Iowa AG Miller’s Term Sheet with Banks

The 27-page term sheet between the group of 50 state Attorneys General, led by Iowa AG Tom Miller, and the banks is online and it isn’t pretty. There are a few categories I see this term sheet doing:

1. Getting things to work the way they are already intended to work under current law. This is the bulk of the term sheet;

2. Getting the servicers actions back in line with MBS investor interests and homeowner interests;

3. Improving systems for homeowners in sensible ways advocated by consumer groups.

But mostly #1. Fraud Digest writes, “For the most part, the settlement would require servicers to do exactly what they are already required to do.”

At FedUpUSA, Stephanie has a very detailed analysis:

Let’s be blunt: There’s no “there” there.

The entire document is a rehash of what servicers had a legal mandate to do right up front. Accurately apply payments. Respond to inquiries. Operate in good faith. Use a NPV test for HAMP (was in the HAMP program originally.) Document the assignment chain before foreclosing.

There’s exactly one substantive change, in that HAMP did not prohibit “dual-track” (that is, foreclosure while attempting modification.)

Yves Smith rips apart the landscape that bred this term sheet:

Team Obama has put on a full court press since March 2009 to present the banks as fundamentally sound, and to the extent they needed more dough, the stress tests and resulting capital raising took care of any remaining problems. Timothy Geithner was even doing victory laps last month in Europe. To reverse course now and expose the fact that writedowns on second mortgages held by the four biggest banks and plus the true cost of legal liabilities from the mortgage crisis (putbacks, servicer fraud, chain of title issues) would blow a big hole in the banks’ balance sheets and fatally undermine whatever credibility the officialdom still has.

But the fallacy of their thinking is that addressing and cleaning up this rot would lead to a financial crisis, therefore anything other than cosmetics and making life inconvenient for the banks around the margin is to be avoided at all costs. But these losses exist already. The fallacy lies in the authorities’ delusion that they are avoiding creating losses, when we are in fact talking about who should bear costs that already exist.

Smith goes on:

Even if these measures were tough-minded and vigorously enforced (two irrelevant “ifs”), they are still deficient. We don’t even know the extent of servicer abuses, since we are conveniently moving very quickly to avoid any serious probe, but there is considerable evidence that suggests that a lot of foreclosures were servicer driven. So merely fixing practices going forward, is necessary but far from sufficient. What are the remedies for people who suffered in the past? Of course, it’s horrifically difficult for individuals to prove their case, which is why having state AGs act on their behalf is the best remedy we have. And if that is going to be waived, the trade needs to be that the pubic gets something punitive, not just prescriptive.

In other words, this is simply another example of how the too big to fail banks are chipping away at the rule of law. The banks have over time have fought successfully to reduce the influence of state laws and regulations on their business while increasingly bending the Federal regulatory apparatus to their will. But the state AGs are still enough of a force to be reckoned with that the Federal bank regulators are now applying considerable to pressure them into abandoning initiatives that could help homeowners in their states. Hopefully at least a few of these AGs will wake up and have the self-preservation instincts to realize that this settlement is not in their or their constituents’ best interests.

David Dayen has a take that ends up being very close to where I am (it stems from his writing on an Iraq veteran whose home was illegally foreclosed and whose possessions were stolen by the servicer):

The main point is this: you can make all the guidelines you want, and basically, the 27-page term sheet has most of them. You can demand a single point of contact for borrowers, an end to the dual track process of the servicer pursuing modifications and foreclosures simultaneously, specific mandates for modifications and all the rest. You can even set stricter guidelines for dealing with military families. All of those are in the term sheet, and many of those kinds of guidelines are in the VA Home Loan that Sgt. Kevin Matthews received. It didn’t matter. Neither did all the promises servicers have made to reform their systems going back to 2003. Servicers pretty much don’t follow the law. That’s why they were under investigation. A document that tells them to comply with the law, in language the banks are already using, doesn’t seem like it’ll make much of a difference.

Two more things. Without rigorous enforcement, the guidelines are approximately meaningless. State AGs and the Consumer Financial Protection Bureau would serve as the enforcement monitors under the terms of the agreement. And CFPB adds a new wrinkle to this. However, if servicers have been abusing their customers for this long, and the term sheet mostly reinforces the same laws that they broke all this time (with a couple additional strictures), who’s to say that they won’t simply treat the Kevin Matthewses of the world the same way again?

The final issue is this. The term sheet sets the basic standards for conduct in the servicing industry that servicers should have followed all along. But this is supposed to be a sanction, for violations of law. So now the penalty for failing to follow the law is having to sign an agreement saying you’ll really follow the law this time? We don’t know what monetary penalties or quotas for principal mods will come along with this yet. But we do know this. Kevin Matthews had all his possessions stolen from him, and nobody under this agreement will go to jail for that theft.

The term sheet is not a full deal. We don’t know if there will be any financial penalty to along with it. We don’t know if banks will have a specific money budgeted for principal reduction. But the implication prior to last night was that whatever terms were agreed to would come in exchange for the 50 state AGs not pursuing criminal investigations. And I don’t see any of this, even good parts that will hopefully make life a lot easier for currently distressed home owners, as an appropriate trade for not looking backwards at illegal actions by servicers.

What’s most frustrating is that it seems that the things that need to happen are not happening not because of a lack of need, but because these AGs and federal regulators don’t have believe they have the political will to fight the banks or that the banks need to be protected from suffering the consequences of their action. Given that and everything else we’ve seen from regulators and AGs, I find it hard to believe that the provisions in this term sheet will be adequately enforced, that whatever commitment to principal modification that is made alongside this will be large enough to be meaningful, and that servicers will be sufficiently dissuaded from continuing illegal behaviors that squeeze people out of their homes. If there was a realistic chance of enforcement and if there ends up being a requirement for a large volume and dollar amount of principle modification and if the settlement effectively stopped servicers from behaving the way they have structured themselves to behave, this could be a good thing, as long as it also included a pathway for some of these fraudsters to go to jail.

I look forward to seeing the rest of this deal, as well as seeing if the rest of the state Attorneys General are actually on board with it. Until then, I will file this in the ever-growing section of things that might have been tolerable had they also looked backwards and held people accountable.

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