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Yet Another Mortgage Settlement Gimmie: Conflicting Servicing Standards Play into Hands of Banks

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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).

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6 comments

  1. diptherio

    I think a universal divestment campaign is called for against the multi-nationals. Not only divestment by individuals, but also by municipalities, universities and pension funds. We’ve all seen that doing business with these crooks is a sure way to get yourself screwed (and not in the good way), so why should we the people, or any of the people’s institutions be doing business with them?

    Move Your (0ur) Money!

    1. F. Beard

      Not good enough. The corporations will just get loans from the counterfeiting cartel, colloquially known as the “banking system”, and buy back their stock.

      It all goes back to the banks.

      Until you are willing to do what some of the greatest men in history have recommended and put a stake though the heart of banking (all government privilege), then you are doomed to continued slavery to them and their big borrowers.

  2. Situation Rumpus Room

    What happened to all the calls to rid the FHFA of DeMarco?
    Too much celebration and hoopla over the sea burial anniversary perhaps? Gotta “MoveOn” from that mortgage thingie lest it tarnish Obam? Banks are still on a full court credibility press, they need all the help they can get from both owned parties, radio ads, shiny front loaded retail outlets and mood music for the still well off.

    1. Yves Smith Post author

      A non-starter.

      DeMarco is acting chief. Nominating a permanent chief is subject to Senate confirmation. DeMarco is well liked by Republicans, and has also played this very well bureaucratically (as in no fumbles that put the Dems in a strong position). The Rs would not approve any replacement that is to the left of DeMarco (who also has a long career of being a selfless public servant. You may hate his call on this one, there are good reasons to be upset, but he has a long history of fair dealing).

      If Obama were somehow to get him to resign, whether or not he nominates a permanent chief, one of the deputies would become the new acting chief. All four deputies share DeMarco’s views; they are likely to be more intransigent in the wake of a DeMarco expulsion.

      1. MoveOwner

        Same team, but different parties. (Why would principle reduction imply ‘left’ or ‘Democrat’, for that matter?)

        “The focus on DeMarco has been very convenient for the Administration, shifting away from their housing deficiencies and toward this one Bush-era official who is supposedly gumming up the works.”

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