What I couldn’t understand about Eric Schneiderman’s lawsuit against MERS and three banks today is how it could possibly square with any settlement on foreclosure fraud. These are precisely the same issues, after all. The settlement would cover robo-signing and other falsified documents, and the lawsuit seeks damages, through MERS, over robo-signing and other falsified documents. So what gives?

The answer is, according to what I’ve learned, is that it’s a carve-out. Schneiderman can pursue this case and also theoretically join a settlement. This may or may not be true of other cases with other AGs. The timing of Illinois’ lawsuit against Nationwide Title Clearing yesterday seems significant in that regard; perhaps Lisa Madigan also secured a carve-out for her case. It’s plausible to think that AGs are being told to get out their lawsuits now, prior to a settlement, and they would be allowed in the event of a settlement. Schneiderman still hasn’t agreed to the settlement, but in the event that he does, the case dropped today would be able to go forward.

So this makes me wonder why banks would agree to a settlement, then. They must be truly desperate to start the foreclosure machine in states which will not get a carve-out, if they can’t stop New York, Illinois and other states from these lawsuits.

Additionally, private label mortgage backed securities investors have begun to make noise against a settlement, seeing that they would essentially be paying for the banks’ misdeeds.

The state Attorneys General, federal agencies, and certain mortgage servicers have worked for approximately one year on developing a solution to address our national foreclosure crisis. The time now may be nearing for a settlement of claims of alleged wrongdoing by servicers. AMI and mortgage investors have neither been involved in the negotiations nor are aware of the ultimate settlement terms. In anticipation of a possible settlement, however, AMI cautions these negotiators not to rush into a settlement, but rather work to get a properly constructed settlement that helps distressed homeowners with the right solutions. “Investors in mortgage trusts, such as unions and pensions, do not service these loans and certainly did not create these woes for borrowers. The use of mortgage trust money (from pensions funds, unions and charities) to settle the investigation is tantamount to a bank bail-out. We expect that principal modifications of private mortgages made to satisfy any kind of settlement will involve only mortgages held by the settling parties and that the criteria for all additional principal modifications be firmly established,” explained Chris Katopis, AMI’s Executive Director.

AMI would only support such a resulting settlement, if any, if appropriately designed to address such alleged wrongdoing while not implicating innocent parties. AMI is on-record as supporting long-term, effective, sustainable solutions to the housing foreclosure crisis. It is generally supportive of a settlement if it ensures that responsible borrowers are treated fairly throughout the foreclosure process; while at the same time providing clarity as to investor rights and servicer responsibilities. The settlement should be designed in a way that ensures that investors, who were not involved in the alleged activities and, who likewise were not a participant in any negotiations, do not bear the cost of the settlement. Specifically, mortgage servicers should not receive credit for modifying mortgages held by third parties, which are often pension plans, 401K plans, endowments and “Main Street” mutual funds. To do otherwise, will damage the RMBS markets further and limit the ability of average Americans to obtain credit for homes for generations to come.

More noise is being made about the other issues with the settlement. As Loren Berlin and D.M. Levine write, the restitution for homeowners does not look adequate. Relief would go more, based on the terms of the settlement, to homeowners with more equity and larger homes, upending the expectations of who actually needs help. And questions remain about the enforcement and the monitoring committee.

But with this massive carve-out – questioning the private mortgage registry system for the third-largest state in the country – I don’t see why banks would feel like they cleared any kind of hurdle in agreeing to a settlement.

David Dayen

David Dayen