According to the Wall Street Journal, the foreclosure fraud settlement could finally get released today. Nick Timiraos goes through the “trade-offs” in the settlement, which seem to only go in one direction, with state and federal officials easing off the banks in exchange for the hope of more “relief” for borrowers. I documented this yesterday in looking at the ever-expanding “tight release,” which now incorporates multiple whistleblower lawsuits and other liabilities for the banks. Here we see how the banks won the right to pay the penalties in the settlement with someone else’s money:
The banks that are party to the settlement—Ally Financial Inc., Bank of America Corp., Citigroup Inc., J.P. Morgan Chase & Co ., and Wells Fargo & Co .—heavily and publicly resisted initial government proposals that they absorb the hit for write-downs of loans held by investors for which the banks collect payments. They argued that doing so amounted to transfers of wealth to Fannie Mae, Freddie Mac, and investors in mortgage-backed securities such as hedge funds and pensions.
Banks agreed to cut loan balances, a step they had long resisted, but they won’t only get credit against their shares of the $25 billion settlement for reducing balances of loans they own. In some cases, they can receive partial credit if investors shoulder the cost of writing down loans the banks service. The banks also will receive credit for some steps they are already taking, such as approving short sales, where a home is sold for less than the amount owed, according to draft settlement documents reviewed by The Wall Street Journal.
So instead of transfers of wealth to Fannie and Freddie and MBS owners, we have transfers of wealth to the banks, particularly because they don’t have to wipe out their second liens (typically home equity lines of credit) when the first gets written down, boosting the value of what were thought to be worthless secondary mortgages.
Timiraos gives it away when he writes that “Those concessions to lenders allowed federal officials to achieve the large dollar figure.” It was all about a big number that they could put into the press. Banks getting credit for short sales they’re already doing, or for waiving deficiency judgments (which could take up as much as $1.7 billion of the settlement) which they would never pursue, equals money for nothing.
So looking to the settlement for not only relief, but justice for those who perpetrated the largest consumer fraud in history, is a fool’s errand. However, a little-noticed ruling last week from a federal appellate court could clear the way for what the Administration failed to do for so long – mandatory HAMP modifications:
A Chicago homeowner who was denied participation in a federal mortgage modification program can sue her lender for fraud and other claims, a federal appellate court said this week.
Lori Wigod sued Wells Fargo in 2010 after the bank had deemed her ineligible for the Home Affordable Modification Program, or HAMP. Wigod alleged that Wells Fargo had broken a promise in 2009 to permanently reduce her loan payments on a more than $700,000 mortgage after giving her a four-month trial modification.
U.S. District Judge Blanche Manning threw out her complaint last year, ruling that Wigod’s claims were barred by federal law.
The 7th Circuit U.S. Court of Appeals, in an opinion released Wednesday, overturned Manning’s decision and revived most of Wigod’s suit. The ruling is likely to send shivers through the banking industry, which up until now has largely been shielded from HAMP-related lawsuits.
This has the potential to be a huge lawsuit. Throughout the life of HAMP, the banks have had discretion to string along borrowers, to deny permanent modifications for obscure reasons after granting trial mods, and to trap homeowners and threaten foreclosure after the fact. The 7th Circuit did not rule on the merits of the case. but they allowed it to go forward, which means that Lori Wigod will get her day in court. And if she can win on these counts, it sets the precedent that every borrower denied a permanent modification can go to court to obtain one. This would be a nightmare for the banks; you’re talking about nearly a million borrowers. And it would convert HAMP from a discretionary to almost a mandatory modification program. It would accomplish what the Treasury Department refused to do. Wigod, incidentally, wants class-action status for her suit.
This is the more fruitful territory, in my opinion. You have increasing lawsuits seeking back fees from MERS; Houston’s Harris County just joined a lawsuit from Dallas seeking $10 billion in fees. You have individual laws in states like Oregon, preventing dual track and mandating mediation for borrowers facing foreclosure. And you even may have some enterprising Attorneys General pushing the limits of what claims they can pursue. None of these are on their own sufficient for accountability. But enough of them put together can certainly go further than a disappointing settlement.