Since last October, Iowa Attorney General Tom Miller has been leading a national foreclosure working group involving attorneys general from all 50 states. The group was supposed to investigate “robosigning” and other abuses that led to many wrongful foreclosures. Last week the five largest mortgage servicers in the U.S. received a proposed settlement from Miller’s group, and the American Banker posted the settlement terms here (27-page pdf file). Financial penalties will be determined later; $20 billion seems to be the most likely figure, and it’s not clear how that money will be used.

Miller described the settlement offer as an attempt to “change a dysfunctional system” and “reach an agreement good for banks and good for homeowners.” Many observers charge the deal would do little to correct abuses by mortgage lenders and contains nothing to compensate victims of past misconduct. More details and analysis are after the jump.

Cheyenne Hopkins summarized key points from the proposed settlement here. The idea is to commit lenders to specific procedures to prevent fraudulent or wrongful foreclosures going forward. But most of the requirements outlined in the settlement are the same requirements the lenders have been violating for years. Stephanie at FedUpUSA concludes,

The entire document is a rehash of what servicers had a legal mandate to do right up front.  Accurately apply payments.  Respond to inquiries.  Operate in good faith.  Use a NPV test for HAMP (was in the HAMP program originally.)  Document the assignment chain before foreclosing.

There’s exactly one substantive change, in that HAMP did not prohibit “dual-track” (that is, foreclosure while attempting modification.)

Essentially every other item in this 27 pages is something that Servicers already had a legal duty to do, either as a fiduciary to the investor or just through the ordinary covenant of operating in good faith (You know, the original standards that all businesses are held to that aren’t actually racketeering outfits and gangsters?  Yes, that.)

There’s no prosecution for all the bad affidavits, despite them being apparent acts of perjury.

Yves Smith adds at the Naked Capitalism blog,

There is actually one other new requirement which is single point of contact, meaning that one individual will be responsible for handling the loss mitigation process. This is something borrowers have wanted due to the utter incompetence of banks in handling borrower inquiries (see this not at all unusual horror story from Dana Milbank).

But the only place in banking you get that level of service, one person tasked to your needs, in retail banking is in private banking or near-private banking high net worth product groups. Trying to remedy lousy servicer record-keeping in a call center environment, which suffers from chronic high turnover, is simply unworkable.

Felix Salmon noticed another problem with what he called a “well-intentioned but doomed mortgage settlement”:

[T]he big question here isn’t whether the settlement is reasonable – yes, it’s entirely reasonable. Instead, we should ask what the penalties for non-compliance are, since just about every servicer will be non-compliant for the foreseeable future.

Those penalties come at the end of the document and they’re extremely vague: there’s talk of “monetary penalties and additional remedial actions”, but there’s also talk of “failure to meet timelines”, which implies that much of this stuff could be pushed off far into the future and of “a special master or referee to resolve violations”, with no indication of how such a person might be chosen.

David Dayen also pointed out that “a great many of the elements of the settlement term sheet are similar to how the servicer is required to deal with a [Veterans Administration] loan.” Yet those requirements haven’t stopped lenders from wrongfully foreclosing on veterans like Sgt. Kevin Matthews, whose story Dayen describes in detail.

The final deal with major lenders may contain even more lenient terms. The Wall Street Journal reported that the 27-page proposed settlement “remains the starting point for negotiations and is likely to change as banks respond about the feasibility of different requirements.”

Miller is not in a strong negotiating position for several reasons. First, his working group of state attorneys general partnered with federal agencies, and the Obama administration has yet to advocate for any policy that threatens the interests of major banks.

Second, Miller took criminal penalties off the table at least two months ago. In December, Iowa Citizens for Community Improvement representatives met with Miller and hailed these comments as a sign state AGs were going to pursue criminal charges:

“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.”

It’s not clear whether criminal chargers were ever really considered, or whether Miller misspoke during that December meeting. Miller didn’t raise the subject of criminal penalties in a lengthy Des Moines Register interview a few days before his comments to Iowa CCI. Within a few weeks, he had ruled out criminal charges:

The five largest loan servicers, including Bank of America Corp. and JPMorgan Chase & Co., may be the first to settle with the 50 state attorneys general probing foreclosure practices, Iowa Attorney General Tom Miller said….The group isn’t pursuing a criminal investigation, Miller said. “Our focus is to reform the servicing process and that’s inherently civil, not criminal,” he said.

