It’s Now Official: No More Joint Federal/State Attorney Mortgage Settlement Effort

Housing Wire has confirmed what American Banker and the New York Times had indicated was underway, namely, that the formerly joint state/federal effort to deal with foreclosure abuses (still undefined beyond robosigning and improper affidavits) are now separate initiatives. We think that’s a good thing, since the state and federal law issues were so different that it made the idea of a grand global settlement seem a tad deranged, particularly on the fast timetable the Obama crowd was pushing for. As a reader with securities law regulatory experience noted via e-mail:

Whoever was leading this charge for the Feds totally miscalculated. The fundamental failure was to separate the past from the future. The CFPB is about getting the systems right in the future so that securitization can work without all the fraud and self-dealing. The foreclosure mess is a state battle about fraud on the courts in foreclosure actions and other state real estate matters such as the effect of MERs. To the extent that fiasco bankrupts some banks, then it may become a Fed (FDIC) issue at that time, but not until.

As we’ve noted, we also think the 50 state effort is misguided, given how far apart many of the AGs are. Our hope is that enough of the one who like doing their job (as in prosecuting misconduct) defect and pursue their own actions.

The Housing Wire piece did fill in one part that had been a bit of a mystery: who besides the OCC was behind the laughably weak cease and desist order which is in reality a fig leaf for the fact that no meaningful Federal actions will be taken? It turns out the other chief bank enablers, Federal Reserve and the Office of Thrift Supervision (who covered themselves in glory as the supervisor of AIG’s holding company) also joined this action. That means the intended-to-be-tougher action that was thwarted was led by the FDIC, with the CFPB providing analytical support (the CFPB can’t take direct action, it can only be brought in by other principals) and perhaps HUD (note the DOJ also participated in the talks, but that may have been a function of regulatory protocol).

The other interesting aspect is that Tom Miller keeps changing his story as far as state AG investigations are concerned. He keeps maintaining that the states are investigating in some sort of orchestrated fashion, when the few reports I am getting from people in contact with the AGs says they are being largely kept in the dark by Miller and the ones who are moving ahead seem to be doing so independently. But we pointed out last week, Miller has a rather footloose relationship with the truth:

You can’t settle what you haven’t investigated. The fact that Tom Miller has suddenly mentioned to an obscure mortgage industry rag that state banking regulators probed Ally is unpersuasive. First, Miller has a record for being less than truthful; he promised criminal investigations in no uncertain terms and has been walking that back ever since. Second, his own staff and various state attorneys general have effectively said there has been no investigation (as in they’ve at most gotten voluminous but undigested responses to subpoenas). You’d think state AGs would be aware of what their own state banking regulators were up to on a hot topic like foreclosure fraud. Third, I guarantee whatever thin “investigation” has taken place has overlooked the most important issue, and one that lay at the heart of the 2003 FTC/HUD examination of and settlement with rogue servicer Fairbanks: junk fees and misapplication of payments that push borrowers who’d otherwise be viable into foreclosure.

Bottom line: the idea that the Federal regulators were ever serious about fixing servicing was revealed to be a joke last fall when they announced a patently phony investigation to try to pretend otherwise. This latest regulatory theater production is more of the new, post crisis normal in DC

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  1. Matt Stoller

    Unless banks put a lot of investment into their servicing arms, they simply can’t obey the consent decree. Does anyone really see that investment happening?

  2. attempter

    Whoever was leading this charge for the Feds totally miscalculated. The fundamental failure…..

    I don’t follow. There’s no element among “the feds” who hasn’t been 100% in the bag for the banks from the start.

    (Though not directly relevant here, that includes Warren and anyone else voluntarily involved in the CFPB scam.)

    BTW, securitization can never “work” (if that means being anything but robbery), and was never good for anything anyway. When are people going to get that straight?

    We can easily produce sufficient food and other necessary goods without securitization. Yet with it, suddenly we have a problem even feeding ourselves. What’s the problem here? Let’s see….

