Stalled $25B civil settlement with lenders may conclude this week

Hardworking Americans left holding the bag

During President Obama’s State of the Union address, he noted that leading up to the housing collapse in 2008, regulators looked the other way. “It was wrong. It was irresponsible,” and ultimately, “innocent, hardworking Americans were left holding the bag.”

On the same day, the administration announced a new task force aimed at mortgage crimes as 50-state talks stall after over a year of negotiations with the major financial institutions, Ally Financial, Bank of America, Citigroup, JP Morgan Chase, and Wells Fargo. In response to sharp criticism from the far left for inaction against illegal foreclosures, the administration appointed New York Attorney General, Eric Schneiderman, who is well known for a strong position against fraud, particularly on Wall Street.

The 50-state talks are in the final stages of negotiation, a source close to Reuters said, with the final settlement amount depending upon which states are a part of the final settlement, and which states opt out of the settlement agreement, for instance, California whose Attorney General, Kamala D. Harris, is calling the settlement offer “inadequate,” claiming the agreement does not provide enough relief to distressed homeowners in one of the worst hit states.

The $25 billion settlement aimed to cut mortgage debt for distressed homeowners is said to not cover any mortgages held by Fannie Mae and Freddie Mac, only those held privately by the banks, a point of contention among states. Additionally, $17 billion would be put toward principal reductions for underwater borrowers and $5 billion would be in a reserve account for individual homeowners victimized by bad servicing. Another $3 billion would help homeowners refinance their current mortgages at 5.25 percent. The settlement releases banks from civil claims of errors in servicing and originating.

Still, California’s AG says the terms are not favorable enough. The settlement states that attorneys general would be required to release the banks from any further action related to the improper servicing of loans and claims against originating mortgages, which many attorneys general have called overly broad and vague. Schneiderman and Harris have both protested any interruption of their current investigations.

Other agencies taking their own path

California is not alone in their skepticism, as Massachusetts has a pending lawsuit against the five financial institutions for wrongful foreclosures, noting they will not drop the suit until they resolve illegal foreclosures in their state and receive assurances from the banks that they will help borrowers and give them “consistent treatment,” Attorney General Martha Coakley said in a statement. Coakley worries the multi-state settlement may become a maximum level of assistance lenders will give homeowners, rather than a minimum or baseline for aide.

Arizona Attorney General, Thomas Horne has filed suit against Bank of America for impeding an investigation of its loan modification practices, according to Bloomberg. The bank is allegedly offering mortgage modifications to borrowers who agree to keep the settlements secret and agree to not criticize the bank publicly. Bloomberg reports that the borrower “will remove and delete any online statements regarding this dispute, including, without limitation, postings on Facebook, Twitter and similar websites,” and not make any statements “that defame, disparage or in any way criticize” the bank’s reputation, practices or conduct.

Meanwhile, Colorado Representative Beth McCann has introduced a bill that seeks to remedy the robosignature scandal by requiring all of the proper paperwork including past transfers and property records, prior to judges approving a foreclosure, essentially forcing banks to prove ownership of a loan prior to filing. The bill also requires that prior to ordering a sale at public auction, county judges must certify that the lender has the right to take the house as opposed to the current method of “presumption,” McCann said. While this is not part of the multi-state negotiations, it is one of many states that are not only seeking criminal and civil penalties for banks, but are seeking to hold the courts accountable going forward.

Resolution of multi-state negotiations

Last month, Trulia’s Chief Economist, Dr. Jed Kolko predicted that in 2012, there would be a resolution to the multi-state negotiations, telling AGBeat, “We are likely to see very soon what agreements the attorneys generals will have,” he said, noting that the sooner this happens, the better it is as our nation is suffering from the robosigning hangover.

If a settlement is finally reached, loan modifications as well as foreclosures will begin increasing across the nation, which many will misread as a failure of housing, rather it is more of a clearing up of the foreclosure backlog. Other national efforts similar to the multi-state talks aimed at improving the housing sector include the Obama Administration’s recent announcements of government-sponsored entities’ turning their REOs into rentals, and makeovers for the Home Affordable Mortgage Program alongside the President’s bypassing Congress to issue an executive order, implementing the second phase of the Home Affordable Refinance Program (HARP) which eliminates fees and appraisal process, along with other adjustments.

Attorney General Eric Holder recently stated that the Justice Department has issued civil subpoenas to 11 unnamed financial institutions as part of the new task force’s kickoff. “We are wasting no time in aggressively pursuing any and all leads,” Holder said at a press conference, adding, “you can expect more to follow.”