Latest Attorney General Bailout Plan: Give Banks “Get Out of Jail Free” Card for a Few Refis

Attorney General Tom Miller of Iowa, who is leading the whitewash once known as the 50 state attorney mortgage settlement negotiations (7 have defected), reliably, every few weeks, has gotten word to the media that a deal is weeks away. This has been going on so long that it is easy to ignore it, particularly since the absence of key states is going to reduce the importance of any settlement being reached.

Note we’ve been skeptics of a deal happening unless the AGs capitulated on a release of liability. Remember the overall context: even though there is rampant evidence of all sorts of mortgage abuses (see the interview of Attorney General Beau Biden for a quick overview), the attorneys generals never investigated (I have this from a senior person on the Federal regulatory side, there was not even document discovery before the negotiations started). You can’t negotiate if you don’t have a credible threat to go to court.

So the banks know that the AGs are carrying a gun loaded with blanks. They also know the AGs have painted themselves in a corner: they’ve floated trial balloons of settlements of $20 billion or more. The banks won’t agree to that for just robosigning, so the only way a deal gets done is for a juicy enough “get out of liability free” card. And that means a release for things the AGs never investigated and have no idea how bad the rot is. As Biden put it, it’s like having a contractor admit he screwed up on the gutters and agreeing to pay for the damage related to a resulting leak you had, then offer to give you 10% more if you sign away your rights to sue him over the roof or the foundation. Would any person with an operating brain cell do that? Answer: only AGs who were never going to go after the banks anyhow. Case in point: Illinois attorney general Lisa Madigan, who will sue small fry over mortgage-related frauds (hat tip Josh Rosner), but won’t go after the big boys. And of course, we have Miller, who is so deeply identified with this charade that he no doubt feels pressured to get something done in order to save face.

We have a combo plate of stories, one in the Wall Street Journal yesterday morning and a further critical tidbit from Reuters this evening that together give an overview of Miller’s latest effort to push a deal over the goal line. The latest idea is as bad as we feared. It gives banks a broad waiver in return for very little. That was always the only deal that might ever get done here, and Miller is now officially trying to arrange a give-away with a few sops to borrowers as a camouflage.

The “what the borrowers might get” trial balloon was leaked to the Journal is pathetic. It is a refi plan for borrowers who are current on their mortgages but underwater. Oh, and you have to be one of the lucky ones whose mortgage was NOT securitized!

As we’ve discussed ad nauseum, any payment reduction plan (and note they are even discussing only short term relief as a possible outcome, this might not even be a typical refi) is not going to provide that much in way of payment reduction. Extra money is always nice, but the number of borrowers it saves will be few. And it is pretty much guaranteed that the banks will also demand that borrowers waive other rights in return for this great deal. This is more a small stimulus program than a “help stressed borrowers” plan.

And it’s completely inequitable. The banks did damage as servicers. The borrowers who have been hurt most by the abusive practices are the ones whose mortgages were sold to securitization trusts. Yet it is the borrowers who have the best arrangement, some in the 20% that deal with the bank that lent them the money in the first place, that will get a break! It is massively unfair in the case of Countrywide, where 96% of its mortgages were securitized. Any relief will go to loans originated through the old Bank of America, and pretty much not through Countrywide. This deal is particularly unlikely to get the latest defection, California AG Kamala Harris, back to the table, since Countrywide was, not surprisingly, particularly active in California, where it was headquartered.

And as we anticipated, the inducement that had led the Miller camp to hope it might clinch a deal is a juicy release. From Reuters:

Originally, the states were only considering immunity for shortcuts taken during mortgage servicing and foreclosures, including the so-called “robo-signing” of documents to evict people behind on their mortgages.

In recent days, the state attorneys general agreed to release major banks from claims that they made legal errors when first originating the loans, such as approving loans for borrowers without verifying any income, according to two people familiar with the talks.

In exchange, banks would agree to refinance mortgages for borrowers who are current on their payments but owe more than their homes are currently worth, the sources said.

This is very troubling. Investors should be up in arms. Any release the banks get here is worth multiples of what the banks will pay for this (note that because investors are conservative creatures and have ongoing relationships with banks, having attorneys general pave the way is particularly important for them).

The failure to verify income is the tip of the iceberg of origination abuses. The most serious is chain of title, where the banks promised to investors to take a series of steps to convey the mortgages properly to the securitization trusts within a stipulated time frame. For reasons we’ve explained in gory detail in earlier posts, retroactive fixes or waivers simply won’t work. That is why the banks have resorted to widespread forgeries and document fabrication. Every day, I get multiple examples like this on document, erm, improprieties. And judges witness rampant incompetence on a regular basis:

Rocha Baltazar and Martha AP Transcript Motion to Vacate Default Order Rocha v U S Bank 10-12-11

As a lawyer I know said, if a bank is so bad at doing its job that it can’t foreclose, it deserves to go out of business. And that’s capitalism. But things don’t seem to work that way in America any more.

