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Slade Smith's Blog

Views on the National Mortgage Settlement
by Slade Smith | 2012/02/10 |

Disclaimer: The actual final language in the national mortgage settlement is not yet available, so the details in this agreement are yet unknown. The devil, as they say, is often in the details. What information is available comes largely from summaries of the settlement published by the Administration, and as the Administration has a motive to make the deal sound as tough as possible, these summaries have to be viewed with a little bit of skepticism. I tried to read the available information from that skeptical perspective.

With that out of the way, here are my initial thoughts on the national mortgage settlement announced yesterday:

Slade Smith's Blog ::

From what information is available, my overall take is that it does not punish the banks greatly. It's clear that the $26 billion headline number overstates the true financial impact of the settlement on the banks.  The majority of the $26 billion dollars in the settlement is for modifications from which the banks derive benefits: they prevent defaults and foreclosures, and preserve value in second mortgages that the same banks own in many cases.  Some of this modification activity may have occurred without the settlement.  Only about $6 billion of the $26 billion will be in the form of cash outlays by the banks.

I personally don't think it's a bad thing that the deal does not extract a severe financial toll on the banks.  We bailed out the banks at great cost because their failure would have caused an economic crisis even more severe than the one we have just faced.  It would be absurd to then turn around and extract such a huge toll over robosigning as to put the banks back to the brink of collapse.  I did want to see robosigning and the other foreclosure abuses addressed, but I didn't want the cure to cause another financial crisis!  I think the settlement amount strikes a reasonable balance in this regard.  The amount of the settlement is more than a "rounding error" to the banks, as some have characterized it.

Some aspects of the deal appear to be pretty weak, however.  For example, one facet of the agreement touted by the Administration is a set of national servicing standards that apply going forward, along with independent monitoring, paid for by the banks, that supposedly will help ensure that the abuses of the past do not occur in the future.  But, at least on robo-signing, there does not appear to be much new in the summary of the "new" standards that was not the law already in virtually every state.

For example, according to the summary of servicer standards provided by the Administration, foreclosure affidavits "must be accurate as to the amounts owed and the standing of the bank/servicer to file for foreclosure and must be based on the signor’s personal knowledge of the facts."  Bu in what state was that not the case previous to now?  "The affiant must actually review the bank/servicer records before signing."  Don't affidavits themselves already state that the signer has personal knowledge of the facts contained in the affidavit or something similar? 

"Affidavits shall be signed in the presence of a notary."  Wasn't this already the law... everywhere?

And missing is anything which explicitly bars surrogate signing-- signing someone else's name with their permission.  Is that permissible under the settlement?

The settlement summary says that "banks/servicers shall not pay incentives to employees or third parties to encourage speed in the signing of affidavits."  Okay, but actually I do not recall any instance where that exact thing was done.  The banks simply used the document mills that could churn these documents out the fastest, and the document mills simply employed people who were willing to sign all day without looking at the documents.

Perhaps when the final settlement is published, some of these issues will be cleared up, but for now I am skeptical-- I suspect that the Administration simply wanted a laundry list of requirements to publish here.

One of the criticisms of the settlement, which I think has some merit, is that by short-circuiting the investigative process into robosigning, it may help the banks hide other, more important abuses that may have been uncovered in the process of those investigations. 

For example, some observers suspect that the purpose of the many and often robosigned "lost note" affidavits during the foreclosure crisis has not been due to neglectful archiving of mortgage documents, but rather to cover up defective transfers of mortgages into securitization trusts.  To the extent that these mistakes are revealed or concealed, it could be the difference between banks and investors eating the losses on the mortgages that may or may not have been successfully transferred into these trusts, according to this theory. 

And if the banks are systematically deceiving the investors regarding the true nature of these transfers, crimes may have occurred.  But according to this theory, since the robosigning will now not receive a full investigation, investigators have now lost this golden opportunity to conduct discovery which would likely reveal why these affidavits were used so routinely, and clues as to the true nature of the banks' motivation to use them will not be uncovered.

On the other hand, there are things in the settlement that are not so generous to the banks.

It has long been reported that the settlement will provide no criminal immunity, but this fact has been lost on many critics of the settlement.  If you do not like the fact that bank executives have not been hauled into court in handcuffs over the foreclosure abuses of the banks, blame the Attorneys General, blame the laws... but don't necessarily blame this settlement.  To the extent that criminal investigations and prosecutions are under way, they are not affected by this settlement.  For example, the indictment of the former president and founder of DocX that was just handed down in Missouri will be unaffected.

MERS was not protected in the settlement.  All the county lawsuits alleging that MERS illegally avoided recording fees are untouched and will proceed.  A lawsuit filed by the Delaware Attorney General alleging that MERS violated the state's deceptive business practices laws goes untouched, and will also proceed.  MERS has stated that its member banks have indemnified it on these claims, so if MERS loses, its member banks will presumably be on the hook for the damages.

Private lawsuits go untouched.  Unfortunately, a lot of consumer lawsuits into robosigning are apparently filed with the sole intent of settling, so I have not seen a lot of significant consumer class actions involving the foreclosure mess proceeding to the satisfying conclusion of a trial and a decision, but every single homeowner who had a viable case yesterday morning still has a viable case this morning.

In conclusion, the mortgage settlement is a mixed bag.  It will provide a number of former homeowners with a check they would have not otherwise gotten.  It will give some homeowners a chance to refinance that they would have not gotten otherwise.  It will provide some other borrowers with a break on their principal.  But it will not solve the deep, systemic flaws in our mortgage finance system.  It will not stun the banks into reforming their ways.  It won't remove the stumbling blocks to foreclosure in states with huge backlogs due to their own particular problems.  It will not heal the housing market.



1720 words | 2450 views | 2 comments | log in or register to post a comment

Kris Bjorge - CEO TDI

Good article Slade and a lot of sifting there! 

Seems to me the legal system just needs to be used for what it was intended for - to make laws work and fix them when they don't. All this other back and forth has sure added all kinds of time to the handling of the elephant in the room of the overall non-performing loans burden. We have a tsunami hitting here now of foreclosures and it will continue for some years to come. I think the real pain is it has taken so long - kinda like nobody pulled the bandage off of the festering wound and now it will cause death or dismemberment for real.

by Kristine Bjorge | 2012/02/20 | log in or register to post a reply

Yes, a good, insightful article

A little late, but wanted to say I found your article to be truly insightful and well written.  And my two cents, if I may: I'm hard pressed to understand how any default figures can be authentic when they never reflect the four payments guaranteed by FNMA before FNMA must make good on its guarantee (see FNMA Prospectuses) and repurchase the loan.  Maybe it's that those payments are not reflected in the records that the person who is to have personal knowledge looks at, presumably the servicer's. Hmmm...

You were kind or at least very diplomatic in your assessment of those folks having to agree to do what they should have been doing all along.   And you said (my favorite):

 One of the criticisms of the settlement, which I think has some merit, is that by short-circuiting the investigative process into robosigning, it may help the banks hide other, more important abuses that may have been uncovered in the process of those investigations. " Yep!





by john gault | 2013/02/10 | log in or register to post a reply
Slade Smith's Blog

I'm the web developer for Source of Title.  Due to this role, I have become an interested observer of the title insurance industry and the broader issues arising out of real estate and finance.   I have also blogged extensively about politics under the pseudonym "skymutt" at the partisan Democratic blog Daily Kos and the non-partisan community Swords Crossed






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