Banksters’ Mortgage Counteroffer Makes a Further Mockery of Fraudclosure Settlement Negotiations

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”. The degree of exaggeration involved is roughly equivalent to him claiming he’d bedded every woman he had ever met for coffee.

To recap the state of play: early in March, American Banker published a leaked copy of a 27 page term sheet presented by the 50 state attorneys general (more accurately, Iowa state AG Tom Miller representing the Administration and negotiating against the AGs on its behalf), the Department of Justice, and various Federal regulators. Yours truly, Karl Denninger, and various other quickly derided it. All it did was require servicers to obey existing law plus two additional requirements: end the so-called “dual track”, in which banks keep the foreclosure process moving forward in parallel with the modification process, and establish single point of contact, which means that homeowners in mod discussion would deal with a single person at the servicer, or if that person was not available, a supervisor. Tom Adams also pointed out that the various “obey the law” demands in this settlement proposal less stringent than the terms of a 2003 consent decree with miscreant servicer Fairbanks, which other in the industry understood to represent the new standard for conduct. So now it appears the exercise is defining deviancy down to the bare minimum level and waiting for the industry to ignore it as before (admittedly, after Fairbanks, the servicers cleaned up their acts for a while, but it was not very costly in a low-delinquency/default environment).

Note we said we didn’t think single point of contact was either doable or necessary; the chaotic process many borrowers many borrowers suffered under HAMP was the result of both a servicer “dog ate my homework” effort to lose documents to sabotage mods, plus real, longstanding software platform problems. You’d have to address the operational issues as a precondition of implementing single point of contact, and if the servicers did that, there would be no excuse for the sort of dropped balls that led to demands for dual track in the first place.

Our recommendation to the attorneys general was to run, not walk, from this proposal. Anyone in a state where voters were suffering as a result of foreclosures would be certain to pay a political price for a settlement deal designed to provide adequate optics to allow the Administration declare “peace with honor” while giving the banks yet another reward for criminal misconduct.

So now to the banks’ counteroffer (for the record, it appears Matt Stoller made it public). It isn’t just even worse, which was to be expected, it’s insulting:

March 28, 2011 Bank Mortgage Fraud Settlement Proposal

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. Start with the very first point under II A above. The servicers have already done that as a result of the robosigning scandal, or at least that’s what they’ve said over and over in Congressional testimony and to the media. Do we know whether these processes go far enough? The banks’ position is that it’s not the AGs’ or the Federal government’s business. By contrast, the AG/Federal proposal required training, providing sworn statements supporting the borrower’s right to foreclose in non-judicial foreclosure states, clear indication on affidavits as to who the employer was (clarifying the relationship of anyone relying on corporate authorizations), specific requirements as to payment application (as in no holding checks, no use of undisclosed suspense accounts). Aside from the sworn statements in non-judicial states and the training requirements, the other items are basically recastings of current requirements. But the banks refuse to concede even that. They are shooting for a settlement standard at or where possible BELOW that of current law (and since that hasn’t been enforced with any seriousness either, why should they worry?). A lot of belt and suspenders reaffirmation of current law and contractual requirements is gone, such as no fee pyramiding. For instance, get a load of this:

Servicer shall provide accurate information to borrowers relating to its loss mitigation programs.

Translation: We won’t engage in consumer fraud as far as providing loss mitigation program information is concerned.

There are some items that are noteworthy, nevertheless:

Chain of title. The original proposal set forth various requirements regarding chain of title, such identifying the holder, custodian, location of the original note, as well as interim assignments. as providing borrowers in non-judical foreclosure states with a certification. Again, if the banks had been meeting their legal requirements, this should already be in place. But see this curious section in the counterproposal:

Screen shot 2011-04-01 at 6.18.46 AM

Exactly how can the servicer “….assigned mortgages or deeds of trust at the formation of the residential mortgage backed security”? Do these servicers have a time machine? And the servicer was never part of the original conveyance chain; even if the deal was conducted within the same organization, Countrywide as originator is not the same legal entity as Countrywide as servicer. Moreover, as many borrowers know, servicing rights have often been assigned, further complicating any time machine operation by putting the servicer at an even further remove from the original transaction. Or is this some sort of weird legalese that authorizes backdating of documents? I can’t imagine they are brazen enough to try to get cover for that sort of operation, but I am also struggling to understand the intent of a nonsensical-looking piece of drafting that was clearly reviewed by a ton of very big ticket lawyers.

