Bleeding Heartland
An independent website about Iowa politics
 Bleeding Heartland

Tom Miller didn't get the Christmas present he wanted

Hope dies last for Iowa Attorney General Tom Miller when it comes to reaching a settlement with major lenders accused of foreclosure fraud. He predicted that a deal would be finalized by Christmas, but so far, no deal has materialized. Attorneys general for several major states remain unlikely to abide by any agreement Miller’s working group negotiates.

Miller was chosen to head a 50-state working group investigating foreclosure fraud in October 2010, but his credibility has eroded over the past year. First, his group failed to seriously investigate allegedly fraudulent lending and mortgage servicing practices. Then, he took criminal charges off the table without having investigated whether crimes were committed. Under Miller’s leadership, the group floated settlement terms that would be extremely favorable to the banks.

During the past six months, several state attorneys general made clear that they would not participate in any deal that gave lenders wide-ranging immunity from prosecution in exchange for a relatively modest settlement of $20 billion to $25 billion. Yet Miller told Des Moines Register reporter Adam Belz this month that

a settlement between almost all state attorneys general and the five largest mortgage servicers should be finalized before Christmas, with or without California.

The deal, which Miller has been trying to negotiate since March, would release the five servicers – Ally Financial, Bank of America, Citigroup, J.P. Morgan Chase, and Wells Fargo – from legal claims on past home loan servicing and foreclosures. The deal would not prohibit individuals from suing the banks, or government prosecutors from suing banks over issues related to the packaging of home loans into mortgage-backed securities.

In return the banks will agree to pay for what Miller calls “substantial principal reductions” for homeowners who are underwater, and agree to a set of mortgage servicing standards, interest rate reductions, and cash payments to some homeowners who’ve alrady gone through foreclosure.[…]

Principal reduction is the most striking feature of the proposed deal. A formula would be applied to each underwater homeowner to determine how much he or she can afford to pay each month, Miller said. The bank would reduce the loan’s principal to that level. Each bank would be responsible to make a minimum amount of principal reduction across its portfolio.

“We’re not necessarily going to take people to 100 percent to where they’re totally reequified,” said Patrick Madigan, an Iowa assistant attorney general who has worked closely with Miller on the issue. “But we’re going to take them down to a level where they can see hope, quite frankly.”

Miller and Madigan say the deal should stabilize the housing market and reduce default rates.

The settlement would also force the mortgage servicers to reduce interest rates under certain circumstances, and make cash payments to people who lost their homes and can show mistakes were made in the foreclosure process.

Madigan’s spin on this potential deal is hard to take seriously. The Calculated Risk blog pointed out,

The discussion of possible principal reductions is too optimistic. They are discussing something like a $25 billion settlement (including California) and only a portion would be for principal reductions. Currently, according to CoreLogic, homeowners with negative equity (including 2nd liens) are an aggregate $699 billion underwater. Even if the entire settlement went to principal reductions, the average underwater homeowner would only see a few percent of their negative equity eliminated.

It’s not clear how close Miller’s team is to a deal in any case. Bloomberg News reported two weeks ago that selection of a “foreclosure monitor” was one of the last remaining barriers to an agreement. The monitor “would ensure compliance with any agreement with mortgage servicers.”

But the major lenders appear to be asking for more concessions late in the game. According to Yves Smith of the Naked Capitalism blog, now the banks also want the new Consumer Financial Protection Bureau to “release them from liability related to mortgage origination.” Smith believes there will be no settlement:

So get this: we don’t have a deal and the teeny odds of getting one done keep shrinking. The biggest items to be negotiated, the release (this deal is scope of release v. cash, the rest is decoration) is still unresolved (as in the two sides are really far apart, as confirmed by how long this charade has continued). AGs have walked over the concessions Miller made. And the banks keep upping their demands. The bank strategy is negotiating in bad faith, and even talks that are faring well will start coming apart with that sort of conduct.

