Tuesday, September 6, 2011


Banks Offered a Deal on Foreclosure Flaws—Will They Bite?

Probably not: they will hold out for the best deal they can get to eliminate as much uncertainty as possible
600 foreclosure REUTERS Rebecca Cook.jpg
These days, it's hard to keep all of the mortgage-related lawsuits against banks straight. Investors are suing banks over bad mortgage-backed securities, claiming that securitization procedures were flawed. The Federal Housing Finance Agency has also filed lawsuits, saying that banks misled Fannie and Freddie about the quality of the mortgages underlying the bonds they purchased. Finally, states are suing big banks over their foreclosure practices, alleging that they didn't follow the law. 

The banks have reportedly been offered a settlement on that last suit by the group of state attorneys general. 

Unfortunately, the deal the states are offering isn't likely to be accepted.

Shahien Nasiripour at the Financial Times reports on the latest progress in the settlement talks. He writes:
Though the counteroffer attempts to release the banks from liability with respect to home repossessions, and explicitly states that the release does not include securitisation claims, the language is broad enough in that it could prevent state officials from bringing securitisation claims in the future should they sign up to the agreement.
This gets a little complicated. The question here is whether the settlement should include only documentation practices related to foreclosure procedures or also banks' broader documentation missteps, which would extend to the securitization process.

Obviously, banks would prefer the latter, while aggressive state attorneys general would prefer to leave the banks with some securitization liability so they could go after them in future lawsuits. Banks will almost certainly demand that any settlement includes the broader option, particularly if the sum of damages they agree to is in the tens of billions of dollars. To justify a settlement of that size, banks will want some assurance that their liability is contained.

But Nasiripour also says that banks are "pressing for immunity from a raft of alleged civil violations and have called the latest proposal a 'non-starter'." It's not clear what is being said here. Do banks actually believe that they can avoid private civil suits brought by investors if the state attorneys general provide them with some broad immunity on securitizations? If such a result is possible, then it isn't hard to understand why banks would be angling for such immunity. Then, additional mortgage security lawsuits brought by investors would be very hard to win -- they would need to prove fraud.

A quick, clean resolution to this mess would be best for everybody. As long as this uncertainty casts a dark shadow over the financial industry, banks will have to remain ultra-conservative in their lending to ensure they have enough padding to accommodate losses that could be coming. And if banks aren't lending as much as they normally would be, then the recovery will just be that much slower.

An even bigger concern here is that investors could become very worried about all of the pending litigation facing the big banks and begin to dump their equity, which could lead to another financial crisis if panic sets in. The FT piece puts the state settlement dollar value between $10 billion and $25 billion. If that doesn't cap losses, then banks could face another $20 billion to $60 billion in losses from the FHFA lawsuits filed last week. Banks could easily see tens of billions dollars more in losses related to lawsuits brought by other investors. These are big numbers that could easily spook investors if banks can't shake these lawsuits.

But according to a Reuters report, a broad-based settlement might not come anytime soon. It quotes a spokesman for Iowa Attorney General Tom Miller, who leads the charge, as saying that the no deal has been offered that includes securitization. If the states and the banks remain that far apart, then a realistic agreement isn't likely near.

Image Credit: REUTERS/Rebecca Cook


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  • JGBHimself 1 hour ago
    Dan, you are absolutely correct, this is complicated.

    What most articles fail to address is what a state AG can deal with, and what they cannot. Take the "securitizations", please.

    One issue is "The packaging". While the AG in Iowa may be a nice guy, he will have some small legal difficulty addressing the "packaging up" of the RE loans in NY and NJ. Note that those two gentle-men are not going along for his ride - one he kicked off the train, and the other ("the son of Biden"?) who dropped himself off.

    The SEC does not have that problem. State claims are distinct, however, from Federal claims. NO state AG can bind the Feds - not the SEC, not Justice, nor whatever agency has banking jurisdiction (pick one) over them under the new, let-me-be-Frank-with-you, law. (Sorry:)

    As interesting is the fact that AG's do NOT usually have any "criminal" jurisdiction. They DO usually have "consumer protection" authority. So, Iowa's AG, et al, probably CAN give away any and all state "consumer protection" litigation - over the MAKING of the origination loan, but nothing after than - in his state.

    What t/HE/y cannot give away is the criminal jurisdiction in NY state or city; or in NJ. Nor can they control the criminal jurisdiction in the counties where the foreclosures took place. The state AG in Fla cannot "settle" the criminal charges for filing the purchased fraudulent and robo-signed docs with the courts. And, ONLY the court can address the "contempt of court" charges.

    A second issue is the "sale" of the investment packages. While states do have some very limited jurisdiction over "securities" sales, they do NOT have any "securities" jurisdiction over Wall Street investment banksters sales of those "packaged RE loans" to national insurance co's, national and state private and public pension plans, or to 401K individual investors.

    The only two state AGs that do, are in NY and NJ. And, the Federal Attorney in those two states controls all Federal litigation - subject to Holder's or Obama's interference, of course. They can be fired, but they cannot be told/forced - to sue or not to sue, that is not the question.

    A third issue is the inexcusable "gaming" by the investment banksters - buying CDO's to pay them when the packaged failed. What they might do with pigs, sheep and horses in Iowa is irrelevant, to what they did do in the back rooms in NY and NJ.  THAT fraud is actionable only in those states - both civilly and criminally - both Federally and being stately.

    Please, also note, Dan, that this does NOT address "The MERS Trust (is that not a joke?) Problem. All of the MERS Trusts are located in NY and NJ. Tis not clear that there is ANY Federal jurisdiction over that "private" activity. Did they cross a state line?

    Please, also note, Dan, that this does NOT address "The Land Title Problem(s)". Land titles are "recorded" in the county where the land is. State AG's have absolutely NO jurisdiction - absent a change in state laws; which AG's cannot make - to change or fix any title related problems.

    Please, forgive me, Dan, for asking once again: "What, precisely, do those AG's think that they are doing?"

    Setting aside, for the moment, whether they can be, or are even capable of , thinking; you are much better at answering "interesting questions" such as this than they are. Dan, don't even try; leave them twisting slowly, slowly twisting in the wind. Maybe they'll simply be blown away.
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