Single point of contact. The banks do Orwell proud:

Servicer will establish a single point of contact, which may be more than one person…

Breathtaking. So what is a single point of contact? A phone number? Well, later it does say, “SPOC will remain assigned to borrower’s account and available….” But since SPOC can be whatever the banks want it to be, don’t hold your breath.

Dual track. The banks have cut back the AG/Administration proposal to mean very little. The bank merely has to not foreclose (as in it can keep the process moving forward up to the final step) IF the borrower has completed all documentation and a mod decision is pending or the borrower is in a trial mod and current. The banks do agree to establish a third party portal…..but…given the frequency with which my insurer rejects perfectly good medical claim form on the bogus basis that they didn’t scan correctly (!), don’t think that there isn’t room for abuse here.

There are some other losses in the language that I don’t think would have meant much in practical terms, such as an affirmative obligation to do loan modifications, and mention of that ugly word, principal modifications. The controversial requirement to do pro-rata writedowns of second liens has also been scotched.

This was Tom Adams’ reaction:

When I first saw the proposed settlement from the AGs a few weeks ago, I said that it looked like the AG’s had simply taken dictation of the servicers’ wish list for a settlement. Little did I know… Now that I’ve seen this I am shocked at how similar the documents look.

In sum, this is embarrassing. The banks put in phrases like “reasonable efforts” – which they already argue they are taking, promise to make best efforts to do better, and chalk it all up to a big misunderstanding and a lot of burdensome paperwork. The Administration and AGs basically agree.

They all hope that the process will help make the headlines go away – after the promised quid pro quo (Miller to head CFPB etc) occurs.

In the meantime, the issue is effectively stalled while it is “investigated” and “studied” so JPM and others can pretend their balance sheets are fine and get approval for their dividends. Of course, having the banks pay dividends is an important national security interest for the recovery of the economy.

This document, and its AG doppleganger, are further proof that the banks have won the engagement – the politicians were all effectively captured (and the investments in them were all “successful”). Perhaps a few solo AGs can make some headway and some private litigants might draw a little blood here and there. But the political battle is over.

On the one hand, Tom affirms the point made in the post: when you consider the backdrop of existing law on these topics, the substantive differences aren’t as great as they appear to be between the weak proposal and the abominable counteroffer. But the flip side is the language in deals more often that not reveals the attitude of the principals (either directly or via the sort of counsel they chose to represent them). And this proposal says the banks are telling the public to go to hell.

Update 8:00 AM: Adam Levitin, who was more positive about the AG/Administration proposal than I was, shreds the counteroffer. His whole post is worth reading, and I though I’d extract his section on the chain of title issues, where he puzzles over the same section that bothered me:

My initial read was, wow, they’re saying that their going to make sure that chain of title is proper. But then I started to wonder about this. So it would require a process to document an enforceable interest. What does that mean? Does it mean that the servicer will provide the court with a statement of chain of title? That’s not what’s required, here, though. This seems to be an internal control process.

Then I read further. This would seem to giving a blessing to endorsement of notes in blank. As a generic matter, as I’ve said before, that’s fine. But if the PSA calls for something different, that’s a problem. So it looks as if the servicers are trying to use the settlement as a way to change the legal requirements regarding the transfers of mortgages. Neither the Feds nor the AGs have the power to grant that, however.

There is this interesting language about “appropriate transfer and delivery of endorsed notes and assigned mortgages…at the formation of a residential mortgage-backed security.” Is that a concession that transfers that occur after the closing date are invalid? I can’t imagine so, so I’m puzzled by this.

And then there’s the “all in accordance with applicable state law.” I might be seeing a problem where there isn’t one, but I worry that this is an attempt to change the applicable law in foreclosure litigation. The “applicable state law” phrase is used twice in this paragraph. First it is used in reference to the promissory note and mortgage. That would be the state law of the state where the property is located. But the state law governing the “appropriate transfer and delivery” of the notes and mortgages is not the state law of the property situs. It’s the state law of the state governing the PSA (most likely New York). The way this paragraph is phrased, however, one would think that “applicable state law” would refer to the same state both times its used, and by using it first in reference to the situs state for the property, it would prime a reader to think that the situs law governs the transfers.

There are lots of other points to criticize with this counterproposal, but it’s hardly worthwhile doing so–it’s such an obvious in-your-face document that it’s really not worthwhile engaging with serious. This isn’t the basis for a good faith discussion of mortgage servicing reform. It’s simply another part of the banks’ strategy to run the clock and thereby avoid doing principal reductions–that’s what will cost them the big bucks, not a $20B fine.

Note the press reports I read never said the leaks to say that the principal mods would be in addition to the $20 to $30 billion settlement figure bandied about, that instead they might be in lieu of them. But since other reports made clear that the thinking was changing on an almost daily basis, who knows what the plan is now.

