When I started digging into whether this Monday meeting with HUD and DoJ officials to go over a proposal for a foreclosure fraud settlement was legitimate, I couldn’t find one state Attorney General who mattered actually committed to showing up. When I say AGs who “matter,” I mean the ones who have been critical of a settlement in the past. I mean the Justice Democrats. I mean Eric Schneiderman in New York, Beau Biden in Delaware, Martha Coakley in Massachusetts, Catherine Cortez Masto in Nevada, Kamala Harris in California, not to mention the AGs from Hawaii, New Hampshire, Missouri, Mississippi, Maryland, Kentucky, Minnesota, Oregon and Montana who showed up (either themselves or representatives) at the meeting in DC last week to discuss alternatives to a settlement. I mean them. They aren’t going to Chicago, by all accounts.
That doesn’t mean the negotiators aren’t trying to push a deal, of course. And Shahien Nasiripour reports that the terms of the deal have been set and will get circulated to the AGs for approval.
The proposed pact would potentially reduce mortgage balances and monthly payments by more than $25bn for distressed US homeowners, these five people said.
The tentative agreement still must be approved by all 50 state attorneys-general, and negotiators have previously missed proposed deadlines. Participants described the proposal terms as set, meaning the states will be asked either to agree to them or decline to participate.
The amount of potential aid is contingent on state participation and would decrease significantly if big states do not sign the agreement. New York and California are among several states that have voiced concerns about the terms of the proposed deal with Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial. New York and California are particularly concerned with the part of the deal that would absolve the banks of civil liability for allegedly illegal mortgage-related conduct.
California borrowers would be eligible to receive more than $10bn in aid if the state were to agree to the terms, according to several people involved in the talks.
But while Shahien, who has been pretty good on the reporting of this, says that Administration officials and the AGs who brokered the deal will meet with Democratic AGs on Monday (with a conference call with Republican AGs set for Monday night), he does not confirm the attendance of any of the AGs involved. My sense is that this settlement proposal comes from the Obama Administration, Iowa AG Tom Miller and the small group of negotiators on the executive committee of state AGs, and pretty much nobody else. There’s just no guarantee that any of the Justice Democrats – or any of the Republicans, for that matter – will agree to any of it.
The Administration is trying to put the squeeze on the state AGs, particularly California, dangling $10 billion in “aid” in the deal. The aim, as Marcy Wheeler writes, is to increase pressure on Kamala Harris to agree to the settlement. The core issues haven’t changed, however. Harris called the settlement inadequate last year and it remains just as inadequate. This is a $25 billion settlement when there is $700 billion in negative equity in the country. This is a settlement that, according to HUD Secretary Shaun Donovan, will help 1 million homeowners, when 10.7 million are underwater and millions of others have been wrongfully foreclosed upon. This is a settlement that could put $17 billion of credits toward principal reduction (the rest of the money would go to legal aid, refis, short sales, token payoffs to foreclosed borrowers, and penalties), when there is more than twice as much sitting unused in an account as part of HAMP.
And these credits would get paid mostly by the owners of mortgage-backed securities, investors rather than the banks themselves.
The proposed settlement is structured as a three-year system, under which banks would receive credit toward a target dollar amount by restructuring mortgages held on their own books or owned by investors through mortgage-backed securities (that do not involve government guarantees).
The banks would receive less credit if they reduce balances for loans packaged in bonds or by reducing monthly payments through cuts in borrowers’ interest rates. In one scenario, the banks would get about 50 cents of credit for every $1 of reduced mortgage principal in home loans used to back bonds. In another scenario, balances on loans held on the banks’ books that are cut in the first year of the deal would receive $1.25 credit. This means, under certain circumstances, the aid to homeowners would be less than the aggregate size of the settlement, people familiar with the matter said.
Investors in US home mortgage bonds may have to swallow significant losses as part of the deal, people familiar with the matter have said. Sherrod Brown, an Ohio Democratic senator, sent a letter to negotiators this week urging them not to allow the banks to pass on the cost of the settlement to pension funds and other investors.
According to previous reports, investors would not have approval on the modifications. So the majority of the settlement, where banks get the release of liability, would get paid with other people’s money. Servicers actually make out because they would reimburse themselves for the loan modifications, taking money that would otherwise go to the investors. The investors, in short, would get massively screwed by this deal.
But again, I’ve seen no evidence that anyone outside of the small circle of the Administration and the AGs on the executive committee negotiating the deal actually agree to it. Call it the 12-state deal, rather than the 50-state one. This is only closer to getting done in the sense that the folks who have wanted to cave all along are ready to do so.