Quelle Surprise! DoJ Pushing State AGs to Whitewash Servicing Abuses; Failure to Investigate Confirmed

The latest report by Shahien Nasirpour at Huffington Post confirms two things you’ve heard here and on some other sites following this sorry affair: first, that Tom MIller, Iowa attorney general who is leading the 50 state attorneys general negotiations on mortgage abuses, is a liar, and second, that any settlement will be a whitewash.

Actually, we already knew Miller was a liar. Shortly after the effort was launched, Miller promised that “”We will put people in jail.” He then started walking that back. Not only did he tell Bloomberg that they were NOT pursuing criminal charges, but per an e-mail:

I was w/ a European documentary maker this weekend who spoke to Miller a few days ago and said Miller relayed the fraud isn’t so bad, everything will be worked out .. the standard line; he’s already made up his mind. He doesn’t want those European governments demanding their money back. The meeting is a photo-op setup because the too-big-to-fail crowd is scared of put-back liability and shorts; they’re working hard to make it appear they’re doing something to quiet everybody down.

Note this message was sent BEFORE MIller made the “jail the baddies” promise that MIller recanted. And it indicates that this entire affair was intended to be an exercise in kabuki theater rather than anything remotely resembling a real investigation.

That brings us to MIller’s second lie. After a staffer ‘fessed up that no investigations were being undertaken, Miller maintained that extensive examinations were underway. That, as Nasiripour indicates, confirming earlier intelligence via Gretchen Morgenson, is complete crap (emphasis ours):

According to sources familiar with the ongoing state and federal probes, state and federal officials have wasted months not digging into the details of the foreclosure crisis, yielding little of value in court and undercutting the lenders’ incentive to strike a settlement of greater benefit to homeowners and taxpayers.

The investigators have yet to gather many documents, conduct depositions or assemble tallies of aggrieved homeowners. They don’t yet have a good handle on the number of wrongful foreclosures, the amount of fraudulent documents filed in local courts or the volume of legal instruments processed by so-called “robo-signers,” the agents that lenders employed to process foreclosure filings en masse without examining the underlying paperwork.

“The evidence a prosecutor would use is not in the possession of the prosecution,” said one person familiar with the ongoing settlement talks.

Even Richard Shelby, the ranking member of the Senate Banking Committee, and a long-standing critic of Wall Street, is not happy with the lack of investigations:

We need a full-fledged investigation,…There’s no substitute for a thorough investigation and finding of fact

The piece later details the evidence the prosecutors say they have obtained, and shows how it actually adds up to very little. This was a feature, not a bug. Consistent with the objective of doing nothing more than provide air cover for the banks, no meaningful investigations were conducted (and on top of that, there have been plenty of other irregularities in how the discussions were conducted). We pointed out this was essential to have any negotiating leverage: a party agrees to settle in order to escape possible litigation. The HufPo article underscores that point:

“I would never want to go into a negotiation without solid evidence of actual misconduct to hold as leverage over my counterpart,” said Neil M. Barofsky, the former special inspector general for the Troubled Asset Relief Program, which was crafted to bail out teetering banks. “It would also be very dangerous from a public policy perspective to waive all future claims as part of such a settlement if you do not have a good sense of the size, scope and severity of the underlying misconduct.”

If you don’t have a credible threat to launch a suit, why should anybody bother? The answer here is obvious: this isn’t a “settlement”; it’s a cash for a broad release (effectively, an indemnification). And since the AGs have done nada in the way of a probe, only the banks know the value of that waiver, and they won’t enter into a deal unless they think it is a bargain.

And indeed, the intended deal is a “get out of liability for almost free” card:

….expedience now appears to be trumping other considerations in settlement talks with major mortgage servicers. Despite failing to marshal a strong case proving misconduct during the foreclosure crisis, the government is seeking to craft a settlement quickly, in the hopes that this will inject greater certainty into the financial system, stabilize home prices and add vigor to a flagging economy.

Ah, yes, if we just give the banks another bailout, surely that will fix the economy! We can see how well that movie is working. As if “fixing the economy” is a good reason to ignore crooked behavior. By that logic, the government shouldn’t go after companies that sell beef full of e-coli because they provide employment.