Even if Miller pulls a rabbit out of his hat, he can’t force other state attorneys general to sign on. Democratic AGs have been the most vocal critics of the working group’s negotiating strategy, and I saw recently that all the Democrats running for Pennsylvania attorney general have distanced themselves from any potential deal. It would be political poison to embrace the approach Miller and Obama administration officials have taken.

Meanwhile, Massachusetts Attorney General Martha Coakley filed suit against five major lenders a few weeks ago. Gretchen Morgenson reported for the New York Times that the Massachusetts lawsuit “diminishes the likelihood of a comprehensive settlement between the banks and federal and state officials to resolve foreclosure improprieties.” The banks named in the lawsuit expressed regret that Coakley went to court while negotiations with Miller’s working group were pending. Coakley responded,

“When those negotiations began over a year ago, I was hopeful that we would be able to reach a strong and effective solution,” she said. “It is over a year later and I believe the banks have failed to offer meaningful relief to homeowners.”

Delaware, Nevada and New York have also objected to the direction the settlement negotiations were taking.

Kurt Eggert, a professor at Chapman University School of Law in California who is an expert in mortgages and securitization, said the Massachusetts lawsuit was a significant step because it opened the banks’ practices to far greater scrutiny than they had been subject to.

“So far the servicers have escaped any real review or punishment for their bad practices because federal regulators have by and large given them a pass on whether they followed the law in foreclosures,” Mr. Eggert said. “This lawsuit argues that they haven’t followed the law and that they can’t just fix all their problems after the fact.”

More ethical and politically astute Democrats figured out a long time ago that lenders who defrauded mortgage holders don’t deserve broad immunity from prosecution. It’s past time for Miller to quit while he’s behind.

Tags: Banking, Crime, Economy, Federal Government, Housing, Tom Miller

About the Author(s)

desmoinesdem

6 Comments

Leave your comment below

  • Surprised

    by Maria Cantwell’s forceful criticism until I realized she’s up for re-election next year. The cynic in me wonders whether she’s just helpfully providing cover for another delay to get past the 2012 election with her call for a “thorough investigation.”  

    albert  Mon 26 Dec 11:50 AM

    • probably

      it’s an election ploy. Cantwell doesn’t come across as the populist hero type. But this deal stinks so badly, that maybe she is sincere in her criticism.

      desmoinesdem  Mon 26 Dec 3:32 PM

  • Tom Miller is dedicated to letting the banks off the hook.

    He has not investigated the potential liability he is proposing to release.  There have been no depositions, no charges filed, no documents subpoenaed in connection with civil or criminal litigation.  The pathetic incompetence of the “investigation” in support of the 50-state settlement was documented by Shahien Nasripour in a terrific piece of journalism in the Huffington Post last summer.

    But we do have some idea of the magnitude of what Miller wants to release versus the chump change he would get in return.  Miller and the administration are pushing for a result that Matt Taibbi calls TARP on crack.  

    But if and when that debate takes place, it will actually obscure the real issue, because this settlement is not about getting money from the banks. The deal being contemplated is actually the opposite: a giant bailout.

    ….

    Any foreclosure settlement will allow the banks to pay one relatively small bill to cover all of their legal liabilities stemming from the monstrous frauds they all practiced in the years leading up to the 2008 crash (and even afterward), when they all schemed to create great masses of dicey/junk subprime loans and then disguise them as AAA-rated paper for sale to big private investors and institutions like state pension funds and union funds.

    To recap the crime: the banks lent money to firms like Countrywide, who in turn created billions in dicey loans, who then sold them back to the banks, who chopped them up and sold them to, among other things, your state’s worker retirement funds.

    …Along the road to this systematic thievery, a great many other, sometimes smaller offenses were committed. One involved the use of the MERS electronic registration system. …So any “AG settlement” might allow the banks to avoid legal damages being sought from three different set of enraged creditors: the public institutions who invested in these sham securities, the private investors who did the same, and the localities who were cheated out of their taxes.

    …The point of all of this is, if you add up all of the MBS-related liability out there, the banks as it stands are facing an Armageddon of claims from all sides. It can’t possibly be less than a trillion dollars, and it’s probably much, much more.

