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Masto Raises Score of Questions Over Foreclosure Fraud Settlement

Lots of developments late today on the foreclosure fraud and servicing settlement. We know that a term sheet of some kind has been sent to the states for approval. Apparently there was a deadline attached to that, of February 3rd. We’ve seen deadlines before in the settlement, but this one has a little more weight attached, because the AGs have the document in their hands for the settlement.

The final value of any settlement will depend on which states it includes, and could drop sharply if states like California, one of the hardest hit by the foreclosure crisis, do not join.

In another sign the deal is close, negotiators have overcome a sticking point and agreed on Joseph Smith, North Carolina’s banking commissioner, as a monitor to ensure the banks comply with the terms of the settlement, these people said.

Smith was President Obama’s pick for FHFA commissioner, but he didn’t make it through the confirmation process. He comes pretty well-recommended.

But the existence of an independent monitor doesn’t answer the host of questions that go well beyond the release of liability in the settlement. In fact, Nevada AG Catherine Cortez Masto saw fit to write up a list of 38 questions and send them off to the settlement negotiators. This suggests that the AGs got a very vague document, with a lot of trust given to the executive committee on the details. Masto, at least, isn’t comfortable with that. And she has plenty of reason to be skeptical.

Nevada has been burned in the past by large, multistate mortgage settlements. In 2009 the state joined 10 others in agreeing to a settlement regarding fraudulent mortgage practices at Countrywide, the subprime lender that came to epitomize questionable lending during the housing boom. Bank of America, which now owns Countrywide, agreed to offer as much as $8.4 billion in loan modifications and foreclosure relief to 400,000 homeowners victimized by Countrywide’s mortgage fraud. But as of June 30, just roughly $216 million in payments had been made through the program. In August 2011, a frustrated Masto asked a court to void the deal so that Nevada could go after the bank on its own.

An Obama Administration official tried to downplay the Masto letter, saying that it only sought clarification on language rather than resistance to the settlement in general. I’d say that a 38-question letter raises more than just linguistic analysis. In fact, I know it, because here’s the letter.

Among other things, Masto questions whether there will be “geographic discrimination” involved in the settlement, wondering whether enforceable controls will be employed to prevent some states from making out better than others. Clearly this is a reference to the attempted California bribe of up to $15 billion out of the $25 billion total. Masto asks for an expected range of value from the settlement for each state, not just California. She wants to know if the states or the federal government would be in control if something goes wrong with the settlement. She asks if the servicers will have to advertise their giving away loan modifications to their customers. She wants to know a lot more about the role of the independent monitor. She asks if the settlement will “prevent states from effectively challenging future foreclosure actions that are based on faulty prior assignments,” which is an important point; essentially, she’s asking if this settlement effectively blesses bogus documents and ties the hands of the AGs who see them as fraudulent. That connects directly to the ongoing litigation in Nevada around mortgage documentation and the lawsuits against LPS.

In other words, Masto did her homework and saw this settlement as little more than a framework, without specificity on the release, the level of relief on a per-state basis, and the level of enforcement. Or, in other words, everything. And by the way, they want an answer by the end of the week. That’s clear at the end of Masto’s letter, where she writes: “Because there is a sign-on deadline of February 3, 2012, I need this information as soon as possible to allow my office to continue to evaluate the proposal on behalf of the state of Nevada.”

So where does this leave us? Beau Biden and Kamala Harris have said publicly that the current settlement is insufficient. Eric Schneiderman has said he thinks the settlement has gotten better, but he opposes it in its current form. Masto raises a flood of questions that cannot possibly get answered adequately in a week. Martha Coakley hasn’t said much lately, but she has an active lawsuit against banks on all of the conduct that would get released in this settlement. So in theory, the five Democrats who were always out of this settlement are still out as of this moment.

And yet, I’m sure you don’t find it to be an accident that the deadline on the settlement dovetails pretty nicely with the announcement of the RMBS working group. Just give up on this foreclosure fraud stuff, the theory goes, and next time we’ll really do an investigation, on all the securitization issues. Just sign on the dotted line. And what this has done is to let the air out of the balloon of opposition from progressive groups who organized for months against a settlement. You haven’t heard from any of them on the settlement in the past few days. It’s too soon to say what will happen, but without that outside pressure, I’d guess that a settlement is imminent.

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David Dayen

David Dayen