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.
…
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.

It continues to be hard to provide a full and thorough accounting for a national mortgage settlement where the terms are neither final nor public. This secret deal was agreed to, it seems, without state attorneys general having a full view of what they were signing onto. The fallout from that is likely on just beginning.

But in what surely will go down as one of the nastiest bits of the deal pushed through by the Obama administration, it is being reported by the Financial Times that modifications made under the taxpayer-funded HAMP program will count towards the banks’ principle reduction requirements.

US taxpayers are expected to subsidise the $40bn settlement owed by five leading banks over allegations that they systematically abused borrowers in pursuit of improper home seizures, the Financial Times has learnt.
…
However, a clause in the provisional agreement – which has not been made public – allows the banks to count future loan modifications made under a 2009 foreclosure-prevention initiative towards their restructuring obligations for the new settlement, according to people familiar with the matter. The existing $30bn initiative, the Home Affordable Modification Programme (Hamp), provides taxpayer funds as an incentive to banks, third party investors and troubled borrowers to arrange loan modifications.

Neil Barofsky, a Democrat and the former special inspector-general of the troubled asset relief programme, described this clause as “scandalous”.

“It turns the notion that this is about justice and accountability on its head,” Mr Barofsky said.

Both Shahien Nasiripour of Financial Times and Yves Smith note that since the whole point of providing HAMP payments to banks as an incentive to get them to make principle writedowns, HAMP should have remained outside of the scope of mortgage settlement. But as it’s structured, not only is it a part of it, we have taxpayers paying the banks to make modifications they’re supposed to be making to help homeowners.

This settlement looked pretty bad on the day it was announced. Sadly, it has only gotten uglier with age. That there is no final term sheet and the public is relying on sporadic leaks to understand what is actually in the tentative deal is a guarantee that these unwelcome surprises will continue, especially since it is the Obama administration which has pushed to weaken the deal:

But people familiar with the matter told the FT that state officials involved in the talks had had misgivings about allowing the banks to use taxpayer-financed loan restructurings as part of the settlement. State negotiators wanted the banks to modify mortgages using Hamp standards, which are seen as borrower-friendly, but did not want the banks to receive settlement credit when modifying Hamp loans. Federal officials pushed for it anyway, these people said.

What a sad joke.

This thing hasn’t improved with age, but there is some more detailed and thoughtful commentary that I think is worth highlighting. The first is by Professor Adam Levitin, who scores it as a victory for the banks. He cites the small size as a major part of the settlement’s weakness:

The formal price tag for the settlement is $25 billion, although it is projected to accomplish up to $40 billion in relief. Only $5 billion of that is hard cash contributed by the banks. Let me repeat that. The five banks involved in the settlement, which have a combined market capitalization of over $500 billion, are putting in only $5 billion. That’s less than 1% of their net worth. And they are admitting no wrongdoing. To call that accountability is laughable.
…
But let’s get to the bigger problem. Whether this is a $25 billion or $40 billion settlement is really beside the point. It’s a drop in the bucket relative to the scale of the problem. There is approximately $700 billion in negative equity nationwide weighing down the housing market and the economy. Add to that legions of homeowners dealing with unemployment or underemployment and we’ve got a problem that absolutely dwarfs the settlement numbers. It’s Pollyannism to think that this settlement will have any impact on the national housing market. At best it makes some incremental improvements and helps a small number of homeowners. But at worst, it lets the banks off the hook for the largest financial crime in history.

Levitin then looks at the average payouts for principle reduction, which are so small as to ensure no real impact in the housing market.

What’s interesting, though, is Levitin’s contextualization of the settlement in the political context.

The settlement doesn’t fix the housing market. It doesn’t create accountability for the financial crisis. It doesn’t even create incentives against future wrong-doing. But it provides the Obama Administration (and those attorney generals who just jumped in for the settlement at the last minute) with a fig leaf of political cover. It galls me is that the Obama Administration is going to trumpet this settlement as evidence that it is serious about prosecuting the crimes behind the financial crisis and helping homeowners. It was heartening to hear Obama talk about protecting the middle class in his State of the Union address. It was the right message, but the President is simply not a credible messenger. If Obama wants to run as the champion of Main Street against Romney, the Captain of Wall Street, he’s going to need to do something a lot more credible than this settlement.

If you doubt that the President (and, to a lesser extent, the AGs) are going to use this as a political victory, notice the headline on the national mortgage settlement: “Landmark Settlement, Landmark Relief.” That is a political statement, as it is clearly not grounded in the terms of the deal.

Turning to Matt Stoller’s excellent piece in Salon, he makes an important point about the way in which this settlement represents a very important policy choice about our national priorities.

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.

Note that this is similar to the point both Robert Kuttner and I made in terms of having a rebooted banking system when all is said and done. Stoller makes clear that the choice to not aid homeowners at the expense of the banks and instead aid banks at the expense of homeowners is a deliberate and conscious policy held by the Obama administration.