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  1. Bankruptin'

    Let’s look at this mess from the AG’s perspective, rentiers are first in line with access to land, courts and politicians, i.e entitled. That’s about it.

  2. F. Beard

    What a twisted mess we make
    when we dare to fractionate.

    “Thou shalt not steal”,
    a simple rule,
    but much too simple
    for complex fools.

    The game was lost in 1913 when the Bankers got the government enforced right to loot via the Fed and the Progressives settled for a share of the loot via the Income Tax.

    And we see how well that has worked – World War I followed by a Great Depression followed by World War II.

    Great Depression II and World War III next?

    The whole system is rotten but it sure keeps a lot of lawyers, judges and other folks employed. What a waste – trying to make an inherently dishonest system work.

    1. Nathanael

      Arguably the failure dates back to 1909 and the formation of the Federal Reserve as a “private solution” for a problem which *needed* to be dealt with by government. If the “Greenback” movement had won originally, there would have been no need for a Federal Reserve and we would not have ended up with the Central-Bank-controlled-by-private-bankers which we have now.

      Of course, that doesn’t really address the problem of regulatory capture or purchase of politicians, for which we must blame the Founders for designing a nonresponsive political system. Turns out the Parliamentary system works better — no US Senate, votes of no-confidence at any time to throw out corrupt governments, and when a good guy *does* become Prime Minister, as happens occasionally, he actually has the power to fix things.

      1. F. Beard

        Debt-free fiat (United States Notes) that is only legal tender for government debts, taxes and fees, is definitely 1/2 of the solution. But we also need private money supplies (only acceptable for private debts) to avoid the problem of regulatory capture that you mentioned.

  3. MKJ

    So the way I read it, the AGs are trying to form a consensus on level/standards to which existing laws are to be enforced. Negotiating which the people who may be violating these same laws.

  4. furiouscalves

    the part that really gets me is this:

    Yves said “the servicer was never part of the original conveyance chain” – so this agreement is must be completely invalid since the servicer has no interest there.

    also Levitin said “it looks as if the servicers are trying to use the settlement as a way to change the legal requirements regarding the transfers of mortgages. Neither the Feds nor the AGs have the power to grant that, however.” – so now we have two parties that do not have interest there.

    do either the servicers or the feds/AGs even have the right to negotiate a “settlement” regarding contractual conveyance into trusts? probably not, but …. oh i could go on but i will save it for my executioner.

    1. Francois T

      If Obama and the AGs get to ram this “settlement” through, with two parties with no interest, servicers-fleeced investors will have no other choice than a class action lawsuit rivaling pretty much anything this country has seen.

      The alternatives are:

      1) a de facto re-writing of all real estate laws in this country.

      2) a very messy and public fracture of the AGs coalition. I’ll spare the personal the description of the potential political fallouts.

      3) A decade or two of total legal fog, clouded titles and utter clusterfuck in the US real estate market. Is Obama so dumb that he would risk such an outcome? Does he even GRASP what is at stake here?

      1. Lucy Honeychurch

        Keep Fannie/Freddie as govvie orgs., and offer standard 30-yr. mortgages through the govt., serviced by the govt.

        What’s wrong with a little public/private competition?

        Then, let them have their settlement.

        If the US Government is benefitting from millions of individual asset flows, generated at defined rates for defined durations we, effectively, put a floor under our Gov’t bondholders and – poof! – there goes our debt/deficit problem, n’est pas?

  5. Francois T

    “The degree of exaggeration involved is roughly equivalent to him claiming he’d bedded every woman he had ever met for coffee.”

    Hmmm! Do we detect a nano-smidgen of irritation-driven sarcasm here?


    1. Dirk77

      Maybe he used to do that, but it got old, so he’s now on to bigger game. He could use the SETI project to broadcast his “achievements” to the universe. But then that might get some angry advanced alien race to violate their Prime Directive and come a visitin’.

  6. monday1929

    No settlements. Prosecutions and jail time. Do the AGs know that forgery and fraud are crimes?

  7. Antipodeus

    The section in the box above, under “Chain of Title” (which I can’t c & p) sounds suspiciously like an attempt to legitimize the role of MERS?

  8. viking

    Mers does not require its members to tell when a note is sold. There is no check and balance to ensure that a note is not sold multiple times, nor is there a single place to find out who owns the note.

    The note to CDO process merely assigned ‘cash flows’ to the investors, and if individual notes defaulted, they were pulled out to make new trusts that were designed to fail, all while allowing choice clients to short those trusts while holding a public long share for optics (see John Paulson). I looked into a trust yesterday where a single loan was in all 21 tranches–sold 21 times!!