Now one can hope that “attorneys general” means only Miller at this point, that he has made an offer and may be unduly optimistic about conning his fellow AGs into following his lead. It was revealed that only Harris, who bolted the talks, and Miler were present at the one of last negotiating sessions.

But an astonishing number of media outlets, and even some commentators who really should know better, keep parroting the bank/Miller/captured Federal regulator Big Lie that a deal will help the housing market. The ONLY parties it will help are the banks, and the banks have proven repeatedly through their actions (HAMP abuses, illegal foreclosures on active duty servicemen, widespread servicing fraud like force placed insurance and pyramiding fees) that they care only about their bottom lines and will do whatever they can get away with.
And that includes gaming a refi plan, just as they gamed HAMP. The banks have repeatedly, consistently engaged in bad faith dealing and looting. Further concessions simply reinforce their destructive behavior.

It’s baked in that any relief program will deliver even less in reality than it will in theory, which is at best 2.5% of mortgages in the US.

Securitization expert and Georgetown law school professor Adam Levitin makes clear in a blistering post that the threat of litigation is the only hope we have of implementing the sort of serious changes needed. And it is the combination of deeply underwater mortgages and a broken servicing model that is impeding a housing recovery, not the threat of litigation:

It’s time that we recognize that negative equity is the critical problem in the US economy. Fix negative equity and you will fix the US economy. That is because negative equity is the key for repairing household balance sheets, and that is the catalyst for getting consumers spending again, getting banks lending again, and getting businesses hiring again. If we’re serious about dealing with negative equity, we need to address it directly and not engage in an extend and pretend dance.

It’s also time that we recognize that negative equity didn’t just appear by itself. This wasn’t a freak weather event. It was a man-made disaster. We ended up with negative equity because of a housing bubble inflated by very deliberate acts by a limited number of financial institutions that profitted greatly from bloating the economy with cheap and unsustainable mortgage financing. We witnessed a macro-economic crime and are living with the consequences of it…

We do have one way of clearing the housing market: foreclosures. But foreclosures are an incredibly slow and inefficient method of market clearing, even in the best of times. Foreclosures are rife with negative externalities on neighbors, communities, and local government, and they can result in the market over-clearing because of information problems (foreclosure sale purchasers don’t have a right of inspection pre-sale, so they can’t tell if the plumbing has been torn out before they buy. No refunds. Even if the house is packed with dead cats. Yup. That’s a real case.)….

There’s only one way to skin this cat. The negative equity has to be eliminated. Period. We hoped at first that we’d grow out of it. Fat chance. This is the anchor weighing down the ship. So now it’s just a question of whether we try to clear the market via foreclosure or whether someone pays to clear the market, meaning that the book values at which mortgages are carried are written down to market values or something close to it.

Who should pay? This is basic justice. Those who broke the economy should pay to fix it. You break it, you take it. We bailed out the banks because they are indispensible to the economy as a whole, but that doesn’t mean that they shouldn’t have to pay now. $20-25 billion is a fine price tag for robosigning. But this isn’t and shouldn’t be about robosigning. Robosigning was symptom of a much larger endeavor in reckless lending, in which corner cutting was the order of the day, from MERS to securitization paper work to no-doc loans. All of this was done to maximize profits and to enable a housing bubble that was hugely profitable to a limited number of financial institutions and with extraordinary collateral damage. Simply put, there needs to be accountability for blowing up the economy (emphasis original).

I strongly suggest you read Levitin’s post in full.

The whole pretense is that massive losses do not already exist. Homeowners know they exist. Investors know they exist. This is not about litigation somehow creating costs. That’s bank propaganda. The costs are baked in and will ultimately be worse if we continue on the inertial course of coddling financiers and allowing their foreclosure doomsday machine to mindlessly chew up homeowners and communities when a significant portion are salvageable. And investors, who are the ones who should have a say in this matter, and not their agents-gone-amok servicers, would greatly prefer deep principal mods to viable borrowers rather than bank-enriching, economy-wrecking foreclosures. And since the only tough-minded regulators, the FDIC and the nascent CFPB, have been muscled aside, the only leverage on the banks is the court system.

The good news is that there is so much litigation in the pipeline and about to be filed that the banks will find it difficult to make a clean escape from their “wreck the economy for fun and profit” project. But the AG effort offered an opportunity to come up with a serious, tough minded solution. That can still happen through the defecting AGs led by Eric Schneiderman, and their ranks will hopefully grow when the ones remaining in the original group see what a sellout the latest version of the deal truly is.

