Tag: Fifty State Agreement

Yes, they all lied, the the government and the state attorneys general, Schneiderman, too. The 49 state mortgage settlement that is  not written but was reached is not the narrow settlement that these actors would have you believe. In the Mortgage Settlement Executive Summary Section VII states:

   The proposed Release contains a broad release of the banks’ conduct related to mortgage loan servicing, foreclosure preparation, and mortgage loan origination services. Claims based on these areas of past conduct by the banks cannot be brought by state attorneys general or banking regulators.

   The Release applies only to the named bank parties. It does not extend to third parties who may have provided default or foreclosure services for the banks. Notably, claims against MERSCORP, Inc. or Mortgage Electronic Registration Systems, Inc. (MERS) are not released.

What does that mean? According to Yves Smith at naked capitalism it translates to a complete get out of jail free card

This is sufficiently general so that it is hard to be certain, but It certainly reads as if it waives chain of title issues and liability related to the use of MERS. That seems to be confirmed by the fact that made by local recorders for fees are explicitly preserved (one would not think they would need to be preserved unless they might otherwise be assumed to be waived). This is exactly the sort of release we feared would be given in a worst case scenario. The banks have gotten a huge “get out of jail free” card of bupkis.

Yves also quotes Frederick Leatherman who for a recap:

In one of his articles yesterday at Firedoglake, David Dayen mentioned that the settlement agreement has not been reduced to writing.

That is astonishing.

Let me repeat. That. Is. Astonishing.

The biggest problem with settlement agreements in particular, and all agreements in general, is reaching a so-called ‘meeting of the minds’ regarding the details and ‘chiseling them into stone’ by reducing them to writing. As I used to warn my clients when I was practicing law, we do not have an agreement until it has been reduced to writing, thoroughly reviewed, and signed by each of the parties. That has obviously not happened in this case.

Experience has taught us that humans dealing in good faith make mistakes, no matter how careful they are, and the potential for mistakes, misunderstandings and subsequent disagreements about the terms of an agreement cannot be overestimated. That potential becomes a certainty when one or more parties to an agreement is dealing in bad faith.

That, my friends, is why we have a law called the Statute of Frauds, which requires that certain types of agreements be in writing or they are invalid and unenforceable.

Yves take on Schneiderman and Biden’s involvement:

While the full terms have not been agreed upon, this seems to call into question the claim that Schneiderman got a carve-out for his MERS suit (and Biden had separately insisted that he had wanted to be able to add banks to his case against MERS).

But even with all these caveats, it’s hard to read the executive summary, which no doubt was vetted by the bank, Administration and AG sides, as meaning other than what it intends to mean: that the banks have been released of the meteor-wiping-out-the-dinosaurs-and-the-MBS-market liability they were most afraid of, that of the monstrous mess they made in their failure to convey notes as stipulated in their own contracts, and with their failure to use MERS as a mere registry, rather than a substitute for local recording offices. That in turns means that various cheerleaders for this deal, such as Mike “Settlement Release Looks Tight” Lux and Bob Kuttner have badly misled readers in their assertions that the release was narrow and the deal is good for homeowners.

The Obama administration and its advocates would have us believe that this agreement is going to help underwater homeowners and those who have been victims of foreclosure fraud. I’m not going to be delicate about this, it’s a bold faced lie. To make matters even worse Pimco’s analysis points out how this will damage pensions:

The government’s deal with banks over their foreclosure practices after 16 months of investigations is cheap for the loan servicers while costly for bond investors including pension funds, according to Pacific Investment Management Co.’s Scott Simon.

In what the U.S. called the largest federal-state civil settlement in the nation’s history, five banks including Bank of America Corp. and JPMorgan Chase & Co. yesterday committed $20 billion in various forms of mortgage relief plus payments of $5 billion to state and federal governments.

“This was a relatively cheap resolution for the banks,” said Simon, the mortgage head at Pimco, which runs the world’s largest bond fund. “A lot of the principal reductions would have happened on their loans anyway, and they’re using other people’s money to pay for a ton of this. Pension funds, 401(k)s and mutual funds are going to pick up a lot of the load.”

