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EDITOR’S COMMENT: Adam Levitin has nailed it again. From politics to practicality to legality.

The Multistate Foreclosure Settlement

posted by Adam Levitin
The New York Times came out with a strong editorial urging state AGs and the Administration not to rush into the proposed multi-state settlement deal. I think it’s worthwhile reviewing what we know about the deal and the arguments for and against it.  Let’s start with the facts that we know.  There aren’t many that are publicly confirmed; the Administration, the AGs leading the multi-state settlement, and the banks very much want to avoid public comment on the deal–they want to present it as a fait accompli.  As a result, there hasn’t been definitive reporting on the contents of the term sheet currently circulating among AGs.  It appears, however, the the deal has the following features.

Some 16 banks that do mortgage servicing will:

contribute a total of $5 billion in cash;
contribute total of mortgage assets with a face value of $20 billion, but a market value considerably lower;
agree to uniform servicing standards.
In exchange, the state and federal authorities signing on would give the banks:

  • a release of all servicing claims;
  • a release of all origination claims, including discriminatory lending claims;
  • a release of all MERS claims against the banks, leaving MERS Inc. as a potential defendant for MERS related issues (MERS Inc. has no financial assets of note.)
  • Perhaps $20B of the money would be used for principal write-downs and for interest rate reductions (via refinancings, which have the added benefit of relieving the banks of rep and warranty problems on the old loan) on the loans owned by these banks, which is less than 10% of the first lien loans in the U.S.

Let’s start with the argument for this deal and then consider why it is wrong.

The defenders of the deal make no bones that it is perfect.  Instead, they make two related arguments for the deal:  Too-Big-to-Fail and Exigency.

  • The Too-Big-to-Fail argument is that the US housing market is too fragile and can’t afford anything upsetting status quo; it is necessary to close some sort of deal for stability’s sake.
  • The Exigency argument is that every day of delay means more foreclosures, so it’s imperative to close the deal fast to get help to homeowners.

So what’s wrong with these arguments?

What’s Wrong with the Too-Big-to-Fail Argument

The housing market is too-big-to-fail. It’s true. The problem is that it has failed, and the proposed multi-state deal doesn’t fix the market. The deal simply isn’t broad enough to put all the housing market concerns to rest. The deal doesn’t buy peace for the banks or stability for the US housing market.  It just blows the government’s last wad on a sideshow issue, robosigning. Consider all the critical issues the settlement does not (and cannot) address:

  • The $700B in negative equity in the US.
  • Clouded title from MERS
  • Clouded title from wrongful foreclosrues
  • Billions in investor putback and securities fraud claims
  • Investor suits against trustee banks
  • Disposal of the REO inventory and the shadow REO inventory
  • Foreclosures
  • If the deal is to help the US housing market on a macro-scale, it has to take a major bite out of negative equity. $20B isn’t even a scratch.

The Too-Big-to-Fail argument, like all TBTF arguments, also grates against the rule of law.  In this case, it elevates housing market stability over the rule of law.  Ignoring banking law like prompt corrective action and source of strength doctrine and perverting section 13 of the Federal Reserve Act are all problematic, but the law being violated there is law designed to protect the banking system.  That means it is at least susceptible to the argument that its violation actually furthers its purpose.

The same cannot be said about robosigning and fair lending and securities laws.  Those laws are not enacting to protect the banking system.  They are enacted to protect the citizens for whose benefit the government suffers the banking system to exist.  Ignoring the rule of law in these contexts deeply undermines the legitimacy of the US legal system.  It starts to look like the only rule of decision is “banks win.”  That’s a recipe for social disaster. But that seems to be the message that is going out now.  If you’re a bank, you get bailed out and then get a get out of jail free card to boot.  If you’re a homeowner you get some empty promises of help, some more empty promises, and then you lose your home.  The fate of an $11 trillion market is hardly trivial, but when compared to the importance of rule of law in society, it looks like 30 silver shekels.

Now I recognize that there is a seeming tension between saying that robosigning is a sideshow issue and that it goes to the heart of the rule of law.  My point is this:  if the goal here is macroeconomic stability, who gives a fig about robosigning and why is the multistate settlement wasting its time on the issue?  But if our goal is to be a society of laws, not banks, then robosigning is a hugely important and symbolic issue.

If one takes the Too-Big-to-Fail argument seriously, then this is simply the wrong settlement.  Instead, we need a global settlement that addresses negative equity and makes the market clear, that clears MERS title, that compensates for wrongful foreclosures and for the harm to society via robosigning.  We need a settlement that can put investor claims to rest too.

