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Is the Mortgage Settlement Deal Starting to Unravel? (Updated)

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The Administration had thrown its weight behind getting the mortgage settlement deal done shortly after the State of the Union address. Eric Schneiderman joining a Federal task force that seemed unlikely to accomplish much, given its staffing and the history of Federal investigations, seemed to secure it getting done, as Schneiderman, the de facto leader of the opposition, moved first into a neutral stance and then rejoined the talks over the weekend.

The deadline had been first set as February 6, then moved to the 3rd, then late last week moved back to its original date. There was no announcement of a pact today, which in and of itself would not necessarily mean that things might be going pear-shaped. After all, the participants could be wrangling over fine points.

A fresh Reuters report indicates that the Administration messaging and cheerleading (witness the Shaun Donovan interview reported by Dave Dayen and Shahien Nasiripour) may have been ahead of events. In addition, as I indicated, the Schneiderman MERS suit exposed, as I indicated, that the widely reported exclusion of MERS from the waiver in the deal allows for what amounts to robosigning suits to be filed as MERS suits. Reuters indicates that the banks aren’t happy with that. Schneiderman’s suit may have exposed a difference in views as to what certain language in the deal meant. If so, the two sides may be further apart than the cheery “We’re about to have a deal!” PR indicated.

If the reports from Administration sources on MERS not being included in the deal was accurate, I’m still surprised that they didn’t contemplate that a deal like Schneiderman’s might be filed. This is the sort of thing big ticket lawyers are paid to anticipate. However, it is one thing to face a potential risk, and another to have it show up before you sign, particularly since Schneiderman’s lawsuit could probably serve as a template for similar suits in other states. Even though the stealth bailout now embedded in the deal (it has the effect of increasing the value of their large portfolios of second liens) looked to be a big win, the banks now seem to be rethinking the wisdom of having a narrower release to get the attorneys general on board.

Key sections from Reuters:

But on Monday, as a close-of-business deadline loomed, many states had not yet reached a decision….

California Attorney General Kamala Harris, whose state would see homeowners get some $6 billion to $8 billion if it participates, was not expected to issue any statement on Monday, a person familiar with the matter said.

On Friday, Harris told Reuters she was “less concerned with the timeline than the details” of the settlement…

A New York lawsuit filed on Friday against JPMorgan Chase , Bank of America and Wells Fargo has also become a stumbling block, according to a person briefed on the negotiations.

This person said on Monday that the banks are balking at the lawsuit from New York Attorney General Eric Schneiderman that accuses them of fraud in their use of the electronic mortgage registry MERS..

Let me stress: the big deal is whether California and the banks stonewall. Obama still really wants this deal badly and can always go ahead with Federal regulators and the minimum of 36 states which seem fine with the deal. If California is out, that will provide air cover for a lot of the other fence sitting AGs.

Harris’ point about relief not going to the most troubled borrowers is a deal point. The banks get less credit for modifying loans with LTV ratios of over 175%. Harris appears to object to that. That may prove to be a serious bone of contention.

Dylan Ratigan interviewed Beau Biden on the status of the settlement. Biden indicated he will sign on only if he can continue to pursue MERS and not be precluded from adding the banks from the suit. He also pointed out how tempting the settlement numbers were to budget-starved states.

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Update: There have apparently been been other defections from the dissenting AG group, which was reported as being as high as 15. It was announced last week that Oregon was joining the deal, which would reduce the total to a maximum of 14, and Housing Wire reports that Tom Miller’s office says “at least 40″ are willing to join the pact. Miller, as we have indicated repeatedly, is not the most credible source, and it is hard to understand how attorneys general can have agreed to a deal while terms are still being negotiated. But the flip side is it it not hard to imagine that some of the fence-sitters have given in to Administration pressure. Even Biden in the video above was much less firm about not joining the deal than he has been.

Update 1:30 AM: Aha, the plot thickens! The banks ARE unhappy with the Schneiderman suit. From Bloomberg:

Bank of America Corp., JPMorgan Chase & Co. and Wells Fargo & Co. made a last-minute demand that New York drop claims filed against them Feb. 3 as a condition of the settlement, a person familiar with the matter said.

Hhm, well the banks can’t really force Schneiderman to withdraw his claims against them. It would be a PR disaster for him. So this may just allow Schneiderman an excuse not to join the deal and to still have his Federal task force. This will be interesting, but the deal does seem to be lumbering to a conclusion, sadly.

