There have been so many rumors about the so-called 50 state attorney general settlement (which now is more like a 43 state settlement) being on the verge of having a deal that we’ve discounted them. We’ve said from the beginning that this was a cash for release deal. Basically, because the Federal regulators and state AGs, by design, had done no meaningful investigations, they didn’t have any threats to bring the banks to heel. So they’d have to offer a bribe, and the bribe has always been a “get out of jail free” card.
Put it more simply: The banks got bailed out, and the rest of us got left out. Yet all levels of government are actively trying to find a way to release from wrong doing for the banks, when everyone knows that they violated a host of laws every step of the way in the mortgage business.
We said the only way a deal would get done is if the state AGs capitulated completely. There have been enough leaks about state AGs being uncomfortable with a broad release, plus the banks greatly overplaying their hand, that it looked like no deal would happen. Tom Miller, the Iowa AG who is the lead negotiator for the states, has been saying a deal is imminent since last January, so his credibility is pretty thin. But the Obama administration is moving heaven and earth to get a deal done, since they seem to think the public can be snookered into thinking motion is progress.
Nevertheless, the negotiations appear to be grinding forward. And it isn’t the banks that are giving ground. Gretchen Morgenson tells us at the New York Times what an utter joke the settlement has become.
The $25 billion being bandied about is about as solid as AIG’s credit default swaps. Of that total, only $3.5 to $5 billion would be paid in cash. That’s spread across 12 or more companies, with Bank of America presumably paying the most. So how do you get to $25 billion? Smoke and mirrors, natch. Per Morgenson:
The rest — an estimated $20 billion — would consist of credits to banks that agree to reduce a predetermined dollar amount of principal owed on mortgages that they own or service for private investors. How many credits would accrue to a bank is unclear, but the amount would be based on a formula agreed to by the negotiators. A bank that writes down a second lien, for example, would receive a different amount from one that writes down a first lien.
I hope you can see how insulting this is. How many mortgage modification programs have we had so far? And what has the result been? In every case, the number of mods done has fallen well short of the target and the banks have gamed the programs massively. And the Treasury Department has seemed remarkably unembarrassed by their glaring failures. Even if everyone involved knew that these programs were merely to placate the public, the banks were not supposed to make it so bloody obvious. But the Treasury hasn’t bothered to pretend either. For instance, one of the few things it could do under its
limp wristed voluntary HAMP program is claw back incentive payments. Has it bothered? No.
Morgenson highlights another feature of the plan:
One of the oddest terms is that the banks would give $1,500 to any borrower who lost his or her home to foreclosure since September 2008. For people whose foreclosures were done properly, this would be a windfall. For those wrongfully evicted, it would be pathetic. Roughly $1.5 billion in cash is expected to go into this pot.
“Pathetic” isn’t strong enough. Let’s look at the damages sought by Nevada attorney general Catherine Masto in her second amended complaint against Bank of America: civil penalties of $5000 per violation, or $12,000 for elderly or disabled borrowers. An individual loan can, and likely does, have multiple violations. The suit also seeks restitution, costs for wrongful foreclosures, plus the cost of damage to municipalities and homeowners from unnecessary vacancies. Note that an AG victory on the issue of wrongful foreclosure would pave the way for private lawsuits, and here the damages would be massive, particularly if state law or precedent allows for penalties (as we’ve noted, Alabama has statutory tripe damages for wrongful foreclosure, and recent rulings have had applied penalties in excess of nine times).
And what did Masto get from a different servicer, Morgan Stanley’s Saxon? The settlement is estimated to average somewhere between $30,000 and $57,000 per borrower. And the basis of action wasn’t erroneous or fraudulent foreclosures, but deceptive practices in mortgage lending and securitization.
Look at the MERS compplaint filed by Delaware AG Beau Biden. He’s suing MERS over deceptive practices, at $10,000 per violation. It’s quite possible that he may find more than one violation per mortgage. And I would imagine that success against MERS would pave the way for actions against servicers who relied on MERS in the face of knowledge of its deficiencies.
In other words, the suits filed by two AGs alone make a mockery of these negotiations. We discussed that the $25 to $30 billion settlement figure which the AGs have become fixated upon was derived from a bogus analysis performed by the CFPB for Tom Miller in February:
The critical part comes on the third page, “Calibrating the Size of Potential Penalties”. You’ll note it assumes that the cost of special servicing of delinquent loans would have cost 75 basis points a year more than actual costs incurred. That drives the entire analysis…
Now….is this “75 basis points a year” a knowable figure, ex doing a lot of real nitty gritty work, which certainly has not taken place? We can debate whether this is the right figure, and whether the CFPB has also captured the actual costs correctly…Our Tom Adams has estimated that servicing now costs 125 basis points versus the banks’ typical fees of 50 basis points, plus another 30 to 50 basis points in late and junk fees.
If you take this analysis at face value, the biggest question is what standard of servicing is implied by “effective special servicing of delinquent loans”? If they mean loan modification, that’s the same as a new underwriting of a mortgage. That cannot be done through the current platform and would require new staff with different skill sets and software/systems support. So any estimates are at best finger in the air exercises. And given that some servicers are far more abusive with junk fees than others, Tom Adam’s comment above suggests that a one-size-fits-all estimate is misleading too.
But arguing over a pretty much made-up figure misses the critical point: the money the servicers saved is not even remotely the right basis for thinking about the appropriate settlement level. Settlements are based on potential liability. For instance, in 1998 the tobacco settlement, the tobacco companies agreed to pay a minimum of $206 billion over 25 years to be released from liability on Medicare lawsuits on health care costs plus private tort liability.
The saved costs bear no relationship to the banks’ legal liability for servicer-driven foreclosures, nor to the damage they have done to homeowners or broader society through their actions. It’s like basing the penalties in a robbery on the unpaid parking fees and rental costs of the car used to make the heist.
But all is not lost. First, Morgenson tells us a lot of mortgages are excluded from this deal, in particular, Fannie and Freddie mortgages. Second, her story says nothing about the terms of the release. The objective of the negotiations now seems to be to get the true economic value of the deal to be so small that the banks will agree to a relatively narrow release. I would not bet on that.
It’s important to keep the pressure up, particularly on state AGs who might walk from a too bank friendly deal. States whose AGs might decamp include Oregon, Washington, Arizona, and Colorado. It’s also key to let the AGs in states who have left the talks and are under pressure to return that voters are watching and will be unhappy if they reverse themselves. Those states are New York, Delaware, Massachusetts, Kentucky, Nevada, Minnesota, and of course, California. You can find their phone numbers here.