    Let me repeat: there is NO mechanism that stops entities in the securitization chain from selling the same note more than once. None. Remember the plot of the PRODUCERS?

    There are no cops to cry to. The OCC, Treasury, Congress will not bring down TBTF in order to enforce the law–their own livlihoods are at stake.

    This is a level of de facto corruption that is unprecdented. This corruption is now metatisizing–its coverup via the FED is resulting in worldwide inflation.

    A campaign of peaceful non-violent legal protest is our only hope.

    We should organize a nationwide campaign for people to withdraw cash/accounts from TBTF on the same day and put them in local credit unions, etc.

    Point is, we need to DO SOMETHING. Not blog. Not ask for QWR. We need to take action, before the next crisis hits, which will be the UST tipping point.

    Yves, as a leading light, your bully pulpit could have a huge impact, along with the other econ-truth blogs. I’m willing to volunteer. Who is with me?

    1. Obsvr-1

      blogging, networking and spreading ideas is a necessary step in a grass roots effort to make change, demand change and influence leadership to reform.

      We are our government, it is outrageous that the representatives that we send to Washington get sucked into the corporatocracy and ignore the will of the people who elected them. It would be great if a critical mass of folks would use their power of voting with their dollars and feat by taking business from TBTF to local banks/credit unions and patronize local business.

      With the amount of institutionalized fraud/crime spreading through our financial and system of gov’t it is just a matter of time to hitting a tipping point where more aggressive action will appear.

  9. maude

    Sent a long indignant e-mail to my state AG (a corporate tool, but I digress) hitting all the high points. I only hope I sounded like I knew what I was talking about so that they at least read it. I know they got it because I received a “thank you for your email” response.

    I think a new one pointing out the laughable counter-proposal is in order. I think I will ask some specific questions this time and see what I get.

  10. MichaelC

    What relief did Fairbank get from the AG in their settlement?

    The thorough shredding of each side’s offer/counteroffer is fascinating, but if the servicer’s and bankers offer is bmodelled on the Fairbanks precedent,I’m betting the banks/servicers will ultimately ignore their side of any agreement this time as well, while they reap the rewards of AG forebearance.

    So it seems like a good time to ask, what do the bankers think they can reasonably get away with? in order to focus attention on the AGs to call bullshit as soon as an immunity trial baloon is floated.

    what did the AGs give away with Fairbank and Countrywide?

  11. chaunceyG

    “A campaign of peaceful non-violent legal protest is our only hope.

    We should organize a nationwide campaign for people to withdraw cash/accounts from TBTF on the same day and put them in local credit unions, etc.”

    totally agree, problem is the house of cards is bigger than you think. Look at situation in Japan as a comparison, BOJ/G7 had to step in with a QE2 sized liquidity injection to prevent a global run on the yen. No way of knowing the what part of the JPY gap up was due to repatriation, cash withdrawals, or provisioning against future credit writedowns, but I’d imagine absent a major intervention there would’ve been a subsequent stock market crash. Without an alternative source of credit for communities to function, and an alternative banking system that could withstand the collapse of bofa, citi, wfc and jpm I’m afraid you’d have total anarchy no? Either way, we do need to start to build an alternative system as saving the current one at the expense of the rule of law and individual representation is not an acceptable trade-off. Right now our representative government clearly serves its creditors at the expense of the long term viability of the people its supposed to serve. This is no different than in Iceland, Ireland, Greece, etc. and we should expect that our politicians will unknowingly serve us up to a similar fate.

  12. hermanas

    “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.”
    Esp. when one remembers the proposition that “money is the root of all evil”, and their role in this play.

    1. Name (required)

      The actual biblical quote is: “The love of money is the root of all evil” (1 Timothy 6:10) and while I don’t believe in any divine source for the Bible I think the guy who wrote this is correct – money itself is a useful tool, but it when money itself becomes the beginning and the end (as it does with investment bankers) and/or for people who can only measure themselves and their value by their monetary worth (hence their need for obscene salaries and bonuses which bear no relation whatever to any value they have created) money becomes a tool of evil damaging both the individual in love with it and the society which applauds it.

  13. Donns

    Any settlement without the following will not be a settlement to hold banksters accountable for defrauding this great country and its people.

    1. Break up ‘too big to fail’ banks
    2. Criminal investigation and criminal prosecution to rebuilt the integrity of the banking system.

    p.s. We want and need Elizabeth Warren to lead the CFPB.

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