California Attorney General Kamala Harris’s holdout position in a proposed agreement with banks over foreclosure practices may reap financial and political rewards at the cost of prolonging some constituents’ suffering.
Her strategy has created an obstacle in the negotiations between state attorneys general and the five largest U.S. mortgage servicers over a nationwide probe. By Harris’s own reckoning, her reluctance to sign onto a deal and any investigation she might pursue risk deepening the “blight and despair” for many of the 2.2 million California homeowners whom she has said are “holding on by their fingernails.”
Still, she is pushing a broader probe of banks’ mortgage practices, including securitization of the loans. The gambit may lead to more favorable terms in a proposed multistate agreement said to be worth as much as $25 billion, and might carry Harris, a rising star in the Democratic Party, to higher office, both a state political observer and law professor said.
“If she just goes along with other attorneys general, it’s not her achievement” said Bruce Cain, a professor of politics and executive director of the Washington Center at the University of California, Berkeley. “It’s hard to claim credit for something that was a group effort.”
By holding out, Harris stands to “put her own mark on it,” Cain said. “It’s a risky strategy but if it works out well for her then this is something she’ll be able to use in her future campaign for governor.”
State and federal officials have been negotiating a settlement with Bank of America Corp., JPMorgan Chase & Co., Citigroup Inc., Wells Fargo & Co. and Ally Financial Inc. The nationwide foreclosure probe, begun in October 2010, was triggered by revelations that companies were using faulty documents in seizing homes.
The proposed accord would set requirements for how lenders conduct home foreclosures and mandate that the banks fund loan principal writedowns for homeowners and provide refinancings, said a person familiar with the matter who didn’t want to be identified because the terms aren’t public.
After Harris rejected a proposed agreement in September, negotiators crafted two deals: one including California for $25 billion and another without the state for $19 billion, the person said.
As the talks progressed, Harris persisted in her objection to releasing the banks from liability concerning how mortgages were designed and constructed, or origination. This month, as the Justice Department pushed for a deal, she again rejected the proposed terms as “inadequate.”
When she took office a year ago, Harris identified mortgage reform as a priority. Of the 20 U.S. metropolitan areas with the highest foreclosure rates in 2011, 10 were in California, according to RealtyTrac, which monitors foreclosure activity.
California had the third-highest foreclosure rate in the U.S. last year, behind Nevada and Arizona, RealtyTrac reported. One in every 31 homes, or 3.19 percent, was in some stage of foreclosure. California had almost 2 1/2 times as many foreclosure filings for housing units, 428,045, as the second-ranking state, Florida, which had 181,965.
Harris, 47, served as the elected district attorney for San Francisco from 2004 to 2010 and was previously a deputy in the Alameda County District Attorney’s office. Through a spokesman, she declined to comment on the foreclosure probe.
At a housing conference in San Francisco in October, Harris said she was taking plane flights as often as six times a week to visit California cities hard hit by foreclosures. She named inland and rural communities such as Fresno, Los Banos, El Centro, Redding, Crescent City and Shasta.
‘Blight and Despair’
“In many of those communities we are seeing struggling families, and blight and despair,” Harris said.
At the conference, Harris described herself as a prosecutor at her “core.” She spoke of having an investigator’s penchant to leave no stone unturned in learning what banks told homeowners when they entered into loans, and how documentation of the transactions measured up to what mortgage holders believed to be the terms of the agreement.
“It is my bias, at least as it relates to other cases I’ve handled, that I’m reluctant to strike a deal where I haven’t seen the evidence,” Harris said.
That predilection may put her at odds with officials pushing to close the multistate settlement.
While both federal officials and Harris’s counterparts in other states want her on board in an agreement, they must decide soon whether to move ahead without her, said the person familiar with the negotiations.
Nevada Attorney General Catherine Cortez Masto wrote in a Jan. 27 letter to the Justice Department that there’s a “sign-on deadline” of Feb. 3.
At the October conference, Harris conceded that dragging out the standoff doesn’t help struggling homeowners.
“Every single day of conversation and delay -- every single day -- we are talking about specific homeowners that will lose their home,” Harris said. “And in that way, we have to take seriously not only what must be punishment and consequences and accountability and restitution, but also take into account what must happen on a time frame that works to get the greatest relief for the greatest number of people.”
