Saturday, February 11, 2012

Landmark Borrower Relief? Biggest Settlement Ever?

On Thursday, the US Attorney General and several state AGs announced that they finalized an agreement for $26 billion with five major home mortgage lenders.  See WSJ  This "settlement" was touted in various sources as punishing foreclosure abuses and as providing homeowner relief and was generally reported as a landmark agreement representing the largest settlement since Tobacco if not ever.

There are a few flaws with this narrative.  First, both sides do not agree that an agreement has been "finalized."  To the contrary, the major banks are reporting an "agreement in principle." See Bank of America Announces Agreements in Principle With Federal and State Authorities on Mortgage Matters While this distinction between a finalized settlementn agreement and an agreement in principle might seem relatively insignificant, there are two key points to remember:  1) this settlement relates to numerous alleged violations and unfair practices involving millions of borrowers. There are hundreds if not thousands of unresolved issues still to be negotiated (such as, keep your eye on this one, the extent to which lenders will be immune from future private suit).  2) These government attorneys' public statement, "a historic deal has been reached, please congratulate us," makes it politically impossible for them to end up without a deal.  We should expect all of the myriad final details to be dictated by the banks.  The banks still have the leverage to say "no."

Second, this settlement is no major victory for tax-paying consumers.  As noted by Michael Hiltzik for the LA Times in Mortgage settlement is great — for politicians and banks ,
There certainly are some big winners in the deal, which has the approval of 49 of the 50 state attorneys general. Start with its godfathers. President Obama took to the podium a couple of hours after the deal's announcement to declare that it will "speed relief to the hardest-hit homeowners."

California Atty. Gen. Kamala D. Harris went before the cameras soon after that, taking credit for "a tremendous victory for California," which has been perhaps the hardest-hit state in the foreclosure crisis.

Then there are the banks. The signatories to the deal are Bank of America, Citibank, Wells Fargo & Co., JPMorgan Chase and Ally Financial (formerly GMAC), which handle payments on more than half the nation's outstanding 27 million home loans and therefore have been at the center of the servicing and foreclosure abuses the settlement is supposed to end.

If you don't listen too closely, it sounds as if they're putting up the $25 billion. Not so. The only cold cash the banks are paying is a combined $5 billion, including $1.5 billion to compensate borrowers whose homes were foreclosed on from 2008 through the end of last year, with the rest going to the federal and state governments to pay for regulatory programs.

Most of the balance is in mortgage relief for stressed or underwater mortgage holders, including principal reductions, refinancings and other modifications.

How much of this will translate into an outlay of cash by the five banks? Not much, if any.
The banks want a settlement.  They have a massive set of massive problems (which they created), and no real solution.  For example, I am familiar with many cases where discovery has determined that the lender who claims to hold a note and mortgage cannot produce proper evidence that it owns the note, owns the mortgage, or can document the borrower's payments received and therefore cannot prove the balance due.  I do not know where the evidence went if it ever existed, but I know that the lender now cannot prove its case.  That means that the lender cannot sue the borrower for repayment and foreclosure in a Court of law.

I have been predicting for at least a year that the way that the banks would resolve this dilemma would be by accepting a "punishment" from the federal and state governments.  We will see what this agreement provides with respect to bar of private suits.  My latest prediction is that we won't be privvy to the details on this point until after the agreement is actually finalized, signed, and approved by a Court.

Not only do the banks want a settlement, the Obama administration obviously wants a deal.  This is a great photo op and an excuse for self-congratulation on the part of administration officials.  A more sinister motive for the Obama "rush to announcement" is suggested by blogger Yves Smith at naked capitalism

Maybe the Administration believes its own PR and thinks this measley program will help the housing market, or more important, secure the fealty of banks. But my guess is that the fact that 15 AGs concerned about the negotiations had met is what pushed the Administration into high gear. They did not want a meaningful, cohesive opposition forming. In addition, I am certain some evil genius in the Administration understood full well the value of destroying the AGs’ bargaining leverage before the final phase of negotiations.

Stay tuned as we find out how much the banks extract in protections, waivers and immunity after the settlement is finalized. 

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