The Servicing Settlement: Banks 1, Public 0

What are we to make of the servicing settlement announced today with much hoopla?  The short answer is not much.  The settlement is the large consumer fraud settlement ever, but it accomplishes remarkably little in terms of either alleviating the foreclosure crisis of holding to account those responsible for the housing bubble and subsequent foreclosure abuses.  As my Texas relatives say, it's “All sizzle, no steak.” 

Instead, I think the settlement needs be seen as the conclusion to round one of an on-going struggle for accountability and reparations for the enormous damage the housing bubble did to the United States.  Whether we will ultimately see meaningful accountability and reparations in the end is very much in question.  Round two, featuring the Residential Mortgage-Backed Securities Fraud taskforce, could well be stillborn; the taskforce combines more motivated and more capable agencies, but it isn't clear of the motivated can leverage the more capable or will be bogged down by them. But as for this settlement, if this is all that we get, it’s a big nothing. 

There are two big issues to parse in the settlement:  what does it cover and what sort of relief does it provide.  Not surprisingly, both are quite limited; the banks wouldn’t pay big dollars for a small release. 

The settlement covers mortgage servicing abuses, as well as a $1 billion settlement of claims that Countrywide (BoA) was cheating the FHA.  It also includes settlements of litigation by the Arizona and Nevada AGs for BoA’s violations of an earlier settlement.  It also covers some origination claims on which the statutes of limitations have run or will shortly expire.  The settlement apparently (and here the precise language is crucial) excludes securitization-related claims, fair lending claims, false claims acts violations, MERS issues, and criminal claims.  It also doesn’t prevent homeowners or investors from bringing their own suits.  So it’s really covering robosigning and overbilling in foreclosures. 

Given the relatively narrow scope of this settlement, it’s not surprising that the dollars involved are quite small compared to the overall harms created by the housing bubble and aftermath.  The formal price tag for the settlement is $25 billion, although it is projected to accomplish up to $40 billion in relief. Only $5 billion of that is hard cash contributed by the banks.  Let me repeat that.  The five banks involved in the settlement, which have a combined market capitalization of over $500 billion, are putting in only $5 billion.  That’s less than 1% of their net worth.  And they are admitting no wrongdoing.  To call that accountability is laughable. 

That $5 billion in hard cash is going to the state and federal government, only some of which will be given to borrowers.  What about the other $20 billion?  That’s to come in the form of $3 billion in refinancings and $17 billion in principal reductions, deeds in lieu, short sales, anti-blight measures, etc.  The banks receive variable credit for these actions, depending on whether these measures are taken for loans owned by the banks or owned by others and serviced by the banks.  Basically, it’s full credit if the bank owns the loan, and half credit if the bank merely services the loan.  Because of this formulation, the $17 billion in principal reductions, DILs, short sales is anticipated to result in $32 billion in actual relief.  In other words, it is expected that the banks will modify the loans owned by others rather than the loans they themselves own.  And when a second lien loan owned by the bank is involved, it only has to be written down pari passu (at the same percentage) as the first lien loan.  So from absolute to relative priority, which is a major handout to the big banks, which have large underwater second lien positions. 

Or put differently, $32 billion of the settlement is being financed on the dime of MBS investors such as pension funds, 401(k) plans, insurance companies, and the like—parties that did not themselves engage in any of the wrong-doing covered by the settlement.  This shouldn’t be a surprise—the state Attorneys General previously cut a similar deal with Bank of America, which promised to make up for its wrongdoing by modifying loans own by other parties. 

But let’s get to the bigger problem.  Whether this is a $25 billion or $40 billion settlement is really beside the point.  It’s a drop in the bucket relative to the scale of the problem.  There is approximately $700 billion in negative equity nationwide weighing down the housing market and the economy.  Add to that legions of homeowners dealing with unemployment or underemployment and we’ve got a problem that absolutely dwarfs the settlement numbers.  It’s Pollyannism to think that this settlement will have any impact on the national housing market.  At best it makes some incremental improvements and helps a small number of homeowners.  But at worst, it lets the banks off the hook for the largest financial crime in history. 

