Banks to Pay AG Settlement with Investor Money: Deja Vu


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EDITOR’S NOTE: Adding insult to injury it appears as though the great settlement will fall far short of the tobacco settlement, at a fraction of the nominal cost and with other people’s money used to pay for what should be criminal fines. Investors are increasingly going vocal about supporting principal reduction (or correction), but this is no license to use the money in the pool to finance a $25 billion settlement for wrongdoing by the Banks, not investors.

This settlement is a farce. Securitization was a farce. The mortgages were a farce. The foreclosures were a farce. The auctions were a farce. The credit bids at auction were a farce. And the evictions were a farce. They were and are all based upon upon fraudulent conduct and representations, inducing investors to lose money the moment they bought the bogus mortgage bonds and inducing the  borrowers to lose money the moment they bought the bogus loan products.

Somehow the Banks have kept the narrative going that foreclosures are good and that they were clear out the inventory of homes that are empty and offered for sale. That is a living lie. The foreclosures are false and each additional foreclosure adds to the mounting title problems as well as being a vehicle for shifting and transfer of wealth from those who earned it to those who simply want it.

Sherrod Brown: Banks Shouldn’t Be Able to Pay Foreclosure Fraud Settlement With Investor Money

By: David Dayen

I brought up one of my chief problems with the possible foreclosure fraud settlement, the fact that AGs have already tried a settlement that mandated banks to deliver loan modifications to borrowers, and they flat-out didn’t do it. But Sen. Sherrod Brown offers up another problem. It turns out that, under the settlement, the banks could be allowed to pay out penalties using mortgage capital – basically the assets of investors, not anything that would harm the banks themselves. I wrote about this a couple weeks ago:

To be clear, a substantial number of investors would support principal reductions. They’ve come out and said so. They often end up in a better place with them than with foreclosure sales. But they would not have any say in the matter, according to this proposal, and the banks would get off scot-free for their fraudulent activities. The losses in the system would incur to the homeowners and the investors […] not only is the $19-$25 billion figure inadequate to deal with the massive foreclosure crisis or the extent of the fraud perpetrated, but banks would have a way to wriggle out of some of the charges.

It’s good to see Brown pick up on this in his letter to the lead negotiators on the settlement, which I’ve put in full below. In addition to stating that the sum total for the settlement is inadequate, Brown criticizes this creative accounting where the banks wouldn’t even pay the penalty. Here’s an excerpt:

There are reports that the settlement could permit servicers to receive credit for writing down the value of mortgage-backed securities (MBS) owned by investors, without requiring servicers to reduce principal on the mortgages and second liens that they own. Ohio’s public employee pension funds have significant investments in MBS, and therefore have significant interest in the terms of the settlement. The reported settlement terms would allow banks to write down the investments of many of my constituents, without sacrificing anything. And, depending upon the scope, any settlement could potentially preclude these funds from pursuing actions to recoup more than $457 million in losses, allegedly due to credit ratings agencies improperly rating MBS. Such terms are unacceptable.

It’s a nice bit of framing to say that teachers and law enforcement officers and first responders would be penalized for Wall Street malfeasance. But as I’ve said, and as Brown said in this letter, investors often make out better with principal reduction than with a foreclosure sale at a massive loss. That’s not the issue. It’s that a penalty should actually hurt. And this won’t hurt a single servicer; they’ll be settling with someone else’s money. The settlement could rectify this simply by saying that the servicer must pick up the cost of the principal reduction and make the investors whole. But that probably won’t happen.

Brown also mentions that “State attorneys general tried this approach in a 2008 settlement with servicer Countrywide—it did not work.” Indeed! This is the point I’ve been trying to make. The settlement path is well-traveled and always unsatisfactory.

I would expect stakeholders to raise the volume on all of these issues in the next few days. They should stick to a few simple points. This settlement does almost nothing for most homeowners, the release of liability damages the rule of law, we tried this kind of settlement before and the banks just ignored their responsibilities, and the banks want to pay the penalty with someone else’s money.

6 Responses

  1. Haven’t I always stated that eventually Banks would turn on Public Pensions?

    And as is shown in this article, the IDENTITY of ‘INVESTORS’ is in fact STATE and FEDERAL EMPLOYEES and THEIR PENSION FUNDS. It’s only a matter of time before enough people realize (or the banks put it out there themselves) that THIS IS A CONFLICT OF INTEREST!

