naked capitalism

The New York Times reports that two attorneys general of states regarded as important for the Obama Administration to declare the mortgage settlement a success have rejoined the negotiations, which says they are likely to sign the pact.

Kamala Harris, the California AG, was widely seen as “political” and therefore was not seen as a solid holdout. I remain disappointed by the conduct of our attorney general Eric Schneiderman, who is also now participating in the talks. His decision to join a Federal task force undermined the opposition to the settlement and looks to have cleared the way for the Administration to craft a win on this deal (note it is still possible it will not get done, but the odds were low as of last week and appear to be sinking further).

Assuming a deal is inked, Schneiderman and new partners in the Administration will no doubt contend that his involvement in the negotiations resulted in an improvement in terms for homeowners and states. I’m also told that he sincerely believes he can get a serious investigation underway and take advantage of Federal statutes with longer statutes of limitations than most state level ones.

Schneiderman may think he can beat the Administration at its own game, and if he can, more power to him, but I would not bet on him coming out on top.

It is too late (it was probably too late when Schneiderman sat in Michelle Obama’s box during the State of the Union address) but if you are in California or New York, you might as well call or e-mail your AG and give them a piece of your mind. Keeping the pressure on Schneiderman and Harris, and supporting AGs like Beau Biden of Delaware, Catherine Cortez Masto of Nevada, and Martha Coakley of Massachusetts, are the best hope we have at this point.

For New York, call 800 771-7755, 212 416-8000 or 518 474-5481 use the web form here or at his fundraising office. For Kamala Harris, call 916 445-9555 or this web form.

Key excerpts from the account in the New York Times:

The biggest remaining holdout, California, has returned to the negotiating table after a four-month absence, a change of heart that could increase the pot for mortgage relief nationwide to $25 billion from $19 billion.

Another important potential backer, Attorney General Eric T. Schneiderman of New York, has also signaled that he sees progress on provisions that prevented him from supporting it in the past.

The potential support from California and New York comes in exchange for tightening provisions of the settlement to preserve the right to investigate past misdeeds by banks, and stepping up oversight to ensure that the financial institutions live up to the deal and distribute the money to the hardest-hit homeowners….

Officials involved in the negotiations cautioned that broader state support could still be days away. And although the timing of any announcement is subject to last-minute maneuvering, as it stands now the deal would set aside up to $17 billion specifically to pay for principal reductions and other relief for up to one million borrowers who are behind on their payments but owe more than their houses are currently worth. The deal would also provide checks for about $2,000 to roughly 750,000 who lost homes to foreclosure.

One good bit of news is that a spokesmen states specifically that homeowners who take payments will not waive their rights to sue for “improper behavior” in the foreclosure process (note I’d still want to see the terms of any offer. How does “improper behavior” map on to concepts like “lack of standing”?).

Oh, and now we see why Florida AG Pam Bondi was hectoring Harris so aggressively to rejoin the deal:

California’s participation would result in having more money available for many other states, including an estimated $500 million in additional money for Florida.
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But the agreement’s terms do not guarantee minimum allocations of mortgage relief by state.

Erm, this is awfully trusting. If you don’t know who gets what, how can any AG ex Florida’s be sure they are coming out ahead? And I don’t understand how the banks can do this:

The settlement, if all states participate, will also include $3 billion to lower the rates of mortgage holders who are current.

Huh? The banks have an explicit obligation to service the loans for the benefit of the certificate holders, meaning the investors. There is NO economic rationale, none, for reducing interest charges to borrowers who are current (unless they are under financial duress and at risk of delinquency/default). This is a bribe to prevent complaints by borrowers who pay on time and are in “beggar thy neighbor” mode.

In addition, there are three serious defects with the “settle and monitor” approach. The first is that the evidence strongly suggests that many securitizations failed to transfer the notes to the securitization trust as stipulated in the PSA. There is no legal remedy for that problem. The servicers and foreclosure mills fabricate documents (allonges, which are separate documents that magically appear with the needed signatures on them, are the preferred device) to fix this problem. The settlement thus somehow pretends the banks can stop these bad practices, when the bad practices are a symptom of a much bigger problem that remains unremedied.

Second is there has been no and is likely still to be no investigation of servicer driven foreclosures. A story in the New York Times yesterday highlighted that issue, when Nye Lavalle, a man of means, tried paying off a mortgage on a family property in the 1990s and discovered $18,000 of fictive fees which he tried disputing with no success. If people with resources find it hard to get the banks to reverse bad charges, even when they fight in court, how can ordinary folks hope to combat this predatory behavior? I’ve seen nothing to indicate that any regulator or attorney general is prepared to look into the validity of bank charges to borrowers.

Third is that the monitoring provisions of the pact look to be weak. In a Reuters article with the Ministry of Truth title, “Mortgage deal would give states enforcement clout,” we have this discussion towards the end:

Under the settlement, the banks will set up internal quality control groups to assess their mortgage servicing units’ compliance with the terms of the agreement, and turn over quarterly reports to the monitor about servicing complaints.

If the monitor concludes the group “did not correctly implement” the reviews, the monitor can have a third party review the work.

If the monitor finds information that a servicer “may be engaged in a pattern of noncompliance,” he can undertake a more thorough review, and impose even tougher standards.

Servicer compliance will be measured through detailed information about unlawful foreclosure sales and incorrect denials of loan modifications, according to the documents.

If the servicer continues to violate any of the terms, any of the states or a monitoring committee can go to court and seek penalties of up to $1 million for the first “uncured” violation and up to $5 million for a second.

Notice that the first level of monitoring is having the banks score their own activity. There appears to be NO procedure contemplated along the lines of normal bank oversight, where regulators can and do make on site visits, demand copies of internal records, and perform their own analysis.

Dave Dayen also found this scheme to be less than convincing:

Joseph Smith, the current banking commissioner of North Carolina, would become the enforcement monitor on the settlement. And states would get some more authority to directly enforce their own consumer protection statutes at the big banks. But get this, the initial measure of whether or not the banks are following the terms of the settlement will come from “internal quality control groups.” In other words, the foxes will guard the henhouse…

And lest we believe that giving states a piece of the enforcement will help, that only depends on whether the state regulators believe in their job description. In fact, a recent NBER study showed that state bank regulators are often even more lax than the compliant federal ones:

“Federal regulators are significantly less lenient, downgrading supervisory ratings about twice as frequently as state supervisors. Under federal regulators, banks report higher nonperforming loans, more delinquent loans, higher regulatory capital ratios, and lower [return on assets]. There is a higher frequency of bank failures and problem-bank rates in states with more lenient supervision relative to the federal benchmark.” [...]

Why are state regulators so much more lax? The authors argue that it could be attributed partly to banks being required to pay state regulators assessment fees that are pegged to bank size. As a result, “it is possible that state supervisors maintain a more lenient stance to ensure that banks do not shift out of a given state in search of another state with even softer state regulators.”

Exactly. These are the state meal tickets we’re talking about and the banks hold that over the heads of the regulators.

I wish I could be more optimistic, but this settlement deal has all the hallmarks of yet another win for the banks.