Banks Win Again: Weak Mortgage Settlement Proposal Undermined by Phony Consent Decrees

Wow, the Obama administration has openly negotiated against itself on behalf of the banks. I don’t think I’ve ever seen anything so craven heretofore.

As readers may recall, we weren’t terribly impressed with the so-called mortgage settlement talks. It started out as a 50 state action in the wake of the robosigning scandal, and was problematic from the outset. Some state AGs who were philosophically opposed to the entire exercise joined at the last minute, presumably to undermine it. Not that they needed to expend much effort in that direction, since plenty of Quislings have signed up for the job.

The supposed leader of the effort, Tom MIller of Iowa, promised criminal prosecutions, then promptly reneged. His next move was to get cozy with the Treasury, presumably out of his interest in heading the Consumer Financial Protection Bureau. Federal regulators, such as the OCC and the Fed, who do not like being upstaged by states, were similarly keen to exert “leadership”, which really meant “lead a hasty retreat from anything that might inconvenience the banks.” So Miller, who was supposed to be representing the interests of the states, was instead working with the Treasury et al. to beat the state AGs into line (and separately, since the state and Federal legal issues are very different, the idea of having a joint effort was questionable from the outset). Not only have some Republicans (predictably) rebelled, but so to have the more aggressive Democrats, such as Eric Schneiderman of New York, Lisa Madigan of Illinois, and Catherine Masto of Nevada.

The first sighting of what this group might come up with was a bizarre 27 page proposal. It was bizarre because it represented an incomplete set of demands. You never do that in a negotiating context, you make a complete offer and see what other side’s counter.

The proposal was incomplete because it failed to describe the sort of release the banks would get (would they be released from claims by the state AGs on robosigning, or broader areas of liability?) and there was no section for penalties, despite press rumors and Congressional tooth gnashing about $20 billion and up sanctions. We dissed it not only for those reasons but also because it was largely a recitation of existing law, with only two new provisions: one was the end of dual track (in which servicers keep the foreclosure process moving ahead even as mod evaluation and approvals are also in progress) and single point of contact, in which the borrower has a dedicated person to deal with on his case. We deemed single point of contact to be undoable and unnecessary (as in if servicers straightened out their procedures and trained their staff adequately, they wouldn’t have the screw-ups that led to demands for single point of contact). Yet despite the obvious shortcomings of this deal, the bank lobbyist masquerading as a bank regulator known as the Office of the Comptroller of the Currency has absented itself from this effort in an apparent show of pique.

Given how underwhelming the 27 page leaked proposal was, it was predictable that the banks’ counteroffer verged on being a joke. As we noted last week:

It should really be no surprise that the banksters have the temerity to take a weak mortgage fraud settlement proposal, advanced by the 50 state attorneys general and various Federal agencies, and water it down to drivel. Since March 2009, when the Obama administration cast its lot with them, major financial firms have become increasingly intransigent. And this has proven to be a winning strategy, since Obama’s pattern over his entire political career has been to offer proposals that don’t live up to their billing, then eagerly trade away what little substance was there in the interest of having bragging rights for yet another “achievement”….

What’s striking is the utter lack of any teeth or any procedural requirements. The banks’ position is that they are to be trusted after having demonstrated again and again that they’ll take anything that is not nailed down. It is drafted wherever possible to make current practices fall within the “settlement”, which means the “settlement” is a total whitewash.

We then had wild card enter the picture. American Banker reported that “federal regulators” were about to issue cease and desist orders to force the servicers to take the negotiations seriously. Normally, that would be a potent threat. But the leaked version that American Banker posted didn’t even qualify as a slap on the wrist. As Adam Levitin explained:

The C&D order basically tells banks to set up lots of internal procedures and controls within the next few months and then to tell their regulators what they have done…. The result, I suspect, is that in a few months the bank regulators will declare that everything is fine.