Stoller concludes with a sobering look at the housing landscape and the need for a response which actually helps solve the problems we’re facing:

Settlement or no, the housing crisis isn’t going away. The entire mortgage market at this point is backstopped by the government, and even so, housing prices are sliding. The roughly $1 trillion of underwater mortgages and the destruction of the rule of law in the private mortgage market need to be dealt with, one way or another. And they will be, whether through a restoration of a healthy housing market, or through the end of broad homeownership as part of the American experience.

At this writing, the federal government and forty-nine state attorneys general (all minus Oklahoma) have agreed to a settlement with the nation’s five largest banks for their fraudulent robosigning practices. The banks will pay $5 billion penalty as part of this deal and also provide a vary range of credits which could account for another $20 billion. David Dayen at FireDogLake has the best rundown of what is in the deal, based on his own reporting and mainstream outlets. Dayen gives the breakdown:

$3 billion will go toward refinancing for current borrowers who are underwater on their loans, as well as short sales. $5 billion will go as a hard cash penalty to the states, which can use them for legal aid services, foreclosure mitigation programs, and ongoing fraud investigations in other areas (one official close to the talks feared that much of that hard cash payout will go in some Republican states toward filling their budget holes). The federal government will get a cash penalty as well. Out of that $5 billion, up to 750,000 borrowers wrongfully foreclosed upon will get a $1,800-$2,000 check if they sign up for it, the equivalent of saying to them “sorry we stole your home, here’s two months rent.”

The bulk of the money, around $17 billion, will go to principal reduction credits for troubled borrowers. The banks will not get dollar-for-dollar credit for every write-down; reductions on loans bundled in private-label mortgage-backed securities, for example, will be under 50 cents on the dollar, and write-downs for second liens (mostly home equity lines of credit) will be more like 10 cents. Housing and Urban Development Secretary Shaun Donovan believes that they will be able to get between $35-$40 billion in principal reduction in real dollars out of the settlement. Donovan became the point person on the federal level, along with DoJ, as the Administration pretty much took over the investigation and settlement process from the states, who were led by Iowa AG Tom Miller.

But even this $35-$40 billion number, which is at best a guess since the direction of the principal reduction is mostly at the discretion of the banks, pales in comparison to the negative equity in the country, which sits at $700 billion. And the banks have three years to implement the principal reductions, drawing out the loss on their books. [Emphasis added]

Look at the section in bold. What this settlement says is that if the bank stole your home – and according to the deal, banks did this to 750,000 American families (though in reality the number is much higher) – the banks will get off scot-free for $2,000. Can you imagine the Department of Justice arresting a bank robber who stole $180,000 and letting him go as long as he returned $2,000? Wouldn’t we all be bank robbers if such was the state of justice? This is quite possible the most insulting, if not the most problematic, aspect of the deal.

Dayen goes on to note that at its best, this deal will provide an almost certainly insufficient amount of principle reduction to a small fraction of underwater homeowners: “you’re talking about $20,000 (when homes are on average underwater $50,000) for 1 million borrowers (when there are 11 million underwater).” Given that being underwater is the single largest predictor of foreclosure, making someone 40% less underwater is no panacea.

If you want a much deeper analysis of the reasons why this is a bad deal, Yves Smith is a good starting place. She identifies twelve reasons to hate the settlement and frankly it’s just the tip of the iceberg as we have yet to see the text of the deal. One that is surely worth noting, though, is:

That $20 billion actually makes bank second liens sounder, so this deal is a stealth bailout that strengthens bank balance sheets at the expense of the broader public.

Gee, and here I was just thinking the other day, “Wouldn’t it be great for America if we had another bank bailout?”

The actual settlement has not been released and likely will not be released until it is filed in federal court. This lack of transparency is actually a fundamental problem, in part because the majority of the money that is in this deal will not be coming from the banks who agreed to it, but from their investors (including 401ks, public and private pension funds). The less time this agreement is fully in public before being filed in court, the less time investors will have to object to its terms.

Smith concludes her post with an important observation:

As we’ve said before, this settlement is yet another raw demonstration of who wields power in America, and it isn’t you and me. It’s bad enough to see these negotiations come to their predictable, sorry outcome. It adds insult to injury to see some try to depict it as a win for long suffering, still abused homeowners.

The fix has been in for a long time, though it was delayed because a number of Attorneys General wouldn’t agree to the direction things were heading. We are told that they are now on board because the settlement is sufficiently narrow in scope (though, again, both Dayen and Smith highlight some ways in which that is not believable). Until we see the actual settlement, it’s impossible to know whether this is truly narrow in scope. But even if it is, the idea that there be any immunity as part of any settlement of any area of criminal behavior which has not been fully investigated is a heartbreaking testament of the failures of system of justice.

As the sign at Occupy Wall Street said, shit is fucked up and bullshit.