If anyone expects that that new panel with New York’s Attorney General Eric Schneiderman is going to ease the housing crisis and hold the banks accountable, I have some really cheap bridges for sale in California and New York.

So one has yet seen the final agreement between the banks and the state attorneys general and it may be awhile before we do. And as Yves Smith at naked capitalism stated “You know it’s bad when banks are the most truthful guys in the room“:

Remember that historical mortgage settlement deal that was the lead news story on Thursday? It has been widely depicted as a done deal. The various AGs who had been holdouts said their concerns had been satisfied.

But in fact, Bank of America’s press release said that the deal was “agreements in principle” as opposed to a final agreement. The Charlotte bank had to be more precise than politicians because it is subject to SEC regulations about the accuracy of its disclosures. And if you read the template for the AG press release carefully, you can see how it finesses where the pact stands. And today, American Banker confirmed that the settlement pact is far from done, and the details will be kept from the public as long as possible, until it is filed in Federal court (because it includes injunctive relief, a judge must bless the agreement).

This may not sound all that important to laypeople, but most negotiators and attorneys will react viscerally to how negligent the behavior of the AGs has been. The most common reaction among lawyers I know who been with white shoe firms (including former partners) is “shocking”.

In fact as the American Banker points out the document does not exist:

More than a day after the announcement of a mammoth national mortgage servicing settlement, the actual terms of the deal still aren’t public. The website created for the national settlement lists the document as “coming soon.”

That’s because a fully authorized, legally binding deal has not been inked yet.

The implication of this is hard to say. Spokespersons for both the Iowa attorney general’s office and the Department of Justice both told American Banker that the actual settlement will not be made public until it is submitted to a court. A representative for the North Carolina attorney general downplayed the significance of the document’s non-final status, saying that the terms were already fixed. [..]

Other sources who spoke with American Banker raised doubts that everything is yet in place. A person familiar with the mortgage servicing pact says that a settlement term sheet does not yet exist. Instead, there are a series of nearly-complete documents that will be attached to a consent judgment eventually filed with the court. That truly final version will include things such as servicing standards, consumer relief options, legal releases, and enforcement terms. There will likely be separate state and a federal versions of the release.

Some who talked to American Banker said that the political pressure to announce the settlement drove the timing, in effect putting the press release cart in front of the settlement horse.

Whatever the reason for the document’s continued non-appearance, the lack of a public final settlement is already the cause for disgruntlement among those who closely follow the banking industry. Quite simply, the actual terms of a settlement matter. [..]

“The devil’s in the details,” says Ron Glancz, chairman of law firm Venable LLP’s Financial Services Group. “Until you see the document you’re never quite sure what your rights are.”

“It’s frustrating,” agrees Stern Agee analyst John Nadel. “But it’s not unlike anything else that’s been going on in financial reform generally, is it?” [..]

“It is hard for me to believe that they would have gone public in the way that they did if they didn’t have it all worked out. But it is unusual that we don’t have a copy of the settlement yet,” says Diane Thompson, an attorney for the National Consumer Law Center.

A spokesperson from the South Carolina AG’s office told American Banker that when the agreement is finalized it would be posted to this website “nationalmortgagesettlement.com,” which raised some eyebrows. David Dayen at FDL News Desk questioned why .com and not .org? Dayen also pointed out that by not having all the details ironed out is “just a shocking abdication of responsibility”:

This is incredible. The Administration, the AGs, everyone involved in this made a big show of an agreement reached on foreclosure fraud. But there is no piece of paper with the agreement on it. There’s no term sheet. There are just agreements in principle.

There’s a HUGE difference between an agreement in principle and the actual terms. I mean night and day. The Dodd-Frank bill was for all intents and purposes an agreement in principle. It left to the federal regulators to write hundreds of rules. And we have seen how that process of implementation has faltered on several key points. But the Administration wanted to announce a “big deal,” the details be damned. And they got buy-in from the AGs. Everyone else stayed silent.

