Saturday, November 5, 2011

A primer on the foreclosure fraud settlement negotiations (updated)

When it comes to holding Wall Street accountable, one of the big stories these days is the negotiation currently underway for a settlement with the big banks over foreclosure fraud.

I'll admit that I might not be the best person to write about this. I have NO background in finance and could be considered a perfect case for the blind leading the blind when it comes to trying to talk about a topic like this. On the other hand, I'm a fairly intelligent human being and if regular voters are going to have any chance of understanding what's going on, I might not be a bad test case.

I'd also suggest that this isn't the "sexiest" topic around these days. But I think some basic understanding of what's going on here is important. And as I said in my last post, being an informed voter is sometimes hard work. If you're interested in knowing what's going on with this one, I invite you to wade into the weeds with me on it for a bit.

A little over a year ago, the 50 state attorneys general banded together to launch settlement talks over foreclosure fraud with 5 banks...Bank of America, Wells Fargo, J.P. Morgan Chase, Citigroup and Ally Financial. The narrow issue covered by these negotiations is what has come to be known as robo-signing, or falsification of signatures and documents to expedite foreclosures. Several federal agencies have also been participating, including the Department of Justice, the Department of Housing and Urban Development, the Department of Treasury, the Federal Trade Commission as well as the new Consumer Financial Protection Bureau. Leading the talks on behalf of the states has been Iowa Attorney General Tom Miller.

Back in August, Miller bumped NY Attorney General Schneiderman off the coalition's executive committee suggesting that he was undermining the group's efforts. The principle conflict seemed to be over whether the settlement being negotiated with the banks would grant them immunity beyond the issue of foreclosure fraud. Schneiderman wanted to maintain NY's ability to prosecute the banks for things like the practice of assigning and bundling mortgages into securities.

And then in September, CA Attorney General Harris pulled out of the negotiations altogether. She also cited concerns over the possibility of broad immunity, but her principle concern seemed to be that the deal would not provide commensurate relief for the level of hardship suffered by the people of her state.

Since then AG's from states such as Kentucky, Nevada, Minnesota, and Delaware have expressed concerns that the settlement not grant such broad immunity as to limit their pursuit of other issues with the banks. Of course this all is complicated by the fact that states have different definitions and legal assumptions about what constitutes fraud. States that have expressed concern are those most likely to be able to prosecute based on their own statutes (not to mention their political position on being financially beholdened to the banks).

In the last couple of weeks several unnamed sources have leaked information about what might be included in the deal and hinted that a final settlement is near. Anyone with half a brain would know to take these leaks with a grain of salt. The first question we'd want to ask is "what is the leaker's motivation?" It could range anywhere from a commitment to public awareness to an attempt to influence or sabotage the negotiations.

If you're interested in seeing the variety of takes on these leaks, here are 3 good examples of things that are being said.

A deal that wouldn't sting by Gretchen Morgenson of the NYT

Foreclosure deal near as banks win more immunity by Aruna Viswanatha of Reuters

California is wooed in mortgage settlement talks by Alejandro Lazo of the LA Times

Where all three articles agree is that the current price tag for the banks is $25 billion. Things get a bit fuzzy - at least for me - in how that money would be structured. But one of the basic ideas is to provide some relief for homeowners whose mortgages with those 5 banks are "underwater," ie, they owe more than the house is worth.

While the NYT article expresses concern about homeowners not covered under this deal - like those who's loans are held by Fannie Mae and Freddie Mac - the Reuters article anticipated President Obama's announcement about those last week with his Home Affordable Refinance Program.

It also could bolster the Obama administration's plan to further extend help to underwater borrowers whose loans are owned by Fannie Mae or Freddie Mac to refinance their mortgages.

In terms of the immunity extended to banks, the Reuters and LA Times article report basically the same thing.

From Reuters:

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.

And the LA Times:

In exchange for the refinancing component, state attorneys general would release the banks from mortgage origination allegations — that is, allegations of fraud and abuse in the creation of home loans.

That is a much more narrow extension of immunity than the ones AG's from many states expressed concern about.

The NYT article doesn't spend much time on this issue of immunity - which has been the central concern of most state AG's. Morgenson simply says that the deal might include extending immunity to MERS.

The deal being discussed now may also release the big banks that are members of MERS, the electronic mortgage registry, from the threat of some future legal liability for actions involving that organization.

In case you don't know what MERS is, don't feel bad, I didn't either. You can read more about it here.

Both the NY and Delaware AG's have filed suit against MERS. So whether or not that is included in the immunity deal will be important to note.

I think I'll leave it there for now because we've probably reached the end of my ability to explain much of anything else. I write all this to familiarize you with some of the issues involved so that you (and I) can be informed readers when this information is spread around.

It should come as no surprise to anyone that the poutragers have seized on the NYT article by Morgenson and have already started with their hissy fits about the Obama administration selling out home owners and siding with the banks. And of course, OWS is holding a march against the deal today (warning: firebagger link).

After all of the above, I hope you can see how premature and simplistic their take is on what is likely happening. Oh, and no matter what happens, to them it will be bad...and of course, its all Tim Geithner's fault.

UPDATE: In the comments, Laura pointed me to an article Deaniac83 wrote about this back in August. He makes the important point that any offer of immunity has to be balanced against the relief provided to homeowners. When we see the final deal, that's EXACTLY how we need to measure things!

When it comes to criminal immunity for bankers, AG Tom Miller has made it very clear that is NOT on the table.

We've made it very clear for at least a month that there's nothing to do with criminal immunity. That should be known.


  1. I'm going to comment here that if anyone has additional information or has read good articles about this I'd love to hear. I feel like I might be wading in over my head on this but decided to put it out there since I hadn't seen much about it from us pragprogs.

  2. This seems to be the same freakout from back in August. Deaniac83 had a great post back then:

  3. Laura - Yes! Its exactly the same freakout Deaniac wrote about. Thanks so much for the link.

    I'm going to finish reading it and then link it in the article.

  4. Thanks ABL.

    I appreciate it on this one as it was a "labor of love" starting off from such total ignorance. LOL

  5. "We've made it very clear for at least a month that there's nothing to do with criminal immunity. That should be known."

    It should be known but the left won't hear it or spread it as fast as they told people that banks were getting immunity.

  6. Anonymous @ 11:13

    After I did so much reading about this yesterday, it became absolutely clear that most of the poutragers screaming about this know absolutely nothing about what's going on. Its just another excuse to get their rage on.