A year after the start of a nationwide investigation of foreclosure practices, state and federal negotiators haven’t settled with banks and face infighting that might leave some states outside any agreement.
A year ago today, all 50 state attorneys general announced they were investigating the foreclosure procedures of banks following reports they were using faulty documents to seize homes and possibly violating state laws.
The effort, since broadened to force banks to provide mortgage relief for homeowners, hasn’t resulted in a deal. States, meanwhile, are fighting among themselves. The biggest, California, walked away from the talks, possibly putting a nationwide agreement out of reach.
Criticism has come from Democratic and Republican attorneys general since the spring. Republicans portrayed a state-federal proposal as overreaching. Democrats have insisted a settlement shouldn’t protect banks from enforcement actions.
“We’re trying to reform the entire mortgage-servicing industry, which has been an intractable problem for this country the last four years,” Iowa Assistant Attorney General Patrick Madigan, who is helping to lead negotiations, said in an interview. “That’s something nobody else has been able to achieve.”
The five largest mortgage servicers, including Bank of America Corp. and JPMorgan Chase & Co., have been negotiating a settlement with states’ legal chiefs and federal officials from agencies including the Justice and Housing and Urban Development departments.
Bank shares have sunk since the 50-state investigation was announced, with Charlotte, North Carolina-based Bank of America falling 51 percent, New York-based JPMorgan declining 18 percent and New York-based Citigroup Inc. falling 31 percent.
The extended negotiations have been a drag on bank shares, said Bernard Nash, a lawyer at Dickstein Shapiro LLP in Washington who leads the firm’s state attorneys general practice. The banks need a settlement, he said.
“The market hates uncertainty,” he said. “Once you cut the deal, no matter how big, the market will go up.”
The investigation was triggered by the disclosure that foreclosure documents had been signed without verification of the facts, which came to be known as robosigning. In response, banks said they were suspending foreclosure actions across the country to review their procedures.
Homeowners, meanwhile, complained about the difficulty of obtaining loan modifications to reduce their payments. The federal government’s Home Affordable Modification Program hasn’t delivered as promised, according to a government report.
Lack of Success
The program “continues to fall dramatically short of any meaningful standard of success,” according to the report this year by the Office of the Special Inspector General for the Troubled Asset Relief Program.
Chief state legal officers, seeing that federal banking regulators weren’t addressing the crisis, took on the “gigantic task,” said Ira Rheingold, executive director of the National Association of Consumer Advocates in Washington. He said settlement talks may still fall apart.
“This is not an easy thing to do,” he said. “But when nobody else is stepping up and people are being wrongfully foreclosed on and banks are violating state foreclosure laws in many instances, they saw an opportunity and felt like, ‘We need to protect consumers.’”
Officials are seeking an accord that would pay for loan modifications for borrowers, including reductions of principal, and require proper foreclosure documents, according to a 27-page term sheet offered to the banks in March.
The settlement would prohibit banks from initiating a foreclosure while a loan modification is being considered. It would require monitoring of the banks to ensure compliance.
In addition to Bank of America, JPMorgan and Citigroup, the banks involved are San Francisco-based Wells Fargo & Co. and Detroit-based Ally Financial Inc.
A Bank of America spokesman, Lawrence Grayson, declined to comment on the negotiations. Citigroup’s Mark Rodgers, Wells Fargo’s Vickee Adams, JPMorgan’s Tom Kelly and Ally’s Gina Proia also declined to comment on them.
“Attorneys general have worked long and hard together to pull together an agreement and may not make it,” said James Tierney, director of Columbia Law School’s National State Attorneys General Program. “But their disagreements have been honest ones, and they have certainly come closer than any other groups of elected officials in actually doing something to enforce laws and help consumers.”
In August, Iowa Attorney General Tom Miller, the Democrat who is leading talks for the states, removed New York Attorney General Eric Schneiderman from the executive committee representing the 50 states, saying Schneiderman was “working to actively undermine” negotiations.
