Home -> Law Blog Directory -> Bankruptcy Blogs -> Credit Slips

Bankruptcy

: Credit Slips

Is the Foreclosure Fraud Settlement Overbroad?

By Adam Levitin

We don't actually know the terms of a foreclosure fraud settlement.  All that we're really hearing now is a proposed $20B figure.  There could well be other substantive terms in a settlement, but it's worth considering some of the arguments made by the banks in objection to a large dollar settlement.  

Basically, the banks' argument is no harm, no foul.  Yes, they did some robosigning, but it was all fun and games, and no one got hurt.  Moreover, using any settlement dollars to help homeowners would reward undeserving profligates and encourage strategic defaulting, which would be bad morally and for the housing market.  

There are a lot of problems with this line of argumentation.   

First, we don't actually have a tally of servicer malfeasance.  Neither the AGs nor the federal regulators have done the sort of investigation necessary to really know the full extent of servicer wrong-doings.  Servicers might downplay the harms, but we just don't know.  This isn't just robosigning.  The banks forfeited their ability to make the "trust me" argument some point in fall of 2008.  

Second, even if few homeowners themselves were actually harmed, mortgage servicer malfeasance, such as robosigning has done tremendous harm to the legal system and to the housing finance system.  Banks shoddy mortgage underwriting and then complete inability to handle the resulting foreclosure tsunami has already deeply eroded confidence in our financial system, which has forstalled economic recovery.  That's a harm to everyone in America. Finding out that our largest financial institutions have been at best cavalier about the law and at worst criminal in their handling of foreclosures can hardly be helping the economy recover.  

Third, it seems like the settlement might involve servicers committing to doing a certain number of loan modifications which would cost them $20B.  In other words, servicers wouldn't pay Treasury fines directly, but would pay in-kind via loan mods.  Servicers are objecting that doing so is tantamount to an unappropriated social program or that it will result in windfalls for undeserving borrowers.  

This argument should be rejected out of hand.Treasury could simply fine the servicers in cash and then use the cash to carry out various programs. Objecting to the ultimate use of the funds is not a legitimate basis for objecting to having the cough up the money. If Treasury spent the money on balloons and ping-pong balls or bailing out banks, it wouldn't make the servicers less culpable.  

But if the servicers find doing loan mods so distasteful (which they clearly do), and they're worried that it will result in strategic default, then how about this for a use for the cash--let Treasury fund legal aid programs for foreclosure defense.  Of course, $20B in legal aid would end up costing the banks much, much more.  Alternatively, why not just require each servicer to produce a quota of loan mods that meet certain requirements?  That would let the banks figure out who is deserving and who isn't.  If BoA thinks it can sniff out the strategic defaulters from the deserving ones, let them try.  

Finally, it's worth noting that the $20B wouldn't be split equally among all banks. It would probably be divided by the size of servicing portfolio. The chart below shows how that division would work, based off of Q4 2009 servicing portfolios in dollars. And no surprise, BoA takes it on the chin with a $4B hit.  Maybe that's why they're among the loudest objectors.    

?

 

Full post as published by Credit Slips on March 03, 2011 (boomark / email).