I want to circle back to today’s New York Times story on the looming foreclosure fraud settlement. With the return to talks of New York and California (though I don’t really think they were ever all that far away), we can infer that pretty much every other state, save perhaps Delaware and Nevada and Massachusetts, are on board with the settlement. The reason is simple: there’s a most-favored nation clause written into the settlement. That means that if a renegade AG successfully sues a bank and gets back improved terms or financial penalties, all states would benefit with an increase on the settlement terms. So this creates a massive free-rider problem. A state that has not done meaningful investigations or prosecutions can simply sit back and let the others do the work. So in the end, we’re talking about a 45-state settlement or a 47-state settlement, or maybe even all 50 if Delaware and Massachusetts and Nevada get carve-outs for their existing cases.

Let’s move on to California. Kamala Harris wants to do investigations on origination fraud, on borrowers not learning the true terms of their deals until after signing. But the 2008 Countrywide deal extinguished many of those claims, and on others, the statute of limitations has run out. So by calling the term sheet “inadequate,” I see that Harris was playing for a bigger deal, perhaps a way to access longer federal jurisdictions on origination claims, more of a share of the financial benefit, or something. Her statement today reads like this:

“For the past 13 months we have been working for a resolution that brings real relief to the hardest-hit homeowners, is transparent about who benefits, and will ensure accountability,” Ms. Harris said in a statement. “We are closer now than we’ve been before but we’re not there yet.”

Considering some of the other pieces in the article, I’m not sure we can say that real relief will go to the hardest-hit homeowners. First of all, $3 billion of the proposed $25 billion settlement is earmarked for refis for bank-owned loans, on borrowers who are underwater but current. This looks like a fallback for when the refi plan announced by the President last week fails in Congress. By definition, current borrowers are not the hardest hit. There’s a reason to allow them to refinance, but it has a bit more to do with stimulus than it does housing (underwater borrowers are vulnerable to economic shocks, so a refi does help at some level).

I would argue that the hardest-hit families are the ones who lost their home to foreclosure over this time period, amid errors in documentation and general servicing. I am told that some of the error rates on servicing found in investigations that will be made public as the settlement gets released approach 60%. So those are the hardest-hit. They get a check for $2,000. And they have to know to ask for it:

The deal would also provide checks for about $2,000 to roughly 750,000 who lost homes to foreclosure.

Those figures are contingent upon the number who respond to the offer, which is likely to go to people who lost their homes between Jan. 1, 2008, and Dec. 31, 2011.

The real issue for Harris is that she wants to preserve the right of California state officials and pension funds to sue over false claims in securitization, which I think is an important thing to preserve. We also learn why Florida’s Pam Bondi has been running her mouth about California’s participation in the settlement: she stands to gain a chunk for her state as a result (though this is contradicted in the very next sentence:

Another critical issue for California is narrowing the amnesty given to banks because under the state’s False Claims Act, state officials and huge pension funds like Calpers would be able to collect sizable monetary damages from the banks if they could prove mortgages were improperly packaged into securities that later soured. What is more, California’s participation would result in having more money available for many other states, including an estimated $500 million in additional money for Florida.

But the agreement’s terms do not guarantee minimum allocations of mortgage relief by state.

How does Florida get an automatic $500 million, but there are no guaranteed minimums? That doesn’t make much sense. Administration officials reconciled this to me by saying that each state has certain side deals that don’t necessarily impact on the total settlement figures. But with numbers that big, wouldn’t they have to? Shaun Donovan responded to this in a weekend conference call by saying that there is no geographic discrimination in the deal, and that “We’re not capping the amount of relief that can be provided. There’s always an ability to do more principal reduction, more refinances than required.” OK, but the problem with past settlements has been that the banks have done far less than their requirements, not more.

The LA Times has more on this development. Coalitions like Campaign for a Fair Settlement and the New Bottom Line blasted the proposed settlement over the weekend, but they left this playing field at a key moment, when the Schneiderman task force was named. That broke the unity of opposition on the left. Maybe that’s because there is still an opportunity for meaningful relief down the road. I’ll look at that in a later post. But as for this settlement, I’d say it’s a matter of days now.