  3. jake chase

    Securitization cannot be “fixed” except by pretending that fraud did not exist or was confined to a few bad apples. That is the only way in which financial misconduct is ever fixed. The fifty State AGs are in way over their heads and now know (if they ever didn’t know) they are being set up for a whitewash. The issue is whether they can declare victory and position themselves for future political glory, or whether Yves will expose their duplicity before their own careers can be advanced. Rudy Guilliani should be damn glad Yves did not exist in the Eighties. He would still be wiping dog turds off his thick soled shoes and drinking stale coffee from paper cups.

  4. f247

    It seems like the federal side is doomed to begin with if they are setting up to punish/regulate/fine something that isn’t going to be their long-term domain. I keep reading that as of this summer, servicing regulation will fall under the CFPB.

    So if I’m sitting at any of the OCC/OTC/etc., why would I want to impose a harsh punishment? I don’t see how incentives would line up to produce that outcome.

  5. indio007

    I agree 100% securitization can not be fixed for a simple reason. An MBS is basically taking a bunch of private securities (mortgages) and turning them into a public offering. An accurate prospectus can never be had because the creditworthiness of the underlying mortgages can never be publicly disclosed due to privacy laws. There will never be a way to fully disclose the strength underlying collateral. You have to rely on abstract representations of the collateral i.e. sub-prime, prime, etc…

  6. Bravo

    One big oversight: Securitization = irresponsible lending = asset bubbles = dysfunctional system of loss mitigation post-bubble = unsettling and unnecessary periods of boom and bust.

  7. Paul Tioxon

    There needs to be some clarification of the dual nature of banking in the US. There are state banking laws, and requirements for a license within each state to carry on banking in each state. Then there is the National Banking Act, the federal law which allows for banks to operate nationally, without, in general requiring a state banking license in every state where they do business. Up until recently, most banks were state banks and did not operate across state lines. If and when they did, it was usually in Metro markets like N Jersey NYC CT or S Jersey PHilly Delaware.

    Of course, there were many state requirements to bring some business revenue into the JR partners, physical location of office, local phone number and other hooks. And of the over 20,000 banks in the US by 1980,most were state licensed, not NBA. Today, there are 1000s fewer banks and the majority will be if not by now, NBA operations. For the most part, this effectively puts them out the reach of state banking commissions and state AGs. For example, West Virginia AG, has fought for years in the federal courts just to get standing to bring suit against deceptive practices of Capital One Bank, among others. He finally established the fact that Capital One Bank, for years up until March of 2008, was operating with only a State of Virginia banking license, was not operating under the NBA, and because of that, a state AG could bring suit. The Federal Government reserves most if not all of the regulatory and investigative prerogative over banks organized under the Federal NBA, placing them beyond the reach of state law enforcement.

  8. TC

    “This latest regulatory theater production is more of the new, post crisis normal in DC” … and more reason why state pension fund managers with huge rmbs exposure ought be thinking of pulling the plug sooner rather than later, while cheap opportunities on the other side of the trade still exist, that the blow their dumping causes might be softened.

  9. MichaelC

    Re: How far apart the states are:

    From BBG (

    ‘There’s also a split among the states, with the attorneys general of Oklahoma, Nebraska, Alabama, Virginia, Texas, Florida and South Carolina writing letters to Miller last month voicing their displeasure. Republican lawmakers complained about the proposed settlement and questioned whether the Consumer Financial Protection Bureau has authority to take part in the talks.The banks might argue that any state investigation is preempted by the actions of their federal banking regulator, and may be backed in that claim by the OCC, which has taken a “very aggressive” position in the past arguing that federal banking laws preempt state laws, White said.’

    ‘The banks might argue that any state investigation is preempted by the actions of their federal banking regulator, and may be backed in that claim by the OCC, which has taken a “very aggressive” position in the past arguing that federal banking laws preempt state laws.’

  10. chris

    Wow how long can they drag this out? Are they actually waiting for everyone to forget what the banks have done so they can more easily let them off the hook?

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