The “new” details of the proposed foreclosure fraud settlement, now alleged to be “just around the corner” for the ninth straight month, have mostly been revealed before by Shahien Nasiripour of the Financial Times or others. Under the proposed agreement, between $19 and $25 billion (depending on California’s inclusion, which is unlikely, so I’d expect the smaller number) would be distributed from the banks, in three separate areas:
1) cash payments to individuals, states and the federal government, totaling around $5 billion. This would include the “sorry we foreclosed on your home without the proper information, here’s a check” payment in the amount of around $1,500 to wrongfully foreclosed borrowers. The rest would go to state and federal foreclosure mitigation programs, like legal aid services, housing counseling and mandatory mediation.
2) refinancing of underwater mortgages. Somehow this is seen as a penalty for the banks, to force them to refinance people deeply underwater. Keep in mind that many of these borrowers, without the ability to access low mortgage rates like their counterparts, would fall into default, at which point the bank would make much less on the mortgage over the long term. Refinancing is not a penalty in any respect. What’s more, only those who have been current for several months would be eligible. What’s MORE, there’s already an existing program extending refis to underwater borrowers through Fannie and Freddie; this just adds on to that program for bank-owned underwater homes, a very small subset of the population.
3) Principal reduction. This is where most of the money would get targeted, but again we’re talking credits – banks would do loan modifications reducing principal and get dollar-for-dollar credits toward the target. The numbers here are still not really enough to deal with the morass of underwater and troubled loans in America, even if you think the book value of the write-down would be higher than the scheduled amount.
And then there’s this:
In return for the $5 billion in cash and the $20 billion in credits, the banks would be released from claims against them for servicing and foreclosure abuses that might be brought against them by the states and the federal government. The states also release the banks from origination claims, that is, claims they might face for all the fraud and duplicity they engaged in when they made bad loans at the height of the housing craze. The banks do not get immunity or a release of for individual claims by homeowners–just a release from past practices State- and Federal-initiated claims. They also don’t get released for securitization abuses of the kind Citibank and Goldman Sachs have been investigated for.
The releases, then, are pretty comprehensive, on servicing, foreclosure and origination. Homeowners can sue, but the banks know well that they can outgun individuals in court much more easily than an entire state. Securitization abuses would still be fair game for the states, and this is seemingly being done to entice AGs like Eric Schneiderman into the fold, though that seems unlikely. Still, even with securitization fraud available, you’re talking about the AGs only able after the settlement to go to bat for rich investors, not individual homeowners fleeced by banks. And despite no meaningful investigations, all this would be given away for a relative pittance.
The government could point to the Office of the Comptroller of the Currency foreclosure reviews as another avenue for relief for homeowners, but these are almost certainly complete shams, designed to get the banks off the hook for systematic abuses. The banks got to choose the “independent” reviewers themselves, and they pay their salaries. And these reviewers are completely conflicted:
Michael Olenick, a specialist in mortgage research, said he spotted a conflicted consultant after one hour of digging. Allonhill, a smallish firm appointed by Aurora Bank, a mortgage servicer, is headed by Sue Allon, whose previous small firm acted as credit risk manager in a 2003 mortgage pool for which Aurora oversaw the loans’ servicing. The prospectus on that deal noted that Murrayhill, Ms. Allon’s former firm, would “monitor and advise the servicers with respect to default management of the mortgage loans.” It also said that Murrayhill would make recommendations to the servicers regarding delinquent loans.
Now, under the comptroller office’s program, Ms. Allon’s firm may be analyzing the treatment of borrowers on whose loans it acted as credit risk manager. “This conflict is so deep and so obvious, how could anybody have missed it?” Mr. Olenick asked.
Incidentally, the years under review by the “independent” consultants are 2008 and 2009, well after the bubble years ended. And borrowers would lose the ability to challenge their loans under the OCC reviews, leaving them unable to collect down the road. The bank can still take an individual’s home, but the individual cannot sue on the origination fraud or break in the chain of title.
To be clear, I still don’t believe there’s any imminent settlement coming. Too many states would exempt themselves from this deal for the banks to find it worthwhile. We’ve crossed too many “imminent” deadlines before.
But state and federal prosecutors have multiple avenues of inquiry to prosecute banks for their wide range of overlapping fraud, any of which would force much larger remuneration than what can be assumed by the AG settlement or the OCC review. But far too few law enforcement officials understand the nature of their job as being to prosecute wrongdoing, rather than facilitate it.