Yves Smith appeared with Amy Goodman and Juan Gonzalez on Democracy Now to discuss just how bad this deal is.

The U.S. Justice Department has unveiled a record mortgage settlement with the nation’s five largest banks to resolve claims over faulty foreclosures and mortgage practices that have indebted and displaced homeowners and sunk the nation’s economy. While the deal is being described as a $25 billion settlement, the banks will only have to pay out a total of $5 billion in cash between them. We speak to one of the settlement’s most prominent critics, Yves Smith, a longtime financial analyst who runs the popular finance website, “Naked Capitalism.” “The settlement, on the surface, does look like it is helping homeowners,” Smith says. “But in fact, the bigger part that most people don’t recognize is the way it actually helps the banks with mortgages on their own books. … The real problem is that this deal is just not going to give that much relief.”

Yes, this could be a lot worse and won’t address the needs of the underwater homeowners or those who lost their homes through fraud.

This is a state by state breakdown of the foreclosure settlement (h/t Yves Smith):

An astute observation from Lambert Strether:

OMFG, look at the weasel wording in the press release:

   “This agreement is very significant in how it addresses the fraud that these banks committed against many homeowners across our state,” said ___.” This agreement not only provides much needed relief to (STATE) [Ha ha, fill in the blank!!!] borrowers, but it also puts a stop to many of the bad [criminal] behaviors that contributed to the mortgage mess in our state and across the country.”

And then there’s “fraud that these banks committed.” So if it’s fraud (against whom?!) then why is nobody going to jail?

UPDATE Oh, I’m sorry. I forgot. Banksters never go to jail. A banana republic like ours has a two-tier system of justice, and banksters have impunity for all crimes. Unlike you, peasants. My bad, seriously.

And is definitely a top comment:

Google tells it like it is. I google the first phrase as a complete string, a la “This agreement is very significant in how it addresses the fraud“, and the first thing that comes up is indeed Tom Miller’s press release, from 9 minutes ago (10:44AM EST), and two or three down after that, links to Nigerian 419 scams, triggered by the similarities between the Miller’s wording, and the scripts of scam artists. Shocker!

(all emphasis mine)

Some of the propaganda (again h/t Yves Smith):

Settlement Graphic and Settlement Graphic

Click the links but first put all heavy and sharp objects out of reach.

The biggest banks involved in mortgage fraud have agreed to a $26 billion settlement along with 49 states attorneys general. Oklahoma is the only hold out because the state’s Attorney General, Scott Pruitt, did not believe that the banks should face any penalty. The agreement will “help borrowers owing more than their houses are worth, with roughly one million expected to have their mortgage debt reduced by lenders or able to refinance their homes at lower rates. Another 750,000 people who lost their homes to foreclosure from September 2008 to the end of 2011 will receive checks for about $2,000. The aid is to be distributed over three years.”

Yves Smith at naked capitalism notes that while the final terms of the agreement have not been released but some of the details have been leaked:

   1. The total for the top five servicers is now touted as $26 billion (annoyingly, the FT is calling it “nearly $40 billion”), but of that, roughly $17 billion is credits for principal modifications, which as we pointed out earlier, can and almost assuredly will come largely from mortgages owned by investors. $3 billion is for refis, and only $5 billion will be in the form of hard cash payments, including $1500 to $2000 per borrower foreclosed on between September 2008 and December 2011.

   Banks will be required to modify second liens that sit behind firsts “at least” pari passu, which in practice will mean at most pari passu. So this guarantees banks will also focus on borrowers where they do not have second lien exposure, and this also makes the settlement less helpful to struggling homeowners, since borrowers with both second and first liens default at much higher rates than those without second mortgages. Per the Journal:

      “It’s not new money. It’s all soft dollars to the banks,” said Paul Miller, a bank analyst at FBR Capital Markets.

