Giving the banks a pass using money that never existed (Or: why the Mortgage Settlement sucks.)(Government Works For Me?)

The good, the bad, and the warmed-over same-old-stuff about the latest attempt to claim the housing crisis was ended by a settlement that benefits only banks, as recounted to you by me -- the very first lawyer consulted in this article on Madison.com.

The full settlement documents haven't been released yet, so this information comes from the document entitled "Servicing Standards Highlights," available here.

1. It makes banks promise to follow the laws they weren't following already. (Good?). The settlement "highlights" begin with a section in which servicers are said to be required to stop "robo-signing" and actually have people read documents before they sign an affidavit swearing that they read the documents, and requires that affidavits be "accurate."

Really? That's a settlement? Getting the servicers to promise to stop breaking the law? If they weren't inclined to follow the law just because it's the law, will they be inclined to follow it now that some old guy from North Carolina has been appointed the mortgage czar?

Other things the banks and servicers were already required to do but now will be superextrarequired to do include "providing notice of foreclosure status before referring the case to an attorney." Every (noncommercial) mortgage document I've ever seen requires notice of a default. The added proviso of requiring that notice before referring to a lawyer may help reduce legal fees slightly for mortgagors -- but the required length of advance notice is only 14 days. That letter also must "document" the servicer's right to foreclose... but there's no information yet on what will be required as documentation, and people familiar with laws like the Fair Debt Collection Practices Act with it's debt validation requirement can tell you that courts tend to require very little to meet that law's standards. Which is fine because...

2. There's really no enforcement mechanism (Bad!): Loan modification requests must be submitted for "internal review," and there's an appeal process for denied loan modifications -- but the appeal is to the lender who denied the modification in the first place.

I remember when I was kicked off of Facebook for making too many friend requests (how else are you supposed to publicize your new book?) and the email let me know that I could appeal that decision by replying to the email. So I did that, and the next day I got a new email that said "Your appeal was denied." I emailed back for an explanation of why, but I never got an answer.

We really take due process for granted, don't we?

There's also just a 30-day window for appealing, which is a pretty short time-frame to appeal something. You get 45 days, minimum, to appeal a state court case, for example, and that appeal is done by lawyers.

What's missing from the framework, though, is any mention of a private cause of action. That's something that restricted the effectiveness of HAMP and similar laws. The settlement appears headed for "enforcement by the government only" land, a scary country where government employees get no extra budget money or staff to enforce new laws, and are already hard-pressed to enforce the old laws we already have; in some states (such as Wisconsin, where our AG's highest priority is fighting terrorism) law enforcement officials may not be entirely motivated to enforce this settlement.

So Old Man Mortgage Cop will be the only authority enforcing this. Besides the lenders and servicers, of course.

Why do I hear snickering?

3. There'll be some transparency, finally. (Good!). Try finding out, sometime, what the actual restrictions or requirements for a modification are. And let me know if you get that particular pot of gold. One witness testifying in court in a trial of mine -- a witness who worked for the servicer - - couldn't say what the guidelines for modification were. Lenders lawyer up faster than mobsters when you ask them to tell you what the modification guidelines are.

Under the settlement, they'll be required to post the proprietary guidelines they have for modifications, and give you the name of the investor who denied your modification if you didn't qualify for a non-proprietary loan modification. That's helpful, because you'll be able to see if you should qualify for a loan, or contact the person who said you didn't.

...of course, there's no way to enforce that, so if your lender doesn't follow through, and you lose your appeal... to the lender... you'll have to call that guy from North Carolina who's going to be patrolling all this.

(The old man is former NC Banking Commissioner Joseph Smith, who will "monitor" the settlement as Mortgage Czar, or something. Not a single word of anything I've read sets up Smith with anything so much as an office, so he's less powerful than, say, former House Speaker Dennis Hastert.)

