Firm Commentary:

The article below lists good reasons to not get excited about the $26Billion Attorney General Settlement with the five major lenders. 

The California specific settlement numbers: $430Million will be paid directly to the state government for "foreclosure prevention efforts, legal aid etc.";  $279Million will be paid to homeowners victimized by wrongful foreclosure [estimated 140,000 borrowers at $2,000 a piece]; $850Million for refinancing of current but underwater borrowers; $15Billion worth of Loan Mods, ShortSales and principal reductions determined by the loan servicers.

Please read the specific are comments included throughout.

"The Top Twelve Reasons Why You Should Hate the Mortgage Settlement"
by Yves Smith, Naked Capitalism

As readers may know by now, 49 of 50 states have agreed to join the
so-called mortgage settlement, with Oklahoma the lone refusenik.
Although the fine points are still being hammered out, various news
outlets (New York Times, Financial Times, Wall Street Journal) have
details, with Dave Dayen's overview at Firedoglake the best thus far.
The Wall Street Journal is also reporting that the SEC is about to
launch some securities litigation against major banks. Since the
statue of limitations has already run out on securities filings more
than five years old, this means they'll clip the banks for some of the
very last (and dreckiest) deals they shoved out the door before the
subprime market gave up the ghost.

[The Settlement does not protect the banks from civil claims by homeowners or class actions such as those filed by this firm against CHASE, GMAC Mortgage, AHMSI and Aurora Loan Servicing.]

The various news services are touting this pact at the biggest
multi-state settlement since the tobacco deal in 1998. While narrowly
accurate, this deal is bush league by comparison even though the
underlying abuses in both cases have had devastating consequences.
The tobacco agreement was pegged as being worth nearly $250 billion
over the first 25 years. Adjust that for inflation, and the disparity
is even bigger. That shows you the difference in outcomes between a
case where the prosecutors have solid evidence backing their charges,
versus one where everyone know a lot of bad stuff happened, but no one
has come close to marshaling the evidence.

The mortgage settlement terms have not been released, but more of the
details have been leaked:

1. The total for the top five servicers is now touted as $26 billion
(annoyingly, the FT is calling it "nearly $40 billion"), but of that,
roughly $17 billion is credits for principal modifications, which as
we pointed out earlier, can and almost assuredly will come largely
from mortgages owned by investors. $3 billion is for refis, and only
$5 billion will be in the form of hard cash payments, including $1500
to $2000 per borrower foreclosed on between September 2008 and
December 2011.

[Again, most of the losses will be born by private investors not the banks:  Pension plans, governments and insurance companies who funded hundreds of mortgage backed securities]

Banks will be required to modify second liens that sit behind firsts
"at least" pari passu [meaning:  "hand-in-hand"], which in practice will mean at most pari passu.
So this guarantees banks will also focus on borrowers where they do
not have second lien exposure, and this also makes the settlement less
helpful to struggling homeowners, since borrowers with both second and
first liens default at much higher rates than those without second
mortgages.

Per the Journal:
"It's not new money. It's all soft dollars to the banks," said Paul
Miller, a bank analyst at FBR Capital Markets.
The Times is also subdued:  Despite the billions earmarked in the accord, the aid will help a
relatively small portion of the millions of borrowers who are
delinquent and facing foreclosure. The success could depend in part on
how effectively the program is carried out because earlier efforts by
Washington aimed at troubled borrowers helped far fewer than had been
expected.

[The same problems will occur as we have seen under HAMP, the banks are in charge of picking winners and losers and lack any incentive to act in a competent or responsible way-its another case of the "fox watching the chickens"]

2. Schneiderman's MERS suit survives, and he can add more banks as
defendants. It isn't clear what became of the Biden and Coakley MERS
suits, but Biden sounded pretty adamant in past media presentations on
preserving that.

[Expect more civil suits:  we know the evidence of fraud and abuse is out there; leveraging that evidence against the banks however is a slow and expensive avenue for homeowners in financial distress]

 
3. Nevada's and Arizona's suits against Countrywide for violating its
past consent decree on mortgage servicing has, in a new Orwellianism,
been "folded into" the settlement.

[This is a sellout, a punt by the Nevada\Arizona AGs... plain and simple]
4. The five big players in the settlement have already set aside
reserves sufficient for this deal.

[Great news for bank stock prices]

Here are the top twelve reasons why this deal stinks:

1. We've now set a price for forgeries and fabricating documents. It's
$2000 per loan. This is a rounding error compared to the chain of
title problem these systematic practices were designed to circumvent.
The cost is also trivial in comparison to the average loan, which is
roughly $180k, so the settlement represents about 1% of loan balances.
It is less than the price of the title insurance that banks failed to
get when they transferred the loans to the trust. It is a fraction of
the cost of the legal expenses when foreclosures are challenged. It's
a great deal for the banks because no one is at any of the servicers
going to jail for forgery and the banks have set the upper bound of
the cost of riding roughshod over 300 years of real estate law.

