AG Settlement is Not Done and Won't Do Anything.

Editor’s Note: First let me answer the questions that have been pouring in — all asking the same thing. The answer is NO, the settlement won’t bar you from taking action to defend your home, sue the parties who defrauded you, quiet title or anything else UNLESS you accept the settlement and sign a release.

Frankly, the settlement, if it ever comes to pass (Delaware is out now which is a signal that the Vice-President’s son, as attorney general isn’t going for it) might not do much else except perhaps set some bottom of the barrel standards below which banks and servicers promise not to go. These promises most often have proven illusory — with banks committing the same acts, the same violations and the same arrogant display of raw power that they were using before.

There is nothing in the settlement that will stem the tide of foreclosures. But the Obama’s new commission is aimed at exactly that. The pundits missed it. They are talking about the new commission as though it is a repeat of the old commission and that everything is going to be business a usual. I don’t think so, and the appointment of New York’s Attorney General Schneiderman underscores my point.

Up until now, the focus has been on foreclosures and that is exactly what the Banks wanted. By misdirecting out attention to the “paperwork” in foreclosures, they distract us from the real issues presented in examining securitization itself as it was actually practiced, and the process of mortgage origination, as it was actually practiced. THAT is where the meat is.

The new commission will have an opportunity —- unless stopped for political reasons — to reveal the actual events, rather than picking at the carcass at what had been a plan of securitization. It will also have the opportunity to reveal mortgage origination practices in which the real creditor was intentionally hidden from the borrower — a violation of the Federal and State lending laws. And it will reveal the actual money trail which we will find did not even come close to conforming with the securitization documents ( the closing with investor lenders) or the mortgage documents (the closing with the borrowers).

If actual tangible relief comes from government action it will come from this commission. Everything else looks forward to stopping this from happening again through regulation. The new commission looks backward at what happened and can reveal, if they want it to, the many violations of statutes, rules and regulations in the securitization of loans, the collecting of money into pools, the funding of the loans, and the resulting need to create even more violations by fabricating forged documents after the loans became “non-performing” allegedly transferring the non-performing loans into the pools using those fabricated documents.

No investors on Earth would have accepted non-performing loans as a basis for their investment. The very idea of transferring loans in default into the pools is absurd. It’s not just that it violates the prospectus and pooling and servicing agreement, it is that the practice of transferring the loans after default doesn’t make any sense. Thus there is no rational business reason to do so and the investors would all say and do all say they don’t want them.

A proposed $25 billion settlement between five big banks, state attorneys general and the Obama administration may help resolve some of the thornier legal issues surrounding the mortgage mess that caused the housing market to collapse.

It will do relatively little to stop the ongoing wave of home foreclosures or revive the deeply depressed housing market, however.

Talks got underway more than a year ago after a series of private lawsuits focused national attention on an outbreak of “robo-signing” and other shoddy and fraudulent document processing practices by mortgage servicers foreclosing on homes. Most of the key issues that have sidelined past tentative agreements have been addressed, according to a source close to the talks who was not authorized to discuss the proposal.

But a final agreement could still be weeks away. Iowa Attorney General Tom Miller said Monday that some terms still have to be resolved. He made clear that the parties still have significant work ahead of them.

“We have not yet reached an agreement with the nation’s five largest servicers, and we won’t reach a settlement any time this week,” he said in a statement.

The deal would require banks to devote roughly $17 billion of the total settlement to various types of loan modifications for homeowners. Rather than paying that amount in cash, lenders would receive a series of credit toward that amount based on a complex formula that would assign different levels of credit to different types of modifications. Decisions about which loans to modify would be left to bankers.

The program would apply largely to the relatively small universe of home loans owned outright by the five lenders, including Bank of America, JPMorgan Chase, Wells Fargo, Citibank and Ally Financial (formerly GMAC). Loans held by government-controlled Fannie Mae or Freddie Mac — some 60 percent of the 31 million U.S. home loans outstanding — would not be covered in the deal.