   The Times is also subdued:

       Despite the billions earmarked in the accord, the aid will help a relatively small portion of the millions of borrowers who are delinquent and facing foreclosure. The success could depend in part on how effectively the program is carried out because earlier efforts by Washington aimed at troubled borrowers helped far fewer than had been expected.

   2. Schneiderman’s MERS suit survives, and he can add more banks as defendants. It isn’t clear what became of the Biden and Coakley MERS suits, but Biden sounded pretty adamant in past media presentations on preserving that.

   3. Nevada’s and Arizona’s suits against Countrywide for violating its past consent decree on mortgage servicing has, in a new Orwellianism, been “folded into” the settlement.

   4. The five big players in the settlement have already set aside reserves sufficient for this deal.

Yves goes on to enumerate the top 12 reasons why this settlement really stinks. These are her top 5:

1. We’ve now set a price for forgeries and fabricating documents. It’s $2000 per loan. This is a rounding error compared to the chain of title problem these systematic practices were designed to circumvent. The cost is also trivial in comparison to the average loan, which is roughly $180k, so the settlement represents about 1% of loan balances. It is less than the price of the title insurance that banks failed to get when they transferred the loans to the trust. It is a fraction of the cost of the legal expenses when foreclosures are challenged. It’s a great deal for the banks because no one is at any of the servicers going to jail for forgery and the banks have set the upper bound of the cost of riding roughshod over 300 years of real estate law.

2. That $26 billion is actually $5 billion of bank money and the rest is your money. The mortgage principal writedowns are guaranteed to come almost entirely from securitized loans, which means from investors, which in turn means taxpayers via Fannie and Freddie, pension funds, insurers, and 401 (k)s. Refis of performing loans also reduce income to those very same investors.

3. That $5 billion divided among the big banks wouldn’t even represent a significant quarterly hit. Freddie and Fannie putbacks to the major banks have been running at that level each quarter.

4. That $20 billion actually makes bank second liens sounder, so this deal is a stealth bailout that strengthens bank balance sheets at the expense of the broader public.

5. The enforcement is a joke. The first layer of supervision is the banks reporting on themselves. The framework is similar to that of the OCC consent decrees implemented last year, which Adam Levitin and yours truly, among others, decried as regulatory theater.

She goes on to explain how there are no constraints on servicers cheating to reduce their losses and will face no consequences when caught as in the past. With the law suits against Countrywide somehow “folded into the deal”, Bank of America, who is by far the worst offender in the chain of title disaster, gets a “special gift”: “that failing to comply with a consent degree has no consequences but will merely be rolled into a new consent degree which will also fail to be enforced”. As David Dayen at FDL News Desk explains:

As far as the release goes, AG offices that signed onto the lawsuit claimed it was narrowly crafted to only affected foreclosure fraud, robo-signing and servicing (which I don’t feel is all that narrow, but I’m trying to just-the-facts this – ed). The lawsuit that New York AG Eric Schneiderman filed last Friday, suing MERS and three banks for their use of MERS, was preserved fully. There was a last-minute request by the banks to dissolve that lawsuit, but it was not successful. In addition, Schneiderman reserves the right to sue other servicers for their use of MERS along the same lines as the current lawsuit. [..]

Other lawsuits, like Delaware AG Beau Biden’s lawsuit against MERS, Missouri AG Chris Koster’s criminal indictments against DocX, and Nevada AG Catherine Cortez Masto’s suit against LPS and its employees would be able to go forward as well because the banks are not a party to them. However, it’s unclear whether any of those AGs will be able to work their way up the chain to indict bank officers for the same conduct; the likely answer, I assume, would be no. In California, Kamala Harris preserved the right for state officials and large pension funds to sue under the state’s False Claims Act over mortgage backed securities that later fell in value.

The status of Massachusetts AG Martha Coakley’s suit against five banks for foreclosure fraud is unknown. In all likelihood, the Nevada/Arizona suit against Bank of America for failing to follow their responsibilities in the Countrywide settlement will be folded into the deal.