I can’t say I’m surprised, however.  There was no investigation was done prior to this settlement.  That had been the sticking point for a number of attorneys general who eventually signed on to the settlement, but only once it was narrowed.  But that doesn’t take away the problem that there was no investigation.  If you go bear hunting without any ammo, you aren’t going to bag a bear.

To illustrate how little the settlement does for the housing market, let’s take the settlement’s most optimistic projections and assume that it really results in $40 billion of mortgage relief of various sorts.  How much does that translate into per distressed homeowner?  Let’s assume that the universe of distressed homeowners is limited to those underwater—roughly 11 million.  So we’re talking $3,636 per homeowner.  That doesn’t help a whit in terms of preventing foreclosure. 

Now to be sure, the relief will be more concentrated on a subset of these homeowners.  The settlement is estimated to help about 2 million homeowners, hopefully to the tune of about $22,000 each.  That's certainly a lot better than $3,636, but consider that the average negative equity is about $50,000.  At a very generous best, then the settlement only gets rid of less than half of the negative equity for 18% of underwater homeowners.  So we're talking about a solution that has less than a 10% impact.  Best case scenario is less than 1 in 10 are helped.  In any case, those luck few, will be chosen not by where the relief will help the most or by who is most deserving, but by what will be most advantageous to the banks.  So some lucky group of homeowners will have “won the lottery” and in some cases might avoid foreclosure.  For most distressed homeowners, it’s “no soup for you!” And because fixing the housing sector is about volume, this means that there's no soup for all of us--the housing sector will remain severely depressed. 

What about the argument that the settlement will help the housing market by enabling foreclosures to start up again and for banks to clear through the shadow inventory?  Well, what’s causing the shadow inventory?  Is it the possibility of state and federal prosecutions for robosigning?  Is it lack of uniform servicing standards?  Nope, and nope.  The shadow inventory problem is at core the result of two problems.  First, the foreclosure system only has limited bandwidth—there are only so many foreclosures that can be processed at a time.  Second, the banks have their own staffing issues.  And third, the bigger problem is that the banks don’t have their paperwork in order to foreclose. This servicing settlement doesn’t affect any of these problems (maybe it will encourage better staffing on behalf of the banks, but if that hasn’t happened by year 5 of the crisis, I can’t imagine it will any time soon).  National servicing standards as part of a settlement in no way replace existing state and local requirements, and to the extent they supplement them, it may make things harder for the banks. The fact that a bank is in compliance with the servicing standards in the settlement doesn't mean that the bank can in fact foreclose, and litigation of foreclosure actions is private litigation, not governed by this deal. (And this leaves aside the question of bank compliance with this settlement.) 

The settlement also creates really awful incentives.  It has zero deterrent effect against future wrong-doing.  This settlement set a price-tag for mortgage servicing abuses.  If the abuses are more profitable than the cost of settlement, what rational bank wouldn’t engage in them?  The early CFPB-settlement analysis that was leaked months ago envisioned $25 billion as being simply the disgorgement component, not the remedial component.  Here we have a settlement with $ 5 billion in actual disgorgement and very little that’s remedial, let alone punitive (which is necessary to have deterrence). 

Also announced in conjunction with the big settlement were the fines the OCC is imposing as part of its consent orders.  They total $394 million, but they are payable either in cash or in kind via relief given to homeowners as part of the OCC Potemkin foreclosure review process.  Please Hammer, Don't Hurt 'Em! (Hmm, maybe the banks' theme song should be "U Can't Touch This".) 

Is this really the best our government can do?  I hope not.  This settlement might or might not be the end of the attempt to rectify the financial crisis, but as things stand, we have a settlement in which the banks commit to follow the law and pay out some pocket change.  The settlement doesn’t fix the housing market.  It doesn’t create accountability for the financial crisis.  It doesn’t even create incentives against future wrong-doing.  But it provides the Obama Administration (and those attorney generals who just jumped in for the settlement at the last minute) with a fig leaf of political cover.  It galls me is that the Obama Administration is going to trumpet this settlement as evidence that it is serious about prosecuting the crimes behind the financial crisis and helping homeowners.  It was heartening to hear Obama talk about protecting the middle class in his State of the Union address.  It was the right message, but the President is simply not a credible messenger.  If Obama wants to run as the champion of Main Street against Romney, the Captain of Wall Street, he’s going to need to do something a lot more credible than this settlement.