And have no doubt, the Administration’s fingerprints are all over any deal:

The Justice Department is pressing state attorneys general to release the banks from liability for a host of alleged violations in exchange for a far-reaching settlement, people familiar with internal discussions said.

And the AGs have been sold a complete bill of goods:

The government fears that if it can’t stanch the flood of foreclosures by lowering troubled homeowners’ monthly mortgage payments — and if mortgage servicers cannot resume taking possession of homes for which borrowers have long been delinquent and sell them to people able to afford them — the housing crisis could drag on for years, keeping the broader economy in a feeble state. This is the scenario the government is seeking to stave off by striking a swift settlement with banks, restoring legal clarity to the foreclosure process and providing additional relief for distressed borrowers.

By including assistance for homeowners in the settlement agreement — like loan modifications that reduce payments or the overall amount owed — state and federal authorities said they believe they can help the housing market recover.

This is utter rubbish. First, the AGs are NOT going to “restore clarity to the foreclosure process.” Any action by the AGs will have no impact on the judiciary (the settlement will apparently include useless boilerplate about how banks will follow the law. They are supposed to be following the law regardless; an extra affirmation is pointless). The reason the banks are having so many trouble foreclosing is pervasive problems with how ownership interests were handled in the securitization process. In most cases, they are not amenable to easy fixes, which is why there has been so much fraud committed in courts all over the country.

The story indicates that the states are willing to sell out because any cash settlement would help fill yawning state budget gaps. But what we have been told by well placed sources is that the banks will take a deal only if it is very close to free: a minimal cash component (the $30 billion number in the HuffPo article is pure smoke and mirrors), with the rest being credits of various sorts, including for past mortgage mods. Oh, and any settlement is tax deductible, further lowering what little real cost there will be.

To the extent the AGs believe they need to bribe the banks to do mods, they’ve been snookered. The Fed and the OCC had the power to make them happen, now. The biggest banks all have large second lien portfolios (almost entirely HELOCs). They’ve refused to modify first mortgages because it’s a lot of work they don’t get paid for, and they make good money foreclosing. And they are able to keep borrower looking current on seconds via a combination of bullying and accepting very skinnied down payments.

If the Fed and the OCC told banks that they had to write down the second liens on delinquent mortgages, and write off the second liens on homes where they started foreclosing on the first, you’d see a 180 degree change in behavior. Banks would be falling all over themselves to do mods Indeed, if these regulators were to take this step (which is within their power) you’d probably see an bank change of heart on bankruptcy cramdowns too (banks twice beat back legislation to write down the value of a mortgage to the market value of the house in bankruptcy proceedings, which is done with very other type of secured consumer debt).

If you are as upset with this as I am, call your state attorney general and give him a piece of your mind. You can find their phone numbers here.

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  1. NYT


    Last July 8 WSJ has this article
    Is there a problem with sticking the cash into the trusts as part of a settlement?” says Adam Levitin, an associate law professor at Georgetown Law. “I don’t know what the IRS would say, because it’s not really contemplated by the Internal Revenue code.”

    From my reading this is saying that part of the settlement is for IRS to ignore the laws about ringfencing of the trust assets and allow BofA to put cash into the trusts long after they are supposed to be closed off.
    Did I read that right?

    1. Yves Smith Post author

      The discussion of cash payments going to help state budgets and the intelligence I got separately, that the cash portion will be meager, suggests that the deal may not have any cash going to trusts.

      The IRS would probably give a waiver if they came up with a remotely plausible gimmick anyhow.

  2. bmeisen

    I think a flag would help – think of how much attention the POW MIA crazies got with theirs. Modify it slightly: “Mortgage Docs – MIA” and keep the black profile with a concentration camp in the background.

    1. ScottS

      Skull and crossbones — i.e., the pirate flag, not the secret society Governor Bush was in.

  3. Woodrow

    “If you are as upset with this as I am, call your state attorney general” –

    I have, no response.

    My AG, Martha Coakley is silent, while my Registrar of Deeds John O’Brien is screaming at the top of his lungs. I’ve written “Letters to the Editor”, and I even filed a “Consumer Complaint” through The Massachusetts Attorney Generals Office to no avail. It’s not that we’re not aware of the issue, it’s TPTB are already bought and paid for.

    In Massachusetts, even with the strength of The Ibanez Decision, and now arguably the most corrupt State in the country, the law is on the side of justice, but justice is not being served.