In that settlement, BofA promised to deliver $8.5 billion in relief for Countrywide borrowers who fell victim to deceptive practices in the mortgage process. In reality, only $236 million was ever spent. Weak settlement terms allowed BofA to take credit merely for offering loan modifications to borrowers. And the Nevada suit alleged that BofA immediately started abusing borrowers who tried to get relief under the deal. But that suit is now gone.

As to the role of new Federal task force, if it were to be taken seriously this settlement should have not been completes until the task force’s investigation was finished. A good investigation takes charges that are easy to prove to help get the more evidence for the more difficult ones. By letting the banks walk. As Yves sees it, and she is correct, the investigations in Nevada and Missouri led to criminal charges and arrests that might have led to deals to catch the criminals “higher up the food chain.” There is plenty of evidence of bankruptcy-related filings, such as inflated and bogus fees, and even substantial, completely made up charges that has been ignored that could have led to a bigger settlement and prosecutions. By cutting a deal on robosigning the deeper chain of title problem has now been covered up making it even more difficult to address the on going fraud at high levels, the banks themselves.

So the bottom line is the banks have three years to hand out $5 billion in cash to about one million homeowners that will amount to about $2000 each for the loss of their homes through fraud. They will suffer no other consequences and there will be no further means to prosecute them, even if there is clear evidence of complicity in fraud related to robosigning. There is still the issue of 10 million underwater homeowners with $700 billion in negative equity that will continue to drag on the housing market and the economy for years to come. It would seem the Obama administration has once again screwed the vast majority of Americans to protect the Banks and Wall St. and his supporters are cheering this as another reason to reelect him. I see no reason for the Republicans to worry about another four years of Obama.

Up Date: If you’re one of the victims of the banking ghouls, you might not want to visit the new website for “The National Mortgage Settlement” The picture alone might make you want to do something you’d regret. The site details the agreement. David Dayen gives a brief synopsis of some of the gorier detail:

$750 million in a payment to the federal government;

$4.5 billion in direct payments to the states, of which $1.5 billion will go to those $2,000 checks to borrowers, and $2.75 billion to state foreclosure prevention services like legal aid, mandatory mediation and other programs. So the hard money comes to $5.25 billion.

$20 billion in “direct consumer relief”;

$3 billion to help current underwater borrowers refinance, and $17 billion in “credits” for principal reductions. HUD estimates that the dollar value of this will come to $32.3 billion in the end, as we’ve discussed. HUD Secretary Donovan has alternately said that a “substantial” amount of this money will come from MBS investor loans, and also that the large majority would come out of bank-owned loans. Also second liens have to be reduced along with firsts at least pari passu (on equal terms).

In addition, officials are touting the nationwide servicing standards that will be ushered in with this deal. Left out of this is the fact that the CFPB now has control over the servicing market, and can regulate national standards all by themselves.

The site mentions what the settlement doesn’t cover:

Release any criminal liability or grant any criminal immunity.

Release any private claims by individuals or any class action claims.

Release claims related to the securitization of mortgage backed securities that were at the heart of the financial crisis.

Release claims against Mortgage Electronic Registration Systems or MERSCORP.

Release any claims by a state that chooses not to sign the settlement.

End state attorneys general investigations of Wall Street related to financial fraud or the financial crisis.

We still don’t have any specific answers to the letter that Nevada AG Masto sent to the settlement negotiators. What Davyen finds really annoying is that the specific details haven’t been released to the  public who really deserves to know how badly they are being screwed.

I may have a separate article later as more specifics trickle down

As the the multistate foreclosure settlement inches to some conclusion, the Big Banks have dropped the other shoe. They won’t sign on to the agreement unless Schneiderman drops his law suit against them and MERS. The proposed settlement would also require the attorneys general from Nevada, Massachusetts and Arizona to drop their litigation should they decide to sign onto the agreement:

Bank of America Corp., JPMorgan Chase & Co. and Wells Fargo & Co. made a last-minute demand that New York drop claims filed against them Feb. 3 as a condition of the settlement, a person familiar with the matter said. [..]