The multistate agreement doesn’t address the securitization of mortgages because negotiators didn’t want to pit homeowners against investors seeking compensation, the person familiar with the matter said.
The proposed deal releases the banks from origination claims because in many states, including California, the statutory deadline for the claims has already passed, the person said. Any such liability would have to be asserted no more than four years from when the mortgages at issue were put together during the housing boom ending in 2007, the person said.
New York Attorney General Eric Schneiderman, Delaware’s Beau Biden and Nevada’s Masto are also conducting mortgage investigations. Massachusetts Attorney General Martha Coakley has sued the five banks involved in the talks.
Another person involved in California’s negotiations confirmed the origination of mortgages is a sticking point in the deal, along with other releases of liability for violations of state “false claim” laws, and securitization, or the packaging of mortgages into bonds sold to investors.
That person, who didn’t want to be identified because the negotiations weren’t public, said resolving liability related to mortgage origination is a more difficult piece of the negotiations.
The most recently drafted terms of the deal offer the banks such releases in exchange for a refinancing program for people who are still in their homes and current on their mortgage payments, the person said. It ignores victims of the most egregious origination fraud who were the first to lose their homes to foreclosure, the person said.
To counter the argument that the deadline for origination claims has expired, lawyers may contend that the clock didn’t start ticking on such claims, or was at least delayed, until the fraud was uncovered, the person said.
Geoff Greenwood, a spokesman for Iowa Attorney General Tom Miller, a Democrat who is leading the multistate negotiations, declined to comment on the talks or Harris’s role.
Miller, after representatives of Democratic attorneys general met in Chicago on Jan. 23, said an agreement with the banks was getting closer.
“There are still issues to be worked out,” he said.
Dan Frahm, a spokesman for Charlotte, North, Carolina-based Bank of America, declined to comment on Harris’s role in the settlement talks. Tom Kelly, a spokesman for New York-based JPMorgan, Mark Rodgers of New York-based Citigroup Inc., Vickee Adams of San Francisco-based Wells Fargo and Gina Proia of Detroit-based Ally Financial also declined to comment.
The proposed multistate settlement won’t release banks from criminal liability, said another person briefed on the talks who declined to be identified because the negotiations are continuing. Any final agreement will be narrowly focused to release banks from claims related only to documentation errors and the so-called robo-signing conduct, the person said this month. Miller said in September that negotiators in the multistate talks weren’t preparing to release the banks from any criminal liability.
U.S. regulators including the Federal Deposit Insurance Corp., Federal Reserve, Securities and Exchange Commission, Consumer Financial Protection Bureau and Department of Housing and Urban Development would be free to pursue cases related to securities fraud, loan origination and other practices, the person said.
Claims by state pension funds, including those related to their purchases of mortgage-backed securities, also wouldn’t be affected by a final settlement, the person said.
President Barack Obama, during his State of the Union speech on Jan. 24., announced the formation of a joint mortgage crisis unit with state officials to investigate wrongdoing by banks.
U.S. Attorney General Eric Holder said Jan. 27 that the group will investigate misconduct in the bundling of mortgage loans into securities. The Justice Department had subpoenaed 11 financial institutions in the previous few days in related investigations, he said.
New York’s Schneiderman will lead the unit along with officials from the Justice Department, the SEC and the Internal Revenue Service. Schneiderman said the proposed releases in a multistate agreement wouldn’t impede investigations by the new federal and state unit.
‘Pot of Gold’
Ken Scott, a professor at Stanford Law School, said in a phone interview that Harris may be “maneuvering to get a bigger cut of any pot of gold -- and that’s a game she’s playing against the other attorneys general rather than the banks.”
“If the banks need her to be in the settling group then the other AGs would be willing to pay a price to keep her in it,” Scott said. “That could be a tactic to up the percentage of the total take.”
Negotiators of the multistate settlement are “looking at it like lawyers paying attention to the legal position of their client, and whether there’s a prospect of liability,” Scott said. “That may not be the way Kamala Harris is looking at it - - she can get political mileage out of an investigation whether or not it leads to successful litigation.”