vital to restoring that confidence. I urge you to ensure that any settlement with mortgage servicers over alleged foreclosure abuses does not absolve liability for crimes and wrongdoing that has yet to be fully investigated, and ensures just compensation for victims.

I appreciate your attention to this matter.

Sincerely,

U.S. Senator Maria Cantwell