New York sued Bank of America, JPMorgan and Wells Fargo in state court in Brooklyn, saying their use of a mortgage database known as MERS led to improper foreclosures. Schneiderman said the banks’ use of the Mortgage Electronic Registration Systems database misled homeowners, undermined foreclosure proceedings and created uncertainty about ownership interests in properties.

The banks have asked that many of the claims in the complaint be thrown out, said the person. The other two banks involved in the nationwide settlement proposal, Ally Financial Inc. and Citigroup Inc., weren’t named in the complaint. [..]

The proposed settlement already requires Massachusetts, Nevada and Arizona, which have sued banks involved in the talks, to settle their claims, a person familiar with them said.

Nevada and Arizona each sued Bank of America over mortgage- servicing practices, accusing it of misleading consumers, while Massachusetts sued all five banks.

It appears that the agreement would give the banks immunity from prosecution and civil suits from mortgage origination fraud. The settlement does not prevent an investigation into mortgage securitization (secondary mortgage fraud), it would give the banks a free pass on all the fraudulent foreclosures and mortgages that are the primary cause of the housing market crash.

So where does this leave the new unit the President Obama created to investigate mortgage fraud? Professor of law and economics at the University of Missouri-Kansas City, Bill Black, spoke with Theresa Riley on Bill Moyers & Compnany:

The special new unit is a charade. There will be no prosecutions of any elite criminals. Obama has made sure of that.

Meanwhile the agreement is inching towards a conclusion with Iowa Attorney General announcing that 40 states have agreed to sign:

“The sign-on deadline for the proposed joint state-federal mortgage servicing settlement passed Monday with more than 40 states signing on,” Miller said “This enables us to move forward into the very final stages of remaining work.Federal and state officials, as well as representatives from the banks, continue to address matters that they must complete before finalizing any settlement.”

Delaware Attorney General Beau Biden, who spoke with MSNBC’s Dylan Ratigan, indicated he will sign on only if he can continue to pursue MERS and not be precluded from adding the banks from the suit.

Apparently Missouri’s Attorney General didn’t get the word about not filing suits. He not only filed a criminal lawsuit against DocX, one of the largest companies that provided home foreclosure services to lenders across the nation, for forgery in the preparation of documents used to evict financially strained borrowers from their homes but arrested Lorraine O. Brown, the company’s founder and former president.

Chris Koster, the Missouri attorney general, will prosecute the case. “The grand jury indictment alleges that mass-produced fraudulent signatures on notarized real estate documents constitutes forgery,” Mr. Koster said in a statement. “Today’s indictment reflects our firm conviction that when you sign your name to a legal document, it matters.”

Mr. Koster said his office’s investigation was continuing. This suggests he may hope to persuade Ms. Brown to cooperate in his investigation of the parent company. If convicted, Ms. Brown could face up to seven years in prison for each forgery count. DocX could be fined up to $10,000 for each forgery conviction.

Hey, Mr. President, this is what needs to be done on a federal level.

There was a deluge of news about banking and foreclosure fraud over the weekend much of it going unnoticed because of the Super Bowl. There was the revelation that Fannie Mae has known about mortgage and foreclosure fraud for 10 years, knew it was fraud but did nothing to stop it. This morning there was another surge with the news about the state attorneys general agreement. It looks like two of the biggest holdouts, New York and California, may sign the agreement even though public details are still very vague. I suspect that the secrecy about the final agreement may be because it let the banks off the hook for the biggest fraud ever perpetrated on investors, robosigning.

Here’s what we know:

New York AG Eric Schneiderman filed a law suit in NY State Court in Brooklyn on Friday charging them with deceptive and fraudulent practices that harmed homeowners and undermined the judicial foreclosure process. David Dayen at FDL thinks this is a “carve out” that paved the way for other state AG’s to do the same and still be able to sign onto the federally negotiated agreement:

The answer is, according to what I’ve learned, is that it’s a carve-out. Schneiderman can pursue this case and also theoretically join a settlement. This may or may not be true of other cases with other AGs. The timing of Illinois’ lawsuit against Nationwide Title Clearing yesterday seems significant in that regard; perhaps Lisa Madigan also secured a carve-out for her case. It’s plausible to think that AGs are being told to get out their lawsuits now, prior to a settlement, and they would be allowed in the event of a settlement. Schneiderman still hasn’t agreed to the settlement, but in the event that he does, the case dropped today would be able to go forward. [..]

