The U.S. government surrendered. That's the only conclusion to draw from reports that federal financial regulators have abandoned state legal officials negotiating a foreclosure settlement with Wall Street banks and instead struck their own deal.
All 50 state attorneys general and multiple federal agencies had joined forces last year to hammer out a pact with big mortgage servicers. Among the terms under discussion was making banks reduce struggling homeowners' mortgage principal, accept loan-servicing standards, and pay financial penalties for "robo-signing" and related foreclosure abuses.
That looks to be dead. Instead, the Federal Reserve, Office of the Comptroller of the Currency, FDIC and other bank regulators have started signing individual "consent agreements" with Bank of America (BAC), Wells Fargo (WFC) and other large servicers.
Legal experts who have reviewed the government's agreement (which you can review here) describe it as exceptionally weak. Banks aren't forced to cut loan balances or pay a fine. They also don't have to admit any wrongdoing in connection with the robo-signing scandal. Rather, banks are simply required to tighten their internal loan modification and foreclosure processes. Said Georgetown University law professor Adam Levitin, a noted housing finance expert:
The bank regulators are going to provide cover for the banks by pretending to discipline them very hard, but not really doing anything. The public will see a stern [cease-and-desist] order, but there won't be any action beyond that. It's as if the regulators are saying so all the neighbors can hear, "Banky, you've been a bad boy! Come inside the house right now because I'm going to give you a spanking!" And then once the door to the house closes, the instead of a spanking, there's a snuggle. But the neighbors are none the wiser.Feds to states: You're on your own
The agreement does require loan servicers to hire independent consultants to examine some foreclosures that occurred between 2009 and 2010. But it doesn't specify what foreclosures are eligible for review, meaning that is left up to servicers. It also puts few limits on the third-parties banks may hire to conduct these reviews. Presumably, such experts won't be paid based on how many foreclosures they red-flag.
Iowa Attorney General Thomas Miller, who has led the states' robo-signing investigation, told Bloomberg he's "disappointed" that the feds are going their own way. He should be. By laying down such minimal requirements and forgoing all punishment, the consent agreement removes whatever negotiating leverage the states may have had. Any real help for homeowners or serious punishment for financial firms is off the table.
The banks will resist further pressure to offer mortgage relief by pointing to the settlement with bank regulators. The AGs, some of whom had begun to think twice about pushing for a strong agreement, must now decide whether to effectively sign on to the federal agreement or pursue action on their own. Given the obstacles in fighting Wall Street and Uncle Sam, most will relent.
What the robo-signing scandal is really about
No doubt some people will continue to dismiss the robo-signing fiasco as one big clerical error by the financial industry. They will argue that ramrodding illegal foreclosures through the courts is justified by the need to stabilize the housing market. They will say that losing your home is proof-positive of reckless borrowing. And they will claim that helping some struggling homeowners is unfair to those who, by luck, circumstance or hard work, managed to stay out of trouble.
None of this is persuasive. But let's also remember what's at stake here. This isn't only about preventing unnecessary foreclosures, although as an ethical and economic matter that's critical. In a larger sense it's about preserving the rule of law.
Robo-signing isn't some kind of administrative misdemeanor. It amounts to a massive case of fraud and willful obstruction of justice. Legal documents were forged. Banks wrongly, deliberately kicked numerous homeowners to the curb. People were royally screwed. This is about some of this country's most powerful institutions deciding to play by their own rules.
And getting away with it.
- Feds: How About a Foreclosure Settlement? Banks: F.U.
- Feds to Homeowners: It's Your Own Damn Fault Our Foreclosure Program Failed
- Immoral Hazard: How Helping Homeowners Avoid Foreclosure is Good for Everyone
- House Poor: How Foreclosures Cost Taxpayers a Bundle
- Foreclosure Express: Why the Feds Let Banks Get Away With Murder