Alternative, if this is about robosigning, then there shouldn’t be any settlement, much less any rush. Instead, we should just see prosecutions, fines, and jail time.

What’s Wrong with the Exigency Argument

The exigency argument REALLY galls me. It’s got all the chutzpah of the patricide pleading for mercy because he’s an orphan. Where the fuck was the exigency for the past three years?  The Administration wasted years dicking around with HAMP and HARP programs that were patently flawed from the get-go.  Look at the Congressional Oversight Panels’ original reports of HAMP.  All of the problems were obvious to anyone who wasn’t willfully blind.

And what of the AGs?  It’s not like servicing is a brand new issue to many AGs–some of them have been dealing with servicing since 2003 or so.  If there was some exigency, the AGs inclined to sign onto the settlement should have been putting resources on investigation years ago, and they should have closed this deal months ago.

Now, it is true that every day of delay means more foreclosures.  But rushing a crappy deal doesn’t serve homeowners’ interests.  A quickie deal that gives token relief won’t prevent any foreclosures.  Better to take a little more time and have a serious deal that gives serious relief.

If we want to prevent foreclosures, we need to see something more than a token attack on negative equity.  We need major principal reductions (remember, however, that principal reductions are a GAAP accounting write-down, not hard cash).  We also need serious hands-on involvement with borrowers.  It is time-consuming, and expensive, but these are our neighbors, our friends, our family, our countrymen.  Their fate affects us all.  And the evidence is clear that hands-on involvement works.  It saves money and homes in the end.  A recent HUD door-knocking program for FHA loans cost $17 million and saved taxpayers $1 billion. Fortunately HUD insisted on the program, because the bank that services those loans had no interest in it.

The two arguments for the multi-state deal, Too-Big-to-Fail and Exigency don’t hold any water.  But pointing out the flaws in these arguments are not an affirmative argument against the deal. So here they are:

The Multi-State Deal Gives Too Much Away.

The settling AGs and federal government would be giving away claims that they have not investigated and therefore cannot possibly value, something the NY and DE AGs noted in a recent op-ed.  The Huffington Post has previously reported that the AGs have done virtually no investigation of robosigning (excluding now NY, DE, and NV).  And there has been even less investigation of origination claims.  Many of the origination claims have statutes of limitations are will expire soon, but these are serious fraud and civil rights claims.  They are much, much more serious issues than the mass perjury of robosigning in terms of harms to individuals.

The Multi-State Deal Accomplishes Too Little.

If the goal of the settlement is to bring stability to the housing market, this won’t do it.  Consider all the issues left unresolved.  Investor claims, including putbacks and trustee suits are left untouched.  Homeowner claims for wrongful foreclosure and wrongful denial of modifications are left untouched.  Homeowner claims for discriminatory lending are left untouched.  Servicing standards will, hopefully, reduce servicer abuses, but that requires real enforcement.  It’s hard to imagine the AGs who sign this deal ever cracking the whip on compliance.  We know the OCC won’t.  And the CFPB can’t yet.  Critically, NOTHING in the settlement will stop the unending parade of foreclosures or get rid of the $700 billion in negative equity that is dragging down the US economy.  Indeed, it’s laughable to think that $25 billion of nominal assets would possibly cover these liabilities.

To put hard numbers on this, what does $20 billion buy?  At $65,000 negative equity per mortgage, it doesn’t buy very much.  It puts 307,692 homeowners back to zero equity. That less than 3% of the 10.9 million homeowners with negative equity. Or what about in terms of interest rate reductions over 5 years?  Let’s assume an average mortgage balance of $150,000.  That means a 1% (100bps) reduction in the interest rate on that mortgage would be $1,500.  How many homeowners does $25 billion over 5 years help?  $20b/$1500/5=2.6 million.  So $20 billion gets 2.6 billion homeowners a 1% (100bp) reduction in their interest rate.  These homeowners save $125/month for 5 years.  At the end of which the homeowner will still have deep negative equity. And it would still be helping less than a quarter of underwater homeowners.

Here’s my proposal:  let’s just call this HAMP 2.0.  It’s like a sequel to a bad movie.  We know how it is going to end. Let’s just stop wasting everyone’s time here. If this is the best the Administration can do, we might as well adopt the Mitt Romney foreclosure plan–stand aside and let the system do its work. (Gosh, that sounds an awful lot like the Geithner non-plan…) Even if one thinks of the settlement as a one-two punch with HARP 2.0, it’s a wishful featherweight in a heavyweight bout.

