It’s bad enough that the overhyped mortgage settlement was a big victory for the banks at the expense of homeowners and the rule of law. It let servicers out of considerable liability at very low real cost, and even that is offset by the transfer from pension funds and savers to the banks by letting them write down securitized first loans without wiping out bank owned second liens that sit behind them.
But we now learn there are other gimmies that appear to have resulted from negotiating incompetence. Remember all those months, when Iowa’s attorney general Tom Miller was heading the negotiation, and the chump public kept being reassured that they were making serious headway on the servicing standards? Well, it turns out, first, as Abigail Field pointed out in March, the deal was not done. Major elements of the servicing standards remained to be completed, namely operational aspects of compliance.
Second, it turns out there is an even bigger, and more basic stuff up: the servicing standards in the settlement conflict with existing FHA servicing standards. This was one of the most overlawyered deals in history. How did this screw up take place?
Answer: the bank lawyers are likely to have noticed and let it go by because it was in their interest, while the government’s side was negligent in covering the basics. For the bank lawyers, any conflict is a work/profit opportunity: everybody has to hash out how to resolve the conflict. They presumably saw it and told their clients to let it ride, since they’d be able to take the position on every point in conflict that the more permissive standard should prevail. And that is probably how it will fall out: “if you are willing to let us do it that way under the FHA standards, how can you take the position that it’s too lax under the servicing standards?” And even if regulator with any spine could push back on that, you are guaranteed not see any evidence of backbone from the Obama Administration, particularly in an election year.
You can read the ugly details at the website of leading securitization law firm K&L Gates, which is pretty certain to have been involved in the settlement talks (hat tip April Charney).