(Even if the regulators think the internal controls are inadequate, it’s not clear what the consequence would be. My guess is that it just results in the bank regulator telling the bank to revise and resubmit.)…

(I was struck in some places by the linguistic similarities between the proposed C&D order and the banks’ counterproposal to the AGs. It’s impossible to know who was cribbing from whom, but the similar language is revealing.)

So here’s what’s going down. The bank regulators are going to provide cover for the banks by pretending to discipline them very hard, but not really doing anything. The public will see a stern C&D order, but there won’t be any action beyond that. It’s as if the regulators are saying so all the neighbors can hear, “Banky, you’ve been a bad boy! Come inside the house right now because I’m going to give you a spanking!” And then once the door to the house closes, the instead of a spanking, there’s a snuggle. But the neighbors are none the wiser. The result will be to make it look like the real cops (the AGs and CFPB) are engaged in an overzealous vendetta if they pursue further action.

Tonight, a story in the New York Times lends credence to the American Banker account:

The nation’s top mortgage servicers are expected to sign legal agreements by the end of this week compelling them to change their foreclosure procedures, regulatory officials said Tuesday.

The servicers, which violated state and local laws and regulations governing foreclosures, are agreeing to improve their methods in numerous ways. They will be required to have more layers of oversight and proper training of their foreclosure staff. The oversight will extend to third party groups, including the law firms that do much of the actual work of eviction.

The New York Times, however, seems to be buying bank/Adminisration PR hook, line and sinker. For instance:

Under the new rules, every homeowner in default will have a single point of contact with the servicer.

“Single point of contact” does NOT mean a dedicated person. A phone number with a live person answering it would do. This is basically the same level of service as provided with credit cards, minus the prompts to, say, get to the “lost or stolen card” person versus the “balance transfer” person. So it’s better than what servicers provide now, but it is an Orwellian defining down of what “single point of contact” originally meant.

Another Times misconstruction:

One of the most significant measures in the consent agreement will require servicers to hire an independent consultant to review foreclosures done over the last two years. If owners were improperly foreclosed on or paid excessive fees, they will be compensated.

If you read the consent decree the review is NOT comprehensive, as the Times erroneously implies. And as Levitin noted:

By far the most interesting bit in the draft C&D order is the bit requiring the banks to engage independent foreclosure review consultants to review “certain” foreclosures that took place in 2009-2010. There is no specification as to which foreclosures are to be reviewed or precisely what the standards for review are. But that’s all kind of irrelevant. Who do you think the banks are going to engage to do these reviews? Someone like me? Not a chance. They’re going to find firms that signal loud and clear that if they get the job, they won’t find anything wrong. It’s just recreating the auditor selection problem, but without even the possibility of liability for a crony audit.

Frankly, this sort of regulatory outsourcing is pretty astounding–the OCC has resident examiner teams at the major servicer banks. Shouldn’t they be the ones auditing the internal controls and performance, not a third-party compensated by the bank? (Oh wait, I forgot that the OCC is paid by the banks–it’s budget comes from chartering fees and assessments on the banks is regulates.)

However, the Times does confirm what I suspected last week, that this move was to end the Federal push for monetary damages which would be used for principal reductions:

The attorneys general have larger goals than the regulators. They are seeking to make the banks to cut the debt of delinquent owners. The servicers are balking at this.

The part I am puzzled by is who is behind this rearguard action. It clearly guts the Federal part of the settlement negotiations. If you pull out your supposed big gun (ex having done a real exam to find real problems, and it’s weaker than your negotiating demands, you’ve just demonstrated you have no threat. Now obviously, a much more aggressive cease and desist order could have been presented; it’s blindingly obvious that the only reason for putting this one forward was not to pressure the banks, as American Banker incorrectly argued, but to undermine the AGs and whatever banking/housing regulators stood with them (HUD and the DoJ were parties to the first face to face talks).

So the only part that I’d still love to know was who exactly is behind the C&D order? Is it just the OCC? I have a sneaking suspicion that Treasury has been playing both sides of the street on this one, and that the Fed either aligned with the OCC or pretending to sit it out, which has the effect of supporting the OCC. The only regulator certain to have been keen to take action against the banks was the FDIC (despite the Administration having put a target on Elizabeth Warren’s back, she is a mere advisor and the CFPB is merely a regulator in waiting).

