Wow, the Obama administration has openly negotiated against itself on behalf of the banks. I don’t think I’ve ever seen anything so craven heretofore.
As readers may recall, we weren’t terribly impressed with the so-called mortgage settlement talks. It started out as a 50 state action in the wake of the robosigning scandal, and was problematic from the outset. Some state AGs who were philosophically opposed to the entire exercise joined at the last minute, presumably to undermine it. Not that they needed to expend much effort in that direction, since plenty of Quislings have signed up for the job.
The supposed leader of the effort, Tom MIller of Iowa, promised criminal prosecutions, then promptly reneged. His next move was to get cozy with the Treasury, presumably out of his interest in heading the Consumer Financial Protection Bureau. Federal regulators, such as the OCC and the Fed, who do not like being upstaged by states, were similarly keen to exert “leadership”, which really meant “lead a hasty retreat from anything that might inconvenience the banks.” So Miller, who was supposed to be representing the interests of the states, was instead working with the Treasury et al. to beat the state AGs into line (and separately, since the state and Federal legal issues are very different, the idea of having a joint effort was questionable from the outset). Not only have some Republicans (predictably) rebelled, but so to have the more aggressive Democrats, such as Eric Schneiderman of New York, Lisa Madigan of Illinois, and Catherine Masto of Nevada.
The first sighting of what this group might come up with was a bizarre 27 page proposal. It was bizarre because it represented an incomplete set of demands. You never do that in a negotiating context, you make a complete offer and see what other side’s counter.
The proposal was incomplete because it failed to describe the sort of release the banks would get (would they be released from claims by the state AGs on robosigning, or broader areas of liability?) and there was no section for penalties, despite press rumors and Congressional tooth gnashing about $20 billion and up sanctions. We dissed it not only for those reasons but also because it was largely a recitation of existing law, with only two new provisions: one was the end of dual track (in which servicers keep the foreclosure process moving ahead even as mod evaluation and approvals are also in progress) and single point of contact, in which the borrower has a dedicated person to deal with on his case. We deemed single point of contact to be undoable and unnecessary (as in if servicers straightened out their procedures and trained their staff adequately, they wouldn’t have the screw-ups that led to demands for single point of contact). Yet despite the obvious shortcomings of this deal, the bank lobbyist masquerading as a bank regulator known as the Office of the Comptroller of the Currency has absented itself from this effort in an apparent show of pique.
Given how underwhelming the 27 page leaked proposal was, it was predictable that the banks’ counteroffer verged on being a joke. As we noted last week:
It should really be no surprise that the banksters have the temerity to take a weak mortgage fraud settlement proposal, advanced by the 50 state attorneys general and various Federal agencies, and water it down to drivel. Since March 2009, when the Obama administration cast its lot with them, major financial firms have become increasingly intransigent. And this has proven to be a winning strategy, since Obama’s pattern over his entire political career has been to offer proposals that don’t live up to their billing, then eagerly trade away what little substance was there in the interest of having bragging rights for yet another “achievement”….
What’s striking is the utter lack of any teeth or any procedural requirements. The banks’ position is that they are to be trusted after having demonstrated again and again that they’ll take anything that is not nailed down. It is drafted wherever possible to make current practices fall within the “settlement”, which means the “settlement” is a total whitewash.
We then had wild card enter the picture. American Banker reported that “federal regulators” were about to issue cease and desist orders to force the servicers to take the negotiations seriously. Normally, that would be a potent threat. But the leaked version that American Banker posted didn’t even qualify as a slap on the wrist. As Adam Levitin explained:
The C&D order basically tells banks to set up lots of internal procedures and controls within the next few months and then to tell their regulators what they have done…. The result, I suspect, is that in a few months the bank regulators will declare that everything is fine.
(Even if the regulators think the internal controls are inadequate, it’s not clear what the consequence would be. My guess is that it just results in the bank regulator telling the bank to revise and resubmit.)…
(I was struck in some places by the linguistic similarities between the proposed C&D order and the banks’ counterproposal to the AGs. It’s impossible to know who was cribbing from whom, but the similar language is revealing.)
