naked capitalism

A number of writers, such as Mike Lux, Bob Kuttner, Matt Taibbi, and Justin Krebs, have been willing to convey the Administration message that the current version of the mortgage settlement is a “much tougher deal” and even a pretty good deal, thanks to Schneiderman’s intervention.

It is important to note that any recent improvement in terms has come at the cost of Schneiderman moving from being decidedly against the settlement to being in the “maybe/maybe not” camp as an apparent part of his decision to join an Administration investigation on mortgage abuses. But as we have stressed, the fact that the Obama team is pushing to wrap up the settlement agreement before the probe underway is a very bad sign. How can you settle when you don’t know the full extent of the bad conduct?

In addition, the change in Schneiderman’s posture has undermined the solidarity of the dissenting attorneys general, which is no doubt what Obama hoped to achieve.

While there is every reason to believe there has been some improvement in terms due to the resistance of Schneiderman and other state attorneys general (Beau Biden of Delaware, Martha Coakley of Massachusetts, Catherine Cortez Masto of Nevada, and Kamala Harris of California), the notion that, per Mike Lux, “the settlement release is tight” appears to be patently false.

Since there has yet to be any disclosure of the draft terms, we can’t be certain, but a reading of a letter sent by Nevada’s Masto gives plenty of cause for pause. Reaching inferences from her 38 questions is a Plato’s cave exercise, but some of the items seem pretty clear.

By way of background: remember that the big concern about the release was that it would go beyond robosigning and waive other types of liability. The ones observers were most concerned about were what we called chain of title issues, namely that the parties that had put mortgage securitizations together had failed on a widespread basis to take the steps stipulated in their own contracts to transfer the notes (and in lien theory states, to assign the lien) properly.

The securitization agreements were rigid, requiring that the transfers through multiple parties be completed by a date certain, typically 90 days after the closing of the trust. Most deals elected New York law as the governing law for the trusts, and New York law allows them to operate only as stipulated. Since the notes were supposed to be transferred in by a particular date, trying to move them in later is a “void act” having no legal effect. That makes attempts to make transfers legally at this juncture a non-starter.

Having realized somewhat late in the game that their failure to do what they promised could interfere with trusts’ ability to foreclose and create tons of liability, servicers and their various agents have relied on not just robosiging, but widespread document fabrication and forgeries to fix their transfer problem when judges have taken notice. Anyone who has been on this beat knows of numerous cases where foreclosure documents are challenged, say for being too late, not having the right transfers, etc, that new versions of supposedly original documents that tell the right story miraculously show up in court.

The other big concern was origination issues, such as misrepresentation of mortgage terms, steering minority borrowers into more costly mortgages, and violating the representations and warranties made to investors about the loans backing the securities they purchased (that is, they were sold dreckier loans than they were promised). However, many Federal statues have five year statutes of limitations. One effect of dragging out the settlement talks forever has been to extinguish a lot of liability, since the subprime origination market shut for good in June 2007. A lot of grounds for suing deals from January 2007 and earlier have gone poof; the subprime market was in freefall for February, leaving only the last (admittedly dreckiest) March through May (and a few in June) securitizations exposed. Was this a bug or a feature?

Now to the Masto letter. Most of her queries are sufficiently technical so as to make it hard to guess with any certainty as to what the language of the agreement might be, but two questions at the top stood out:

This certainly looks as if Masto sees the origination release as broad. Asking for an itemization of what is NOT included suggests a lot seems to be included.

But this is the whopper:

From early on, we have stressed that this is a cash for release deal, and this looks like a VERY big release. The banks will pay an amount into the fund, and all issues relating to robo-signing and foreclosure will be released by the AGs: the banks will have a state level release from all bad assignment/transfer issues.

Note this does not stop private parties, meaning individual borrowers, from suing on these very grounds. But taking the AGs out of the picture prevents them from using their subpoena and prosecutorial powers to determine how widespread these abuses are and to negotiate broad solutions. So we’ll have the worst of all possible worlds: individual borrowers getting better and better at fighting foreclosures (or if you are a pro bank type, getting better and better at throwing sand in the gears) with the AGs sidelined in their ability to shed light on these issues and bring them to resolution on a broader basis. And given that the OCC has already entered into weak consent orders with the major servicers, and past servicing settlements have been violated, I remain skeptical that this deal will stop these abuses. Remember, bank executives piously swore in 2010 that they stopped robosigning, yet their firms continue to engage in that practice.

Our Tom Adams concurred and added:

This is the point of the settlement whitewash – all the press on robo-signing has always be about “sloppy practices” when the truth was that it was about covering up bad transfers. The settlement will cement this false narrative.

If Schneiderman signs onto this, it will almost certainly invalidate an important piece of his motion against Bank of New York in the $8.5 billion Bank of America settlement (and you can be sure they’ll be in court the next day, pointing that out) and it will certainly invalidate Biden’s claim. From Schneiderman’s objection:

One of BNYM’s primary obligations as trustee under these PSAs was to ensure the proper transfer of loans from Countrywide to the Trusts. The ultimate failure of Countrywide to transfer complete mortgage loan documentation to the Trusts hampered the Trusts’ ability to foreclose on delinquent mortgages, thereby impairing the value of the notes secured by those mortgages. These circumstances apparently triggered widespread fraud, including BoA’s fabrication of missing documentation.

Economically, if the banks get released from failing to properly transfer thousands of mortgages into the trusts for a mere $5 billion they will have gotten the deal of the century. Especially because this settlement will do nothing to stop borrowers and courts from challenging foreclosures and continuing to expose the failure to transfer. So not only will investors pick up the cost of most of the settlement, but they will then still be exposed to the bad transfers, while the banks get a get out of jail free card.

If that isn’t bad enough, there is yet another element of the deal that many of the attorneys general seem to have missed: the money part of the deal is now wildly skewed in favor of California if Kamala Harris were to relent and sign on. Other states hit hard by foreclosures, like Florida and Nevada would get table scraps. Their AGs seem to have missed the information conveyed in this story by the Financial Times’ Shahien Nasiripour (emphasis mine):

California, home to the largest US property market, spurned an offer of roughly $15bn in lower monthly mortgage payments and reduced loan balances for its residents in talks to settle allegations of mortgage-related misdeeds by leading US banks…

California would have received more than half of about $25bn of aid that would be available to borrowers in a nationwide deal under discussion to settle allegations that banks illegally seized homes using faulty documentation.

Deal terms, sent to state attorneys-general late last week after nearly a year of talks between the banks and various states and federal agencies, did not include guaranteed minimums for any other states, people familiar with the matter said. Various state officials said they were unaware of the California offer.

Note Masto’s letter went out the same day that Shahien published this story. Her question 24 shows that she does not have any indiction of how much Nevada or other states would receive.

It is hard to fathom how any responsible attorney general can agree to this deal not knowing what they are getting for their constituents. It is particularly bizarre that Pam Bondi of Florida has been pushing so hard for California to join the deal rather than do her best to secure terms at least as good as those offered to California for Florida homeowners.

And the same question can be asked of Schneiderman. Why has he gone from pushing for a better deal or no deal to sitting on the sidelines? This brave talk of investigations is all well and good, but this settlement agreement is being finalized now, and all the PR related to his new Federal role seems to have taken him off his day job responsibilities at a critical time.

I’d like to think better of Schneiderman, but his apparent failure to oppose what looks like the release all of us had feared is not encouraging. It would be much better if the Masto letter were somehow poorly written and hence a mischaracterization, but it looks to be carefully thought out and drafted. And if the footprints in her missive are indeed accurate, the fix is in.