Schneiderman and other state lawyers have questioned the scope of the liability releases that would be granted to the banks in exchange for any settlement. They said the banks shouldn’t receive releases for matters that haven’t been fully investigated, including the packaging of mortgage loans into securities.
A nationwide deal may be out of reach because different states face widely different degrees of harm from the housing market collapse and resulting foreclosures, said Tierney and Allison J. Schoenthal, a lawyer at Hogan Lovells in New York who does work for lenders and servicers. That may push states such as Nevada, California and New York to seek separate accords.
“They have constituents who are particularly angry because they’ve been hit by foreclosures,” Schoenthal said. “They probably have a lot of pressure on them. Look at the protests downtown. You don’t see that in Iowa,” she said, referring to the Occupy Wall Street demonstrations in New York.
California Attorney General Kamala Harris, a Democrat, said Sept. 30 that she was rejecting a proposed deal and would conduct her own mortgage investigation.
The state “was being asked for a broader release of claims than we can accept and to excuse conduct that has not been adequately investigated,” Harris said. Shum Preston, her spokesman, declined to comment on whether the state may sign on to any settlement.
Massachusetts Attorney General Martha Coakley said last week that she was preparing to sue banks. Coakley, a Democrat, “lost confidence” that an agreement would hold banks “accountable for wrongful foreclosures,” she said in a statement.
An agreement hasn’t been reached because state and federal officials overreached by demanding a “wildly excessive” payment from the banks, said Bob Davis, an executive vice president at the American Bankers Association.
A federal regulatory review of bank foreclosure practices didn’t find significant harm to consumers, Davis said.
“A settlement is not likely to be agreed to if one side is asking for remuneration or fines that the other side believes is wildly unbalanced to the proof of harm to consumers,” Davis said.
California and New York are motivated to squeeze as much money as they can from the banks regardless of the connection to consumer harm, Virginia Attorney General Kenneth Cuccinelli, a Republican, said in an interview. Their actions have been “outrageous,” he said.
“Their mentality here is Spitzer on steroids,” he said, referring to former New York Attorney General Eliot Spitzer. “The only reasonable explanation is they are so rapaciously engaged in ripping every penny out of any company they can get their hands on.”
No Blind Eye
Danny Kanner, a spokesman for Schneiderman, a Democrat, said the attorney general “refuses to turn a blind eye to potential misconduct” that led to the financial crisis. Preston, Harris’s spokesman, said California residents ``rightly expect that those who caused their pain through wrongdoing will be held accountable.''
Cuccinelli and other Republican attorneys general, including Greg Abbott in Texas and Pam Bondi in Florida, have criticized the plan to force banks to pay for principal reductions. They argue it would reward homeowners who choose not to pay their mortgage.
Loan modifications should be limited and address only conduct under investigation such as improper handling of loan modification requests, they said in a March 22 letter to Miller.
Cuccinelli said he might sign on to an agreement that includes principal reductions. Bondi said in a statement that she is “open to principal reduction, so long as it remedies harm to consumers and stays consistent with the law enforcement role of state attorneys general.”
The settlement will provide “substantial” principal reductions for homeowners and won’t prevent individual states from pursuing securities-fraud claims against banks, Miller said in an interview.
Suits by Cities
Municipalities will be free to sue banks over fees that weren’t paid because of electronic mortgage filings, he said.
Miller said he expects more than 40 states to join the agreement and hopes California will be among them. He cautioned that a settlement isn’t certain and declined to comment on details of the talks.
“We’re getting closer,” Miller said. “These are challenging and complicated and very broad issues.”
Banks should settle to resolve liabilities even if they remain exposed to lawsuits from states over mortgage securitization, said Nash at Dickstein Shapiro. Without an agreement, banks would probably face lawsuits from states and possibly federal agencies. Illinois Attorney General Lisa Madigan and North Carolina Attorney General Roy Cooper, both Democrats, in June threatened litigation if negotiations fall apart.
“The banks may be resigned to the fact that they’re not going to be released from securitization” claims, Nash said. “They ought to settle what they can. They won’t get it all done in the near term.”