I spent last night reading most of the foreclosure fraud settlement documents that were filed in federal court in DC yesterday. I’m going to lay out my findings in a series of posts. Let’s take a look at the penalties being paid to the states.

There’s a discrepancy between the numbers initially contemplated to be delivered to the states and the eventual numbers in the settlement documents. Simply put, all of the numbers in the settlement documents are slightly lower. For example, the spreadsheet showing very specific settlement numbers released on February 9 shows that Alabama would receive $26,474,753. In reality, in the settlement documents, Alabama will receive $25,305,692. New Jersey’s haul from the February 9 spreadsheet? $75,520,276. Their actual total? $72,110,727. The reductions range from $100,000 (in the case of Wyoming) to $20 million (in the case of California). I didn’t do a full tally of the total reduction, but my back-of-the-envelope guess would be over $100 million.

What accounts for this? Probably this little nugget buried in a Reuters article on the settlement:

Some banks negotiated separate requirements.

Ally Financial, for example, negotiated a steep discount on the fine part of its settlement, based on an inability to pay it, according to people familiar with the matter.

It was expected to pay some $250 million, but the Justice Department cut it to around $110 million, these people said.

In exchange, it committed to solicit all borrowers in its own loan portfolios and to offer to cut principal for delinquent borrowers down to 105 percent of the home’s value. It also offered to refinance underwater borrowers who are current on their payments.

Gee, I didn’t know that federal and state civil penalties had a “pay what you can” quality to them.

This matches up pretty well with the reduction in fines for the states. And let’s be clear: those fines, and the fines to the federal government, are the only hard dollars in the settlement deal. The rest is air, money in “credits” to go toward principal reductions, short sales, refinancing, and as we learn in the documents a variety of other possibilities, many of which the banks habitually do anyway. So now we’re moving away from the banks paying penalties up front and toward the banks getting credit for their current practices over a period of a number of years. And in Ally’s case, I think we should be more than a little shocked that an established bank could not pay a $250 million fine.

About those state funds: there is nothing to stop state AGs from using them in any way they see fit. Note the weasel words in this language (which I’ve bolded):

Each State Attorney General shall designate the uses of the funds
set forth in the attached Exhibit B-1. To the extent practicable, such funds shall be used for purposes intended to avoid preventable foreclosures, to ameliorate the effects of the foreclosure crisis, to enhance law enforcement efforts to prevent and prosecute financial fraud, or unfair or deceptive acts or practices and to compensate the States for costs resulting from the alleged unlawful conduct of the Defendants.

No more than ten percent of the aggregate amount paid to the State Parties under this paragraph 1(b) may be designated as a civil penalty, fine, or similar payment. The remainder of the payments is intended to remediate the harms to the States and their communities resulting from the alleged unlawful conduct of the Defendant and to facilitate the implementation of the Borrower Payment Fund and consumer relief.

You have that strong word “shall” competing with “to the extent practicable.” And indeed, several states have already made clear that they will be diverting much of the settlement into their state budgets. More make it clear in the settlement docs, more on that later.

That’s it for this edition. Next we’ll look at the menu of credits.

UPDATE: A reader writes in to note that inability to pay didn’t stop Ally from paying dividends to the US government on its TARP stake totaling $134 million. So when Treasury wants it to look like TARP works, Ally has to pay. When the matter involves homeowners, Ally can cry poor.