So here’s what’s going down. The bank regulators are going to provide cover for the banks by pretending to discipline them very hard, but not really doing anything. The public will see a stern C&D order, but there won’t be any action beyond that. It’s as if the regulators are saying so all the neighbors can hear, “Banky, you’ve been a bad boy! Come inside the house right now because I’m going to give you a spanking!” And then once the door to the house closes, the instead of a spanking, there’s a snuggle. But the neighbors are none the wiser. The result will be to make it look like the real cops (the AGs and CFPB) are engaged in an overzealous vendetta if they pursue further action.
Tonight, a story in the New York Times lends credence to the American Banker account:
The nation’s top mortgage servicers are expected to sign legal agreements by the end of this week compelling them to change their foreclosure procedures, regulatory officials said Tuesday.
The servicers, which violated state and local laws and regulations governing foreclosures, are agreeing to improve their methods in numerous ways. They will be required to have more layers of oversight and proper training of their foreclosure staff. The oversight will extend to third party groups, including the law firms that do much of the actual work of eviction.
The New York Times, however, seems to be buying bank/Adminisration PR hook, line and sinker. For instance:
Under the new rules, every homeowner in default will have a single point of contact with the servicer.
“Single point of contact” does NOT mean a dedicated person. A phone number with a live person answering it would do. This is basically the same level of service as provided with credit cards, minus the prompts to, say, get to the “lost or stolen card” person versus the “balance transfer” person. So it’s better than what servicers provide now, but it is an Orwellian defining down of what “single point of contact” originally meant.
Another Times misconstruction:
One of the most significant measures in the consent agreement will require servicers to hire an independent consultant to review foreclosures done over the last two years. If owners were improperly foreclosed on or paid excessive fees, they will be compensated.
If you read the consent decree the review is NOT comprehensive, as the Times erroneously implies. And as Levitin noted:
By far the most interesting bit in the draft C&D order is the bit requiring the banks to engage independent foreclosure review consultants to review “certain” foreclosures that took place in 2009-2010. There is no specification as to which foreclosures are to be reviewed or precisely what the standards for review are. But that’s all kind of irrelevant. Who do you think the banks are going to engage to do these reviews? Someone like me? Not a chance. They’re going to find firms that signal loud and clear that if they get the job, they won’t find anything wrong. It’s just recreating the auditor selection problem, but without even the possibility of liability for a crony audit.
Frankly, this sort of regulatory outsourcing is pretty astounding–the OCC has resident examiner teams at the major servicer banks. Shouldn’t they be the ones auditing the internal controls and performance, not a third-party compensated by the bank? (Oh wait, I forgot that the OCC is paid by the banks–it’s budget comes from chartering fees and assessments on the banks is regulates.)
However, the Times does confirm what I suspected last week, that this move was to end the Federal push for monetary damages which would be used for principal reductions:
The attorneys general have larger goals than the regulators. They are seeking to make the banks to cut the debt of delinquent owners. The servicers are balking at this.
The part I am puzzled by is who is behind this rearguard action. It clearly guts the Federal part of the settlement negotiations. If you pull out your supposed big gun (ex having done a real exam to find real problems, and it’s weaker than your negotiating demands, you’ve just demonstrated you have no threat. Now obviously, a much more aggressive cease and desist order could have been presented; it’s blindingly obvious that the only reason for putting this one forward was not to pressure the banks, as American Banker incorrectly argued, but to undermine the AGs and whatever banking/housing regulators stood with them (HUD and the DoJ were parties to the first face to face talks).
So the only part that I’d still love to know was who exactly is behind the C&D order? Is it just the OCC? I have a sneaking suspicion that Treasury has been playing both sides of the street on this one, and that the Fed either aligned with the OCC or pretending to sit it out, which has the effect of supporting the OCC. The only regulator certain to have been keen to take action against the banks was the FDIC (despite the Administration having put a target on Elizabeth Warren’s back, she is a mere advisor and the CFPB is merely a regulator in waiting).
But on another level, having the talks come to naught is a good outcome. It makes it easier for the AGs that believe in the rule of law to build and launch cases against servicers, and for the courts to continue to pile up examples of miscreant servicing and botched chain of title (these Potemkin reforms are going to change virtually nothing on the ground). So once a new set of abuses generates more lawsuits (fee pyramiding? force placed insurance? or just plain old “can’t find the note/chain of title”) the Federal banking regulators will again be scrambling to try to get ahead of a mob and call it a parade.