But on another level, having the talks come to naught is a good outcome. It makes it easier for the AGs that believe in the rule of law to build and launch cases against servicers, and for the courts to continue to pile up examples of miscreant servicing and botched chain of title (these Potemkin reforms are going to change virtually nothing on the ground). So once a new set of abuses generates more lawsuits (fee pyramiding? force placed insurance? or just plain old “can’t find the note/chain of title”) the Federal banking regulators will again be scrambling to try to get ahead of a mob and call it a parade.

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  1. heavyjetcaptain

    This is one of the most read economics blogs in the world. Have any of these political pygmies like Tom Miller contacted you and offered to explain their volte face on just about everything they promised to the American public? I would be embarrassed to have to look at myself in the mirror if I knew the banks emasculated me of my gonads.

    1. Francois T

      Why do you assume Miller had gonads to begin with?
      If he could be bought off just because of his interest in leading the CPFB…assuming the presence of génitoires on this sad caricature is overly generous IMO.

  2. jake chase

    I don’t see how you can expect anything but a whitewash from these state AGs, and it is not news that bank regulation exists to protect banks. People who were screwed in foreclosure will remain screwed with trivial exceptions. People occupying these houses still have houses and they still have debt that cannot be serviced, which means it will not be serviced. Usury isn’t going away. The consumer economy would collapse without it. Strip away escalating home equity from the American Dream and you are left with debt servitude. In the nineteenth century they called it the “company store”. Nothing will validate the debt except perhaps a burst of inflation a la the Seventies, but it is difficult to imagine simultaneous inflation and stagnant wages. Since at least 1980 the country has floated in a fantasy bubble in which the most fantastic nonsense has been retailed by one charlatan after another and swallowed breathlessly by all but a tiny minority of realists who were brutalized as Cassandras any time they made a peep. You who are disappointed by Bush and Obama: just wait for the next guy.

    1. emca

      “Usury isn’t going away. The consumer economy would collapse without it.”

      Game’s name; servitude and dependency on its perpetuation. What I see, read is exactly this.

      Debt slaves forever!

    2. Bill

      The next guy ?!?!?!?!?!? you mean spineless worm , no “guys” or men I see anywhere ? How long do these crooks think they can carry on their dark greedy ways . There is an end to ALL things . May theirs be swift.

      1. nonclassical

        Obama has no move of integrity left other than to step aside-then we could get Russ Feingold..all corporate money
        in U.S. would be arrayed against Feingold-which means he deserves the presidency..

  3. Lucia

    “So the only part that I’d still love to know was who exactly is behind the C&D order?”

    Could it be…..SATAN?

  4. Jim Clausen

    I am from Iowa. I sent the original Yves post about his prosecution reversal to him. He replied that it was nice to hear “all” views but gave a political non-answer.

    I used to respect that man.

  5. Brick

    With the Horace case it seems likely time is running out. What I suspect is being covered up is that there was a period when loans were placed in to securitization after the PSA end dates, the question is just what scale this happened on. Up till now it has been very difficult for final investors to argue that the losses on their investments should not have occured due to banks not following their own contractual details. What the treasury, Fed and regulators might be afriad of is that investors taking more and more losses due to cases like the Horace case they will actually join up and go after the securitisers. Some part of the huge losses which occured to investors world wide could then be returned to the securitisers (banks). The US treasury cannot work without well funded banks, the Fed would struggle to maintain control and regulators would look inept. Even US investors might well rather book the loss rather than upset the applecart. What we have now is too big to obey the law and it won’t go down too well with the gernal population if it comes out into the light. Foreign investors and governments are likely to take a dim view if there is a cover up of course and thats probably why they need the AG’s as fall guys.