    Taibbi’s tally of the potential liability that Miller and the Obama administration are trying to release is well worth a read.  When you line that liability up against 20 or 25 billion dollars, it shows how disgracefully inadequate this settlement would be to compensate the wronged.

    Via Adam Levitin at Credit Slips, some numbers on what the settlement would buy (spoiler alert- not much):

    To put hard numbers on this, what does $20 billion buy?  At $65,000 negative equity per mortgage, it doesn’t buy very much.  It puts 307,692 homeowners back to zero equity. That less than 3% of the 10.9 million homeowners with negative equity. Or what about in terms of interest rate reductions over 5 years?  Let’s assume an average mortgage balance of $150,000.  That means a 1% (100bps) reduction in the interest rate on that mortgage would be $1,500.  How many homeowners does $25 billion over 5 years help?  $20b/$1500/5=2.6 million.  So $20 billion gets 2.6 billion homeowners a 1% (100bp) reduction in their interest rate.  These homeowners save $125/month for 5 years.  At the end of which the homeowner will still have deep negative equity. And it would still be helping less than a quarter of underwater homeowners.

    For more on the utter inadequacy of the Obama administration’s response to the pervasive illegality committed by banks and servicers, this post by a former chief of staff to Sen. Ted Kaufmann is both brave and informative.  

    Until this president stops calling Wall Street’s deleterious actions “not illegal,” he’s failing to deter — and therefore effectively encouraging — future financial fraud. And until he gives a clear and full explanation of the inadequate response of his Justice Department and S.E.C., he and his appointees are helping to undermine the public’s faith in equal justice under the law.

    Reuters has a catalog of the kinds of atrocities committed by the banks, including illegal foreclosures on deployed soldiers, falsified mortgage promissory notes, and thousands of other filings of false records of various kinds.

    Yves Smith adds to Reuters’list:

    As readers of this blog know, this isn’t close to a complete list. You can add foreclosing on homes where there is no mortgage, foreclosing on burned-down homes where the insurer has made payment in full, mortgage baits and switches at closings and telling borrowers they had to default to be eligible for HAMP. The only bit of good news is there is a LPS investigation underway, but it has been ongoing since 2009. Funny how Catherine Masto in the comparatively small Nevada attorney general’s office has made more progress from an at the earliest October 2010 start date.

    And we still have the banking industry repeating its mantra: everyone who lost his home was delinquent. Yes, in a kangaroo court, the accused will always lose. …

    Notice the Reuters article doesn’t even get to frauds on investors: double dipping (charging both investors and borrowers for the same fee), misrepresentations to investors (false certifications by trustees and servicers that they held the collateral in good order, Section 11 Securities Act by making representations about loan quality when they never reviewed the loans), and other abuses (such as reporting foreclosed properties being sold months after the fact to allow them to collect additional servicing fees).

    As you noted to begin with, this “imminent settlement” is one in a series that go nowhere.  The biggest reason is that there are a few attorneys general in big states who regard upholding the rule of law as part of their jobs–  Eric Schneiderman in New York, Catherine Masto in Nevada (a state where the FBI closed its office in the midst of this), Jack Conway in Kentucky, Beau Biden in Delaware, and lately Kamala Harris in California.  There are also some recorders of deeds who have conducted their own investigations and brought some shocking abuses into the light of day.  Without New York and California, the banks will likely not sign up for a settlement.  Watch the political pressure on Schneiderman and Harris continue to mount if Miller ever makes any real progress.  If the 50 AGs settle, then there will be no investigations doing the discovery work for individual homeowners or investors, who will have to pay their own lawyers to uncover crimes and frauds committed against them.  Clearly, the feds will walk away, even if a Republican congress doesn’t first pass some version of telecom immunity, but for banks.  

    If Miller succeeds, there will be no justice in the result, but maybe a nice promotion for Miller, if, say, Eric Holder goes back to private practice.

    2laneia  Mon 26 Dec 1:16 PM

Comments