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43 comments

  1. BinDenver

    Wouldn’t it be ingenious (by the banks) to let Schneiderman file the suit, allowing other dissident AG’s to finally feel comfortable signing on to the settlement, knowing that a release is in fact in the settlement, and know that when the NY suit goes to trial it will be struck down by the judge? Of course by the time that has happened the settlement will be long since accepted and too late to change. This NY suit could be nothing but a trojan horse given to those who support justice.

  2. Susan the other

    That blows what I was thinking, that the banks were positioning themselves to make MERS the scapegoat for the whole debacle.

  3. F. Beard

    He also pointed out how tempting the settlement numbers were to budget-starved states.

    A bribe by another name?

    1. Chris

      Silly me, I thought that all of the settlement money was going to be earmarked for struggling homeowners, pay-outs for damages, or principal reductions.

      But much like the tobacco settlement, a good chunk of the cash will end up being pilfered by state governments to blow on pet projects.

      I should have remembered my course in Disaster Capitalism 101.

      1. Eric377

        Thinking about it “struggling homeowners” would seem to have a very weak claim on any of the damages. If they weren’t foreclosed, them robosigning and the rest had no impact on them to date.

  4. Tom Stone

    It’s a lousy settlement and I hope it gets scuttled. Kammie is doing some complicated political math and it comes down to what “0″ can do for her now VS how much capital she can get by going after wealthy and powerful criminals.

    1. CB

      Does Kamala Harris or the department she heads have the lawyering chops to take on the banks and financial services legal teams in actual court? Some high powered and higly competent lawyers at the defendants table.

      1. just me

        From Inside Job:

        GYLFI ZOEGA, Professor of Economics, University of Iceland: You have two lawyers from the regulator going down to a bank to talk about some issue. When they approach the bank they would see 19 SUVs outside the bank. Once you enter the bank, you have the 19 lawyers sitting in front of you, right? Very well prepared, ready to kill any argument you make. And then, if you do really well, they’ll offer you a job, right?

        NARRATOR: One-third of Iceland’s financial regulators went to work for the banks.

        GYLFI ZOEGA: But this is a universal problem, huh? In New York, you have the same problem, right?

        1. CB

          Yeah, a woman who worked for the IRS told me that anyone with enough money to hire top tax lawyers always beats the IRS. No contest.

          1. JeffreyR

            You can have the best lawyers money can buy BUT, when you have bad facts your case is in trouble. I would expect the banks to go the Exxon Valdez route – litigate forever until some judge reduces the judgment to peanuts. In a criminal context this might not work so well.
            Still it is hard to believe in our current environment the banks have not got the fix in with the elected officials. Do any of these AGs really have the guts to fight it out?

  5. f247

    It seems like the ability to pursue MERS-related issue is part of the settlement, at least according to the Q&A section of the Oregon AG’s website: http://www.doj.state.or.us/homeowners/faqs.shtml

    “Only named parties are subject to the agreement, which means that the states are free to pursue action against third parties, such as the Mortgage Electronic Registration System (MERS) and many other financial institutions.”

  6. Bravo

    An insufficient reduction in debt for the homeowner, a disproportionate haircut for MBS investors and taxpayers in GSE mortgages, and an enhancement to the collateral position of the mostly under and unsecured 2nd lien positions of the banks who caused the disaster……what’s not to like?

  7. Donald

    Donovan was incapable of running the HPD (Housing Preservation and Development) properly and protecting regulated tenants from unscrupulous landlords in Manhattan.
    In his current position he is essentially abandoning homeowners and borrowers as he works for the banks’ best interests. He should instead have been digging into the root cause of this disaster — the collusion between the banks, the rating agencies, the insurers and the mortgage brokers who all worked together and took off with Trillions. During the Savings & Loan fiasco 1400 bankers were prosecuted, in this disaster of far greater proportions, there have been none.

  8. jake chase

    Somebody please explain why the persuit or nonpersuit of MERS means anything. What does MERS own? A database of dreck?

    All these AGs are in persuit of personal aggrandizement and nothing more.

    Does anyone know how this AG suit affects foreclosures going forward? That is the billion dollar question. Everything else is opera.

    1. C

      My understanding is this. MERS doesn’t “own” anything. But MERS was not independent. Indeed MERS when you look at it closely wasn’t really anything at all other than a front for the banks. Most of the “MERS Executives” were in fact bank staffers. As such their actions (fraud) were not at the behest of MERS but at the behest of their employers at the banks. As such prosecutions for MERS fraud don’t stop at MERS and, in the case of fraud convictions, yield jail time.

