Friday, January 27, 2012

Mortgage Settlement News: Is it Good?

There was a major development in the mortgage settlement talks earlier this week:

WASHINGTON -- During his State of the Union address tonight, President Obama will announce the creation of a special unit to investigate misconduct and illegalities that contributed to both the financial collapse and the mortgage crisis.

The office, part of a new Unit on Mortgage Origination and Securitization Abuses, will be chaired by Eric Schneiderman, the New York attorney general, according to a White House official.

Schneiderman is an increasingly beloved figure among progressives for his criticism of a proposed settlement between the 50 state attorneys general and the five largest banks. His presence atop this new special unit could give it immediate legitimacy among those who have criticized the president for being too hesitant in going after the banks and resolving the mortgage crisis. He will be in attendance at Tuesday night's State of the Union address

"The goal of this joint investigation will be threefold: to hold accountable any institutions that violated the law; to compensate victims and help provide relief for homeowners struggling from the collapse of the housing market, caused in part by this wrongdoing; and to help us finally turn the page on this destructive period in our nation’s history," reads a White House document outlining the objectives.

"This is a big achievement and something the entire progressive advocacy community wanted [with respect to] housing policy," added the White House official.

The unit will not supersede the efforts already underway by the Department of Justice. Instead, it will operate as part of the president's Financial Fraud Enforcement Task Force. In addition to Schneiderman, the unit will be co-chaired by Lanny Breuer, assistant attorney general at the Criminal Division of the Department of Justice, Robert Khuzami, director of enforcement at the SEC; John Walsh, a U.S. attorney in Colorado, and Tony West, assistant attorney general in the Civil Division at DOJ.

News of the new mortgage unit comes amidst reports of a potential settlement between the five biggest banks, the Obama administration and the state attorneys general. Under the deal, banks would agree to follow existing laws against abusive foreclosures and set aside $25 billion to both help homeowners who are underwater on their homes or who were wrongfully foreclosed. The agreement has been in the works for months, with disagreements over the level of legal immunity granted to banks accused of wrongdoing, and the scope of violations covered by the deal.

Critics of the pending settlement have argued that the president should couple the financial relief for homeowners with a robust law enforcement effort targeting lawbreaking by big banks. Schneiderman has been among the settlement's most prominent critics for months, insisting that a deal not release bankers from criminal charges, and urging AGs to look into violations outside the foreclosure process, including issuing fraudulent loans and improprieties in the packaging of those loans into complex bonds that would become toxic assets.
My initial reaction was not a positive one. The fact that Schneiderman was brought in by the White House insantly worried me, because it appeared that he had been co-opted to come on board with a settlement, of which he had been one of the biggest detractors. As recently as a month ago, the White House had been trying every pressure tactic in the book to force Schneiderman to sign on to the settlement, and now suddently they're giving him more power? Something doesn't seem right. David Dayen, the reported I trust the most on this subject, seemed to agree.

While I still have worries and doubts, I've read things in the last two days that have changed my mind about how terrible I thought this commission was. Dayen:
Schneiderman, according to sources, still has space to object to the settlement while agreeing to join the financial fraud panel. In negotiations, HUD Secretary Shaun Donovan and the Administration tried to link the two, but Schneiderman would not comply. And he still opposes the settlement in its current form. “The language we’ve seen would release claims we are not prepared to release,” one source said.

Schneiderman may look at a settlement if the release is incredibly narrow, more narrow than it is right now, and it doesn’t hinder the investigations being done at the state and federal level (the release has narrowed since the initial offer in August). There’s also the question of enforcement, and whether the settlement will have an actual independent monitor, with real fines for violations. You can see by Schneiderman’s words yesterday that he is making a distinction between pre-crisis conduct and post-crisis conduct, and he simply feels the banks have more exposure on the pre-crisis conduct, which would be the focus of the state/federal probe.

I always thought the point of focusing on robo-signing was that the banks, through depositions and court documents, were dead to rights on those issues (not to mention that they were more recent, and so statutes of limitations didn’t come into play), and that they could be leveraged into a comprehensive deal that gives homeowners what they need, with sufficient penalties on the banks. What Schneiderman seems to be saying here is that, no, it’s the pre-crisis stuff on securitization where the banks REALLY have the exposure, and going after them on that will create the desperation moment where the banks agree to whatever terms are necessary for homeowners.

I’m not sure I totally believe that, and I think giving up the more recent fraud – which is ongoing – is very risky. So is going into the lion’s den and partnering with the likes of Tony West and Robert Khuzami and Lanny Breuer, when their conduct as regulators and investigators speaks for itself.

Here’s what my sources say about that aspect of things. The panel was attached to the existing financial fraud task force because it didn’t require a new executive order. It gives the New York AG new resources that he can take to his state to pursue claims under the Martin Act. In other words, if things are found out by the investigation, and it fits better under New York statutes rather than the federal ones, Schneiderman has that flexibility. If the state statutes on mortgage origination, for example, have run out, the federal origination statutes can be employed. In a best-case scenario, this investigation puts a lot of people on the case, and gives Schneiderman every tool to operate in that context. There may even be other AGs eventually named as part of this panel. I am also told that Schneiderman has some suits ready to release in the coming weeks.

What about a worst-case scenario, though? What if this is, as I suspect, an attempt by the Administration to ring-fence Schneiderman, to slow-walk these cases, and to bottle up any accountability in committee? Sources, who preferred to speak off the record, made this commitment: if the investigation is going in that direction, the New York AG will walk away. And not only that, he will walk away in the most showy, public manner possible, letting everyone know who was responsible for the lack of prosecutions. At that point, Schneiderman can go back and use his own resources and statutes, which while perhaps less flexible than what a state-federal partnership can do, are nonetheless potent.
While I'm still nervous about how this plays out, the fact that Schneiderman can still walk out on the settlement is a huge positive. Additionally, if he's played the system as a way to leverage more resources from an Obama Administration who genuinely fears his actions, then he's bolder than I thought.

I'm still not sure if this commission makes us better or worse off, but it doesn't appear as bad as I initially feared. If you care about the economy, the cases against the banks and the bullshit settlement to shield them from accountability are probably the most important things you should be following over the next 2 years. After cramdown's failure, congress appears to be too fucked up to do anything about the housing/foreclosure crisis, and short of the Obama Administration doing something major from the executive branch (I'm not holding my breath), this is our best hope to fix the housing market and restructure the banking system. Those two things (housing market being fucked, and the too big to fail banks being insolvent) also happen to be the biggest factors holding us back from an actual recovery, so the importance of getting this right couldn't be higher.

Let's just hope Schneiderman knows what he's doing, cause we basically have to go all in with him, whether we like it or not.

1 comment:

  1. my initial reaction to the announcement in the SOTU was that by "investigate" he really meant "grant blanket immunity to the banks for pennies on the dollar of what they should be paying, then declare victory"
    Schneiderman running the thing at least makes that scenario seem a bit less likely, but I'll admit that it IS troubling that they could be using this to pull him away from the settlement negotiations.