[Sadly, Crime does pay...but only if you are a multinational bank with substantial political influence and the ability to hold hostage our national economy and democracy]

2. That $26 billion is actually $5 billion of bank money and the rest
is your money. The mortgage principal write downs are guaranteed to
come almost entirely from securitized loans, which means from
investors, which in turn means taxpayers via Fannie and Freddie,
pension funds, insurers, and 401 (k)s. Refis of performing loans also
reduce income to those very same investors.

[Not accurate:  Fannie and Freddie loans are excluded, only private mortgage backed security trusts]

3. That $5 billion divided among the big banks wouldn't even represent
a significant quarterly hit. Freddie and Fannie put backs to the major
banks have been running at that level each quarter.

4. 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.

[Why:  over 50% of these second liens are actually owned by the banks versus less than 5% of the first mortgages]

5. The enforcement is a joke. The first layer of supervision is the
banks reporting on themselves. The framework is similar to that of the
OCC consent decrees implemented last year, which Adam Levitin and
yours truly, among others, decried as regulatory theater.

[The same problems will occur as we have seen under HAMP, the banks are in charge of picking winners and losers and lack any incentive to act in a competent or responsible way-its another case of the "fox watching the chickens"]

6. The past history of servicer consent decrees shows the servicers
all fail to comply. Why? Servicer records and systems are terrible in
the best of times, and their systems and fee structures aren't set up
to handle much in the way of delinquencies. As Tom Adams has pointed
out in earlier posts, servicer behavior is predictable when their
portfolios are hit with a high level of delinquencies and defaults:
they cheat in all sorts of ways to reduce their losses.

[The same problems will occur as we have seen under HAMP, the banks are in charge of picking winners and losers and lack any incentive to act in a competent or responsible way-its another case of the "fox watching the chickens"]

7. The cave-in Nevada and Arizona on the Countrywide settlement suit
is a special gift for Bank of America, who is by far the worst
offender in the chain of title disaster (since, according to sworn
testimony of its own employee in Kemp v. Countrywide, Countrywide
failed to comply with trust delivery requirements). This move proves
that failing to comply with a consent degree has no consequences but
will merely be rolled into a new consent degree which will also fail
to be enforced. These cases also alleged HAMP violations as consumer
fraud violations and could have gotten costly and emboldened other
states to file similar suits not just against Countrywide but other
servicers, so it was useful to the other banks as well.

[Again...this is a sellout, a punt by the Nevada\Arizona AGs... plain and simple]

8. If the new Federal task force was intended to be serious, this
deal would have not had been settled. You never settle before
investigating. It's a bad idea to settle obvious, widespread
wrongdoing on the cheap. You use the stuff that is easy to prove to
gather information and secure cooperation on the stuff that is harder
to prove. In Missouri and Nevada, the robo-signing investigation led to
criminal charges against agents of the servicers. But even though
these companies were acting at the express direction and approval of
the services, no individuals or entities higher up the food chain will
face any sort of meaningful charges.

[The same problems will occur as we have seen under HAMP, the banks are in charge of picking winners and losers and lack any incentive to act in a competent or responsible way-its another case of the "fox watching the chickens"]

9. There is plenty of evidence of widespread abuses not that are
appear not to be on the attorney generals' or media's radar, such as
servicer driven foreclosures and looting of investors' funds via
impermissible and inflated charges. While no serious probe was
undertaken, even the limited or peripheral investigations show massive
failures (60% of documents had errors in AGs/Fed's pathetically small
sample). Similarly, the US Trustee's office found widespread evidence
of significant servicer errors in bankruptcy-related filings, such as
inflated and bogus fees, and even substantial, completely made up
charges. Yet the services and banks will suffer no real consequences
for these abuses.

[See our class action lawsuits for details]

10. A deal on robo-siginging serves to cover up the much deeper chain
of title problem. And don't get too excited about the New York,
Massachusetts, and Delaware MERS suits. They put pressure on banks to
clean up this monstrous mess only if the AGs go through to trial and
get tough penalties. The banks will want to settle their way out of
that too. And even if these cases do go to trial and produce
significant victories for the AGs, they still do not address the
problem of failures to transfer notes correctly.

[See our class action lawsuits for details]
11. Don't bet on a deus ex machina in terms of the new Federal
foreclosure task force to improve this picture much. If you think
Schneiderman, as a co-chairman who already has a full time day job in
New York, is going to outfox a bunch of DC insiders who are part of
the problem, I have a bridge I'd like to sell to you.

12. We'll now have to listen to banks and their sycophant defenders
declaring victory despite being wrong on the law and the facts. They
will proceed to marginalize and write off criticisms of the servicing
practices that hurt homeowners and investors and are devastating
communities. But the problems will fester and the housing market will
continue to suffer. Investors in mortgage-backed securities, who know
that services have been screwing them for years, will be hung out to
dry and will likely never return to a private MBS market, since the
problems won't ever be fixed. This settlement has not only revealed
the residential mortgage market to be too big to fail, but puts it on
long term, perhaps permanent, government life support.
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.

[Get used to it until people take back control of our government.  As citizens we have passed on our responsibility to monitor and participate in our democracy.  Crime does pay...but only if you are a multinational bank with substantial political influence and the ability to hold hostage our national economy and democracy]