    1. Tim

      My understanding is according to what Adam Leivtin has mentioned on his blog the Mass Ag’s office and Mass Division of Banks has been fairly aggressive with servicers fully subject to Mass state jurisdiction i.e. non National bank in terms of forcing modifications. One issue though is Massachusetts had a relatively low number of subprime mortgages to begin with and the Massachusetts’s authority really only applies to mortgages given to homeowners in the state.

        1. Tim

          This is the link to the article I was referring to:

          The interesting quote: There’s absolutely no reason to think that Morgan Stanley or Goldman Sachs were in any way unique in their practices. What’s amazing, then, is not these settlements in Massachusetts, but that we haven’t seen this elsewhere. Part of the reason, I believe is because of National Bank Act preemption. The Massachusetts AG was able to get the dirt (particularly in the form of loan tapes) on Morgan Stanley and Goldman Sachs because they weren’t able to raise preemption as a defense. But for preeemption, I’d go dollars to donuts that we’d have seen similar settlements with BoA, JPM, Citi, and Wells.

          One thing to note is that as of July 21st National Banks lose preemption rights over operating subsidiaries which includes many of the large servicers. Now as why Massachusett did not bring criminal charges. I think there a couple of reasons. Mass tends to have to bit of pro criminal bias dating back to the days to James Curley and even more recently with the Bulger familiy compared the more proscutorial tradition of NY pols such as Dewey/Javitz/Giuliani/Sptizer/Cuomo. The origin of the term “Statie” in Massachusetts referring to the State Police historically has had fairly negative connatations. Look how many Mass AG’s have failed to reach higher office such as Scott Harshbarger, Tom Reilly, and Martha Coakley

  4. pj

    I am convinced that the only way to fight this is to disassociate from it in anyway.

    This means, not only getting down to the local level in all dealings, but also a refusal to participate in my own demise. I will not vote – and will not support a federal government which shows favoritism toward the rich while actively ignoring the mass of its citizenry.

    What good that will do, who knows? But I do know that one way to stop the game is to stop watching. The game will end when it is starved of attention and “fan” support.

    1. Justicia

      Not voting is what they want you to do. Go to the polls and vote for the least offensive candidate on the ballot — that my be the race for dog catcher — but it shows that you are a voting citizen who rejected the other candidates on offer.

      If enough of us do that, both wings of the Money Party will begin to realize that VOTERS aren’t buying the BS they’re selling.

  5. Daniel Pennell

    It would seem to me that the emphasis should be less on the housing market and more about restoring the faith of the American people in their major institutions.

    People accept decisions that frustrate and anger them only when they believe that the process is fair and just.

    Living in a democracy means that you are always going to have to compromise and that you will therefore always be at least somewhat frustrated and angry.

    Once people no longer have faith and believe that the governing institutions and the governing process are inherently skewed toward their opposition then they will no longer willingly accept the outcomes. That in turn can only lead to the need for the governing institutions to compel the compliance of the goverened or it will lose its abilty TO govern.

    1. Elizabeth

      Absolutely. Except that “faith” is something people give unquestioningly. Isn’t that exactly what Michele Bachmann, Sarah Palin, Rick Santorum and the like are talking about? Restoring unquestioning, dumb “faith” in everything hollow, from traditional marriage to the national debt? Just behave, like little children! Those of us who actually want to view the balance sheet are considered troublemakers.

  6. doom

    This level of fraudulent government conduct ought to invalidate US Bilateral Investment Treaties (and NAFTA, for that matter) by breaching Article 49 of the Vienna Convention on the Law of Treaties.

    1. Elizabeth

      Nope. The rule of law is dead. That’s my “wtf” moment in all this. If people can take your house without even knowing where the title is, they can do anything to you.

  7. Down Souf'

    Contact Us

    Iowa Attorney General
    1305 E. Walnut Street
    Des Moines IA 50319
    Phone: 515-281-5164
    Fax: 515-281-4209

  8. Bob of Newton

    Iowa Attorney General Tom Miller, a Democrat said: “We first have to fix the housing market,”

    Since when is the economy the AG’s concern? I thought that it was law enforcement.

