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More on the Dwindling Global Settlement on Foreclosure Fraud

I wrote yesterday about the disquiet many Democratic attorneys general and consumer advocates had with the initial offer of a global settlement to mortgage servicers for their role in foreclosure fraud. A lot has happened since then. First, the bank-friendly federal regulator at the Office of the Comptroller of the Currency may be going rogue and offering their own settlement to the banks. Now, Shahien Nasiripour writes that the initial offer in the term sheet, which would have included principal reductions and loan modifications for as many as 3 million borrowers, has been scaled back:

The Obama administration has significantly diminished a proposed homeowner relief program that initially aimed to force the nation’s five largest mortgage companies to reduce monthly payments for three million distressed homeowners, according to documents and people involved in the discussions.

The administration has shifted its focus to delivering lowered payments for as few as one million homeowners, according to sources that are party to the deliberations.

However, the pot of money the administration hopes to extract from the firms to fund those modifications — $25 billion — remains unchanged, these people said, partly to fund expensive loan modifications, partly as a function of the desire by some agencies to punish the firms for their mortgage practices.

So this doesn’t necessarily change the amount the banks would have to pay, though it does change the number of borrowers who would be helped. It does appear that they are responding to criticism from the banks and on the right, which means that the banks’ gambit of leaking the contents of the settlement so their Republican allies could beat up on it is having the intended effect.

However, there are ways in which this is a more realistic assessment. By reducing the number of borrowers expected to benefit and keeping the same the dollar value, this creates real value for those able to get the modification. In fact, 3 million borrowers splitting $25-$30 billion may not have saved all of those homes.

The Financial Times reported today on another possibility floated in the talks: a “cash for keys” arrangement, where banks would pay borrowers more than 90 days delinquent $21,000 to leave the unit. $1,000 would go toward seeking financial advice, with the other $20,000 for a “fresh start.”

In his story, Shahien also notes that there is ample dissension among federal regulators on how to proceed, with OCC arguing against any punitive damages and other regulators arguing in favor. And with state AGs similarly divided, it’s unclear that any final settlement will ensue. But the White House badly wants a quick settlement, both to give the impression of doing something on the issue and to help borrowers who could otherwise end up on the street. The Administration also wants to try to stabilize the housing market with this settlement.

The trade-off for a quick settlement is an incomplete investigation into mortgage servicer practices, which could reveal much more widespread abuse and show this settlement as woefully inadequate. Tom Miller, the lead AG on the case, says that there has been investigation of at least one servicer:

“That’s a big price to pay for the additional investigations,” Miller said of the potential delay. He added that state regulators had conducted an in-depth audit of Ally Financial, a state-regulated firm and the fifth-largest mortgage handler in the country, according to Inside Mortgage Finance. It was the “most in-depth analysis and investigation of any of the [mortgage] servicers that has been done or will be done,” Miller said.

State regulators will use their findings from Ally as part of the settlement negotiations with the other large mortgage firms, Miller said, as practices were likely the same across the biggest firms.

Hopefully we’ll get some finding of fact from the Ally investigation.

I’m pretty pessimistic at this point that the needle can be threaded and a settlement produced that satisfies all the moving parts here. In the event of no settlement, individual AGs and regulators could investigate and pursue their own actions. They should start today.

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David Dayen

David Dayen

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