4. There are (supposed to be) restrictions on the fees charged by servicers. (Good, except that nobody can enforce them which is kind of my point, here...) The settlement imposes restrictions on all kinds of fees, restrictions ranging from the ridiculous (fees must be bona fide and legally allowable, which is already a legal requirement, so we're back to point one) to the extra-ridiculous (attorney's fees "shall only be for work actually performed and shall not exceed reasonable and customary fees", a restriction that apparently requires servicers to keep their lawyers from being unethical, which would be a great idea except that's what state bars and courts are for, and also, again, nobody's going to be able to enforce that and also, in the vast majority of cases there is nobody who can challenge the fees, for a variety of complicated reasons) to the weirdly-complicated:

C. Late Fees If a homeowner is delinquent on two payments and then makes a full payment that is applied to the current payment, the bank/servicer cannot charge a late fee on the older delinquent amount. Banks/servicers shall not collect late fees: 1) while a loan modification is being considered 2) while borrower is making timely trial payments and 3) while a short sale is being evaluated.

to restrictions on third-party fees: banks can't impose duplicative or unnecessary fees, and cannot impose "property preservation" fees when there's a pending modification application... "unless there is a reasonable basis," so there's your trapdoor escape route.

5. The money really doesn't matter, and probably doesn't exist.

So here's the thing about that $25,000,000,000: Most of it doesn't exist. Only $5,000,000,000 is "hard cash," according to this article, which also points out that the $5,000,000,000 amounts to one percent of the settling bank's market capitalization, so once again, the 99% are getting screwed over. Settling for 1% of what you're worth is easy to do.

The remainder of the $20,000,000,000 is fictional monopoly money. As that article goes on to say:

That’s to come in the form of $3 billion in refinancings and $17 billion in principal reductions, deeds in lieu, short sales, anti-blight measures, etc.

Let me explain that: Banks will pay the $17,000,000,000 in taking homeowners' properties (deeds in lieu and short-sales) and in reducing the amount they are owed (principal reductions.) No money is going to come out of a bank's pocket for any of that. In fact, banks might well make money: A bank that takes a deed-in-lieu gets to issue a 1099C for any debt forgiven (possibly generating taxes owed by the homeowner), and then gets to sell the house, potentially generating a profit, especially where the property appreciates (as the market recovers) or the bank was owed close to or less than the value of the property. (Which is entirely possible; while homeowners are "under water" to a remarkable degree, as Judge Easterbrook on the Seventh Circuit Court of Appeals pointed out to me in oral argument once, an appraisal is just a guess as to the value of property -- so those losses, like previous gains, are only on paper.)

The article goes on to explain:

The banks receive variable credit for these actions, depending on whether these measures are taken for loans owned by the banks or owned by others and serviced by the banks. Basically, it’s full credit if the bank owns the loan, and half credit if the bank merely services the loan. Because of this formulation, the $17 billion in principal reductions, DILs, short sales is anticipated to result in $32 billion in actual relief.

In other words, it is expected that the banks will modify the loans owned by others rather than the loans they themselves own. And when a second lien loan owned by the bank is involved, it only has to be written down pari passu (at the same percentage) as the first lien loan. So from absolute to relative priority, which is a major handout to the big banks, which have large underwater second lien positions.

Hmmm. Something about that sounds... fishy. Almost as though... yep: We're getting screwed again:

Or put differently, $32 billion of the settlement is being financed on the dime of MBS investors such as pension funds, 401(k) plans, insurance companies, and the like—parties that did not themselves engage in any of the wrong-doing covered by the settlement. This shouldn’t be a surprise—the state Attorneys General previously cut a similar deal with Bank of America, which promised to make up for its wrongdoing by modifying loans own by other parties.

Really. Just read that article -- which I wish had existed before Obama lost my vote by letting this deal happen. Which brings us to

6. You can still sue your lender or servicer: While the language isn't finalized yet, the overall plan appears to be to preserve borrowers' claims against their lenders, which is good because borrowers haven't been represented at all in this process, and suing your lender is the only way you're ever going to get anything.