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State AGs Have Done Almost No Investigation of Servicer Abuse and Foreclosure Fraud

gavel

(photo: The-Lane-Team)

Shahien Nasiripour leads today with a persistent complaint I’ve had about the state Attorney General investigation: that it was not an investigation at all, but an immediate move to settlement talks, in ways that undermined the goal of getting a solution that matches the level of fraud and abuse.

For federal and some state officials, expedience now appears to be trumping other considerations in settlement talks with major mortgage servicers. Despite failing to marshal a strong case proving misconduct during the foreclosure crisis, the government is seeking to craft a settlement quickly, in the hopes that this will inject greater certainty into the financial system, stabilize home prices and add vigor to a flagging economy.

But some officials with experience sitting across the negotiating table with major banks say the government is making a critical miscalculation that jeopardizes the public interest by seeking a deal before amassing a credible threat of successful prosecution: In essence, they say, the government would give servicers a blanket pass for widespread alleged acts of fraud while extracting too little in return and operating from a relative position of weakness.

“I would never want to go into a negotiation without solid evidence of actual misconduct to hold as leverage over my counterpart,” said Neil M. Barofsky, the former special inspector general for the Troubled Asset Relief Program, which was crafted to bail out teetering banks. “It would also be very dangerous from a public policy perspective to waive all future claims as part of such a settlement if you do not have a good sense of the size, scope and severity of the underlying misconduct.”

According to sources familiar with the ongoing state and federal probes, state and federal officials have wasted months not digging into the details of the foreclosure crisis, yielding little of value in court and undercutting the lenders’ incentive to strike a settlement of greater benefit to homeowners and taxpayers.

At this point, the claim that state and federal regulators had to be expedient and speed up the process to provide relief looks ridiculous. The state AG “investigation” began last October. It’s now July. These nine months have been spent not combing through loan files and building the case that the banks have abused their customers and broken state laws with fraudulent documents, but trying to persuade the banks to accept a settlement. This fails on a number of levels Without knowledge of the extent of the wrongdoing, it’s impossible to price a settlement properly. And, without that knowledge, it’s impossible to persuade the banks into giving up anything, since they won’t fear the alternative in the event of a collapse of the talks. In short, as one person familiar with the talks told Shahien, “The evidence a prosecutor would use is not in the possession of the prosecution.”  [cont’d.]

But much like in the debt limit talks, the side that wants to sell an agreement is bending over backwards to get that agreement. It will include some penalties and maybe some relief for a small amount of homeowners or transition assistance when they are forced out of their homes. It will not be commensurate with the crime because we have no idea how big the crime is. And it’s somewhat likely that past loan modifications will be included in the topline settlement number, making that number completely meaningless.

I think a lot of AGs believe they simply don’t have the firepower to conduct a real investigation. Witness Kamala Harris, the California AG, announcing a mortgage fraud task force and then seeing all the money earmarked for it cut during a budget deal. But that assumes that there aren’t low-cost resources that exist. Abigail Field for Fortune Magazine simply went down to her local courthouse and found more widespread evidence of documentation fraud and securitization failure than anyone at the state or federal level. There are registers of deeds around the country sitting on a mountain of evidence. These resources aren’t being utilized.

There’s plenty of reason to question whether all AGs, especially key ones like Eric Schneiderman in New York, will accept this settlement, and the waiving of claims that goes along with it. But the Justice Department is acting as the Administration’s muscle on this one.

Even so, state and federal officials are nearing a settlement that would release companies like Bank of America and JPMorgan Chase from legal liability in exchange for a cash settlement, reduced payments for homeowners, transition assistance for troubled borrowers and promises to improve performance and comply with state and federal rules.

The Justice Department is pressing state attorneys general to release the banks from liability for a host of alleged violations in exchange for a far-reaching settlement, people familiar with internal discussions said.

Whether the AGs settle or not, judges still have the option of viewing outright fraudulent documents as fraudulent and refusing to accept them in a foreclosure, which is what is happening now across the country. This settlement cannot possibly break the deadlock in the judicial process that has slowed foreclosures. Given the puny numbers in the settlement, it cannot fix the foreclosure mess or allow the housing market to heal.

Yves Smith offers a simple solution that could actually work:

The biggest banks all have large second lien portfolios (almost entirely HELOCs). They’ve refused to modify first mortgages because it’s a lot of work they don’t get paid for, and they make good money foreclosing. And they are able to keep borrower looking current on seconds via a combination of bullying and accepting very skinnied down payments.

If the Fed and the OCC told banks that they had to write down the second liens on delinquent mortgages, and write off the second liens on homes where they started foreclosing on the first, you’d see a 180 degree change in behavior. Banks would be falling all over themselves to do mods Indeed, if these regulators were to take this step (which is within their power) you’d probably see an bank change of heart on bankruptcy cramdowns too (banks twice beat back legislation to write down the value of a mortgage to the market value of the house in bankruptcy proceedings, which is done with very other type of secured consumer debt).

But we’re not going to see that at all. Instead, we’re gearing up for a giveaway settlement that I’m not even sure you’ll be able to get more than 25 AGs to even agree to.