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  1. Bill G

    Each state needs their AGs to establish the proper precedent by enforcing current laws, obtaining a few big judgements against the banks, and jailing a few of the banksters and their henchmen/cohorts (mortgage originators, appraisers, lying homeowners). That might get the banks to take things a bit more seriously. Otherwise it looks like typical shady dealing only this time by the top cops in government. Wouldn’t that be a shocker?

    1. PL

      It would be refreshing to see AG’s enforcing current laws against banks, but in judicial foreclosure states, the courts need to apply current laws. The problem of “judicial nullification” is acute. State court judges refuse to hold foreclosing banks to their burden of proof and grant foreclosure judgments on flimsy or non-existent evidence. We know mortgage servicers will lie from their robosigning practices, to say nothing of rampant fraudulent endorsements when the promissory note is produced, so why aren’t judges looking upon foreclosure actions with a skeptical eye and demanding competent evidence? Perhaps being elected to their position and relying upon campaign donations is part of the answer. Note that In Re:Rocha is a federal court action (transcript embedded n Yves post above) and the judge’s questions indicate she will hold the bank to the same standard as other litigants seeking to vacate a default. Very few state court judges would be so evenhanded. Judge Overstreet should be commended.

  2. Tyzao

    Oh what a tangled web we weave,
    When first we practise to deceive!
    Sir Walter Scott, Marmion, Canto vi. Stanza 17.
    Scottish author & novelist (1771 – 1832)

    the Rocha v. BoA transcript, you know, was, you know, completely hilarious, you know

    1. PL

      Hilarious and oh-so telling:

      “it was evident that the systems were not completely reliable”

      Every attorney defending a BoA foreclosure on chain of title grounds should reference this admission by the bank’s attorney.

    2. reslez

      Oh what a tangled web we weave,
      When first we practise to deceive!

      But when we’ve practised quite a while
      How vastly we improve our style!

      – J. R. Pope, A Word of Encouragement

  3. Expat

    The system is not broken. It does not need to be fixed. It works exactly as it is intended to work. The problem is the system itself.

    The only solution is to change the system. Get rid of our existing political and economic elite. Start all over again with wide-eyed freshmen Congressmen and bankers.

    Or, just keep the existing system, whine and moan, and die an unpleasant, early death from pollution, stress, and lack of health care.

  4. Jill

    Do not take what I’m about to write as being ungrateful for clearly laying out what is happening with banking fraud. I simply want to address one point which I believe is profoundly mistaken.

    “Fix negative equity and you will fix the US economy.” This isn’t accurate. Fixing this will help the economy. It is also a matter of justice, legal and ethical. But the economic problems of the middle, working class and people who are poor are much larger than negative equity in the housing market.

    We don’t have jobs to pay for housing, period. We don’t have health care. We don’t have enough to eat. These will not be remedied by fixing negative equity. These could be remedied by providing everyone a guaranteed living wage and national, universal health care.

    1. Fíréan

      A very good point, and many people have been subsidizing their depreciating or stagnant incomes with credit: card or equity in the property.I wouldn’t mind to know where to find the data on that.
      Thanks for the thread, interesting reading.

    2. Ron

      Fixing housing RE means getting back to an appreciating market that then can be used for equity loans along with a backbone for the credit markets. Yves has been consistent from the beginning of this crisis that reducing principle was the only solution but the market at least in Calif has been in a bubble for 40 years and many areas still have that bubble echo. Here is some public NOD’s from two market segments here in Northern Calif, these are very high value neighborhoods and these NOD’s are only the tip of the iceberg, notice the loan amounts!!!!!!!!!!!!
      1 Details 10-13-11 Preforeclosure El Camino… Atherton CA 94027 SF
      2 Details Active 09-28-11 Preforeclosure Ralston Rd Atherton CA 94027 4 / 4 $1,898,400 SF
      3 Details Active 09-15-11 Preforeclosure Ravenswoo… Atherton CA 94027 1 / 1 $2,152,900 SF
      4 Details Active 08-31-11 Preforeclosure Santiago Ave Atherton CA 94027 5 / 4.5 $2,667,600 SF
      5 Details Active 07-06-11 Preforeclosure Cebalo Ln Atherton CA 94027 4 / 3.5 $1,407,100 SF
      6 Details Active 06-22-11 Preforeclosure Selby Ln Atherton CA 94027 3 / 3 $1,239,000 SF
      7 Details Active 12-05-10 Preforeclosure El Camino… Atherton CA 94027 UN
      8 Details Inactive 10-02-11 Preforeclosure Walnut Ave Atherton CA 94027 5 / 3.5 $1,773,200 UN
      9 Details Inactive 09-21-11 Preforeclosure Walnut Ave Atherton CA 94027 5 / 3.5 $1,773,200 SF
      10 Details Inactive 08-28-11 Preforeclosure Greenoaks Dr Atherton CA 94027 4 / 3 SF
      11 Details Inactive 08-28-11 Preforeclosure Walnut Ave Atherton CA 94027 3 / 2 $1,344,200 SF
      12 Details Inactive 08-03-11 Preforeclosure Maple Ave Atherton CA 94027 2 / 1 UN
      13 Details Inactive 07-19-11 Preforeclosure Oak Grove… Atherton CA 94027 4 / 4 $4,353,400 SF
      14 Details Inactive 06-15-11 Preforeclosure El Camino… Atherton CA 94027 $833,000 SF