At Naked Capitalism, Yves Smith quoted a former bankruptcy litigator who challenged Miller’s suggestion that the foreclosure abuses could not lead to criminal charges. Smith added,

[A]ttorneys representing homeowners have found evidence of widespread, and what appears to be systematic violations of contracts and Federal law in how servicers apply payments and charge fees to borrowers, with the net result in more than a few cases that homeowners lose their house due to the pyramiding junk fees rather than bona fide delinquency (as in any arrearage was minor and ex the abuses, could in many cases have been remedied). These attorneys are not able to do a systematic investigation; the state AGs could (and a pattern and practice of fraud would lend itself to criminal charges). But their rush to wrap this up says they indeed have not intent of cleaning up servicing, their pious claims to the contrary.

Later in January, Miller met again with Iowa CCI representatives, but “did not repeat previous commitments to aim for a settlement that would keep people in their homes, nor to press criminal charges against bank officials where evidence of fraud and criminal wrongdoing is found.” Smith suggested at that time that the fix was in to protect the big banks involved in the foreclosure abuses:

The fact is that Miller had decided, before any investigation was undertaken, that his group was not going to take any action that might allow investors to recover for losses. Why? Some of the parties in a position to recover would not be Americans. This came by e-mail before the December meeting at which Miller promised to “put people in jail” as well as obtain deep principal mods and compensation for defrauded homeowners:

The homeowners off to meet Tom Miller is a setup for a photo-op to imply buy-in. I was w/ a European documentary maker this weekend who spoke to Miller a few days ago and said Miller relayed the fraud isn’t so bad, everything will be worked out .. the standard line; he’s already made up his mind. He doesn’t want those European governments demanding their money back. The meeting is a photo-op setup because the too-big-to-fail crowd is scared of put-back liability and shorts; they’re working hard to make it appear they’re doing something to quiet everybody down.

So get this: so keen is a state attorney general to protect the wallets of big banks that he’s decided there wasn’t much fraud before doing any serious forensics. And his reason was to deny payouts to investors because they are foreign (China, are you taking notes?). But to prevent that outcome, he also has to throw US investors and wronged homeowners under the bus.

If the big banks know going into negotiations that there is no chance of facing criminal penalties, and no chance of being forced to compensate homeowners they have mistreated, what leverage does Miller have? Lenders are being asked to sign off on a bunch of things they were supposed to be doing already, but why shouldn’t they object that this or that requirement in Miller’s proposal is too burdensome?

Yves Smith suggests that correcting the causes of foreclosure fraud has taken a back seat in order to protect the institutions guilty of misconduct:

Whether they recognize it or not, this deal is a suicide pact for the attorneys general in states that are suffering serious economic damage as a result of the foreclosure crisis. Tom Miller, the Iowa attorney who is serving as lead negotiator for this travesty, is in a state whose unemployment was a mere 6.2% last December. In addition he is reportedly jockeying to become the first head of the Consumer Financial Protection Bureau. So the AGs who are in the firing line and need a tough deal have a leader whose interests are not aligned with theirs.

Moreover, Miller’s refusal to discuss even general parameters of a deal goes well beyond what is necessary. He knows that well warranted public demands that a deal be tough will complicate his job, but it also does the AGs whose citizens have been most damaged a huge disservice. Pressure on the banks from the public at large is a negotiating lever they need that Miller has chosen not to use.

The argument defenders of the deal make are twofold: this really is a good deal (hello?) and it’s as far as the Obama Administration is willing to push the banks, so we have to put a lot of lipstick on this pig and resign ourselves to political necessities. And the reason the Obama camp is trying to declare victory and go home is that it is afraid that any serious effort to deal with the mortgage mess will reveal the insolvency of the banks.

Team Obama has put on a full court press since March 2009 to present the banks as fundamentally sound, and to the extent they needed more dough, the stress tests and resulting capital raising took care of any remaining problems. [Treasury Secretary] Timothy Geithner was even doing victory laps last month in Europe. To reverse course now and expose the fact that writedowns on second mortgages held by the four biggest banks and plus the true cost of legal liabilities from the mortgage crisis (putbacks, servicer fraud, chain of title issues) would blow a big hole in the banks’ balance sheets and fatally undermine whatever credibility the officialdom still has.

Miller may have taken on this task with good intentions, but the final deal is going to be a lot better for banks than for homeowners.

Share any relevant thoughts in this thread.

P.S.: Smith’s claim that Miller is seeking to lead the new Consumer Financial Protection Bureau is news to me. Shortly after Barack Obama was elected president, Miller said he wasn’t looking for a Washington job.