What makes Eric Schneiderman’s bold intervention in the Bank of America mortgage settlement so important is not even necessarily this particular settlement itself, but what it means for other settlements to the mortgage mess. It’s pretty clear that Bank of America and the other top banks have a strategy of buying their way out of liability. On the same day that Schneiderman filed his action, BofA signed an agremeent with HUD on some servicer issues with government mortgages that whitewashes them from responsibility for breaking the law. BofA had a duty to provide alternatives to foreclosure on these types of FHA-guaranteed mortgages, and they simply didn’t do it, moving right to foreclosure instead. And they won’t really be punished for that.

The Department of Housing and Urban Development has reached a settlement with Bank of America that releases the company from liability for failing to adequately provide alternatives to foreclosure on 57,000 delinquent government-insured mortgages.

The agreement, a draft of which was obtained by American Banker, was previously undisclosed. It has been forged on a separate but parallel track from continuing settlement talks between Bank of America, state attorneys general and other regulators over alleged mortgage origination and servicing failures.

B of A’s pact with HUD requires it to waive a minimum of $10 million in unpaid mortgage payments and vet each of the 57,000 delinquent borrowers for a possible loan modification, short sale or other foreclosure alternative.

“Our total costs for the program will be multiples of that” $10 million minimum, B of A spokesman Dan Frahm said. The deal calls for measures to “ensure these customers have every opportunity to stay in their homes,” he added.

Many of these homes are vacant now because of the threats to foreclose. Rather than having to pay for modifications, in many cases this will simply free BofA up to foreclose. And understand, this is a non-penalty. $10 million is a pittance, and basically HUD is saying to BofA to do what it should have done in the first place, which is follow the law on FHA-insured mortgages.

Schneiderman is showing a different way. Rather than let the banks off the hook and tell them to do right next time, Schneiderman’s order details how the banks committed widespread fraud (that’s actually his term in this case) against investors and homeowners. Down the road, maybe this leads to a settlement. But it would be an informed settlement, which has done the work and documented the fraud, one that would extract the proper amounts and penalties from the offender. And Schneiderman is using state statutes that could easily carry criminal penalties as well.

In Shahien Nasiripour’s report on this, he lays out what Schneiderman is saying here, essentially that the securitization market for Countrywide loans was fake:

In short, Countrywide Financial, the lender purchased by BofA in 2008, failed to properly assemble loan documents needed for the creation of mortgage securities, and BNY Mellon effectively looked the other way, which “apparently triggered widespread fraud,” Schneiderman said in court documents.

BNY Mellon should have known the mortgage securities were improperly created because the evidence was “abundant,” Schneiderman asserted, citing the bank’s own documents, news coverage of “foreclosure fraud” and foreclosure actions brought on the bank’s behalf.

Schneiderman also accused Bank of America of fabricating the missing documents when it came to foreclosing on homeowners who defaulted on their mortgages.

There are “serious questions about the fairness and adequacy” of the proposed settlement agreement, Schneiderman said in court documents.

This will lead to discovery, and a real plumbing of the depths of the problem. And it’s contagious. In California, AG Kamala Haris sent a subpoena to Citigroup over mortgage securitization. You’re finally seeing a focus on investigation rather than settlement. The horse is finally going before the cart.

Yves Smith has started a Bank of America death watch, and for good reason. Their liabilities are extremely large, and their efforts to cast them all aside at once have been stymied by the New York Attorney General. And in her post on Schneiderman’s action, she highlights how Bank of New York Mellon comes out with substantial liability by virtue of failing in their duties as a trustee to properly carry off securitization. This defensive statement by a BNYM spokesman shows how touchy they are on this subject:

Ron Gruendl, a BNY Mellon spokesman, contested Schneiderman’s claims in an emailed statement:

“The allegations by the New York Attorney General are outrageous, baseless, unsupported by fact and law and we will fight them if necessary in court. We are confident that we have fulfilled in all respects our responsibilities as Trustee. The AG’s action is misguided and fails to comprehend the role of the Trustee and the benefit the settlement would provide to investors.”

Schneiderman did a great interview with WNYC yesterday that you can check out.