      I for one hope that the AGs sit on the fence. While the billions sound good to states I think that the long term gain that would come from actually enforcing the law and protecting a healthy market would be far higher.

  9. SoCal 7

    Jake Chase, you are dead on, IMO. Biden is talking about CRIMINAL liability…and nobody is talking about CIVIL liability. That’s what the banks really are trying to pull off here…and I think they will get.

    So, if you find out your mtg origination, servicing, possible foreclosure was soaked in fraud, that parties were misrepresented, secret fees were paid, appraisal was wildly inflated and that true parties were concealed, well, call your local DA, but forget trying to get damages.

    What a frickin farce. This is the ONE (and maybe only) chance we, the Govt, whomever, has to hold the banks accountable, re-establish trust, get the fraudsters out or have them pay (in dollars) in a real way…yet these jokers are frittering it away.

    What will come next?

    1. EH

      Welp, how about for starters agitating for a little SOPA/OWS style action on the financial side of the country, from its players? Everybody’s trying to maintain some misguided sense of propriety, but the value of the proposals being floated can be quantified easily by those with an interest. Passive money, I guess.

  10. Doug Terpstra

    After Miller, Schneiderman, and on-again-off-again Harris, this is little more than Biden’s 15-minutes in the national spotlight of democracy theater. Despite the deeply-furrowed brow over MERS, the son of the Veep is not about to challenge this administration’s new housing centerpiece. No way, no how! This is nothing more than a convenient photo-op for a politician with his father’s national ambitions. Maybe he hopes to cut a better deal than Schneiderman or Miller. (BTW, where’s Joe been biden his time the past three years? Is he AWOL?)

  11. ajax

    Suppose Delaware, guided by State AG Beau Biden, doesn’t
    sign on to the 38+ state settlement. Then Delaware would
    have to sue on its own, and this could take a long time.

    Just how long could this “long time” be? Five to ten years?

  12. Francois T

    “He also pointed out how tempting the settlement numbers were to budget-starved states.”

    States can start to remedy this problem by stopping the stupid practice of giving tax cuts and tons of other fiscal goodies to every corporation that may hint at being interested to do biz in the state.

  13. John Drake

    All we need it for a ‘wag-the-dog’ event thrown in, like a jolly little war against Iran (or Syria) and you can count on the hoople heads will forget all about the banks and MERS and will ‘rally-round the flag’ – just in time for the November 12 election and a ‘waltzing Obama’ right into the White House on the backs of a few hundred thousand dead Iranians, Syrians, and who knows what else.

    1. keepon

      …and American Families and America itSELF. “…and to the Banana Republic for which it stands….” Who will don THAT uniform and wear it with pride and dignity without being spat upon after this con-job?

      Yesterday all that America stands for was lost. All who will sign, gangsters & bangsters, sign for the opportunity to slip under cover of the American Flag to ‘have their way’ with the People. Other oppressed peoples already have that in their own governments.

      What President of the US ever recommended that we should be glad to take a lesser America, or go live someplace else? Yesterday was a sad day.

  14. SoCal 7

    Here’s the question: If Schneiderman, Biden, Masto can sue for damages…why would they, or any AG, sign a deal that says any citizen CANNOT seek damages?

    If MERS and the banks enacted a fraud upon a homeowner, under this agreement as I understand it, they are scot frikin free from claims.

    Give the underwater owners/foreclosed a few grand each MAYBE and the whole thing (on the Civil side) goes away.

    Wow. Is this really America?

    1. Yves Smith Post author

      Private parties can still sue. But AGs are prosecutors, they can bring criminal suits. You can’t.

      More important, AGs are in a position to pursue actions that are too costly for individuals to go after. For instance, Schneiderman pointed out that many of the foreclosures which had MERS abuses were uncontested. That still does not mean those borrowers were not wronged. Similarly. AG suits produce information that private parties can leverage (testimony, depositions, road testing of legal arguments). They facilitate private litigation. That is probably the big reason banks want to stop them.

      1. jake chase

        AGs are clown politicians. Whatever they can theoretically do, all they do do is press conferences. What they are after is a chance to run for governor, senator, president. How many times must one watch this charade before the truth sinks in? What is the current crop doing on the State’s credit card? Can anybody spell Spitzer?

        Beau Biden? The name says it all.

