Latest Leak on State Attorney General Mortgage Settlement: A Shameless Sellout to the Banks

There have been so many rumors about the so-called 50 state attorney general settlement (which now is more like a 43 state settlement) being on the verge of having a deal that we’ve discounted them. We’ve said from the beginning that this was a cash for release deal. Basically, because the Federal regulators and state AGs, by design, had done no meaningful investigations, they didn’t have any threats to bring the banks to heel. So they’d have to offer a bribe, and the bribe has always been a “get out of jail free” card.

Put it more simply: The banks got bailed out, and the rest of us got left out. Yet all levels of government are actively trying to find a way to release from wrong doing for the banks, when everyone knows that they violated a host of laws every step of the way in the mortgage business.

We said the only way a deal would get done is if the state AGs capitulated completely. There have been enough leaks about state AGs being uncomfortable with a broad release, plus the banks greatly overplaying their hand, that it looked like no deal would happen. Tom Miller, the Iowa AG who is the lead negotiator for the states, has been saying a deal is imminent since last January, so his credibility is pretty thin. But the Obama administration is moving heaven and earth to get a deal done, since they seem to think the public can be snookered into thinking motion is progress.

Nevertheless, the negotiations appear to be grinding forward. And it isn’t the banks that are giving ground. Gretchen Morgenson tells us at the New York Times what an utter joke the settlement has become.

The $25 billion being bandied about is about as solid as AIG’s credit default swaps. Of that total, only $3.5 to $5 billion would be paid in cash. That’s spread across 12 or more companies, with Bank of America presumably paying the most. So how do you get to $25 billion? Smoke and mirrors, natch. Per Morgenson:

The rest — an estimated $20 billion — would consist of credits to banks that agree to reduce a predetermined dollar amount of principal owed on mortgages that they own or service for private investors. How many credits would accrue to a bank is unclear, but the amount would be based on a formula agreed to by the negotiators. A bank that writes down a second lien, for example, would receive a different amount from one that writes down a first lien.

I hope you can see how insulting this is. How many mortgage modification programs have we had so far? And what has the result been? In every case, the number of mods done has fallen well short of the target and the banks have gamed the programs massively. And the Treasury Department has seemed remarkably unembarrassed by their glaring failures. Even if everyone involved knew that these programs were merely to placate the public, the banks were not supposed to make it so bloody obvious. But the Treasury hasn’t bothered to pretend either. For instance, one of the few things it could do under its limp wristed voluntary HAMP program is claw back incentive payments. Has it bothered? No.

Morgenson highlights another feature of the plan:

One of the oddest terms is that the banks would give $1,500 to any borrower who lost his or her home to foreclosure since September 2008. For people whose foreclosures were done properly, this would be a windfall. For those wrongfully evicted, it would be pathetic. Roughly $1.5 billion in cash is expected to go into this pot.

“Pathetic” isn’t strong enough. Let’s look at the damages sought by Nevada attorney general Catherine Masto in her second amended complaint against Bank of America: civil penalties of $5000 per violation, or $12,000 for elderly or disabled borrowers. An individual loan can, and likely does, have multiple violations. The suit also seeks restitution, costs for wrongful foreclosures, plus the cost of damage to municipalities and homeowners from unnecessary vacancies. Note that an AG victory on the issue of wrongful foreclosure would pave the way for private lawsuits, and here the damages would be massive, particularly if state law or precedent allows for penalties (as we’ve noted, Alabama has statutory tripe damages for wrongful foreclosure, and recent rulings have had applied penalties in excess of nine times).

And what did Masto get from a different servicer, Morgan Stanley’s Saxon? The settlement is estimated to average somewhere between $30,000 and $57,000 per borrower. And the basis of action wasn’t erroneous or fraudulent foreclosures, but deceptive practices in mortgage lending and securitization.

Look at the MERS compplaint filed by Delaware AG Beau Biden. He’s suing MERS over deceptive practices, at $10,000 per violation. It’s quite possible that he may find more than one violation per mortgage. And I would imagine that success against MERS would pave the way for actions against servicers who relied on MERS in the face of knowledge of its deficiencies.