        1. nonclassical

          …meanwhile the usual corporatists are reviewing ways to
          manipulate the 2012 elections..if you havn’t viewed this fine video, pay particular attention to the portion on “VOTE SHUNTING”, and the Cheney I.T. man who formulated-
          was deposed the day before Obama took office, disappeared in small plane crash (no body) days later:

          We’re also back to “Diebold” vote fraud in several states yet again…

  6. TC

    Yet then there are state pension fund managers (investors with an interest in principal mods) … probably holding no small portion of RMBS … whose unified position to simultaneously dump their stakes (of course, after appropriately positioning for the bloodbath they threaten) would bring these pseudo men of law to their professional end (including our fascist-in-chief), and this in little more time than it would take to execute that trade.

    I would say, “God I pray,” yet though not so vain to insist such a prayer is unnecessary, I do believe concerted action on the part of a unified front of investors is about as sure a thing as one will come upon. All paper is at risk, then.

  7. bill n

    A good friend graduated from law school back about ’75. He told me he took a banking law elective and was flummoxed – he could not figure it out. Then it struck him – the bank always wins.

  8. ex-PFC Chuck

    Am I becoming hopelessly cynical because Tom Miller’s flip-flop brings to mind the possibilities that someone went looking for a skeleton in his closet and found one, or perhaps he woke up one morning to find a horse’s head in alongside him in bed?

  9. Dahotruth

    Principle reduction will hurt the holder of the RMBS…who is the biggest holder of RMBS….the Fed…or Fed financed shadow companies like Maiden Lane LLC I, II and III

    Pension funds have already taken a hit on their holdings but the Fed was buying the toxic RMBS at Par and we don’t know what their balance sheet looks like but I am sure they are not Marked to Market….

    1. Yves Smith Post author

      Um, you have this wrong…

      First, this proposal was for the banks to pay for the mods as part of the settlement.

      Second, and more important, investors would VASTLY PREFER deep principal mods to foreclosing. They are suffering 50% losses on prime mortgages and 70% on subprime. A 30% to 50% principal mod to borrowers with adequate income puts them way ahead.

      1. Francois T

        That bring to the fore THE most vexing question I’ve had for a long time:

        Why are investors so quiet and passive while being robbed blind in broad daylight by the banks, servicers AND the Federal Governement?

        What do they have to gain by not raising holy hell here? I mean, a consortium of biiig investors starting class action lawsuit seeking RICO status against all these cretins would force this whole issue to be front page for weeks on end. The embarrassment just for the Obama administration could be very painful. (they deserve it in spades, BTW) And let’s not talk about the bought-and-paid-for Rent-A-Congress and their Ben Dover Army of Clones called “regulators”.

        I just can’t believe that investors are sitting on their thumbs while being BFed by such psychopathic bandits.

  10. Eric

    Why not just shutdown this episode and have the federal goverment give $2B in grants to states (weighted by outstanding first mortgage balances, maybe) to hire attorneys to help enforce the current laws? Despite much of what we read, this area of law is not that complex in the sense that people were complying with successfully for many years before they decided that it was too much of a bother. It didn’t get harder to comply with – just some parties observed it was cheaper not to and gambled that they would never be called on it. Grind it out, case by case.

    1. monday1929

      Enforce existing law- what a revolutionary idea. Could you put this in simpler terms so the AG’s could understand it?

  11. Sonya Brewer

    EMC/BEAR STEARNS been there did that paid 28 million all though not admitting any wrong doing and guess what folks the FTC offered me a check for forty dollars cause EMC who does not own the NOTE, NOR MORTGAGE as I hold the original NOTE thought they could pay people off. NOT ME SEE YOU IN COURT!!!! The Trustee was never sold the Note …. Hell the depositor was never sold the note … the successor trustee was never sold the note come on FRAUD>>> FRAUD all of you committed FRAUD JPM < BONYM MERS FRAUD LIES FAKE DOCUMENTS UNLAWFUL and FRAUDULENT ASSIGNMENT by a ROBO signer

  12. Michael Olenick

    There is nothing stopping the individual AG’s from pursuing the cases in their own state’s individually. Banks scream about federal preemption whenever they’re faced with state regulatory laws on consumer debt issues. But property law is always state-based because real property is the only thing that cannot possibly become interstate: real-property is stuck in a state, and so are the laws governing real property.