Here’s the question you should be asking the AGs and the Administration:  is this going to matter on the macro level?  And if not, is it doing justice?  A settlement better be doing one or the other, if not both. If it’s neither, all this is a little gravy to a handful of random homeowners and some unconvincing political C.Y.A.

The Administration Only Gets One More Bite at the Apple

A final thought.  Yves Smith made a trenchant political observation at the AmeriCatalyst mortgage conference yesterday:  the Administration only gets one more bite at the apple in terms of getting the housing market right. If the Administration flubs this, as they have consistently flubbed the housing issue, by going small bore and trying to sweep problems under the rug, rather than addressing them, there are serious political implications. It doesn’t take a lot to connect the dots between the multistate settlement and the deep national demand for accountability for the financial crisis that is manifesting itself in OWS and the need to take real action to deal with the housing market problems that are at the core of the US’s economic woes.

I’m not sure where the Administration’s political team is on this one, but imho, it seems like they are letting Treasury drive the 2012 campaign off the cliff via this settlement that will confirm the perception that the Administration works for Wall Street, not Main Street. And if you think I’m nuts on this, just read the first line of the NYT editorial:  “The banks want California, and the Obama administration hopes they can get it.”  In a country craving accountability for the financial crisis and its aftermath, being cozy with the banks is the wrong place to be when approaching a general election.

November 9, 2011 at 10:40 PM in Financial Institutions, Mortgage Debt & Home Equity, Too Big to Fail (TBTF)–

10 Responses

  1. I need some stats pls anybody—-4.5 million foreclosures right?
    11 million not foreclosed but underwater–right?
    how many homes in population–ie what % are the above

  2. @ Enraged.
    None of those. I’m a regular. I had a brother incarcerated. He asked met to learn some things about Redemption. I bought the manual and it’s been eye opening ever sense.
    I ended up studying the Law of One and came across a deep something on the internet called Hidden Hand. That info was hard to digest, I wanted to flat out ignore it but deep down I knew there was some truth, I just didn’t want to admit where the truth was in what was revealed.

    I read their Maxims..that’s got the Latin in them this site is where I’ve quoted most but there is another like I quote from too, I’ll list it second.

    Thanks for asking.

    I remove the front of the links because sometimes my responses are held for moderation.

    The words I use to sign off a post I use as evidence of my status and standing of someone needs a signature in a transaction, now. I have learned so much about the world I live in and who I am.

    Knowing what I know, now, I find life and it’s challenges enjoyable. I actually watch how I respond to what is going on whereas at first I kind of ebbed and flowed with attacks and felt victimized.

    Not anymore. Sometimes the one with the upper hand is the loser and just hasn’t figured it out yet.

    This of most movies where someone is getting the better of another and before it’s over, you see who the true victor is.

    Life imitates art.

    In the mortgage mess, someone is getting the better of some and they call ‘uncle’ and go over to the other side. They aren’t treated better for giving in. The other side knows what they did, but they also know what we should have done, and giving in, relinquishing our power, and paying the tax doesn’t make one a winner in their game.

    Everything is specific. Things happen for a reason.

    It’s not about winning or losing, it’s how you play the game.

    Sometimes it not about winning, it’s about making sure you aren’t the loser.

    Having something stolen from you is different from having ‘lost’ it as the OCC puts in their review form.

    I’ll post this answer in a recent post also, in case you don’t get e-mail responses.

    I don’t receive e-mail responses to the posts here.

    Trespass Unwanted, corporeal, life, free, jure divino, allodial.

  3. Bankruptcy Trustee’s law firm is prejudiced against pro se homeowner–

  4. @Trespass

    Got a dumb question…
    What were you, before you became one of us, polarized on frickin’ banks, mortgages, securitization and the undoing of a great country?

    A latin teacher? A seminarist? I’m just curious. It’s been ages since I read any latin (8 years of it. The nuns taught us well) and I kind of like that…


    “Deutsche is the trustee to the trust —-and the trust according to the TILA Amendment and Fed Reserve Opinion — is not the creditor. Have them respond to 15 USC 1601 (g) and Federal Reserve Opinion — 12 CFR Part 226 — refer to Section by Section Analysis. The definition of “creditor” has been replaced by the TILA Amendment and Fed Res. Opinion (now RULE to the law). Ask how are they cooperating with the new law. Fed Res Opinion —it has been codified as RULE to the law. Read the Section by Section Analysis — very carefully. You must read this stuff — to fight — very difficult as it is complicated. Go through it — carefully. Cite the law — in your letter to them. …above cites here.