In other words, the suits filed by two AGs alone make a mockery of these negotiations. We discussed that the $25 to $30 billion settlement figure which the AGs have become fixated upon was derived from a bogus analysis performed by the CFPB for Tom Miller in February:

The critical part comes on the third page, “Calibrating the Size of Potential Penalties”. You’ll note it assumes that the cost of special servicing of delinquent loans would have cost 75 basis points a year more than actual costs incurred. That drives the entire analysis…

Now….is this “75 basis points a year” a knowable figure, ex doing a lot of real nitty gritty work, which certainly has not taken place? We can debate whether this is the right figure, and whether the CFPB has also captured the actual costs correctly…Our Tom Adams has estimated that servicing now costs 125 basis points versus the banks’ typical fees of 50 basis points, plus another 30 to 50 basis points in late and junk fees.

If you take this analysis at face value, the biggest question is what standard of servicing is implied by “effective special servicing of delinquent loans”? If they mean loan modification, that’s the same as a new underwriting of a mortgage. That cannot be done through the current platform and would require new staff with different skill sets and software/systems support. So any estimates are at best finger in the air exercises. And given that some servicers are far more abusive with junk fees than others, Tom Adam’s comment above suggests that a one-size-fits-all estimate is misleading too.

But arguing over a pretty much made-up figure misses the critical point: the money the servicers saved is not even remotely the right basis for thinking about the appropriate settlement level. Settlements are based on potential liability. For instance, in 1998 the tobacco settlement, the tobacco companies agreed to pay a minimum of $206 billion over 25 years to be released from liability on Medicare lawsuits on health care costs plus private tort liability.

The saved costs bear no relationship to the banks’ legal liability for servicer-driven foreclosures, nor to the damage they have done to homeowners or broader society through their actions. It’s like basing the penalties in a robbery on the unpaid parking fees and rental costs of the car used to make the heist.

But all is not lost. First, Morgenson tells us a lot of mortgages are excluded from this deal, in particular, Fannie and Freddie mortgages. Second, her story says nothing about the terms of the release. The objective of the negotiations now seems to be to get the true economic value of the deal to be so small that the banks will agree to a relatively narrow release. I would not bet on that.

It’s important to keep the pressure up, particularly on state AGs who might walk from a too bank friendly deal. States whose AGs might decamp include Oregon, Washington, Arizona, and Colorado. It’s also key to let the AGs in states who have left the talks and are under pressure to return that voters are watching and will be unhappy if they reverse themselves. Those states are New York, Delaware, Massachusetts, Kentucky, Nevada, Minnesota, and of course, California. You can find their phone numbers here.

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  1. Chris in Florida

    The state attorney generals are in charge of protecting the public service sectors pension funds. They are loaded with toxic bank and mortgage backed securities. They are trying to not let these bad investments tank any further. Most AGs care very little for most of the people they are supposed to be representing. It is a common theme that a person does not want the status quo to change to protect their own interests. Fear is the driving force behind our problems. Greed is actually fear of not having enough. Our system is based on fear not love. If it were based on caring for each other we would not be kicking our neighbors families out of their homes. Scarcity thoughts drive our actions and our perceptions. Let us all wake up to how we have been mislead and lets create something new…Abundance for All!

    1. Catfish

      At the start of 2001 the U.S. economy was reeling from the collapse of the dot-com bubble, leading many to regard Bush as already something of a lame duck.

      The real estate bubble kept the economy pumped full of meth throughout the Bush years. Without it the massive expansion of Corporate America’s power worldwide, Bush’s relection, and the continuation of the Iraq war would likely not have been possible. It Hoovered up and burned the “excess savings” of East Asia’s middle classes, in the process choking off the supply of capital to Corporate America’s East Asian rivals. Its implosion shattered the social democratic block of European nations and seriously undermined the Euro’s ability to function as a rival reserve currency.

      In D.C.’s upper echelons the banksters are probably regarded as the heroes of the age. Would you expect them to want these sainted men to absorb the losses?

    2. Nathanael

      Remember, when the banksters sold fraudulent MBS to pension funds… they *defrauded* the pension funds. The AGs ought to be suing from the investor side on behalf of the pension funds.

      Legally, I believe that fraud victims are supposed to get priority over most other creditors. But bankruptcy court can be rigged too, and seems to be heavily rigged….

  2. Siggy

    There is a part of this fraud that has not been given adequate coverage; clouded titles as a result of the use of MERS to track mortgages/deeds of trust.

    Bear in mind that a clouded title with respect to a single residential property may also effect the title of all abutting properties.

    This is not a chump change problem of say $25 billion, the real cost is more likely to be 20 times that.

    The big push to create a settlement is clearly an effort to avoid the very substantial real costs of correcting the chain chain of title issues. Interestingly, the most direct way is to record the debt to which the mortgage/deed of trust is tied as being extinguished, at that junture the mortgage/deed of trust is moot and the chain of title is re-established.