CommunityThe Bullpen

State AGs Have Done Almost No Investigation of Servicer Abuse and Foreclosure Fraud

Shahien Nasiripour leads today with a persistent complaint I’ve had about the state Attorney General investigation: that it was not an investigation at all, but an immediate move to settlement talks, in ways that undermined the goal of getting a solution that matches the level of fraud and abuse.

For federal and some state officials, expedience now appears to be trumping other considerations in settlement talks with major mortgage servicers. Despite failing to marshal a strong case proving misconduct during the foreclosure crisis, the government is seeking to craft a settlement quickly, in the hopes that this will inject greater certainty into the financial system, stabilize home prices and add vigor to a flagging economy.

But some officials with experience sitting across the negotiating table with major banks say the government is making a critical miscalculation that jeopardizes the public interest by seeking a deal before amassing a credible threat of successful prosecution: In essence, they say, the government would give servicers a blanket pass for widespread alleged acts of fraud while extracting too little in return and operating from a relative position of weakness.

“I would never want to go into a negotiation without solid evidence of actual misconduct to hold as leverage over my counterpart,” said Neil M. Barofsky, the former special inspector general for the Troubled Asset Relief Program, which was crafted to bail out teetering banks. “It would also be very dangerous from a public policy perspective to waive all future claims as part of such a settlement if you do not have a good sense of the size, scope and severity of the underlying misconduct.”

According to sources familiar with the ongoing state and federal probes, state and federal officials have wasted months not digging into the details of the foreclosure crisis, yielding little of value in court and undercutting the lenders’ incentive to strike a settlement of greater benefit to homeowners and taxpayers.

At this point, the claim that state and federal regulators had to be expedient and speed up the process to provide relief looks ridiculous. The state AG “investigation” began last October. It’s now July. These nine months have been spent not combing through loan files and building the case that the banks have abused their customers and broken state laws with fraudulent documents, but trying to persuade the banks to accept a settlement. This fails on a number of levels Without knowledge of the extent of the wrongdoing, it’s impossible to price a settlement properly. And, without that knowledge, it’s impossible to persuade the banks into giving up anything, since they won’t fear the alternative in the event of a collapse of the talks. In short, as one person familiar with the talks told Shahien, “The evidence a prosecutor would use is not in the possession of the prosecution.”

But much like in the debt limit talks, the side that wants to sell an agreement is bending over backwards to get that agreement. It will include some penalties and maybe some relief for a small amount of homeowners or transition assistance when they are forced out of their homes. It will not be commensurate with the crime because we have no idea how big the crime is. And it’s somewhat likely that past loan modifications will be included in the topline settlement number, making that number completely meaningless.

I think a lot of AGs believe they simply don’t have the firepower to conduct a real investigation. Witness Kamala Harris, the California AG, announcing a mortgage fraud task force and then seeing all the money earmarked for it cut during a budget deal. But that assumes that there aren’t low-cost resources that exist. Abigail Field for Fortune Magazine simply went down to her local courthouse and found more widespread evidence of documentation fraud and securitization failure than anyone at the state or federal level. There are registers of deeds around the country sitting on a mountain of evidence. These resources aren’t being utilized.

There’s plenty of reason to question whether all AGs, especially key ones like Eric Schneiderman in New York, will accept this settlement, and the waiving of claims that goes along with it. But the Justice Department is acting as the Administration’s muscle on this one.

Even so, state and federal officials are nearing a settlement that would release companies like Bank of America and JPMorgan Chase from legal liability in exchange for a cash settlement, reduced payments for homeowners, transition assistance for troubled borrowers and promises to improve performance and comply with state and federal rules.

The Justice Department is pressing state attorneys general to release the banks from liability for a host of alleged violations in exchange for a far-reaching settlement, people familiar with internal discussions said.

Whether the AGs settle or not, judges still have the option of viewing outright fraudulent documents as fraudulent and refusing to accept them in a foreclosure, which is what is happening now across the country. This settlement cannot possibly break the deadlock in the judicial process that has slowed foreclosures. Given the puny numbers in the settlement, it cannot fix the foreclosure mess or allow the housing market to heal.

Yves Smith offers a simple solution that could actually work:

The biggest banks all have large second lien portfolios (almost entirely HELOCs). They’ve refused to modify first mortgages because it’s a lot of work they don’t get paid for, and they make good money foreclosing. And they are able to keep borrower looking current on seconds via a combination of bullying and accepting very skinnied down payments.

If the Fed and the OCC told banks that they had to write down the second liens on delinquent mortgages, and write off the second liens on homes where they started foreclosing on the first, you’d see a 180 degree change in behavior. Banks would be falling all over themselves to do mods Indeed, if these regulators were to take this step (which is within their power) you’d probably see an bank change of heart on bankruptcy cramdowns too (banks twice beat back legislation to write down the value of a mortgage to the market value of the house in bankruptcy proceedings, which is done with very other type of secured consumer debt).

But we’re not going to see that at all. Instead, we’re gearing up for a giveaway settlement that I’m not even sure you’ll be able to get more than 25 AGs to even agree to.

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David Dayen

David Dayen