 The score:  Banks 1, Public 0. 

 

Comments

[Rebel Cole]

I am wondering what is going to happen to the $60 billion in delinquent FHA-insured mortgages that the big banks have had to repurchase from investors and that is sitting on their books in "past due," not "nonaccrual" status because they fear that FHA would sue them under the False Claims Act, as it had done to Deutsche Bank last year.

I fear the HUD Secy. Donovan has promised to pay these in full, which would bankrupt the already troubled FHA.

Then again, in his SOTU address, the President promised us "no more bailouts." Good luck with that promise, Mr. President.

[emptywheel]

Adam:

In this sentence,

They total $394 billion, but they are payable either in cash or in kind via relief given to homeowners as part of the OCC Potemkin foreclosure review process.
You mean "million."

[CT Mike]

This settlement is such complete and utter garbage. What happened to the criminal prosecutions? Schneiderman said he would take "the hardest line" against a "quick cheap settlement". What happened there? Was he Spitzered? Was he just in it for advancement? Is he attempting some sort of end-run around the administration that I just can't discern?

You're right, Professor, Obama simply isn't credible. I hate the GOP candidates, but in some ways Obama is worse. He says one thing and does another.

They're just opposite sides of the same coin. Nothing will change until we can remove the corporate money from elections. Until then, we get more of the same. I'm not holding my breath for the second coming of Teddy Roosevelt.

[Carrie Lynn]

I am still frustrated with the legal stretch about loan modifications, considering that the banks don't own the notes and mortgages. They can no more modify the loan lawfully than they can foreclose. If they did own them, and could prove it, neither robo-signing nor a settlement would have been needed. They throw around the word investor, and occasionally the word creditor, as if they know who that is.

Did the AGs get some kind of mysterious powder in the mail that paralyzes brain cells? WHAT were they thinking! Oh. I forgot. Politicians are not required to think.

[oyez]

As dreadful as this settlement is, I have to say I was impressed by NY AG Schneiderman's suit against MERS. Very thorough, well reasoned and supported by citation.

It's too much to hope for that MERS will be consigned to the ash heap of history, as too much money is vested in the system. But Schneiderman's suit is a step in the right directon; we will see if anything ultimately comes of it.

[mt]

Given that it only settles public law claims for robosigning and overbilling, it may not be much of a resolution, yes, but by the same token it's also unfair imo to complain that what's in here is small compared to what it's not settling. Although obviously passionate, this isnt's a particularly well thought through argument.

[Adam Levitin]

Robosigning proper resulted in little harm. Other foreclosure practices were far worse. I wouldnt try to cost out the actually potential liabiItiy under every state or federal cause of action conceivable, but most states weren't going to pursue anything. Compare that to securities claims, where the theoretical liability is in trillions, not billions. (Not that we will ever see anything like that).

[billiecat]

HAs anyone got the actual document yet? The official site still says "coming soon."

[Sandrew]

Is this settlement subject to judicial review? If so: in what jurisdiction, and based on what legal standard would a judge evaluate the settlement? If no: what standard governs when settlements between governments and private parties are subject to judicial review, and how does that standard apply here?

[indio007]

Public officials simply do not protect the public at large anymore.

We need to protect ourselves.

Why aren't there any lawyers out their simply suing in the name of the public as ex relator?

Someone needs to step up to the plate. The watchtower has been abandoned and we need new guards for our safety and security.

[kay]

Interesting Billiecat - I opened it up yesterday and printed it - today it is offline.

As my grandmother used to say..."I smell something rotten in Denmark".

[J]

Banks +10 this past year on top of increased profits. Little know fact, inspectoraudit.com has +a couple of thousand against the banks, check it out for yourself, im a proud client having got a remedy from them.

[JohnR]

Why the devil are we even dealing with these Felons in the 1st place?