    If the Judge ruling on your case, the Sheriff Dept. serving your eviction, the DA’s Office listening to your complaint and the Police Dept. responding to your compaint has the CHOICE BETWEEN DOING THE RIGHT THING AND ENFORCING THE LAW AND UPHOLDING YOUR RIGHTS, OR LETTING ALL THE CRIME JUST SLIP ON BY AND THINKING THAT IT WILL ENSURE THEM A MORE COMFORTABLE AND EARLIER RETIREMENT, WHICH ONE DO YOU THINK THEY WILL CHOOSE !?!?!


    OBAMA PRESSURING AGs to settle so he can win re-election.

    when you dial this number, listen, press 6, listen then press 7 and you can leave a message

  3. Thanks NC Readers! Tom Miller Says No Mortgage Deal Imminent

    Readers no doubt saw both on this site and elsewhere that the Obama Administration was cranking the heat up on the mortgage settlements talks, and was apparently planning to go ahead with the Federal regulators inking a pact, on the assumption they’d get enough state attorneys general to provide at least a modest fig leaf. The assumption also seemed to be that the Administration could enlist Congressmen to pressure some of the current and rumored dissident Democrat AGs to fold and join the Obama camp.

    That effort appears to have gotten such a large repudiation today, when the settlement terms were presented in Chicago to Democratic AGs and discussed over the phone with the Republican AGs that Tom Miller who is leading the attorney general negotiations has done a major climbdown:

    January 23, 2012


    (CHICAGO, Illinois) State Attorneys General from both parties, along with our federal partners, are today discussing the details of the progress we have made so far in settlement negotiations, including the terms we must still resolve. We have not yet reached an agreement with the nation’s five largest servicers, and we won’t reach a settlement any time this week.

    What is intriguing here is the Miller camp claim (effectively) that there never had been a deal on the table. That contradicts the story in the Financial Times last week and a report I had gotten from an investor with good contacts on the Republican side. Since Miller has repeatedly played fast and loose with the truth, I’m not sure I believe the message implied here, that they are still moving forward on a deal, just more slowly than they had messaged, as opposed to a deal on the table came unglued and they need to regroup in a more serious way.

    We will hopefully get more intelligence (or maybe just better attempts at disinformation) but I read this as an indication the deal agreed between the Federal regulators and the biggest servicers somehow came unglued. Possibilities include: someone exposed a definitional/drafting flaw (the Feds thought it meant one thing and the banks thought it meant another); someone (one of the banks?) retraded the deal; the Administration has assumed it could rely on a certain minimum number of AGs to fall in line and they regarded that minimum number as essential, and the pow wow today exposed that they are below that level.

    Regardless, this is positive news, since it vindicates the courageous attorneys general who are pressing forward with investigations and prosecutions rather than trying to cover up pervasive fraud by servicers. Thanks so much to NC readers for your calls to attorneys general. You helped play a role in telling the Administration that the public will not support coverups when enforcement and reform are what is really needed.

  4. So let me understand this we are going to get paid with our own money ?Why couldn’t we just have done that in the first place and not paid the banks saved ourselves some money not been foreclosed on and none of this happened to all of us,and instead thier going to pay us back with money they borrowed from us to begin with .Well alrighty then.

  5. I’m confused, as usual. Weren’t there purposefully intermediaries in this sec deal, the A to D, for the purpose of bankruptcy remoteness (which I admit I don’t really understand)?
    If bk remote, why then not use-my-money-to-settle-your-fraud remote?

  6. WOW! SHOULD I BE SURPRIZED? NO! BUT WOW! HOW BLANTANTLY CORRUPT. ALL OF THEM INCLUDING THE AGS IF THEY MAKE THIS SETTLEMENT. I am not even an investor, I would be so fit to be tied if I was. I am already angry as hell being a homeowner screwed. I sure hope these investors use what money they have left to fight these SOB’s. I am sure there are more investors to vote than banksters. Any politician that supports this “[ANY]” THEY WILL BE OUT OF OFFICE SOON! Any help we can give the investors we need to give them declarations and what ever to help them. We need to help each other and everyone taken by these criminal enterprizes. I will be shocked beyond shocked if the AG’s go along with this. If Obama passes it as a dictator he will be done in politics too. The people out number the one percent and a lot of them are investors. Why should any investor trust a bank again? This would make a healthy enviorment wouldnt it. (meant to be stated as sarcasim)

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