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Is the Foreclosure Fraud Settlement Overbroad?

posted by Adam Levitin

We don't actually know the terms of a foreclosure fraud settlement.  All that we're really hearing now is a proposed $20B figure.  There could well be other substantive terms in a settlement, but it's worth considering some of the arguments made by the banks in objection to a large dollar settlement.  

Basically, the banks' argument is no harm, no foul.  Yes, they did some robosigning, but it was all fun and games, and no one got hurt.  Moreover, using any settlement dollars to help homeowners would reward undeserving profligates and encourage strategic defaulting, which would be bad morally and for the housing market.  

There are a lot of problems with this line of argumentation.   

First, we don't actually have a tally of servicer malfeasance.  Neither the AGs nor the federal regulators have done the sort of investigation necessary to really know the full extent of servicer wrong-doings.  Servicers might downplay the harms, but we just don't know.  This isn't just robosigning.  The banks forfeited their ability to make the "trust me" argument some point in fall of 2008.  

Second, even if few homeowners themselves were actually harmed, mortgage servicer malfeasance, such as robosigning has done tremendous harm to the legal system and to the housing finance system.  Banks shoddy mortgage underwriting and then complete inability to handle the resulting foreclosure tsunami has already deeply eroded confidence in our financial system, which has forstalled economic recovery.  That's a harm to everyone in America. Finding out that our largest financial institutions have been at best cavalier about the law and at worst criminal in their handling of foreclosures can hardly be helping the economy recover.  

Third, it seems like the settlement might involve servicers committing to doing a certain number of loan modifications which would cost them $20B.  In other words, servicers wouldn't pay Treasury fines directly, but would pay in-kind via loan mods.  Servicers are objecting that doing so is tantamount to an unappropriated social program or that it will result in windfalls for undeserving borrowers.  

This argument should be rejected out of hand.Treasury could simply fine the servicers in cash and then use the cash to carry out various programs. Objecting to the ultimate use of the funds is not a legitimate basis for objecting to having the cough up the money. If Treasury spent the money on balloons and ping-pong balls or bailing out banks, it wouldn't make the servicers less culpable.  

But if the servicers find doing loan mods so distasteful (which they clearly do), and they're worried that it will result in strategic default, then how about this for a use for the cash--let Treasury fund legal aid programs for foreclosure defense.  Of course, $20B in legal aid would end up costing the banks much, much more.  Alternatively, why not just require each servicer to produce a quota of loan mods that meet certain requirements?  That would let the banks figure out who is deserving and who isn't.  If BoA thinks it can sniff out the strategic defaulters from the deserving ones, let them try.  

Finally, it's worth noting that the $20B wouldn't be split equally among all banks. It would probably be divided by the size of servicing portfolio. The chart below shows how that division would work, based off of Q4 2009 servicing portfolios in dollars. And no surprise, BoA takes it on the chin with a $4B hit.  Maybe that's why they're among the loudest objectors.    

Foreclosure Fines

 

Comments

The answer doesn't lie with fines - those are simply a cost of doing business that are eventually passed on to consumers.

When an employee of an opportunistic servicer acts to deliberately take advantage of a borrower there has to be a penalty that prevents other employees from engaging in the same predatory behavior.

The absurdity of not punishing the people behind these schemes simply perpetuates them.

20bn dollars doesn't cover the lender/servicer/attorney fraud in 1 Florida county. And of course there are over 3000 counties in the US. We have mortgage origination fraud,identity theft wherein the originators changed all the financial data on every mortgage app where the "borrower" didn't qualify.( We all know that 95% of the liar's loans were prepared by the originators-read the 'Missal Report' from New Century Financial ch11 in Del.courts). Next we have the 'gotta hit the number' appraisal fraud,to create the appearance of climbing property values,whereas is was just,well...appraisal fraud. Next we have the AAA ratings of the garbage loans written by the banks,but indirectly,of course,so as to claim plausible deniability. Federal underwriting standards were all ignored,another pleasant thought. Don't forget MERS,which passed along the promissory note with every assignment of the mortgage or deed of trust,even though the MERS manual states several dozen times that MERS never has an interest in the note. And of course the "trusts" seeking to foreclose are all in violation of both state and federal law,rendering their foreclosures,short sales,loan mods,and deficiency judgements illegal. Cap it off with the IRS REMIC provisions under which the "trusts" supposedly operate,all of which are ignored in every court of law in the country,and we can see why the housing market and broader economy are a little slow right now. To keep things brief,I will not expound upon TILA,RESPA,FDCPA,robosigning,phony evidence,fraud on the court,predatory lending,predatory servicing,the 2009FRB TILA amendment(now law),clouded titles,phony credit bid f/c sales by non-creditors,notaries using fake names and seals,collusion,lack of arms-length transactions where mandatory,false affadavits,fraudulent,forged and backdated documents to name a few. Have a great day.

As a citizen, something about this deal reminds me of belonging to a bad union in which union leadership is a little too cozy with management...

In the last 5 years, 3 mortgage servicers have collectively paid $176,000,000.00 to "compensate" 560,000 +/- victims without admitting any wrongdoing (read buy their asses out of a sling).

And yet, not only has the industry apparently not learned any lessons from it but, as has now been confirmed ad naseaum, they were simultaneously making the problem that much worse.

Once again, I whole-heartedly agree with Judge Roy. The time for carrots for the industry has long since passed. And the sticks that need to be brought forth should either say "Louisville" on them or should be outfitted with pitchforks.

On a separate note, to make the individual chain of title that much more defective, I'm now noticing "robo-signors" and DocX (specifically one of the incarnations of the infamous Linda Green) involved in Satisfactions of Mortgage as well as Assignments thereof. What effect does THAT potentially have on the world as we know it?

I hear $20B settlement and I recall that HAMP was a $45B program. I'm also reminded that the Wall Street bonus pool for 2009 was...$20.3B.

I'm also reminded that, at least the top 5 of the mortgage servicers and some of the others, were declared banks too big to fail, and are still suspected of being insolvent in spite of the Stress Tests that the Treasury department conducted.

And I'm starting to think that perhaps it would be more appropriate to break up some of these conglomerate banks which effectively cornered the residential mortgage-lending markets by underpricing everybody else by way of cheap-but-shoddy underwriting.

If there are no criminal charges attached with these fines, I believe there will be a ROAR from the homeowners. We know what's going on. DC knows what's going on. And so do these 50 AGs. Do not think we are stupid, as you will be sadly mistaken.

We will take to the streets....it will make Wisconsin look like a picnic.

I like $20B for legal aide for homeowners, let the courts determine the penalty, but only if the courts are impartial and the fight is fair. Homeowners need legal representation.

An interesting and intellectually written post. Thankz for the good work dude.

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