    Then, tell them you require all documents including Mortgage Loan Purchase Agreement and Mortgage Schedule to confirm that your loan even went into any Trust – to begin with. Request all information as to how any foreclosure proceedings will be reported to the Internal Revenue Service. Request all documentation that all payments have been advanced to the trust — for which Deutsche claims to be the trustee.

    If they do not cooperate — you will pursue in BK — to force the identification of the current creditor. Right now, INFORM that they are in violation of federal law —- the TILA Amendment — and as codified by the Federal Reserve Opinion — as to the identification and contact information of the current creditor. DO IN WRITING. Request from them where you send the correspondence. IN WRITING.

    These guys — will endlessly — argue with you — that is their business to do so. DO NOT BUY IT — and come back — with the law. State — that they are in violation of federal law — quote (above) —– get it in writing to them. DO NOT — rely on phone conversations.”

  6. @Marie, I like that.
    They are still corrupt. Nothing has changed. Even the investigation and/or settlement is stalled.
    Something else needs to happen and I’ll wait patiently for that something else.
    By the way, on the internet, only the real owner of the property has the Warranty Deed filed in their name. Fannie May was given a Special Warranty Deed, but that doesn’t override the original Warranty Deed. There was a video that said if we just Acknowledge our Warranty Deed we would have ‘accepted the transfer of title for our property’ and we could then evict the people who knew their supposed purchase our homes was ‘as is’ ‘no warranty’.
    They can file a claim with the title company for allowing them to purchase a home with no clear title, but I wonder if somehow they signed away those rights and ‘took a chance’ on someone else’s misfortune. (Man we really need to look in a mirror at ourselves and how we allow others to be treated as long as -they ain’t us-).

    Anyway, if the video ever disappears, there may be some examples of an acknowledgment in the Acknowledgment section of the County Clerk Records. Most counties have those Real Estate records online.

    Accept the deed be the owner

    I want to be made whole. I’m not going to hide what they’ve done.
    I spent money I worked with my life energy for, and it was taken away. I can see that video as another way to get people to cover over what was done because how can you complain something was taken if you got it back? The only way to be made whole is to go after them, after you got it back. That’s costly.

    As long as what they’ve done is out there, they have to come through. The more people who create new contracts, the better it is for me to get a bigger chunk of that $20 Billion. Every hour of my life I was dispossessed from where I was to where I am is worth hmm, a guess, at $67,000 an hour and I’ve been dispossesed for over a year? I wonder how much they made off securitizations…as absurd as what I just typed sounded, that $500,000 mortgage was worth $91 million dollars…so it doesn’t sound so absurd when you really break down how they securitized a mortgage. I wonder how going from $500,000 to $91 million breaks down by the hour in the few years of securitization. I know the federal deficit is pretty high by the hour in interest payments being made.

    There were living men and women behind the master plan for this theft. As one article mentioned with the recent Citibank/SEC settlement, there is no way this can go on unless everyone is on board.

    My life energy is irreplaceable, valuable, and priceless, but if someone thinks they can interfere with my soul contract with impunity…well I say no you ca-an’t.

    The clock is ticking! It’ll be nice to be made whole by payment in a lawful currency backed by commodities and precious metals.

    What was done needs to be undone.

    This is why I tread lightly with all these side offers that contain the word ‘may’ a lot. ‘May’ does not mean ‘will’. They can prey on the ignorance of some but not all have a lack of knowledge.

    Conventio vincit legem.
    The agreement of the parties overcomes or prevails against the law. Story, Ag. See Dig. 16, 3, 1, 6.

    That’s why people need to be careful what they agree to, any agreement that they are okay with an offer is a contract.
    Why, it’s offer/acceptance you didn’t accept unless there was a meeting of the minds, and whatever they offered is the consideration you accepted.

    Even if later they are found to have violated the law, it will only be for the outstanding fraud and not all the fraud. Some agreements gets rid of the accusations. Take the Citibank settlement.
    Look at how there is no admission of wrongdoing, yet an agreement to settle. A valid contract according to law.

    No law can impair the obligations of contracts, but no one can force a contract between parties if there is no meeting of the minds.

    The theft is important because it is a theft. Thus the investigation and negotiations for settlement.

    Read this article and see how an OCC settlement can go the same way. No one has a contract with you. The OCC has a contract with the banks, of which you don’t know the terms. Their goal is to satisfy that agreement they made with the banks as part of the review, that you don’t know about. You go in and think they are representing your interest and there is no contract between you and the OCC to say they represent your interests, well, we are all adults. Only what you agree to is what you’ll get.

    you should read this. How many times did they do wrong and didn’t have to admit a thing? Look at the settlement! The investors were not represented and probably signed on for the SEC to investigate and handle their grievance. Depending on how much an investor knows about contracts some will get less than others in this ‘supposed’ agreement.

