“Attorney General Kamala D. Harris Secures $18 Billion California Commitment for Struggling Homeowners,” the headline blares. But wait: the foreclosure fraud settlement is only a total of $25 billion. Even if you believe HUD Secretary Donovan’s figures about principal reduction credits being worth more in actual principal reduction, you don’t get higher than $40 billion. How did Harris get so much?
The California Attorney General breaks it down this way, from the press release:
California secured the $18 billion agreement as part of a national multistate settlement to penalize robo-signing and other bank servicing and foreclosure misconduct. The agreement comes after California departed from the multistate negotiations last September when the estimated relief to California was $4 billion. Attorney General Harris insisted on more relief for the most distressed homeowners, meaningful enforcement, and the ability of California and other states to pursue investigations into misconduct.
Attorney General Harris also obtained separate, enforceable guarantees to ensure that banks will be accountable for their commitments to California. As part of the separate California guarantee, banks must enact a minimum of $12 billion in principal reductions for California homeowners. Failure to achieve this minimum level of reductions will result in substantial cash payments of up to $800 million that the banks will have to pay to the state. Unlike the larger multistate agreement, which is enforceable in a federal court in Washington, D.C., this payment provision empowers the Attorney General to summon the banks to California state court.
This is known as a side deal. California has a separate agreement with the five servicing units at the big banks to achieve this level of commitment. She breaks it down this way:
• $12 billion for either principal reductions or short sales, which she claims will help around 250,000 homeowners;
• $849 million for refis;
• $279 million for those “sorry we stole your home” $2,000 checks;
• $1.1 billion for forbearance, transition assistance, checks to communities to fix blight (which is part of the $2.75 billion distributed to states for foreclosure mitigation);
• $430 million in additional costs
• $3.5 billion to “relieve 32,000 homeowners of unpaid balances remaining when their homes are foreclosed.” That’s essentially to stop deficiency judgments. I assume that the banks will just back off, so this represents money they won’t collect.
So how does this affect the larger settlement? Well, it means that the other states will get less. Period. HUD Secretary Shaun Donovan tried to claim in a conference call over the weekend that this would not impact other states, but you’re talking about $12 billion in principal reduction – out of either $17 billion in credits, or the $32 billion in expected principal reduction dollars – going to one state. Donovan actually said “Do not make the mistake of equating more certainty for some states with taking resources away from other states.” He mused that banks could always go over the minimums set in this agreement for principal reduction. Um, OK.
In addition, there’s supposed to be a part of the agreement that mandates no geographic discrimination on the part of the servicers for any relief. But how is a side deal like this not in violation of that? It’s unclear.
What is clear is that a lot of states will get a largely mythical benefit out of this. It’s true that California and Florida, which have the most homeowners in trouble, should get the most benefit (under the terms I’m seeing, Florida could get up to $7.6 billion for principal reduction). But under the sample term sheet I have, Arizona, a state ravaged by the foreclosure crisis, stands to get just $1.3 billion in principal reductions out of the settlement. The same for Nevada. You would have to basically do the math on underwater borrowers, but it looks inadequate at least for them.
Harris did get guarantees that the hardest-hit counties in the state would get their principal reductions in the first year of the three-year settlement. And she plans to expand her Mortgage Fraud Strike Force, and the investigative alliance with Nevada, to collaborate on more investigations outside what’s given up in the settlement. Plus, she will “continue to fight for principal reductions for the approximately 60 percent of California homeowners whose loans are owned by Fannie Mae and Freddie Mac.” And she expects a legislative menu of bills to deal with servicing in the state.
But with this side deal, it does look like Harris fleeced the rest of the country, although you have to keep it in perspective, because the overall take is so very paltry.