Yesterday’s on-the-record progressive media conference call with HUD Secretary Shaun Donovan was clearly designed to allay concerns about the imminent servicing settlement (in turn it raised new issues, as I mentioned in this post).
Donovan stressed that the real value of the settlement could be twice as much in principal reduction as has been reported, and he stressed the importance of enforcement and monitoring to ensure this settlement does not disappoint as much as the 2008 Countrywide settlement, which even Donovan admitted “has not delivered the relief it was designed to deliver.” He added that under the terms of this deal, the credit for principal reduction would only be given after the borrower receives the deal and stays in the home making payments for at least 90 days, with large financial penalties (above 100%) for banks that fail to meet their obligations. The monitoring of this would be led by North Carolina banking commissioner Joseph Smith, and it would include an element of self-policing through quarterly reports by the banks, and a committee structure that could bog down enforcement actions for months.
And Donovan highlighted the narrowness of the release, which even allows a lawsuit like the one Eric Schneiderman put forward on Friday against three banks and MERSCORP for deceptive practices. That lawsuit represented a carve-out on the settlement which Donovan acknowledged in a general sense. “There have been discussions about potential carve-outs that would be available… I’m not prepared to give specifics, but there have been some other discussions similar to that, relative to not just particular suits, but relative to specific Supreme Court decisions that vary from state to state.” That’s pretty vague, but he’s basically saying that you could see different customized settlements based on both state law and the relative aggressiveness of various AGs, should they choose to join the settlement.
But I would say one other reason this call was put together was to pre-but this blockbuster New York Times story today, which uncovers a secret report from a Washington law firm showing that robo-signing abuses went back a decade, and were contemporaneous with the housing bubble and crash, rather than simply “post-bubble” cover-up conduct.
Years before the housing bust — before all those home loans turned sour and millions of Americans faced foreclosure — (Nye Lavalle,) a wealthy businessman in Florida set out to blow the whistle on the mortgage game.
In 2003, when home prices were flying high, he compiled a dossier of improprieties on one of the giants of the business, Fannie Mae.
In hindsight, what he found looks like a blueprint of today’s foreclosure crisis. Even then, Mr. Lavalle discovered, some loan-servicing companies that worked for Fannie Mae routinely filed false foreclosure documents, not unlike the fraudulent paperwork that has since made “robo-signing” a household term. Even then, he found, the nation’s electronic mortgage registry was playing fast and loose with the law — something that courts have belatedly recognized, too.
You might wonder why Mr. Lavalle didn’t speak up. But he did. For two years, he corresponded with Fannie executives and lawyers. Fannie later hired a Washington law firm to investigate his claims. In May 2006, that firm, using some of Mr. Lavalle’s research, issued a confidential, 147-page report corroborating many of his findings.
And there, apparently, is where it ended. There is little evidence that Fannie Mae’s management or board ever took serious action. Known internally as O.C.J. Case No. 5595, in reference to the company’s Office of Corporate Justice, this 2006 report suggests just how deep, and how far back, our mortgage and foreclosure problems really go.
The report from Baker & Hostetler is quite incredible. It states boldly that “It is axiomatic that the practice of submitting false pleadings and affidavits is unlawful,” and it added that servicer abuse (things like adding illegal fees without the homeowner’s knowledge) was similarly pervasive. The report agreed that MERS had legal issues with foreclosing in many states because it didn’t hold the underlying notes. There was total sloppiness in the care of promissory notes and other important documents. Baker & Hostetler’s conclusion was that Fannie Mae must address this right away. They, of course, did nothing. And if this was true at Fannie Mae, it is also axiomatic that it was true of the entire mortgage industry.
Therefore, it’s difficult to separate the conduct of MERS and falsified documents with the conduct of illegal, failed securitizations. They were all part of the same fraud, actually.
We already knew about some of this because of an FHFA IG report from October, showing that Fannie Mae knew about foreclosure fraud abuses among law firms in its retained attorney network (the firms it used for foreclosure actions) going as far back as 2003. This Baker & Hostetler report, however, goes further and is more comprehensive. As I said in October, “The banks basically had free reign to do whatever they wanted on foreclosures and housing, and the federal agencies charged with regulating this either looked the other way or actively participated.”
I don’t know if this report will delay the rush to settlement. But it calls into sharp relief what will be settled: years, decades actually, of ongoing fraudulent conduct. At least part of it will be cleaved off and settled, in many cases with investor money rather than money from the perpetrators of the fraud, the banks. And though private right of action would be kept available, the report correctly pegs why you want law enforcement dealing with this instead of individuals:
The report didn’t conclude that Mr. Lavalle was wrong on the legal issues. It simply said that few people would have the financial resources to challenge foreclosures. In other words, few people would be like Mr. Lavalle.
“Courts are unlikely to unwind foreclosures unless borrowers can demonstrate that the foreclosure would not have gone forward with the correct pleadings, which is a difficult burden for most borrowers to meet,” the report said. “Nevertheless, the issues Mr. Lavalle raises should be addressed promptly in order to mitigate the risk of exposure to lawsuits and some degree of liability.” Mr. Cymrot declined to comment for this article.
In other words, individual borrowers will be outgunned. Only the resources and expertise that can be brought to bear by state and federal regulatory and law enforcement officials is significant. And at least part of that would go away in a settlement.