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Tuesday, March 26, 2019

The Mortgage Settlement's Missing Piece: Will Banks Now Follow The Law?

The country’s banks agreed to change their behavior as part of the robo-mortgage settlement announced earlier this week. The announcement, however, leaves open a central question: Does the settlement include new, pre-defined penalties for banks that fail to uphold their new promises? Since a change in bank behavior is a vital piece of the settlement, the absence of an answer is highly disconcerting.

When the deal was announced, the Associated Press reported:

“The conditions will be overseen by Joseph A Smith Jr., North Carolina’s banking commissioner. Lenders that violate the deal could face $1 million penalties per violation and up to $5 million for repeat violators.”

The initial impression on reading this report is that there are real teeth to it. It sounds like the banks are agreeing to pay $1 million dollars each time they fail to perform as promised.

However, the actual press release from the Department of Justice announcing the deal reads (emphasis added):

“Compliance with the agreement will be overseen by an independent monitor, Joseph A. Smith Jr. Smith has served as the North Carolina Commissioner of Banks since 2002… The monitor will oversee implementation of the servicing standards required by the agreement; impose penalties of up to $1 million per violation (or up to $5 million for certain repeat violations); and publish regular public reports that identify any quarter in which a servicer fell short of the standards imposed in the settlement.”

There are two open questions. First, what does “up to” mean? Does the independent monitor have discretion over the size of each penalty? This could effectively make the million dollar figures announced by the Justice Department meaningless. Banks have argued that the tens of thousands of robo-mortgage signatures and well-documented servicing errors were all technical violations that harmed no one. Undoubtedly, they will argue that any single violation was a meaningless error.

This provision would have real meaning if we applied the same standard our nation has applied in other areas: a zero tolerance rule. What would happen if each bank knew that any violation would result in a minimum fine of $1 million? I suspect bank behavior would change significantly.

Second, can banks contest these fines? Have the banks agreed that they will pay any fines assessed by the independent monitor? If not, then once again the provisions have the potential to be meaningless. The monitor will assess fines for violations and the banks will challenge the fines through whatever venues, the courts or otherwise, have been established by the settlement. The judgment and ability of the independent monitor to set fines will have been eviscerated.

Efforts to determine answers to these and related questions have seemingly been rebuffed. The Huffington Post reported on its efforts to understand the details of the enforcement provisions of the settlement:

“North Carolina banking commissioner Joseph Smith will serve as the national monitor of the deal, working from Raleigh…

The announcement on Thursday did not include any new information on bank penalties. A call to Smith’s office was not immediately returned. A HUD spokesman did not immediately return an e-mailed request for comment.”

There appears to be near universal agreement that this settlement will do little for homeowners who have been the victims of past bad bank behavior. But there may be real value in the deal if it successfully changes bank behavior going forward. The New York Times quoted Roy Cooper, the attorney general of North Carolina as saying, “This agreement is more important for the foreclosures we’re hoping to prevent” (emphasis added).

At the same time, The New York Times wrote, “Advocates for homeowners facing foreclosure expressed cautious optimism,” but indicated that these same advocates believe rigorous enforcement is essential for the program to work:

“We’re hopeful,” said Joseph Sant, a lawyer at Staten Island Legal Services’ homeowner defense project. “But we had a lot of programs that are good on paper. What will make the difference is that it’s vigorously enforced.”

The stakes here are enormous. They extend beyond the housing market to the nature of American society itself. The banks’ blatant malfeasance with regard to the robo-mortgage scandal and other foreclosure-related activities has been a clear example of unequal justice. The banks have knowingly and repeatedly violated laws (such as providing tens of thousands of false affidavits to the courts) that would have landed an ordinary citizen in jail.

At the same time, successful capitalism itself depends on the enforcement of rules and contracts in a fair bargain that all participants believe will be enforced by the courts. When powerful players are permitted to alter established rules at will, capitalism ultimately collapses. Contracts and the idea of a fair bargain become meaningless as less powerful parties to an agreement know their rights will not be enforced. Over time, citizens lose faith in government and their own ability to thrive in what becomes a corrupt economy.

If the settlement enforcement provisions turn out to lack substance, these forces will be reinforced rather than counteracted. We must wait for the details. Like homeowner defense advocates, I am cautiously optimistic — but terrified that ultimately I will be disappointed.

Cross-Posted From The Roosevelt Institute’s New Deal 2.0 Blog

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One response to “The Mortgage Settlement's Missing Piece: Will Banks Now Follow The Law?”

  1. Common Sense Patriot says:

    This is a start in the right direction and I agree with the article’s conclusions. But the real crisis is all the foreclosures that are going on right now and will go on in the future. The market will never be stabalized and millions will yet lose their homes through no fault of their own (unless you want to blame them for the meltdown that caused the Great Recession and 14 million plus people unemployed). There were undoubtedly people who bought homes that never should have qualified in the first place, without even credit checks or who clearly didn’t meet loan criteria, but the big offenders were the Banks and Mortgage Lenders that took advantage of Congress’ idiot notion to push the Banks and Freddie Mac and Fannie Mae to give more loans to people who were in the marginal area. But once the Great Recession hit, people who had paid their payments on time for many years, lost their jobs and have gone through all their savings. They may now be employed or at least one in the Household is employed, but not a day passes without news stories of Banks intrasigence in working out modified agreements with these homeowners, who despite being upside down on their loans in many cases, still want to keep their homes and would pay if the price was brought down to something they can afford. But, no, the Banks just stone wall and move forward with foreclosure. Yet, 85% of all home loans are insured by the FHA or owned/guaranteed by Fannie Mae or Freddie Mac, the latter two of which have been taken over by the Federal Government. I suspect that the President alone, by executive order, could direct Fannie, Freddie and the FHA to work out loans with people that can pay at a reduced rate. If necessary, extend the loans to a 40 year loan, or at least put them on a 30 year fixed rate loan (for many that gets them out from under onerous interest rates of Adjustable Rate Mortgages) and for many others who have years of payments already made, refinanced the amount still owed at a lower rate and extends it out for 30 years which will substantially cut their mortgage payments. The egregious cases that just dont’ make sense are in the news every day. Just a few days ago, CBS news reported on a couple who have always made their mortgage payments but whose husband lost his job. Only the wife is working right now. But they lost their home, which was then re-sold at auction for a mere $25,000. The former homeowners couldn’t get a loan for even that much because their credit was now bad. And what is the incentive for the Banks? They get 100% of what’s still owed on the mortgage from the FHA guarantees, or the pass the losses to Fannie or Freddie. They have ever incentive NOT to make new arrangements. But either the President or Congress and the President can fix this with the stroke of a pen. Is it not better to make new arrangements than to incur losses on these homes and keep the value of real estate down so that cities and states tax revenue is cut so badly they are laying off local and state government workers (adding to the problem), and playing political games by doing it with teachers (which robs our children of education) and police and firemen (which threatens public safety) — all in an effort to inflame the public so higher taxes can be imposed. This is insanity. Why should taxpayers sell a $300,000 home for $25,000 and take the loss so the Banks canks can benefit. Why not have Fannie and Freddie and the FHA force renegotiation of these loans for homeowners that will pay the payments and eventually pay it off, or at least keep paying payments until they die by which time the value of real estate will have increased to the point where the mortgage is not upside down. This is the only sane approach. Focusing on the 15% of mortgages held by conventional loans is insanity. And letting the Banks and Mortgage Servicers go merrily about the foreclosure process is insanity — when it can be stopped by the Federal Government, that already has the liability for the loan, in such a way that taxpayers eventually get their money back.

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