    Treasury has never helped in this issue; they’ve defined anything that they perceive as good for the existing banks as also good for everybody else. No matter that new bankers — smarter bankers than the irresponsible, reckless bunch of too-big-to-fail losers — would be happy to take over.

    State attorney-general’s should just move ahead on their own, ignoring the OCC, which has no jurisdiction on real-property laws anyway. Start to throw bad titles out of their court registries, move towards civil forfeiture and grab abandoned properties, sue for injunctions preventing banks from moving cases through the system and we’ll begin to see real change. There is nothing stopping the state AG’s except themselves.

  13. Roger

    As a career Community Banker, it makes me sick to my stomach to see what some of these mortgage and foreclosure mills are getting away with and the inaction of the regulators. If my Bank did something like that, we would be shut down in a heartbeat.

    All of this malfeasence also makes it harder on the community banks because we do try to work out a solution for our customers and when the loan does break down, we are crucified through the foreclosure process and have to pay double the legal costs on a loan that we are already losing money on. In addition, my foreclosure process now takes 9 – 12 months because I have to endure countless delays that were all made possible by the misconduct of the giant mortgage brokers and their incompetent legal counsel.

    Do all of you realize that most of the financial and bank regulators have never actually worked in a community bank and sat across the desk from a customer? Most of the regulators are insurance people and we all know what “insurance people” did in AIG.

    The AG’s should prosecute the guilty parties in the “shadow banking” industry and perhaps people in the industry who really want to do the right thing will have a chance to survive.

    1. Allen C

      A criminogenic environment is corrosive on society. We can hope that some real law enforcement return once the sovereign debt bubble pops.

  14. kravitz

    just making it look like they’s doin sumthin, so it don’t be lookin like they’s be doin nuttin…. obama 2012?

  15. Quandry

    Can someone, anyone, please tell me if someone, anyone, is actually DOING anything about THIS!

    By THIS, I mean the cornucopia of injustices, unethical behaviors, breaches of responsibilities, frauds, media antics, conflicts of interests, revolving doors,class warfares, social injustices, deregulations and all sorts of ECONned malpractices.

    While I enjoy reading the tsunami of analyses on a dozen or so reputable blogs, I am left thirsting for some semblance of actual response, proactivity and constructive suggestion.

    Please, “beam me up.”

    1. financial matters

      The courts seem to be the best bet. Since the banks didn’t partake in reasonable loan modification programs, debt re-structuring will likely be forced on this fraudulent mess in the form of large principal reductions and/or free homes. Also the govt should step in and prevent these modifications from being taxed as income. They give enough breaks to corporations, I think the emphasis needs to shift…

  16. R Foreman

    < However, the Times does confirm what I suspected last week, that this move was to end the Federal push for monetary damages which would be used for principal reductions:

    This is probably for the best, since these too-largess banks will get wiped out by an avalanche of home ownership maintenance, RE taxes, and legals fees on properties that nobody will have desire or ability to buy from them. Any principle modification will only delay this end, so I say let the foreclosures continue, let the collapse gather pace.. release the hounds.

  17. MichaelC

    Is it possible to read the OCC whitewash as capitulation, that the whole ‘settlement’ idea is now a complete non event for all parties involved?

    If the OCC issues C&D orders that are meaningless and the servicers agree to the meaningless conditions, and no one is fined and the AGs go home and do what they do ought to do, then what’s been accomplished? In that case the only casualty is Tom Miller’s ambition, which would be a reasonable price IMHO.

    Looks like nothing’s been gained or fofeited, no one’s been harmed or penalized. Yet while this parody was playing out the courts have been active. Investor’s now have a little less uncertainty that THE grand gov’t fix is in that will undermine their rights. Homeowner’s have had more time to reflect about the leverage they have against the banksters, and the bankers have a little more time to pad their loss reserves from the free fed money/treas spread.