Like me, Dayen doesn’t see the advantage for the banks to sign off on the agreement if they can’t stop suits like Schneiderman’s and others in Illinois, Massachusetts and Nevada. There are a lot of questions.

Late last night, during the Super Bowl, the story broke in the New York Times that the deal with the states was about to be closed:

The biggest remaining holdout, California, has returned to the negotiating table after a four-month absence, a change of heart that could increase the pot for mortgage relief nationwide to $25 billion from $19 billion.

Another important potential backer, Attorney General Eric T. Schneiderman of New York, has also signaled that he sees progress on provisions that prevented him from supporting it in the past.

The potential support from California and New York comes in exchange for tightening provisions of the settlement to preserve the right to investigate past misdeeds by banks, and stepping up oversight to ensure that the financial institutions live up to the deal and distribute the money to the hardest-hit homeowners.

The settlement would require banks to provide billions of dollars in aid to homeowners who have lost their homes to foreclosure or who are still at risk, after years of failed attempts by the White House and other government officials to alter the behavior of the biggest banks.

Yves Smith at naked capitalism was not surprised and expressed her doubts about Schneiderman’s ability to beat the Obama administration’s protectionism:

Kamala Harris, the California AG, was widely seen as “political” and therefore was not seen as a solid holdout. I remain disappointed by the conduct of our attorney general Eric Schneiderman, who is also now participating in the talks. His decision to join a Federal task force undermined the opposition to the settlement and looks to have cleared the way for the Administration to craft a win on this deal (note it is still possible it will not get done, but the odds were low as of last week and appear to be sinking further).

Assuming a deal is inked, Schneiderman and new partners in the Administration will no doubt contend that his involvement in the negotiations resulted in an improvement in terms for homeowners and states. I’m also told that he sincerely believes he can get a serious investigation underway and take advantage of Federal statutes with longer statutes of limitations than most state level ones.

Schneiderman may think he can beat the Administration at its own game, and if he can, more power to him, but I would not bet on him coming out on top.

It is too late (it was probably too late when Schneiderman sat in Michelle Obama’s box during the State of the Union address) but if you are in California or New York, you might as well call or e-mail your AG and give them a piece of your mind. Keeping the pressure on Schneiderman and Harris, and supporting AGs like Beau Biden of Delaware, Catherine Cortez Masto of Nevada, and Martha Coakley of Massachusetts, are the best hope we have at this point.

For New York, call 800 771-7755, 212 416-8000 or 518 474-5481 use the web form here or at his fundraising office. For Kamala Harris, call 916 445-9555 or this web form.

There are also questions about who will actually pay for this bank bailout which in actuality amounts to only $5 billion in cash and the rest in mortgage modifications. It does nothing to correct or compensate homeowners who have already been foreclosed on or who are so underwater that they don’t qualify for modification. Again Yves Smith explains the role of second liens in this bank bailout

To give a brief recap of the post: both a small group discussion with Shaun Donovan (reported by Dave Dayen of Firedoglake and separately by Shahien Nasirpour of the Financial Times) and the Schneiderman MERS lawsuit on Friday confirm our previously-stated hypothesis that the settlement is really a transfer from mortgage investors to banks. That is why the banks remain willing to participate as the release has been whittled down to appease the formerly dissenting attorneys general (remember, the old reason for the banks to go along was that it was a cash for release deal: the banks were willing to pay hard money to get a significant waiver of liability).