    1. Richard

      All the programs from HAMP to the latest refi plan by the administration is to create a new obligation and a waiver to all prior wrongful acts. This waiver clears title. The desire for these programs is not to help the people but to remove as many clouded titles from the record as “QUIET TITLE” actions will dominate the courts and news in the coming years from fraudclosure.

      1. Siggy

        The clouded title problem exists at the County level. That problem effects any national program in that the clouded titles are incapable of being pooled for lack of clear title. A Federal law will not clear clouded titles.

        What has transpired is blatant fraud. Some number of people need to be put in jail. All of the Federal programs operate to absolve the perpetrators. Please explain why the Federal Government has standing to absolve a fraud committed at the State/County level.

      2. CaitlinO

        How does a waiver clear title? I don’t see this would change a decision like Bevilacqua v. Rodriguez. I don’t see how it would prevent some bank from showing up some years from now with the original not, claiming to having standing and foreclosing.

        1. Siggy

          You’re correct. Only the recorded extinguishment of the note which would make the mortgage/deed of trust inactionable will work.

          Banks know this and are routinely refinancing securitized notes at relatively favorable terms to the borrower. This type of action takes a lot of time and is an important reason for banks to want to have the mortgage rates to be relatively low. Note that the refinanced loan is routinely dumped into one of the GSE’s. Even with this action, the banks (Countrywide/B of A) will still have a very substantial liability. It’s that liability that they want to dump on the public.

          1. Nathanael

            The only statewide solution to a title problem would be the following:
            (1) generous adverse possession laws, enabling title to be made good by possession and extinguishing all other title
            (2) government seizure by eminent domain of all of the abandoned, non-possessed property, extinguishing all other title

  3. PaulArt

    The Obama junta seems to think nothing of piling up these brazen acts one upon another even this close to election eve. Do they think that followers of liberal and economic blogs are the only people whose votes they will lose? One wonders if Al Gore thought the same thing or Bill Clinton in 1996. I very sincerely hope not – we need to teach a very very firm lesson to Al From and the DLC Hyenas – we need to send them into the wilderness even if it means another round of 8 years of pain for us to give birth to a new Party that will rise from the middle class.

    1. Catfish

      All the public anger is being rather forcefully funneled into Occupy.

      Occupy has said it won’t even consider third-party challenges until the 2014 election cycle–hey, it makes perfect sense to give the Democrats a “bye” when a third party challenge has a better chance of success now than at any point in living memory.

      What, don’t think it makes sense? Think OWS should take on the two parties this cycle? Sorry, “political” topics aren’t permitted to be raised at OWS.

      Think they should be permitted to be raised? No problem, just go down to Occupy and form a subcommittee to discuss the issue…

      1. CaitlinO

        Occupy started too late and began to build too late to impact 2012, IMO. To attempt a 3rd party and fail because it hasn’t had time to build up membership, momentum and money would be very damaging. It’s not like all the pols are going to suddenly start representing the interests of the 99% so 2014 will be too late, or something.

  4. Ray Phenicie

    The situation with legal violations-lawlessness -for mortgage securitization is indeed not only troubling but covers enough territory politically (why are the 5 largest banks allowed to operated literal dens of thievery, break-your-knee-caps-threats against putative defaulters)that the complete scenario, if understood widely, would bring day to day business to a halt.

    “Delaware AG’s MERS suit should strike fear in MBS industry”

    Some courts have defended the use of MERS (a front piece to keep neighbors from seeing the beatings going on inside the house) but ultimately this will bring down the whole industry.

    My view on the whole mortgage situation is this:
    In Southfield, Michigan, home values have fallen 13% per year for the last 4 years-yes %52!
    Here’s the crunch point-should not every mortgage in this region-look at the sidebar for nearby communities-%3-8% downward in the same time frame-be rewritten now? And should not this rewritten mortgage reflect what the payments SHOULD have been on the ACTUAL value of the home? In other-words, the mortgagee-if they have paid too much-should be allowed to have those excess payments that were made in good faith by the homeowner against a bloated evaluation-those payments should be credited to the future payments on the mortgage. Long version made short-the mortgage industry has some massive losses to tally up and some money to be reapplied to home mortgages-probably at least $1,000,000,000,000 -$2 trillion? More? Commercial real estate is in a similar situation, I’m guessing.
    This on top of the legal fines.

    I’m not really happy to put this out there, lots of people’s lives are drastically affected-but the financial industry needs to be turned inside out, torn down and rebuilt from the ground up.

