I’ve pointed out how effective a non-negotiable posture can be, at least until the other side pulls out its ammo or threatens to walk from the deal. Most people in negotiations go on the assumption that the other side is reasonable or at least sincere (even if sincerely deluded) and will offer concessions on the assumption the other side will reciprocate.
The poster child of the usual outcome of offering concessions to a party who is non-negotiable is can be summarized in one word, as in “appeasement” circa 1939. And the ridiculous part is that the banks are being allowed to cop a ‘tude when the other side holds all the cards.
Let’s get this straight: this “settlement” should not be a negotiation. Virtually all the items in the 27 page outline of mortgage settlement terms that was leaked yesterday simply restates existing law or existing contractual obligations. If the officialdom wants to rely on mechanisms beyond the courts (since some judges are more pro-bank than others, which can produce the dreaded disease of “uncertainty”), the same results could be achieve by rulemaking without regulators or state attorneys general providing any releases from legal liability to the banks.
As banking/mortgage expert Josh Rosner said in an e-mail to clients:
Very high level sources within the CFPB point out that every item in this AG proposal could be required of servicers by CFPB rule-making. This begs the question, why release servicers and banks from claims and tie state Attorneys General for items that can be had free?
Following on that point, Iowa AG Tom Miller has apparently been unwilling to discuss the substance (even with the AGs) of the releases of claims he is asking the AG’s to sign onto. From the term sheet is seems that it is likely he is seeking to release claims not only related to robosigning but to other servicer practices and likely to front end assignment and underwriting issues.
The White House has supposedly begun to assist Miller in an arm twisting campaign to pressure state AGs to sign onto the agreement and release claims. We have heard that President Obama supposedly had a private meeting with Tom Miller and at least one Democrat AG who has been on the fence regarding the deal. For the White House to pressure state representatives appears to blur the lines between federal and state interests.
But instead of recognizing that their days of rule-breaking might be coming to an end, servicers are complaining bitterly, as Kate Berry tells us in an American Banker article:
Privately, mortgage servicers are fuming.
The proposed settlement agreement with state attorneys general and federal regulators, the companies will tell you, is unfair and impracticable.
I’ll spare you several paragraphs of the “but they were deadbeats and no one was hurt by robo-signing and all our foreclosures were warranted.” Well, if you normally operate as judge, jury, and executioner, and it’s too costly for borrowers to counteract predatory servicing, in your little self-referencing world, everything will look hunky-dory and challenges to your authority will be deemed to be improper and unwarranted. For borrower to fight “servicer driven foreclosures” on the issue of erroneous charges and the impermissible fee pyramiding requires hiring costly expert witnesses. That’s something beyond the reach of broke borrowers. So they fight the cases based on issues of standing, which allows the banks to preserve the myth that their records are always accurate. Estimates I’ve gotten from attorneys fighting foreclosures of how many cases they handle are the result of servicer driven foreclosure ranges from 50% to 70% (note that people who fight foreclosure more often than not feel they are the victim of origination or servicing abuse, and they want a mod, not a free home).
The interesting next bit is that Berry undermines the banks’ biggest excuse for not giving mods (emphasis ours):
Lawyers for the servicers maintain that the proposal does not distinguish between loans a bank services for itself and a loan it services for others. And servicers insist they don’t have the authority under the pooling and servicing agreements governing securitizations to do a great deal of what the proposal calls for them to do.
The servicers say they are not authorized by PSAs to make principal reductions on loans held in private-label securities, as the draft settlement calls for them to do, so the companies argue it is unclear if a proposed government settlement would override such contracts.
Industry lawyers are saying the AGs are “shooting the messenger.” But the industry has been pinning the blame for the glacial pace of loan mods on the alleged straightjacket of the PSA for several years now. And when pressed, officials quietly acknowledge that no one at a servicer ever goes back to the investors asking for authority. (It’s also worth noting that the regulators’ term sheet does try to address the issue. If a borrower requests a modification and the servicer believes the PSA prevents one, the servicer must still perform a net present value test and, when that test indicates a mod would be less costly than foreclosure, present that result to trustees or other authorized parties to obtain consent for a modification.)
Some PSAs do prohibit mods, some limit them, and some have no restrictions. The fact that the industry has never mad any effort to reduce principal is due to two reasons. First, their fees are set as a percentage of outstanding principal, so a principal mod works directly against their economic interests. Second, as we have discussed before, writing down a first mortgage would require a writedown of a second mortgage, and banks usually hold seconds on their own books. That writedown would be a hit to capital.
But it appears investors think this settlement is a great deal. And it is. Even if the banks wind up incurring the dreaded $20 billion among them and get a broad waiver from liability (not private suits, but regulators and AGs are far more logical parties to pursue some actions than others), this will be a steal.
Today’s bank rally lets you know exactly what the Street thinks about the proposed mortgage settlement. The big up could reflect the belief that it is a giveaway/bailout, and lets the banks get off scott-free from their criminality.