California’s side deal to the foreclosure fraud settlement is a much simpler document, and one focused primarily on principal reductions. Under the agreement, three of the five banks in the settlement – Wells Fargo, Bank of America and JPMorgan Chase – must engage in $12 billion in principal reductions, deeds-in-lieu or short sales in the state, and those credits cannot apply to actions like donating homes, bulldozing homes or waiving deficiency judgments.
The flip side to this is that this is a dollar-for-dollar credit scenario – any first lien or second lien modifications that get written down qualify for full credit in California’s side deal. This differs from the national settlement, where certain modifications get varying amounts of credit. But it does guarantee $12 billion in actual principal reductions and other actions relatively helpful to homeowners for California. At least for the most part. Like the national settlement, servicers get a bonus for first-lien principal reductions taken in the first 12 months of the start date. But they get more credit – 25% – if those write-downs come in the “Hardest Hit California Counties,” defined as the 12 counties in the state with the highest annualized foreclosure rates. For principal reductions in other counties, servicers get a 15% bonus. I think my views on the settlement are well-known, but in the context of it, California did a reasonable job in this side deal of actually targeting the (admittedly inadequate) consumer relief to actual consumer relief.
What’s more, California has an additional enforcement layer on its side deal, one that looks a bit stronger than the national settlement’s enforcement (which is actually still to be determined, Abigail Field correctly points out). Instead of the self-reviewing mechanism in the national settlement, in California, an independent monitor “shall determine the amount of Consumer Relief credit that Servicer has earned towards its obligations under the California Agreement and shall determine any bonus and determine any payment owed pursuant to the above terms,” on a quarterly basis. So California’s monitor makes the rules and determines the credit, rather than the national version, where the banks self-report and the monitor checks the work. In addition, the California monitor can take feedback and complaints from homeowners. There are penalties for failing to meet obligations under the side deal, in the form of cash payments to the AG (which actually are capped at between $200-$400 million, which seems a bit low, especially for BofA, which has the bulk of the obligation in California because of the legacy of Countrywide, which was huge here). Disputes between the monitor and the servicers will get settled in federal district court in DC.
In order for this side deal to be successful, it requires a dedicated enforcement monitor who is not likely to cut the banks a break. And state Attorney General Kamala Harris made a pretty good selection.
Ambitious programs to help struggling homeowners often have failed to live up to their hype, consumer law expert Katherine Porter said.
Now the UC Irvine law professor will be in a position to make sure Californians get everything they’ve been promised by the country’s largest banks in the recent $25-billion nationwide settlement over foreclosure abuses.
California Atty. Gen. Kamala D. Harris on Friday named Porter as her independent monitor of the state’s portion of the deal — as much as $18 billion worth of relief to homeowners over the next three years.
“I’m going to be checking to make sure the rules are being followed,” Porter said. “We need to restore confidence that financial institutions are doing the right thing.”
I’ve met Katie Porter one time. She writes at Credit Slips and, back in 2007, did one of the first clinical studies of mortgage servicer misbehavior and abuse, in that case with respect to bankruptcy. She is one of the pre-eminent legal scholars in this field, and she knows every single trick that the servicers have done over the past decade. There are few other people as equipped to handle the job of the monitor than her, in my estimation. And I hope that she uses this pathway, with the evidence she will compile, to make a broader effort to blow the whistle on a broken and corrupt mortgage servicing industry. And that’s likely. Here’s an op-ed from Porter about the settlement, from Feb. 14.
The effectiveness of the settlement is going to turn on its enforcement. What matters is what the banks do – and what the government makes them do – not the promises on paper and at press conferences [...]
The success of the settlement rests on attorneys general making sure that the banks’ careless and callous practices have been replaced with the ability to respond efficiently and fairly to troubled homeowners. Four years of nagging from the federal government has not led the mortgage servicers to make the needed changes. Paperwork still gets lost; consumers still are unable to get a straight answer on eligibility for programs; and foreclosure rescue scams still flourish because desperate homeowners have nowhere else to turn on the eve of losing their homes. The settlement recognizes the problem of the banks’ mindset. It requires an independent outside monitor to report on the banks’ compliance and imposes substantial financial penalties if the banks do not deliver the relief promised in the settlement. The government needs to stay focused on this deal and make sure those tools are deployed. The trick of consumer law is not getting a favorable rule enacted. It is getting that favorable rule to actually produce the desired results on the ground.
Anyway, good choice. This was one of the 9 ways I described to make housing policy better in and around the foreclosure fraud settlement. I hope we can check it off in the positive column.
UPDATE: As it happens, Porter will be on FDL’s Book Salon next week, March 25, talking about her new book Broke, which is about bankruptcy. Masaccio is hosting.