    Some proposals (hey if I’m going to dream)
    Restructure every financial institution that holds mortgages by forcing a court appointed receivership –this legal entity would oversee the industry while new leadership for the banking industry was sought out.

    Congress needs to go back to the woodshed, that is, legislative committee rooms and rework financial reform; as the financial industry would be in the penalty box en mass, they would not be able to participate except via written communications, or as the known criminals that we can all see they are.

    A year of the Jubilee should be declared on mortgage payments for everyone.
    Just some messages in a bottle from my island.

    1. Ray Phenicie

      A final touch to mortgage reform would be to force reassessments every 3-5 years. Patent injustice and inequity at law is being forced on anyone who can’t get a revamped mortgage when home values are falling drastically and likely to continue falling for the next decade or two.

      1. FJ_2


        Since, nobody would be foreclosed if the housing market were not crashed. They would simply sell the house.

        And, no homeowner crashed the housing market.

        Therefore no homeowner should be blamed for a foreclosure.


        The banks shared the market risk when they wrote the mortgage.

        The banks got bailed out, homeowners got sold out.

    2. Ray Phenicie

      Well, I knew I should have done my homework-$7 trillion is the loss in the housing market-how much of that has been rewritten?
      I’m going to say almost none until someone can show otherwise.

      Oct 4 (Reuters) – The U.S. economy is still suffering from a “shocking” drop in homeowners’ equity and reforms are needed in how mortgage loans are originated and handled, Federal Reserve Governor Sarah Bloom Raskin said on Tuesday.

      “To my dismay, here we are in 2011, with a recovery that is still being dragged down by serious housing problems that will require not just economic talent — but significantly, legal talent — to address,” she told a Maryland State Bar Association group.

      Raskin did not mention monetary policy specifically.

      She said some $7 trillion has been wiped out in homeowners’ equity since early 2006 as a result of falling house prices.
      “This is a shocking and enormous decline,” Raskin added.

      She noted that there were well documented problems with mortgage servicing, including those turned up by federal banking regulators when they looked at 14 federally regulated mortgage servicing companies.

      “These problems indicate the existence of unsafe and unsound banking practices and violations of federal and state laws, as well as demonstrated patterns of misconduct and negligence on the part of servicers,” Raskin said.

      Maybe we will finally get something from the Repubs on this also
      But on the surface, this just looks like more of the same-talk it up and give the banks a new facelift. How many times can the same skin be re-stretched?

      1. Bill

        “To my dismay, here we are in 2011, with a recovery that is still being dragged down…”

        Anyone still saying there is a “recovery” just
        loses all credibility AFAIC.

      2. Jason Rines

        Ray – The criminals covered there tracks completely and guaranteed the end of the 1st Republic of the United States. That is a feature, not a bug.

        Since mandraking East is a feature and not a bug, no policy at all outside of taxation schemes with no representation, this should all begin to start becoming real clear what the intent is.

        And that intent is to getaway with all profits completely unscathed even if the death toll reaches 50% in America. Isn’t this the intent of all criminals? Get away to actually enjoy the loot?

        1. Nathanael

          But they won’t get away with it. These criminal bankers have no idea how to survive in a world of warlords, and if they destroy the First American Republic *and* refuse to use their power to feed the proles, both of which they seem intent on, only two outcomes remain:

          1 – there will be a socialist / social-democratic revolution (the better option), which will take all their money;
          2 – warlords will take over, who will take their money AND their life.

          The banksters are very stupid people.

    3. Tara

      Ray,those are very good suggestions–I would vote for them. I
      wonder what planet the bankers, obama, congress, courts plan to move to. I don’t think earth with be big enough to hide them all.

  5. hello

    “? One wonders if Al Gore thought the same thing or Bill Clinton in 1996. I very sincerely hope not – ”

    Obama is merely perfecting an art-form begun by Clinton, Gore, Robert Rubin, et al.

    America has no FDR-style Democratic Party. That party died when the Republicans took over the House in 1994. The current Democratic Party is squarely ideologically the same as 1970’s mainstream Republicanism while the current GOP has just gone dingbat crazy to the right.

    As much as a lot of people fawn over Hillary, a President Hillary Clinton probably would’ve enacted most of the same policies as Obama.

    1. Susan the other

      I agree. Nixon was run out of town because he was so dangerous to the puppeteers. Nixon knew what was happening and he would have taken moves in in 1973 to change the course of events. We will never know where he would have lead us. He was very pro corporation, etc. But Nixon simply tried to do what other presidents had done: control the country. Not even Eisenhower could not do it. It was a freight train. And we are the crash.