    You’d do yourself fine to read that article. Especially where we are today in this dog and pony show.

    Trespass Unwanted, life, corporeal, state, free, allodial, in jure proprio, jure divino

  7. Hi Neil,

    I’m happy you like my blog post. Could you clarify please that this post was made on, not on livinglies. I am fine with reposting (we do not have a revenue model for creditslips), as long as there is acknowledgement of the original source. Thank you.

    Adam Levitin

  8. Trespass

    You are so right. The DOT controls but has been ignored and we look to these totally compromised, corrupt government agencies to fix the scam. Won’t happen

  9. Professor Levitin for President. And now, not in Nov 2012

  10. Why the OCC settlement is not an ‘option’ for me.
    Deed of trust names the trustee.
    Lender (on the Deed of Trust) must appoint a substitute trustee.

    If the sale is conducted by anyone other than the trustee named in the deed of trust ‘ or ‘ a properly appointed substitute trustee, the sale is void.


    Trustee and Substitute Trustee.

    The deed of trust will have named a trustee. That individual may not be available to actually conduct the foreclosure, however, and the lender must appoint a substitute trustee.
    Such appointment must be made in strict compliance with the deed of trust terms. Failure to do so will make the attempted appointment invalid. Johnson v. Koenig, 353 S.W.2d 478 (Tex. Civ. App. — Austin
    1962, writ ref’d n.r.e.). The deed of trust may also require that any substitute trustee appointment be recorded. Check for such requirements in the deed of trust and whether the lender has complied therewith.
    All such requirements regarding the substitute trustee must be met before posting. If the sale is conducted by anyone other than the trustee named in the deed of trust or a properly appointed substitute trustee, the sale is void.

    Pretender lenders had everything planned out, except the training of the law firms (foreclosure mills) they hired, especially in non-judicial states.

    It was hard enough to find an attorney that knew real estate law to save a home from foreclosure, so these firms had no stringent procedures for doing the banks bidding.

    Now they are taking their time, retrieving documents, making sure paperwork is in order before proceeding, but they have two years of foreclosures where they botched it literally and are in deep doo-doo.

    When the 50 state AGs started the investigation (an you know they don’t investigate nothing if there is no wrongdoing), there were press releases issued by some. Texas AG press release said the banks violated the state constitution, property law, contract law, trust law, it was beautiful. —————————————————————————-
    We are aware that Bank of America services a significant number of mortgages in the State of Texas. It is likely that affidavits and other documents, such as assignments of deeds of trust and appointments of substitute trustees, with the issued described, above may have been used in connection with foreclosures in the State of Texas. Regardless of whether the foreclosure was a nonjudicial one or a judicial one in connection with a home equity loan, home equity line of credit or reverse mortgage, if any of the practices described above were utilized in establishing Bank of America’s authority to conduct the sale or obtain a court order for a sale, such use would have been in a violation of Section 17.46(a) of the Texas Deceptive Trade Practices Act; Section 392.304, Texas Debt Collections Act; Section 37.02, Texas Penal Code; Section 12.001, Texas Property Code; Section 406.009, Texas Government Code; Texas Constitution Article 16, Section 50; and/or Rule 736(1), Texas Rules of Civil Procedure, and the document and therefore the foreclosure sale would have been invalid.


    There is more documented, it’s a great read if you digest what is alleged. The banks ignored this. They continued to foreclose, and continued to evict, and sold foreclosed homes even though this order told them not to.

    It was issued in October, I had been evicted from my property by the, but the following April they sold it, stuck it under Quicken Loans with is attached to MERS because I saw the documents on file for the supposed new owner.

    The violations and injuries stand until the homeowner enters a new contract.

    People jump to save their home with a mod with a bank who was not their lender on the original mortgage. The only reason I can see OCC would want to have those people between 2009 and 2010 who got a modification, is there must be a missing piece they need a signature for, and this review will give them that missing piece.

    There are pending foreclosures. I don’t know why they won’t just forgive the debt.

    The theft of my home was botched so bad, that I kept track of everything and since I know the sale is void, I know I’m not dealing with any time frame for being made whole again. The bank can drag their feet, but someone is going to have to undo what was done.

    I am a peaceful inhabitant. I have a right to be here.
    Thou shalt not steal.
    Someone waged a financial war on me with no right to do so.
    I will be made whole.
    The meek will inherit the earth.

    Trespass Unwanted, life, corporeal, State, allodial, jure divino, in jure proprio

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