I say we take all the money and start 1 company responsible to audit EVERY County in the US's Court records. If it was an illegal foreclosure (ie. post dated assignment, post dated assignment as it relates to the Trust's closing date (fraud = felony), affidavit that goes against reality in any way (Robo-Signed, post closing date of the Trust, fraudulent Notary signature (again fraud = felony), then we follow the law... ALL THE LAW!and give the people back their houses. Let them be foreclosed on again... the Courts get double paid that way.

And if they were run out of their houses, if they tried to get legal help and couldn't, if the Courts ruled on them in an unjust manner... then damages are appropriate for each and more. The psychological damages alone suffered from taking one's own case to court (pro se) and watching OUR Courts just steamroller past the Truth (Florida's 90 second rocket docket... what an insufferable insult to this Country!)has done irreparable damage to thousands... and it never would have happened if the Banks had done their jobs in the first place.

To those investors who bought foreclosures... they have the right to sue the Banks for their money back and damages.. so there is redress for them also.

This Country only has it's honesty and laws left that make it a great country... unless we do "the right thing"... the thing that goes directly in accordance with the Law when the Law was in effect (no ex post facto!), our Country will lose the only thing left we have that makes us the greatest Nation.

and oh yea.... PROSECUTE! That's what the Law is for!

[Mattie]

"...no investigation was done prior to this settlement... If you go bear hunting without any ammo, you aren’t going to bag a bear."

The GSEs hired lots of very smart, capable investigators (AIG-UG among them) to put the fine tooth comb to mortgage files representing BILLIONS of dollars of 'faulty' %$!# which has been, and continues to be pushed back to the banks.

Can we all agree that the banks don't take anything back unless you can prove it's %$!#?

If so, clearly there has already been an effective investigation. It has been of monumental scale. It has been conclusive on the quality of bubble years' originations.

So why isn't anyone talking about this? - The bear was bagged two years ago.

[JJayR]

I would like to pose a question for those of you in the legal community that have experience with this sort of thing.
Given that about 78% of the state litigants on either side of a civil action are appearing pro se; is this "settlement" likely to color a judiciary against them, as in, "well the state attorney general has already reached a settlement on these matters and reached an accord for you, no need to re-try it here, sorry goodbye"?
I happen to live in Colorado. I don't believe we have the most forward looking judiciary in the nation.

[kay]

Okay - so the banks knew they were headed towards a settlement - what - 3 to 5 months in the making? It doesn't take a rocket scientist to figure out what they did in the months leading up to the settlement. Do some research. It's simply appalling.

[dukeydo]

This article is very negative. Eric Schneiderman said recently, that this $26 billion settlement was for a very small portion of the wrongdoing. The AG gave no ground on banks still being held legally accountable by homeowners. This deal was in relation to robosigning only. He said that this is only the beginning and that a much bigger payday is ahead. Also dude, get a proof reader. Without trying I got snagged on 9 mistakes such as; no suffix, incorrect spelling, wrong word, such as billion instead of million. Your credibility is in question when you can't take the thyme to check your final produce.

[Adam Levitin]

Dukeydo: I'll spellcheck when you start paying for reading this blog.

Yes, the post is very negative, which is just what the settlement deserves. $26B is for a very small portion of the wrongdoing, but that doesn't mean it is priced correctly. And the real question is whether this will be all we see or whether there will be more meaningful judgments or settlements. I hope Schneiderman is right, but aspirations aren't the same as results.

As it happens, we still don't have a public version of the deal language, so it is really hard to say what the deal covers. Given the impaired credibility of some of the parties involved, I'm not ready to take it on faith.

[Kevin]

Although you make some very interesting points, (that I agree with very much!) You should (please) take the time to have someone else look over and edit your work.

The typos, errors in syntax, and poor formatting really detract from your message.

whether you like it or not, you are being referenced as a news source and should take your postings more seriously so as to not harm the cause you are obviously so passionate about.

[bernard champa]

It looks like the dark side rules the day with you people, probably as a result of having been screwed over numerous times prior, but after watching the Rachael Maddow shnow and her interview of Eric i was left with a more positive feeling re the possibility for future effective action including criminal prosecution. Time will tell who was right. for some reason negative analysis always seems to have an authoritative ring to it.