David Dayen continues his stretch of incredible reporting on the foreclosure crisis with a comprehensive update on developments in the state attorneys general settlement around foreclosure fraud. Of note, two different groups of attorneys generals – 4 Republicans and an uncertain number of Democrats – have voiced opposition to the term sheet floated by Iowa AG Tom Miller. It’s not clear how hard the Republican opposition will be nor if there is a critical mass to stop a global settlement. What is clear is that the process seems to be muddled and disconnected from what a serious investigation and search for resolution would look like.

“The angle of this being politically expedient, that appalls me,” said Ira Rheingold of the National Association of Consumer Advocates. He saw the settlement as a kind of substitute for HAMP, the program that the Administration created in the first place to deal with the foreclosure crisis, which hasn’t come close to succeeding. “They’re saying, we’ll hold the banks accountable and now let’s move on. But the part of the speed factor I do like is that every day we wait, people are losing their homes. So this settlement should not be done quickly for political expediency, it should be done well. But it should be done quickly, because the longer we wait people are unjustly losing their homes. So there’s a tension there.”

This tension became very clear in discussions with the AGs who would have to implement and honor this settlement. The prospect of saving millions of homes from foreclosure is appealing, but the potential for having to waive consumer protection statutes in their states is certainly not. Troublingly, there’s been very little indication from Miller and the AG working group on what they would have to give up in this exchange. That raises the spectre of a final agreement that legally indemnifies the banks while providing too little support to homeowners, just enough to make a big press conference full of back-patting about helping the little guy. But in the aftermath, states with strong consumer protection laws could be potentially unable to bring a lawsuit for servicer fraud or abuse.

There are so many avenues for investigation, it’s really hard to believe this group of state attorneys general haven’t started. Speed is only a virtue to the extent that homeowners are in crisis now and being kicked out of their homes now. Perhaps a moratorium on foreclosure while an investigation would take place, but I think odds of this are basically nil.

I really don’t know what the best outcome with the state AGs is. If there’s not going to be real investigation to find out how deep the bank abuses go, I don’t know that urgency necessitates settlement, especially for a small financial fund for principle modifications and a commitment to follow already-existing rules. Moreover, the measures in the leaked term sheet that would essentially point towards improved consumer functions (dedicated representative, online document tracking, etc) are improvements that should happen no matter what and not come as a trade for cessation of cases against banks.

Reingold of NACA has more, which really resonates with me:

Rheingold has an idea of how this should proceed. “The AGs went into this thinking, we have these complaints, before we do investigation that would take months, can we sit down and work with the federal folks and come up with a plan that we think will work,” he said. “What the AGs need to do, is say to the banks, here’s our offer, take it or we will investigate you and you know what we’ll find. The threat has to be, you don’t take this deal, all bets are off.” Just looking at the Federal Reserve denying Bank of America a larger dividend payment, in large part because they cannot even calculate the risk to their mortgage portfolio, shows you that there’s a tremendous amount of potential liability here, especially if coupled with a full investigation.

“There are a lot of snakes under those rocks,” Rheingold concluded. “The banks know full well that it will get ugly for them.”

I get the potential “take it or leave it” negotiation tactic, but only if the “it” is still a legitimate settlement. That is, if $20 billion is what we’re hearing now and meaningful principle modifications could run $800-900 billion plus, then a legitimate settlement would be a lot closer to a trillion dollars than the number currently floated. But until elected officials, both state attorneys general and people in DC, are willing to start turning over rocks, I doubt any floated number will rise towards something that’s both genuinely helpful and reasonable based on what the banks have done.