    2. Fiver

      Even Bush I, who I detested, was not so brazen as to prevent Bill Black and others from doing their jobs. And even Bush II, who was a moral monster, threw a few major players in the can for the Tech Wreck/Enron debacle.

      Obama’s blithely signs off on a whack of war crimes, but take on anyone with real clout? Not a chance. He’s utterly hollow.

  6. debi p

    This whole thing is a joke. We the people are no longer part of anyone’s equation. I am so sick of the fraud they r trying to cover up. Seems like a good class action against the AG’s office. I’m not a big class action person but we have to do something. All I know for sure is that is any one of us did what the banks did we would all be in orange. Where is the justice? This is fraud upon america. Again. Debi 561389-9339

  7. Sam Adam1234

    Polish the gullotines. Keep your musket above the mantle and the powder dry. When the farmstead is no longer safe, its only one step closer.

  8. Brian

    The pretense of a legal system has been washed away to reveal organized crime syndicate being run by attorneys general. We withdraw our consent to be governed, immediately.

    1. erichwwk

      “We withdraw our consent to be governed”

      Bingo. Rather than love between consenting adults we now have rape by force.

      In the 1980’s S&L scandal there were over 10,000 criminal referrals and over 1,100 convictions. With worse fraud and ten times the scale, one would expect at least 100,000 criminal referrals and 11,000 convictions.

      Seems the predators are running out of foreigners to exploit and terrorize.

        1. Nathanael

          Think about it: most people get refunds when they file on April 15, because the taxes are withdrawn from their paycheck.

          The only people who pay taxes on April 15 are either very rich, or making their money entirely from investments. Most of them are not going to rock the boat, but honestly, it’s a really small percentage.

          Not that it matters; the government isn’t really funded by taxes, as the MMTers have pointed out.

  9. F. Beard

    The banks hold the economy hostage.

    I ask again: Who needs banks? The US Gov is monetarily sovereign. It does not need banks. As for the private sector, why should some, the so-called “credit-worthy” be allowed to steal purchasing power from everyone else?

  10. Ray Phenicie

    I’ve been smitten by the fascinatingly horrendous nature (I’ve always like murder mysteries and this whole thing has a wee bit of the trappings of a ‘who done it’ mystery)of this whole situation.
    here are two articles, after the one I posted above, that make fascinating reading.

  11. Blue Sunday

    The settlement from this round of brutality in Oakland will be in the millions. The settlement will be paid for by Oakland’s insurance policy, and thus ultimately by the taxpayer. There is no repercussion for police involved in brutality against protesters, just as there is no repercussions for CEO’s of large companies involved in financial crimes. Under the current situation neither is liable for any wrongdoing.

  12. 60sradical

    I guess I’ll just hAve to pound my point: If the Federal Reserve System exists, no matter what we do with banks, congress, regulations, attorney generals w/integrity, etc., we are all monetized slaves!!!!
    Thanks as usuual, Yves and regulars. END THE FED!!

  13. mannfm11

    Why don’t we forget about monetary penalties and get the police in with handcuffs instead? This scheme in real money is 10 times Bernie Madoff and all we get is more and more coverup, not at the expense of the bankers, but the shareholders of the banks. Everything that has gone on since origination has been done to cover up actual crimes.

    1. Tukung

      The best thing to do would be to just to OWS (occupy weblog sessions) and complain to each other, because that should definitely enact change. The internet is a great place to vent our frustrations with each other but all of us need to apply serious pressure to our representatives. If your Reps. don’t respond accordingly, measures should be taken to begin their removal from office. There are always mechanisms for removing elected officials from office. If there are no consequences for their inaction, they will keep doing nothing until it gets near election time and then it’s like childbirth, you quickly forget about all the pain and hardship you endured and get pregnant again or re-elect the same idiot over and over.

      The Occupy Wall Street movement is a start but it needs leadership and an articulate spokesman otherwise you will get a media dim bulb, like CNN’s Erin Burnett, singling out a recent UFO abductee and asking them a simple question. On cue, the protester flames out and the smugness is restored. It’s an old trick to single out a total nimrod, ask them some innocent questions and then cast dispersions on the whole organization based on their incomprehensible responses. Case in point – Michelle Bachmann. I hear many conservative radio hosts using this technique all of the time. And when the MSM do run into someone who knows what is going on they totally get destroyed. Defending fraud is a very uncomfortable position. My two cents.

      “Better a herd of sheep led by a lion than a herd of lions led by a sheep.”

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