Former Obama Administration transition official Mike Lux was the first to report that the liability release on foreclosure fraud “looks tight.” In other words, the release is limited to mostly post-crisis conduct, basically robo-signing and servicer abuse. Private right of action would still be available under any settlement – Attorneys General cannot stop the right of an individual to sue over misconduct – and there would be no criminal liability release. In addition, these avenues of inquiry would still be available.
No release on any fair housing, fair lending, or civil rights claims.
No release on any Federal Housing Finance Agency or Government-Sponsored Enterprise claims.
No release on any Consumer Financial Protection Bureau claims (which would admittedly be modest, since the Bureau was only established in July 2011).
No release on tax liability claims.
No release on criminal liability claims.
No release on SEC claims.
No release on National Credit Union Association claims.
No release on FDIC claims.
No release on Federal Reserve claims.
No release on the “vast majority” of origination claims.
No release on the “vast majority” of securitization claims, including all claims of state pension funds.
No release on legal liability surrounding Mortgage Electronic Registration Systems (MERS).
Sam Stein and Zach Carter back this up with their reporting. And it matches with mine. My sources tell me that the release is one area where progressive pressure has dialed back the initial offer, which actually included securitization, among other things. “It looks substantially different on the release question today than it did in August,” said one official close to the talks. Of course, the current terms have been enough to keep at least Beau Biden and Kamala Harris off the deal, and Eric Schneiderman actually remains opposed to the final language, so it’s clearly not perfect.
But there are several things related to this. First of all, the liability release isn’t the only issue with the settlement. The penalty is probably paltry for the extent of the crime, which remains uninvestigated to any thorough degree. Under the settlement, 750,000 wrongfully foreclosed borrowers – people who had their houses ripped away from them – will get $1,800. That’s borderline insulting. The principal reduction will do very little for the housing market. And we’re talking about systemic abuses covering up a greater fraud in origination and securitization that we’re only now getting around to investigating.
Furthermore, enforcement is a MAJOR question. I don’t care what kind of penalty you get on paper, it’s meaningless if the banks just blow it off, as they have done historically. And the banks can, under the deal, stick other people with the bill for the fraud, like mortgage backed securities investors. What’s more, you’re talking about an entire model – servicing, the use of MERS, mortgage documentation – that I would say is irreparably broken, and we haven’t seen how that will be standardized and fixed so we aren’t just pretending that we’re using legitimate documents in the housing market, and that MERS is a peachy entity, and that the servicers have their back office and servicing software fixed. Those are huge, ongoing problems, and there must not be any release of liability without untangling that mess, regardless of the penalty (which is too small).
Then you get into the question of why the banks would want to do this settlement at all, if they won’t get a full liability release, and the claims will still hang over the head of their businesses and their stock price. Eric Schneiderman announced today subpoenas for 11 banks coming out of the new mortgage fraud task force, and he announced the participation of all the Justice Democrats in the investigation:
Schneiderman said in a press conference Friday that he will be joined by Delaware AG Beau Biden, Massachusetts AG Martha Coakley, Nevada AG Catherine Cortez Masto, California AG Kamala Harris and Illinois AG Lisa Madigan.
U.S. Attorney General Eric Holder said 15 lawyers and investigators are working with the group. The FBI will add 10 agents, and another 30 lawyers and staff will join the group [...]
“We have jurisdiction to go after every aspect of the mortgage bubble and the crash of the financial market,” Schneiderman said. “We have jurisdiction over every MBS issued over the last decade with Delaware and New York joining the group.”
Holder said if there is evidence of it, civil and criminal charges will be brought.
So why settle, with this still out there? Well, because the banks are basically afraid to foreclose right now. The liabilities in securitization and origination are real but different. The banks are having trouble clearing their product because they don’t know their liability. So if they get a settlement, where they can spend other people’s money and get to fire up the foreclosure engine again, why wouldn’t they get on board? It gives them clarity, the costs are spread out over many years and aren’t even theirs in many cases, and they can move on. The end result of a settlement would be MORE foreclosures, not less, as the market “clears,” to use the parlance.
So while this narrow release is decent enough, I don’t know why you wouldn’t investigate the full nature of this – the registers of deeds have offices full of fraud, literal crime scenes – rather than moving on to the next thing and trying to make that the big reckoning.