    Sheila Bair’s comments on 60 Minutes were telling, in that she seemed to be broadcasting her anxiety that a failure to ‘get ahead’ of the lawsuits would have dire consequences for the FDIC. She seemed to be hinting that failure was imminent, and, to me at least, her body language signalled she was preparing the viewers for a bumpy ride ahead on the legal front, no matter how this turns out.

    So I’m looking to the FDIC as the spoiler here. If they side with the OCC, it just delays (but doesn’t neuter) options at the FDIC. If they don’t go along, that’s a good thing too.

    I can live with an ineffective whitewash. It could be soon forgotten.

    1. MichaelC

      Oops, You said all this in your last paragraph.

      I’ll just emphasize that Sheila Bair’s 60 Minutes performance reinforces the point that the regulators recognize they need to lead the next parade, and that looks increasingly less likely,especially if she bails out in this act. Hopefully she will and leave Timmy (and his boss) as the poster boy(s) for this charade.

  18. Dave

    I keep coming back to the 27 pg term sheet. I agree that Miller went soft between late 2010 and spring of 2011 and that pgs 1-20 of the term sheet were a joke (asking for what was already legally required), but I think the principal reductions outlined on pgs 21-27 were potentially severe. Seems that part of the term sheet has been overlooked by all the anti-bank bloggers.

  19. Donna

    AG Tom Miller is the lead negotiator in 1998 master tobacco settlment. He settled with 4 major tobacco companies on behalf of 46 states for $206 billions dollars over $1.23 pack of cigarette.

    15 years later, consider the inflation, now AG Tom Miller is attempting to settle with 6 major banks on behalf of 50 states for $20 billion dollars over the most expensive investment the homeowners have. There is no criminal prosecution on the table. It doesn’t make any sense to me?

    Please sign the petition

    Join the fight to break up ‘too big to fail’ banks, demand criminal investigation and criminal prosecution.

  20. Kevin

    How exactly do the banks win here? They get to foreclose on mortgages on which they will take a huge principal loss? Plus calling the whole robosigning deal ‘fraud’ is inaccurate. Did not the mortgages exist? Have payments not been missed for months/years? To call this mortgage fraud suggests that the debt doesn’t exist. It does. And the borrowers have defaulted.
    The bulk of these loans are refi money. Such a borrower is making out like a bandit. They get to keep the money they cashed out of the house, effectively the loan turns into income but they don’t even owe taxes on it now. So it’s as if they sold the house to the bank at the top of the market, and for a year or two got to live in it for free too. Pretty smart.

  21. Paul Tioxon

    It is the hardest thing in the world to do, to get one human being motivated to kill another. Armies would bloody the troops, let them go into combat for a good or no good reason, to expose them to the one thing training can’t provide: death of a buddy and knowledge that it could be you next. No one is winning. The banks have lost a generation of mortgage sales to and underwater, devastated housing market. A small cadre of management is looting their way to a hereditary aristocracy. And the regulators are weak, corrupt or coopted.

    But just like a conservative is a liberal who has been mugged, tens of millions or middle class people who had no time for politics or the government have had their eyes crowbared wide open. The smoldering resentment of lives ruined will never go quietly away. And all of those most closely associated with this mess will pay a price in creating wounded, angry and vengeful millions. Whatever party they land in or who ever they vote for, it will not end when the economy picks back up and people reconstruct their lives. They will act out or be exploited by those who will act to capture the elected offices and the bureaucratic machine that controls our social order.

  22. nonclassical


    They are too buried in debt to “act out”…anyone think Bushitters weren’t aware where all this was going, as they changed bankruptcy laws to accomodate banks?

  23. Dave

    Miller has gone soft but my question remains . . . . I think the principal reductions outlined on pgs 21-27 were potentially severe. Seems that part of the term sheet has been overlooked by all the anti-bank bloggers.

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