    2. LucyLulu

      Agree with Yves (of course). Furthermore, few private citizens can afford to take on the banks on a foreclosure. Attorneys won’t take the case on a contingency basis, and the banks show up with high-powered attorneys. A friend of mine fought his foreclosure, won the first round, and the bank immediately filed an appeal. It was going to be a minimum of $100,000 to litigate the appeal. The lenders will typically try to get the case kicked to federal court where the judges are more bank-friendly and less tolerant of homeowners who attempt to represent themselves pro se. Legal aid attorneys are overworked and usually attempt to get modifications. In my state, a friend tried to use legal aid and was told to call them back the day before her court hearing if she still needed their help, that they didn’t accept clients before the date of their court hearings. How reassuring, NOT.

      I don’t mean to be a wet rag, there have been successful cases. However, those are the spectacular ones you tend to hear about, the majority have been in bankruptcy court (special division of federal court with its own judges and homeowners are represented by trustees), and otherwise they have been generally limited to a handful of states. It’s a tough road to hoe. If you demonstrate the paperwork is faulty or incomplete, typically the case is dismissed without prejudice, meaning the banks can refile when they can come up with “better” paperwork. This is not an area of law where justice is being served.

      You want to sue for damages? They aren’t being awarded. Maybe a modification………. Free houses have been rare indeed. Judges are aware of the implications and most are reticent to be the one to set the precedent that could crash the economy (an appellate judge in CA said as much in one of his rulings). IMO, the attorneys general and justice department is our only hope to get this mess sorted out and to put an end to the ongoing fraud being perpetrated by lenders upon homeowners and investors, and ultimately taxpayers.

      1. keepon

        crash the economy my ass. That’s fear mongering as an excuse to embrace the fraud in ALL ways and allow it to continue.

        Nothing in this settlement cures the economy. Its design is merely to get the criminals off and turn financial responsibility back on Little America. True crash awaits us.

  15. LucyLulu

    I think it odd that Schneiderman would agree to head up the task force and say he would sign and then file the MERS suit. I would think that would piss the Administration off, too. Unless Obama has had a change of heart, he appears to be playing both sides of the fence.

  16. richard wilson

    I predict that sooner or later the big banks will get what they want, which is to make this problem disappear cheaply. The big banks always win, since they control the money. We must borrow our own currency from them. What we need are state-owned (i.e. public) banks like North Dakota has. The California legislature (both houses) finally voted to establish one, but the big banks ordered Governor Brown not to sign it. Thus, the big banks will continue to rule as gods, the American masses will continue to be their slaves, and the economy will continue to be in a Depression. And everyone will continue to chatter in confusion.

    1. bhikshuni

      Except for the American residents who are dual citizens & immigrants, etc., who nevertheless are obliged to report and pay taxes on their overseas bank cash reserves (a few may renounce their US citizenship and social security and move off of the plantation).

      It is banana republic pressure all around.

  17. Conscience of a Conservative

    Unfortunatley, conducting a full inquiry and assesing fines, crimininality and providing enough evidence for private lawsuits to commnece in greater number would bring the big banks or at least some of them to their knees. Our system has a solution for that, it’s bankruptyc and recapitalization at the expense of debt holders, but our country doesn’t work that way. To hear Larry Summers say it, its all about confidence. We must have confidence in the banking system above all else, even if it’s not based on reality.. kinda like Keynes animal spirits I suppose. So the reality is we’ll probably get a settlement/bail out at tax payer/investor expense.

  18. Phoebe Loosinhouse

    I want to know if the Nevada AG got the answers to her 37 questions and what the answers were.

    This still looks to me like AGs signing onto a deal that is not finalized with details. What kind of an attorney would have a client sign an agreement like that? Why would they themselves sign an agreement like that then?

  19. Gus W

    This morning on NPR’s The Takeaway, the settlement was described as a homeowner relief package – they barely mentioned the banks being busted dead-to-rights on robosigning, or selling immunity without a determination of guilt as Judge Rakoff described.

    The loss of leverage for individuals still fighting for their homes is not worth the $2000 they might get and that sum is nothing for those who already lost everything.

    Obama must not let the banks breeze off on robosigning – they created this debacle due to their own greed imploding on itself. Prosecute them to the letter of the law and let the banks fail this time if need be. We all know the banks are threatening calamity if they don’t get their way, but for most Americans, it’s a calamity anyway. Let the banks fail this time and go to a North Dakota model to get credit flowing and boost employment.

  20. Conscience of a Conservative

    It’s really become quite apparent that the administration has as first priority protecting the banks. The $1500 benefit that individual home owners might get pales in comparison. The settlement really hurts investors at the expense of banks who hold the 2nd liens.

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