A full year has passed since Iowa Attorney General Tom Miller became leader of a 50-state working group to investigate mortgage fraud. In recent months, seven Democratic attorneys general have broken away from efforts to reach a broad settlement with major lenders, as the flaws in Miller’s approach to negotiations have become more clear. This week news broke that the AG working group are offering new concessions in order to reach a deal with financial institutions.

Miller should give up this charade.  

The Wall Street Journal reported on October 18, “State and federal officials are pushing a plan that could help some ‘underwater’ borrowers get refinancing assistance in the latest government bid to break a legal impasse with big banks over alleged foreclosure abuses and ease problems in the housing market.” Most of that article is behind a subscriber wall, but Aruna Viswanatha followed up on the story for Reuters:

Under the proposed terms of the settlement — which could total $25 billion — banks would get broad legal immunity from state lawsuits in exchange for refinancing underwater loans, those mortgages where borrowers owe more than their homes are worth, the sources said. […]

Banks have been holding out on a multi-billion-dollar settlement because they wanted broader legal immunity than state attorneys general were prepared to offer.

Originally, the states were only considering immunity for shortcuts taken during mortgage servicing and foreclosures, including the so-called “robo-signing” of documents to evict people behind on their mortgages.

In recent days, the state attorneys general agreed to release major banks from claims that they made legal errors when first originating the loans, such as approving loans for borrowers without verifying any income, according to two people familiar with the talks.

It’s disappointing that Miller would give a green light to a ripoff on this scale. I understand the desire to have something to show for a year of negotiations, but why should major lenders get immunity from prosecution for illegal mortgage practices that were never properly investigated? The working group’s willingness to offer broad immunity to banks was the biggest factor that drove away state attorneys general, such as Eric Schneiderman of New York and Kamala Harris of California. Miller has done a lot for consumer protection in Iowa over the past three decades. He should know better than to go down this road.

Yves Smith has more at the Naked Capitalism blog:

Note we’ve been skeptics of a deal happening unless the AGs capitulated on a release of liability. Remember the overall context: even though there is rampant evidence of all sorts of mortgage abuses (see the interview of Attorney General Beau Biden for a quick overview), the attorneys generals never investigated (I have this from a senior person on the Federal regulatory side, there was not even document discovery before the negotiations started). You can’t negotiate if you don’t have a credible threat to go to court.

So the banks know that the AGs are carrying a gun loaded with blanks. They also know the AGs have painted themselves in a corner: they’ve floated trial balloons of settlements of $20 billion or more. The banks won’t agree to that for just robosigning, so the only way a deal gets done is for a juicy enough “get out of liability free” card. And that means a release for things the AGs never investigated and have no idea how bad the rot is. As Biden put it, it’s like having a contractor admit he screwed up on the gutters and agreeing to pay for the damage related to a resulting leak you had, then offer to give you 10% more if you sign away your rights to sue him over the roof or the foundation. Would any person with an operating brain cell do that? Answer: only AGs who were never going to go after the banks anyhow. […]

The “what the borrowers might get” trial balloon was leaked to the [Wall Street] Journal is pathetic. It is a refi plan for borrowers who are current on their mortgages but underwater. Oh, and you have to be one of the lucky ones whose mortgage was NOT securitized!

As we’ve discussed ad nauseum, any payment reduction plan (and note they are even discussing only short term relief as a possible outcome, this might not even be a typical refi) is not going to provide that much in way of payment reduction. Extra money is always nice, but the number of borrowers it saves will be few. And it is pretty much guaranteed that the banks will also demand that borrowers waive other rights in return for this great deal. This is more a small stimulus program than a “help stressed borrowers” plan.

And it’s completely inequitable. The banks did damage as servicers. The borrowers who have been hurt most by the abusive practices are the ones whose mortgages were sold to securitization trusts. Yet it is the borrowers who have the best arrangement, some in the 20% that deal with the bank that lent them the money in the first place, that will get a break! It is massively unfair in the case of Countrywide, where 96% of its mortgages were securitized. Any relief will go to loans originated through the old Bank of America, and pretty much not through Countrywide.

I highly recommend Georgetown law professor Adam Levitin’s post on “The Sweep-It-Under-the-Rug Housing Plan” at the Credit Slips blog. Excerpt:

Who should pay? This is basic justice. Those who broke the economy should pay to fix it. You break it, you take it. We bailed out the banks because they are indispensible to the economy as a whole, but that doesn’t mean that they shouldn’t have to pay now. $20-25 billion is a fine price tag for robosigning. But this isn’t and shouldn’t be about robosigning. Robosigning was symptom of a much larger endeavor in reckless lending, in which corner cutting was the order of the day, from MERS to securitization paper work to no-doc loans.  All of this was done to maximize profits and to enable a housing bubble that was hugely profitable to a limited number of financial institutions and with extraordinary collateral damage. Simply put, there needs to be accountability for blowing up the economy.

Again, those who broke the economy should pay to fix it. And someone needs to go to jail. (We sent over a thousand folks to the pokey for the S&L debacle. So far we’ve sent a couple of small fry to jail. That’s grossly inadequate for justice. But that’s another matter.)  The point is that $20-25 billion is 3% of the book value of the 5 big servicers and just 6% of their market cap. Hardly “breaks the bank.” This settlement is a blip for them. If they can pay $25 billion and see their market value go up $40 billion because of the uncertainty cleared up, it’s a no-brainer for them. […]

The Latest Version of the Tom Miller AG Settlement Plan

Sadly, the Tom Miller-DOJ plan doesn’t seem to do anything on this front.  As far as I can tell, the Tom Miller-DOJ plan is only about servicing issues. But while servicing is the consumer protection issue of the day, it’s a nothing relative to the scope of the harm involved. If one approaches this as a prosecutor, the major harm done wasn’t the servicing fraud. It was the pump-and-dump the banks did on the entire housing market. They recklessly inflated the housing prices and profited greatly from it. And the taxpayers, the government, and mortgage investors were left holding the bag. Tagging the banks for $20-25 billion and calling it a day would be nothing short of a disgrace. On this one the Tom Miller-led group of AGs need to need to play big or they need to pack it up and go home. Dicking around over $25B with five institutions that have a market cap of around $400 billion is just bush league. But then, that’s all they really can hope to get when they try to negotiate a settlement without doing any investigation. It’s frankly an abuse of the public trust for AGs to be settling claims without investigation.  

update: now we learn that this settlement is going to include a release of origination fraud claims against the banks in exchange for an additional $2B-$4B. It’s Keystone Cops worse than Keystone Cops. For a while the AGs just looked incompetent in the settlement negotiations. But now it’s gone from incompetence to outright malfeasance. To contemplate a release of origination claims that have never been investigated for an additional $4B is so shocking that I have trouble finding genteel words to say about it. To paraphrase Rep. Elijah Cummings, “Is Tom Miller a chump?” Why on earth does he feel compelled to even discuss such a patently bad deal?    

Pack it up and go home, Tom Miller.