Abigail C. Field has a very important post, looking at the mortgage settlement and how the deal and changes to mortgage servicing will be monitored by regulators and law enforcement. Field identifies a series of thresholds and tolerance levels the federal government and state law enforcement set for how the well the servicers have to perform. In short, banks can charge extra money, miscount payments homeowners make, and generally have their records remain in a mess, as long as it isn’t more than a certain percentage of their total amount of mortgages. As bad as it is for the people allegedly representing the public to have agreed to tolerate these abuses, it gets much worse. I’m going to quote Field at length, because this is an important analysis:

Even metrics that look tough superficially turn out to be cruelly weak. For example, take the very first metric in the table, page E-1-1, “Foreclosure sale in error”. If it happens, that means the B.O.Bs [Bailed Out Banks] sold your house when they weren’t supposed to. On first glance, things look good: no loan level error is tolerated (Column C is N/A). Column D looks tough, but only if you don’t think much about it: only a 1% error is tolerated.

When 1 million homes are foreclosed, that’s 10,000 sold wrongfully. In 2011 banks foreclosed on nearly 2 million homes according to BusinessWeek (stat on p. 2 of story), so if that metric were in place last year, nearly 20,000 homes could’ve been effectively stolen from people and the B.O.Bs wouldn’t get in trouble. But that 1% isn’t the really big flaw in this metric. The biggest problems with this metric are hidden in the “Test Questions,” which are Column F.

Focus on the parenthetical qualifications that start with question 2:

1. Did the foreclosing party have legal standing to foreclose?

2. Was the borrower in an active trial period plan (unless the servicer took appropriate steps to postpone sale)?

Surprise! It’s not reportable error if the B.O.Bs sold your house during an active trial mod, if they tried to stop the sale from happening.

3. Was the borrower offered a loan modification fewer than 14 days before the foreclosure sale date (unless the borrower declined the offer or the servicer took appropriate steps to postpone the sale)?

Again, it’s not reportable error if the B.O.Bs sold your house while you were evaluating or responding to their mod offer, if they tried to stop the sale.

4. Was the borrower not in default (unless the default is cured to the satisfaction of the Servicer or investor within 10 days before the foreclosure sale date and the Servicer took appropriate steps to postpone sale)?

Wow–it’s not reportable error to sell your house even though you weren’t in default, so long as you foolishly cured the default too close the sale date and the B.O.Bs tried to stop the sale of your home.

5. Was the borrower protected from foreclosure by Bankruptcy (unless Servicer had notice of such protection fewer than 10 days before the foreclosure sale date and Servicer took appropriate steps to postpone sale)?

Again, you can have the law on your side–you’re protected by the bankruptcy court–but the B.O.Bs can sell your house anyway if you dawdled in declaring bankruptcy and the bank tried to stop the sale. I wonder what a bankruptcy judge would make of that provision?

See, in four of the five questions the B.O.Bs have found a way to make yes mean no: Yes, we violated the bankruptcy stay; No, it doesn’t count toward the 1% error rate. As a result, 1% of the foreclosure sales checked by the monitor isn’t the real threshold for getting bankers in trouble. It’s 1% plus all the wrongful sales that this settlement says are ok anyway. [Bold emphasis added]

Let’s be clear: the settlement makes it allowable for banks to foreclose on people who were current on the mortgage, just so long as it’s not more than 1% of their total foreclosures. This is a big part of the bank behavior the settlement was supposed to stop and it is actually legalizing it.

At Naked Capitalism, Matt Stoller looks at other ways the settlement continues to reveal itself as a sweetheart deal for banks:

Beyond these reports (and the complaint by DOJ showing that Holder and the other attorneys general knew and understood what the banks were doing), the mortgage settlement is incoherent. The settlement will be challenged in court by investors. And the formula for settlement credits is bizarre and full of easter eggs for the banks. For instance, banks will now get credit for houses they were going to bulldoze anyway, essentially being allowed to unload low-value properties with clouded title on a dollar-for-dollar basis, which are actually worth pennies on the dollar (or perhaps value negative in areas where there are fines for not keeping up properties). Banks will also get credit for not going after deficiency judgments, which means they get credit when they choose not to sue foreclosed families who have no money. They aren’t suing for deficiency judgments anyway, by and large, because suing people who have nothing is, surprise, not profitable! But they’ll get billions in credit for this regardless.

Seeing how insanely pro-bank and anti-rule of law (let alone anti-homeowner) the settlement is turning out to be, I’m reminded of this passage from a post by Stoller at Salon shortly after the settlement was announced:

Rather than settling anything, this agreement is simply a continuation of the policy framework of both the Bush and the Obama administrations. So what, exactly, is that framework? It is, as Damon Silvers of the Congressional Oversight Panel, which monitored the bailouts, once put it, to preserve the capital structures of the largest banks. “We can either have a rational resolution to the foreclosure crisis or we can preserve the capital structure of the banks,” said Silvers in October, 2010. “We can’t do both.” Writing down debt that cannot be paid back — the approach Franklin Roosevelt took — is off the table, as it would jeopardize the equity keeping those banks afloat.