Another $5 billion would be set aside to help support state foreclosure relief programs. A portion of those funds would be used to pay homeowners who can demonstrate they were victims of abusive or fraudulent foreclosure practices. Those awards would average about $1,800. The system for arbitrating those claims and distributing those checks has yet to be worked out, according to the source close to the talks, who asked not to be named because he was not authorized to discuss the proposal publicly.

Another $3 billion would be applied to a program to refinance mortgages at lower rates.

If enough states go along, lenders would emerge largely unscathed from the settlement, according to Capital Economics housing analyst Paul Diggle.

“The total size of the scheme is unlikely to give lenders too many sleepless nights,” he said.

To put the $25 billion settlement in perspective, the amount represent about three-tenths of a percent of the lenders’ total assets, said Diggle. Because much of the settlement amount represents paper credits against loan modifications that may already be underway, the bottom-line impact would be even less than $25 billion.

The impact on pending foreclosures would also be very small. Diggle figures that as many as 100,000 borrowers could be helped by the settlement, a fraction of the 2.3 million homes in the foreclosure pipeline.

The program would help some “underwater ” homeowners who now owe more than their home is worth, cutting their balances by an average of $20,000. But the overall impact of $17 billion in reduced loan balances would be far too small to help revive the housing market. There are currently some 11 million borrowers with an average shortfall of roughly $65,000 — or a total of $700 billion — in “negative equity,” according to the latest data from CoreLogic.

As details of the settlement have emerged, critics have argued the proposal lets bankers off the hook too easily for the mortgage mess they created with sloppy underwriting during the housing boom.

“The reported settlement terms would amount to a slap on the wrist, allowing banks to write down the investments of many of my constituents, without sacrificing anything,” said Ohio Sen. Sherrod Brown in a letter to White House officials involved in the talks.

President Barack Obama may tout the settlement in his State of the Union address Tuesday, after his administration has been pressuring state officials to wrap up a deal. Some consumer advocates say the White House, eager to broker a settlement, has supported terms more likely to win the bankers’ approval.

“The Obama administration has been has been more concerned with settling quickly than with settling in a way that moves the ball forward for homeowners,” said Diane Thomsen, an attorney with the National Consumer Law Center.

Critics of the deal argue that, while it may spur lenders to act more quickly in the short term, it also creates a cap on the amount of mortgage relief they’re required to provide.

Ironically, a settlement could also have the perverse effect of speeding up the foreclosure pipeline. In October 2010, major banks temporarily suspended foreclosures to address complaints of widespread deceptive foreclosure practices, creating a backlog.

“A resolution of the robo-signing scandal leaves the way open for banks to re-start foreclosure proceedings that were temporarily halted after the scandal first came to light,” said Diggle.

It’s unlikely that all 50 states will sign off on the deal. Frustrated with the progress of the talks, California officials said in September they would not agree to a settlement. New York, Delaware, Nevada and Massachusetts, sued the five banks in December over deceptive foreclosure practices after all but abandoning settlement talks.

The settlement would provide strict guidelines to address those complaints, according to the source close to the settlement talks. Abusive foreclosure procedures have already been targeted by federal bank regulators. Last year, the Federal Reserve issued a series of “cease and desist” orders and the Office of the Controller of the Currency conducted a comprehensive review of the worst practices. In April, the OCC launched an enforcement action against eight large mortgage servicers monitoring those practices and instituting reforms.

Among the abuses regulators found were so-called “dual track processing” in which lenders working with a homeowner to modify a mortgage continue with legal proceedings to foreclose. In other cases, lenders had foreclosed without properly showing they had the right to do so.

As state courts continue to cite lenders for faulty documentation, some of the attorneys general don’t think those efforts by federal regulators have fixed the problem. On Tuesday, Massachusetts Attorney General Martha Coakley said she plans to continue her lawsuit, which claims that lenders are foreclosing illegally on homeowners in her state without properly demonstrating that they held the mortgage.

“Our pending lawsuit seeks real accountability from the banks and real relief for homeowners,” she said in a statement. “We also need assurances that eligible Massachusetts borrowers will get relief and consistent treatment from the banks.”