    1. Elizabeth

      Like I say below, these people seem to think they can fix a “housing market” with a fresh coat of white paint on every house — covering the last owner’s deranged graffiti warning that they can take it back from you any time they wish. They keep forgetting that “markets” are made by “participants” in them.

  9. Bob of Newton

    I just called AG Miller’s office. His assistant told me that what I read was incorrect. When I asked where I could get the correct information, she said she didn’t know.

    1. Elizabeth

      I have to admire your legwork. Imagine, somebody just calling up an official’s office and asking them what’s going on.

      And of course, they’ll just lie. But at least you made them go through the motions.

  10. Daniel Pennell

    Just called AG Cuccineli’s office.

    Heard from Delegate Bob Marshall that the AG was concerened that the settlements were too focused on the monies and not on the underlying issues and crimes.

    I encouraged him to persue the criminal aspects.

    Also calling Paul Ebert, the Commonwealths Attorney for Prince William County. Want to know when he is going to get off his backside and start looking at some of the frauds on the courts and fraudulant docs in the county records.

    Anyone from PWC can call Paul Ebert at 703-792-6050.

  11. kaj

    & Shiela Bair said in the Joe Nocera article on 7/10/11, “The presidents is in the right place,” or words to that effect.

  12. Elizabeth

    Jesus. “Inject greater certainty into the financial system”? What the heck do these people think a “financial system” is made out of? Cotton candy? The last time I checked, it was built of the confidence of ordinary people had to finance their homes and futures as trusting bank customers.

    So now, when you open a new account or sign on a mortgage, do you get a stash of hashish instead of a toaster? Because that’s what you’re going to need to keep hallucinating that you can trust this place not to foreclose on your whole life.

    1. Mark P.

      ‘“Inject greater certainty into the financial system”? What the heck do these people think a “financial system” is made out of?’

      Yes, it’s an interesting question. When trust is gone, it’s gone. And there are now large segments of the U.S. population who have direct experience — via their own participation or that of those close to them in the housing market — that the system is fraudulent from the top down to the bottom.

      Yet the message in the MSM is universally maintained: there may currently be problems in the housing markets, but they’re essentially temporary, fixable, effectively non-systemic enough that “we” will put all this behind us and the game will resume.

      Presumably, that line will remain the same and the MSM will still be manufacturing consent “Baghdad Bob”-style, even when the major tectonic shift of general recognition comes somewhere in the 2012-2014 period that the U.S. housing market — that central economic sector — remains partially or fully broken, bust, defunct.

      After all, the problems, and the inventories of REO and underwater homes, are only going to get larger.

      And so what’s interesting, as always, is the question of the motives of people like Miller and those taking similar strategic lines. Are they delusional idiots? Or are they rational players operating on the supposition that if it’s going to be ‘game over’ sometime in the relatively near future their best option is still to simply play the hand they’ve been dealt for now?

      Of course, in many cases that latter tactic amounts simply to looting the system before it fully or partially collapses.

  13. wafranklin

    I just sent the following to the AG in North Carolina. This whole scam makes me ill. And, in NC, BOA and Wachovia are two primary corporations with tentacles everywhere for every reason, most for no good.


    July 10, 2011

    North Carolina Department of Justice
    Roy Cooper, Attorney General

    Mr. Hartsell:

    I am informed you are the party to whom I should address questions concerning policies of the NC DOJ with regard to the multi-AG settlement talks. I would have liked to talk with AG Cooper, but then I am but a lowly taxpayer. It took me five tries to get to your assistant – unacceptable. Please understand that my knowledge of these
    issues is from open publications and discussions on the news.

    Please read the following as it encapsulates my concerns rather completely:


    I have followed these issues for four or five years and been concerned at the likelihood of collaboration of State AGs and the DOJ with the banks to minimize the frauds which
    they appear to have committed on the public. In other words, US DOJ and AG Miller of Iowa are acting as if they want to minimize any “problems” arising from the use of MERS
    to fundamentally bypass the legal property transfer and title protections concerning real estate transactions which are at the county level, which not incidentally causes counties to lose tax money. Then there is the matter of who really owns the property -causing a blight on the title, perhaps forever. The banks developed and used this system – and taxpayers are now paying the price for direct fraud, such as robo-signing, etc. And no one seems to be coming to their aid of people selling or buying properties or those facing foreclosures, either individually, or as a group. I would think that is your job.