What we are seeing is a deal that seeks to preserve the capital structure of the banks. Having thresholds were the banks can continue to behave exactly as the have, even in the face of temporary new servicing standards, makes sense as long as we remember that this is about making sure the banks don’t go bust and we can move on past these inconvenient consequences of the housing bubble.

The national mortgage settlement finally happened yesterday, over a month after it was triumphantly announced by the Obama administration. The documentation for the deal is long and confusing, so analysis is coming out slowly, but early indications are that the deal is just as bad as it looked like it would be and potentially quite worse.

David Dayen pulls out the long lists of crimes and abuses the servicers have committed. The list is so full of failures that it forces Dayen to ask:

You might ask why any industry with this kind of performance record would be allowed to stay in business. It would be a good question.

Dayen also flags a passage which seems to suggest that the servicers can force any homeowner who takes a modification or compensation for relief to waive their due process rights. Not only do we have to trust the banks to handle things correctly, despite having a record of being completely incapable or unwilling to follow the law, this settlement will empower them to make needed aid — aid that is coming to buy a release from liability! — contingent on further insulating themselves from liability from individuals pursuing legal action against them. To put it differently, one of the things the AGs and the Obama administration long promised is that any settlement wouldn’t forestall individuals from bringing their own suits. This seems to suggest exactly the opposite.

Isaac Gradman of The Subprime Shakeout has one of the more comprehensive analyses I’ve seen. There’s a lot to go through but a few passages merit promotion.

On the tiny size of the settlement’s aid to underwater homeowners:

The first problem is that, as the Wall Street Journal recently noted, the actual amount of loan forgiveness isn’t large relative to the problem of underwater debt. The WSJ attributes to Ted Gayer, co-director of economic studies at the Brookings Institution, the estimate that the settlement’s complex set of requirements mean that about 500,000 borrowers, or 5% of those who are underwater, may be eligible for help. Let me repeat that so it sinks in – if you are one of this nation’s 10 million underwater borrowers, you have only a 1 in 20 chance of getting any semblance of relief.

For a very long time, the public was promised that a release for bank liability would be narrow. Now that we see the deal, that turns out to not be true.

We now have the language of the actual release, which the banks have been given in return for the penalties and reforms discussed above. As expected, the release is fairly broad in the arena of servicing activities, releasing essentially any claim that any regulator may have based on mortgage servicing, loss mitigation, collection or accounting of borrower payments, or foreclosure or bankruptcy practices. In other words, this is the last we’ll see of any government agency digging into the who, what, where, when and how of robosigning and forged affidavits.

That is, this goes well beyond mere robosigning, even if claims related to origination and securitization are not released. Gradman goes on to note, “But here’s the rub. In the face of the litany of charges brought against them, the banks are not forced to admit to any wrongdoing.” This practice, which is very common with the federal government’s regulation of Wall Street, has recently come under scrutiny and will likely be under even more scrutiny in this deal. After all, why should a judge sign off on a $25 billion settlement when the people paying the money aren’t admitting any wrongdoing? How could a judge possibly determine if this is a fair deal?

Yves Smith has a fairly deep dive into how the settlement will almost certainly screw investors in mortgage backed securities – making it so it is more likely that public pensions, union pensions, and 401ks pay for the settlement than the banks who are ostensibly being punished.

And since the banks are held to a total dollar target, and can use mods of other people’s mortgages to meet this target, they are using other people’s money to pay off their misdeeds. There is no two ways about it.
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Remember, the investor beef is not that they are anti-mod per se, but they want the seconds wiped out before the first mortgages are touched. The second lien investors knew they were second in line and got a higher interest rate as a result. Moreover, had investors had a seat at the table, you can be sure there are other servicing abuses they would have insisted be corrected, so railroading them benefits the banks in other ways too.

There’s a big problem here. It just doesn’t seem possible that trustees can agree to changing the rules of the road regarding first and second liens and magically allow modifications to the firsts while not totally wiping out the seconds first. It’s not clear at all that investors have approved these dealings and it’s not clear at all that the trustees have the power to make such a deal without approval from the investors. That is, at least according to most of the PSAs governing these trusts.

There will presumably be lots more analysis and investigation coming out of the foreclosure and economic blogosphere. But one high level perspective that’s worth flagging is by Matt Stoller at New Deal 2.0:

Beyond that, there is no coherent organizing principle behind the deal. It’s not like you can explain this as “we’re going to write down debts for people who can’t pay them and foreclose on those that can’t pay anything,” or “we’re going to foreclose on people who aren’t paying their debts, period,” or “we’re going to force the banks to stop using accounting fraud.” It’s a mish-mash of claims and releases, some of which seem to contradict each other. Some of the signature lines are left blank. If this doesn’t become a “catalytic” event, and banks don’t write down debts after the credits run out, oh well. Get ready for a policy and legal mess on top of a housing market that is in and of itself a policy and legal mess. There is precedent for a deal like this: the alphabet soup of housing programs from the Bush and Obama administrations.

Given what we’re seeing so far, this seems to be right. It’s not surprising, given what we’ve seen over the last three years, but it certainly isn’t encouraging either. It doesn’t inspire confidence that even this weak tea will be served properly and what little aid has been secured will be delivered in a timely and fair fashion to homeowners in need.