The principles articulated by the Obama administration today are good guideposts for much-needed reforms in the mortgage market. The problems that plague consumers are well-documented. Too many consumers were steered into complicated mortgages that they did not understand and couldn’t afford. Too many families were forced into foreclosure because paperwork was lost, phone calls went unanswered, errors were not resolved, or documents were falsified.
“To protect consumers, there must be clear rules of the road and real consequences for breaking them. The Consumer Bureau is already hard at work making the costs and risks of mortgages clear upfront through our Know Before You Owe project. The financial reform law also requires us to create new mortgage servicing rules that hold servicers accountable for disclosing fees and fixing problems. We are also working with other federal agencies to develop common-sense national servicing standards. But having rules in place isn’t enough. We are closely monitoring mortgage servicers to make sure that no one gains an unfair advantage by breaking the law. Taking these steps to fix the mortgage market is good for consumers, honest businesses, and our entire economy.
“Documents were falsified.” Not “allegedly” falsified, not in some cases falsified, just the simple fact that documents were falsified. This is coming from the former Attorney General of Ohio, who filed the first lawsuit against a bank over the aforementioned falsified documents.
But now that bank, Ally, is banking a $270 million charge for “foreclosure-related matters.” You can reliably read this as the precursor to a settlement, where Ally and the other top banks will pay $5 billion at most, and then make principal reductions on investor-owned mortgages (paying off the penalty with other people’s money) totaling another $17 billion or so, to get out of the liability for routinely falsifying documents. We’re not talking about errors. Falsification connotes knowing fraud. It’s called foreclosure fraud for a reason.
Which brings me back to the question of why any AG would release said liability – which as we’ll soon see is probably a release of liability going forward – for a miniscule amount of relief for their constituents. In fact, as we know from Shahien Nasiripour, the only state that has any idea of the level of relief their constituents would get is California, which publicly opposes the settlement. These other AGs are flying in blind, when $15 billion of the $25 billion total is committed to another state, and there’s no guarantee that their affected customers will see one dime from the settlement.
Furthermore, in the one area where the settlement has been said to have improved, the terms of the liability release, as Yves Smith demonstrates, the letter from Nevada AG Catherine Cortez Masto about the settlement indicates that the release could be broader than recent reports suggest. Masto’s crucial Question #3 out of 38 says: “The State release contains a provision that prevents the State AGs and banking regulators from seeking to invalidate past assignments or foreclosures. Does this prevent States from effectively challenging future foreclosure actions that are based on faulty prior assignments?”
That’s a key question. All of the fabricated mortgage assignments and associated documents used to foreclose are back-dated, so the banks can simply say that they are covered by the release. Meaning that the release could cover ONGOING foreclosure fraud. The foreclosure mills basically invent new, “found” documents all the time, so this is a real concern. Yves writes:
The banks will pay an amount into the fund, and all issues relating to robo-signing and foreclosure will be released by the AGs: the banks will have a state level release from all bad assignment/transfer issues.
Note this does not stop private parties, meaning individual borrowers, from suing on these very grounds. But taking the AGs out of the picture prevents them from using their subpoena and prosecutorial powers to determine how widespread these abuses are and to negotiate broad solutions. So we’ll have the worst of all possible worlds: individual borrowers getting better and better at fighting foreclosures (or if you are a pro bank type, getting better and better at throwing sand in the gears) with the AGs sidelined in their ability to shed light on these issues and bring them to resolution on a broader basis. And given that the OCC has already entered into weak consent orders with the major servicers, and past servicing settlements have been violated, I remain skeptical that this deal will stop these abuses. Remember, bank executives piously swore in 2010 that they stopped robosigning, yet their firms continue to engage in that practice.
So this is a major release of liability. And in exchange, we’re supposed to be happy about an ongoing investigation with the participation of the New York Attorney General, something Harold Meyerson lauds today. What this fails to recognize is that this release would invalidate one of Eric Schneiderman’s key motions against Bank of New York Mellon, in his bid to stop the settlement between Bank of America and investors over mortgage backed security claims. Schneiderman used the argument of mortgage originators failing to convey loan documentation to the trusts as a key part of why the settlement should be disallowed. That’s the “pre-crisis” conduct he’s going on about. This settlement would make it nearly impossible to litigate that. To quote Tom Adams (from Yves’ post):
Economically, if the banks get released from failing to properly transfer thousands of mortgages into the trusts for a mere $5 billion they will have gotten the deal of the century. Especially because this settlement will do nothing to stop borrowers and courts from challenging foreclosures and continuing to expose the failure to transfer. So not only will investors pick up the cost of most of the settlement, but they will then still be exposed to the bad transfers, while the banks get a get out of jail free card.
Bill Black has more on the lack of teeth to the prosecutions here.
When I first got wind of this new fraud unit, I thought that its goal was to grease the skids for the settlement. It’s really hard to see how events have rejected that thesis. So far, Schneiderman, Kamala Harris and Beau Biden remain nominally opposed to the deal. Their fellow AGs ought to understand what they’d be giving up here.
UPDATE: And now we have a possible indication that joining the robo-signing settlement is a condition of joining the federal/state RMBS working group:
Oregon Attorney General John Kroger likes what he sees in final deal between the multistate AG coalition and mortgage servicers and said Wednesday he will sign onto a settlement.
But Kroger also said he wants to join the federal task force investigating securitization and other lending mispractices at the largest banks [...]
A spokesperson for Iowa AG Tom Miller, who has led the talks, said the deadline was extended for states to sign the deal to Feb. 6 from Friday at the request of an undisclosed AG. The multistate coalition will file the judgment in federal court assuming it gets a sufficient number of sign-ons.
Oregon was one of the states that met with dissident AGs prior to the announcement of the RMBS working group. Kroger also lists specific numbers to which borrowers in his state should expect (“$100 million to $200 million in relief”), so that’s new.