      2 Details Active 10-06-11 Preforeclosure El Nido Rd Portola… CA 94028 $876,000 UN
      3 Details Active 08-31-11 Preforeclosure Crescent Ave Portola… CA 94028 3 / 2 $1,247,100 SF
      4 Details Active 08-28-11 Preforeclosure Golden Oa… Portola… CA 94028 5 / 5 SF
      5 Details Active 07-30-11 Preforeclosure Canyon Dr Portola… CA 94028 3 / 3 $1,269,600 SF
      6 Details Active 07-06-11 Preforeclosure Golden Oa… Portola… CA 94028 6 / 5.5 $4,675,200 SF
      7 Details Active 06-15-11 Bankruptcy Carmel Way Portola… CA 94028 2 / 1 $959,000 SF
      8 Details Active 07-26-11 Deal Lucero Way Portola… CA 94028 3 / 2 $130,000 $1,486,700 UN
      9 Details Inactive 09-27-11 Preforeclosure Pecora Way Portola… CA 94028 3 / 2 $1,358,200 SF
      10 Details Inactive 06-22-11 Preforeclosure La Mesa Dr Portola… CA 94028 6 / 4 $1,962,200 SF

    3. mac

      I don’t think you can fix all the ills of the world, jobs, health care etc, but you can fix the Home loan mess and get a start on those other issues that have existed for 100’s of years.

  5. problem is

    So Yves, Do You Believe Obama?
    After that well written, fact infused run down on the state’s AG/Fed “whitewash,” I have to ask you… You mention “bad faith dealing and looting,” you have detailed securities fraud and foreclosure frauds…

    So what do you think of Obama’s press conference statement:

    “On the issue of prosecutions on Wall Street, one of the biggest problems… is that a lot of that stuff wasn’t necessarily illegal, it was just immoral or inappropriate or reckless.

    1. mk

      the first time I heard him say that I felt sick to my stomach, all the hope started rushing out of me.

    2. Yves Smith Post author

      You must be new or an only occasional reader.

      We shellack Obama on a regular basis here. And we took that horrid statement down when he made it, weeks ago.

  6. rich

    William K. Black on OWS as a Reaction to White Collar Fraud

    #3) Me: Do you feel that your outspoken views preclude you from future government appointments?

    Mr. Black: My crucial CLGs (“career limiting gestures”) were being a serial whistleblower and helping to cause two presidential appointees (i.e., my bosses) to resign in disgrace. I also played some role in Speaker Wright’s decision to resign in disgrace and the embarrassment of the Keating Five. Pointing out that Geithner was selected because he was a perennial failure and moral cripple, not despite these defects, pales in comparison to those CLGs.

  7. Steve Bradley

    I know that everyone is embroiled in what actions might be taken to punish the banks, but very little is being done to “right the ship.” Here is my own “plan” (One that I am fairly certain will never happen), which would resolve the whole mess inside of 6 months or so, with far fewer foreclosures, pain, and suffering. I’m a real estate broker, so my solution does focus on the real estate, but the main aspect is keeping folks in the home they have now, if they want to stay:

    It’s the lead article at the moment.

    1. Ron

      ” mortgages on primary residences get principal reductions to 90% of the current market price for that home”

      What is current market price? Without distressed home prices, without GSE FHA loans that are jacking the market? While your shotgun approach has merit what happens if the RE market continues to decline another 25 to 50 per cent? Immediately after the reduction can the homeowner sell without any claims on whatever profit is realized? Many homeowners have rented out the property hoping to keep the property but are now considered investors, will they be included?

  8. Some Bloke

    That lawyer for, you know, US Bank, the way she, you know, talks, she reminds me of, you know, Atticus Finch, or, you know, some due down at the, you know, local basketball court. Like she is very, you know, eloquent.

  9. Westcoastliberal

    Seems to me any “whitewash” settlement as has been described will be very ill-timed and just may further inflame the “occupy” movement by energizing even more borrowers/investors who’ve been screwed.
    This could be the straw that breaks the proverbial “camel’s back”.

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