The reason this settlement amounts to a transfer is the banks will be given credit towards the total reported value of the settlement for modifying mortgages that they do not own, meaning that economic loss will be borne by investors. Servicers have an obvious incentive to shift losses onto other parties whenever possible, and so the only principal mods they are likely to do of loans they own are one they would have done anyhow.

In addition, default rates are higher among borrowers with second liens, and second liens are almost entirely held on bank balance sheets. Which banks? Oh, the ones that happen to be the four biggest servicers: Bank of America, Citigroup, JP Morgan, and Wells. And those second lien holdings are collectively in the hundreds of billions. Were they written down to the degree that some mortgage investors argue is warranted, it would reveal that these banks were seriously undercapitalized.

As we stressed, this plan is a serious violation of property rights (not that that should be any surprise at this point). The creditor hierarchy is clear: second liens should be written off in their entirety before first liens are touched. Yet we also linked to evidence in the post from top mortgage analyst Laurie Goodman that servicers were already doing everything they could to favor their second liens over firsts. This settlement would give official sanction to this practice.

I also want to flag, a second time, an appalling throwaway comment in a New York Times update tonight:

  The settlement, if all states participate, will also include $3 billion to lower the rates of mortgage holders who are current.

In other words, the agreement bails out homeowners that don’t need it while throwing those who are in the deepest trouble  because of that second lien (mortgage) to the sharks. Those second liens are a big problem, as Yves notes:

   As leading mortgage analyst Laurie Goodman pointed out in a late 2010 presentation, just over half of the private label (non Fannie/Freddie) securitizations have second liens behind them (overwhelmingly home equity lines of credit). Moreover, homes with first liens only have far lower delinquency rates than homes with both first and second liens. Separately, various studies have found that defaults are also correlated with how far underwater a borrower is. If a borrower is too far in negative equity territory, it makes less sense for them to struggle to stay current, no matter how much they love their home […]

   [Banks] also have been modifying first liens to preserve their second liens. If you reduce the payments on the first mortgage, the borrower has more money left to pay the second lien. From the transcript of Goodman’s 2010 presentation:

   “Clearly there’s a differential standard of managing second liens and securitizations versus second liens in bank portfolios. It’s very clear banks are doing all they can to get the, to keep, to get the first lien modified in order to keep the second intact, and that is just a huge conflict of interest.”

   Legally, the hierarchy of payment OUGHT to be clear: a second should be wiped out before a first lien is touched. That’s how it works in a foreclosure or a bankruptcy: only after the first lien was paid in full would a second lien get anything. But that isn’t what is happening now.

Homeowners with second liens are in far more trouble. Which brings us to this revelation that Fannie Mae knew all about the wide spread mortgage abuses for 10 years and ignored it:

YEARS before the housing bust – before all those home loans turned sour and millions of Americans faced foreclosure – a wealthy businessman in Florida set out to blow the whistle on the mortgage game. [..]

What Fannie Mae knew about abusive foreclosure practices, and when it knew it, are crucial questions as Congress and the Obama administration weigh the future of the company and its cousin, Freddie Mac. These giants eventually blew themselves apart and, so far, they have cost taxpayers $150 billion. But before that, their size and reach – not only through their own businesses, but also through the vast amount of work they farm out to law firms and loan servicers – meant that Fannie and Freddie shaped the standards for the entire mortgage industry.

Almost all of the abuses that Mr.(Nye) Lavalle began identifying in 2003 have since come to widespread attention. The revelations have roiled the mortgage industry and left Fannie, Freddie and big banks with potentially enormous legal liabilities. More worrying is that the kinds of problems that Mr. Lavalle flagged so long ago, and that Fannie apparently ignored, have evicted people from their homes through improper or fraudulent foreclosures.

This is a huge financial problem that will still loom over the economy, especially if the banks, Fannie and Freddie are not being held legally and financially responsible for setting this all in motion. The likelihood that Schneiderman will have any success in prosecuting or obtaining a satisfactory restitution for the victims of this massive fraud against an administration that has protected the perpetrators is slim to none. I wish him luck but I will be truly disappointed if he signs this agreement.