Iowa Attorney General Tom Miller spoke out this week about changes attorneys general and bank regulators will seek in order to resolve major problems in the banking and mortgage servicing industry. Miller has led the national mortgage foreclosure working group since October. He discussed the investigation and possible terms of a settlement in a recent Des Moines Register interview and in a December 14 meeting with advocates for reform to reduce foreclosures and compensate homeowners.

Miller’s remarks suggest the settlement will focus on ending all “robo-signing” practices, increasing the number of loan modifications and reducing principal to help keep people in their homes. The investigation may lead to criminal prosecutions as well. More details are after the jump.

The Des Moines Register published a lengthy interview with Miller on December 12. He said working group investigators originally focused on widespread “robo-signing” of affadavits without lenders or mortgage servicers verifying the terms of the loan, how much the mortgage-holder owes, and so on. That investigation uncovered major problems with loan servicing and modification, so the working group broadened the scope of its work. Miller told the Register that the executive committee of 14 state attorneys general and several banking regulators has already met with representatives of five corporations that service a combined 59 percent of U.S mortgages: Bank of America, Wells Fargo, JPMorgan Chase, Citibank and Ally Financial/GMAC. Asked about possible remedies in a settlement, Miller said:

[T]he thinking from the beginning was if companies owed substantial fines from robo-signing, it would make more sense to use that money to further the modification and servicing process and make that what it should be. […]

That’s an option – to compensate homeowners who were foreclosed upon that shouldn’t have been. And I think that’s something that should be in a resolution. […] But another category to think about … are people who should have had a loan modification and weren’t modified even though they met the criteria. […]

And when I say modification, I mean fundamentally this: some people who can’t make the full payment but could make a substantial payment and that payment that they can make is more than the investor would get if the home was foreclosed upon. So in those cases, the modification is in everybody’s best interest – the homeowner, the investor, servicer and the national economy. […]

In general terms, I’d like to see that the robo-signing issues never happen again. We need to make sure those issues never happen again.

And second, to try to improve significantly the servicing operations in such a way that the maximum number of modifications be made – the ones I described where the person would pay more than the investor would receive in foreclosure – that those modifications be made in an efficient, effective system.

On December 14, Miller met with more than 100 advocates of reform in the mortgage servicing industry, with a focus on modifications and principal reductions to reduce the number of foreclosures. Iowa Citizens for Community Improvement applauded Miller for telling the meeting participants that he supports prosecuting some people for crimes uncovered in the mortgage investigation:

“We will put people in jail,” Miller said, in response to questioning. “One of the main tools needs to be principal reductions, just like in the farm crisis in the 1980s. There should be some kind of compensation system for people who have been harmed. And the foreclosure process should stop while loan modifications begin. To have a race between foreclosures and modifications to see which happens first is insane.”

Click here to read the rest of the Iowa CCI press release and here to read Jason Hancock’s story on the event. Yves Smith sounds a cautionary note at the Naked Capitalism blog:

This is certainly good news, since the public can hold Miller’s feet to the fire if he fails to live up to these commitments. One concern I have is that the standard for fraud under the law, as opposed to from a common-sense perspective, is stringent, which means it is extremely difficult to prove. Remember Joe Cassano of AIG, the head of AIG’s financial products group? An investigation of him did not lead to prosecution, effectively because he has discussed what he was up to with AIG’s accountants. Fraud, as defined under the law, requires intent. So perversely, “I thought this was kosher” will get you out of a fraud charge.

We have a short form discussion in ECONNED as to how various laws and regulations were weakened over the 1990s to make it very difficult to prosecute financial fraud successfully. You can find a full treatment in Frank Partnoy’s book Infectious Greed.

I doubt many people will go to prison over robo-signing and related problems, but I hope Miller and the rest of the executive committee will be able to negotiate a strong settlement on modifications and principal reductions. Before the 2008 election, Barack Obama and other Democrats called for giving bankruptcy judges so-called “cramdown” authority to reduce foreclosures by altering the terms of mortgages. However, Obama bargained that away during negotiations on the 2009 stimulus bill, and the banking industry was able to get cramdown out of a bankruptcy bill that passed later in 2009. In what has become a familiar pattern of behavior, the president nominally remained supportive of this reform but did nothing to urge wavering Congressional Democrats to back it.

Share any relevant thoughts in this thread.

Reading Miller’s interview about this investigation, I was so thankful that he defeated Brenna Findley despite being outworked and outspent by her on the campaign trail. He isn’t a great politician, but he is an excellent attorney general. It’s hard for me to imagine Findley driving a hard bargain with corporations that exploited mortgage-holders.

If you know Iowans who are behind on their mortgage or in danger of falling behind because of significant financial stress (divorce, illness, job loss, etc.), encourage them to call the Attorney General’s Office free Mortgage Help Hotline.