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Feds to AGs: Can't Touch This

posted by Adam Levitin

As this NYT story notes, the administration has been putting pressure on the AGs, particularly NY AG Schneiderman, for several weeks now, urging them to fall in line with the administration's hear-no-evil, see-no-evil position on MBS and servicing fraud.  The NYT story makes it sound as if the feds were jolted into intervening because of pleas from the banks.  It's enough to make one think that we're back in 2005.   

There are three things that particularly bother me about what's happening.  

First, is that if the Feds had shown some teeth on servicing, the AGs wouldn't have to be the ones cleaning up the mess. The AGs are acting because the federal bank regulators are dancing to the same tune they were in 2000-2008: Can't Touch This. (Now they're saying to the AGs "Please, Hammer, Don't Hurt 'Em".  Yuck, yuck, yuck.) Milquetoast consent orders (that impose costs on servicers without getting better servicing) and no criminal prosecutions so far other than of the garden variety warehouse fraud (Farkas et al.). It's sad to see Shaun Donovan get in on this act, though, and then claim that his intervention was "motivated by a desire to speed up help for troubled homeowners." Please. 

Second, and what really galls me, is that the administration doesn't have a serious alternative. The administration is flat out of ideas on servicing and has been so for at least a year. It's not that there aren't possibilities, but none are politically palatable to an administration that is terrified of rubbing Wall Street the wrong way. It'd be one thing if there were a plan. But the administration's got nadda. Schneiderman's intervention in the BNYM settlement isn't holding up much needed servicing reform. That's just nonesense. There's nothing stopping BoA from entering into sub-servicing arrangements today if they wanted to. Even if the settlement were approved today, it would take months, if not over a year before the BoA servicing was properly transferred to third-party servicers.

Frankly, it's too late to help a lot of homeowners. We're not in damage control mode anymore, as unemployment, rather than mortgage product features is increasingly the driving force behind foreclosures.  We're just doing mop-up.  Put differently, the administration missed its chance to really do something on the foreclosure front when it went it opted for the weak, half-measure of HAMP.  If the administration had taken aggressive action in the winter-spring of 2009, maybe things would be different. But it went with a soft-touch approach whose limits and flaws were patent from day one.  

Third, without an alternative plan, it takes a lot of chutzpah to demand that the AG step back and ignore rampant violations of law. I don't dispute that there are times when punctilious enforcement of the law needs to bend to overarching national policy considerations, but I don't think the administration has made any case as to why this should be one of those times.  And I don't think that this can be an implicit case, given how strong the argument is for serious law enforcement in the mortgage area.   

So this is what it comes down to: the administration is urging the AGs to ignore their duty to enforce the law because of an administration policy to let bygones be bygones in the securitization market.  Heck, I wouldn't be shocked to see OCC or Treasury intervene or file an amicus brief in the NY state action.  I'll leave it to others, like Yves to speculate on why this is the administration's policy. I think it is foolish and short-sighted both in terms of financial market regulation and in terms of the 2012 election, but irrespective, there's no reason for state AGs need to toe the administration's line.


The overarching national Security concern is the 2012 campaign and the amount of $ needed to win.

This is the part of the NYT article that bothers me the most:

Characterizing her conversation with Mr. Schneiderman that day as “not unpleasant,” Ms. Wylde said in an interview on Thursday that she had told the attorney general “it is of concern to the industry that instead of trying to facilitate resolving these issues, you seem to be throwing a wrench into it. Wall Street is our Main Street — love ’em or hate ’em. They are important and we have to make sure we are doing everything we can to support them unless they are doing something indefensible.”

- Kathryn S. Wylde,
Board member
Federal Reserve Bank of New York Chief Executive of the Partnership for New York City

If what "Wall St." has done and CONTINUES to do to the U.S. economy, and more importantly U.S. homeowners, is considered "defensible" by Ms. Wylde then something is seriously, seriously wrong here. IMO, in addition to her employment history, maybe her stock holdings should be examined. Otherwise, Ms. Wylde may be found to holding positions of power and influence while not being in complete and stable control of her faculties....

Ja, bend it Adam. How did bending justice work out for the National Socialists of Deutschland?
The national emergency is the theft of peoples housing, and the subsequent loss of jobs to allow the theft of homes.
Every time I read one of your posts it leaves one side of the pyramid holding itself up.
This isn't one of the little crises our government has enhanced and supported to transfer wealth, this is the big one. The last one.
Do you ever get angry?

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