Banks to Pay AG Settlement with Investor Money: Deja Vu

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EDITOR’S NOTE: Adding insult to injury it appears as though the great settlement will fall far short of the tobacco settlement, at a fraction of the nominal cost and with other people’s money used to pay for what should be criminal fines. Investors are increasingly going vocal about supporting principal reduction (or correction), but this is no license to use the money in the pool to finance a $25 billion settlement for wrongdoing by the Banks, not investors.

This settlement is a farce. Securitization was a farce. The mortgages were a farce. The foreclosures were a farce. The auctions were a farce. The credit bids at auction were a farce. And the evictions were a farce. They were and are all based upon upon fraudulent conduct and representations, inducing investors to lose money the moment they bought the bogus mortgage bonds and inducing the  borrowers to lose money the moment they bought the bogus loan products.

Somehow the Banks have kept the narrative going that foreclosures are good and that they were clear out the inventory of homes that are empty and offered for sale. That is a living lie. The foreclosures are false and each additional foreclosure adds to the mounting title problems as well as being a vehicle for shifting and transfer of wealth from those who earned it to those who simply want it.

Sherrod Brown: Banks Shouldn’t Be Able to Pay Foreclosure Fraud Settlement With Investor Money
By: David Dayen	Tweet

I brought up one of my chief problems with the possible foreclosure fraud settlement, the fact that AGs have already tried a settlement that mandated banks to deliver loan modifications to borrowers, and they flat-out didn’t do it. But Sen. Sherrod Brown offers up another problem. It turns out that, under the settlement, the banks could be allowed to pay out penalties using mortgage capital – basically the assets of investors, not anything that would harm the banks themselves. I wrote about this a couple weeks ago:

To be clear, a substantial number of investors would support principal reductions. They’ve come out and said so. They often end up in a better place with them than with foreclosure sales. But they would not have any say in the matter, according to this proposal, and the banks would get off scot-free for their fraudulent activities. The losses in the system would incur to the homeowners and the investors […] not only is the $19-$25 billion figure inadequate to deal with the massive foreclosure crisis or the extent of the fraud perpetrated, but banks would have a way to wriggle out of some of the charges.

It’s good to see Brown pick up on this in his letter to the lead negotiators on the settlement, which I’ve put in full below. In addition to stating that the sum total for the settlement is inadequate, Brown criticizes this creative accounting where the banks wouldn’t even pay the penalty. Here’s an excerpt:

There are reports that the settlement could permit servicers to receive credit for writing down the value of mortgage-backed securities (MBS) owned by investors, without requiring servicers to reduce principal on the mortgages and second liens that they own. Ohio’s public employee pension funds have significant investments in MBS, and therefore have significant interest in the terms of the settlement. The reported settlement terms would allow banks to write down the investments of many of my constituents, without sacrificing anything. And, depending upon the scope, any settlement could potentially preclude these funds from pursuing actions to recoup more than $457 million in losses, allegedly due to credit ratings agencies improperly rating MBS. Such terms are unacceptable.

It’s a nice bit of framing to say that teachers and law enforcement officers and first responders would be penalized for Wall Street malfeasance. But as I’ve said, and as Brown said in this letter, investors often make out better with principal reduction than with a foreclosure sale at a massive loss. That’s not the issue. It’s that a penalty should actually hurt. And this won’t hurt a single servicer; they’ll be settling with someone else’s money. The settlement could rectify this simply by saying that the servicer must pick up the cost of the principal reduction and make the investors whole. But that probably won’t happen.

Brown also mentions that “State attorneys general tried this approach in a 2008 settlement with servicer Countrywide—it did not work.” Indeed! This is the point I’ve been trying to make. The settlement path is well-traveled and always unsatisfactory.

I would expect stakeholders to raise the volume on all of these issues in the next few days. They should stick to a few simple points. This settlement does almost nothing for most homeowners, the release of liability damages the rule of law, we tried this kind of settlement before and the banks just ignored their responsibilities, and the banks want to pay the penalty with someone else’s money.

Tags: bankruptcy, borrower, countrywide, disclosure, firedoglake.com, foreclosure, foreclosure defense, foreclosure offense, foreclosures, fraud, LOAN MODIFICATION, modification, quiet title, rescission, RESPA, securitization, sherrod brown, TILA audit, trustee, WEISBAND
Posted in bubble, Corruption, Eviction, securities fraud |