    I read several articles concerning Jeff Thigpen, Register of Deeds for Guilford County. He found a number of faulty, if not perhaps fraudulent, deeds on file there and advertised it in the newspapers. What, if anything, are you doing about that. If not, why not?

    Bluntly, I feel that the fix is in, everyone in power and authority seems to want this problem to go away via the banks paying some hush money. Where is the legal system when white collar crime is done, particularly in banking where one of the largest and most powerful institutions in NC are in fact two of the major suspects? If I steal a loaf of bread, I would get a misdemeanor. They get bonuses for screwing us. And now I read that Wachovia laundered $378 billion (with a “b”) in Mexican drug money for which
    they paid some fine. Some fool on the streets of Raleigh found with drugs easily gets felony time and or long term as a repeat offender. Where is there any justice
    there. Or are the political contributions from the banks enough to keep NC State Government or anyone else in the state away from an investigation.

    Where are the fully scaled and scoped investigations needed to tackle this problem? And if you or Cooper cannot affect AG Miller or US DOJ, why does NC DOJ not drop out of the so called settlement. I cannot believe the fix is not in. This country has deserted the rule of law lead by its law enforcement people and the courts. There have been
    no investigations of the Bush Administration and their multiple crimes, some high crimes and treason. It has to stop somewhere.

    Where does NC DOJ stand on these matters, with the people or with the banks?

    Thank you for your response,

    Bill Franklin

    William A. Franklin
    Burlington, NC 27215-3575

    1. Mark P.

      And here we are —

      ‘Bluntly, I feel that the fix is in, everyone in power and authority seems to want this problem to go away via the banks paying some hush money.’

      Yup. Americans are figuring it out.

  14. duffolonious

    “Richard Shelby, the ranking member of the Senate Banking Committee, and a long-standing critic of Wall Street”

    Huh? Doesn’t he oppose all Wall Street reform like every other mainstream Republican?

    “Sen. Shelby also believes that bank oversight violates the right to privacy and is against the Government Office of Financial Research being able to collect any financial data it needs to regulate the bank industry.”

    Although there appears to be some evidence that he’s not 100% in Wall Street’s pocket, I wouldn’t put him against the interests of Wall Street. He did oppose the bailout. He may be even somewhat principled too, but I don’t see how your assertion is justified.

    1. Yves Smith Post author

      Shelby is pro smaller banks, not pro Wall Street. He voted against the TARP . He was very skeptical of the banks on MERS and chain of title issues (he has owned a title insurer). He’s also been critical of extend and pretend. He’s not as easily pigeonholed as you suggest.

  15. 2laneIA

    I can’t call my AG about Miller, because my AG is Miller. I have been following this on your blog and elsewhere, and I am grateful to you for continuing to write about it. Also, Taibbi, Dayen, and Frank Rich.

    Tom Miller and Barack Obama were roommates for a while at Harvard. Miller’s wife is a bank exec. He was an early and enthusiastic Obama supporter, and reportedly a short list candidate for US AG. The DM Register had a photo in the Sunday edition of Miller in someone’s backyard trying to fire up the troops. He conceded that it will be harder to win Iowa in 2012, but is not discussing how the free pass to Wall Street and the banks contributes to the “enthusiasm gap.”

  16. Dan

    This helps me to understand why my MA bank wanted to unilaterally lower my mortgage rate. Their explanation was complete gibberish. I have excellent credit and payment history and a low remaining principal relative to the original price after 15 years prepaying principal. (I’m one of the few lucky ones.) The bank wanted to lower the rate from 4.35 to 4.0 points. They sent two snail mail offers that I ignored, then sent a FedEx with the time-limited offer. It said they could offer no fees nor other cost in a refi because they already hold the note. True enough, but still, why are they bending over backwards to needlessly reduce their investment income? There is no point in a refi with another bank; even with a 5/1 ARM, the fees are about what I’d have saved by the refi with my existing bank, so they aren’t just trying to retain a good customer. Now I get it. This relief will count towards their metrics as a past mortgage mod even though I’m not behind or under water, yet they risk virtually nothing because the mortgage is demonstrably well-performing. And they get a tax-deductible credit towards any settlement with the AGs. They put enough of these together and they will pay the states nothing.

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