A settlement proposal by state attorneys general with the five biggest U.S. mortgage servicers stands out less for what it contains than for what it omits — terms for resolving the most difficult issues dividing regulators and the big banks.
The proposal, which calls for a dramatic increase in loan modifications, is intended as the basis for settling allegations of widespread wrongdoing by the big loan servicers in handling millions of foreclosures.
But the sharply conflicting interests of the banks, regulators, homeowners and investors in mortgage securities signal that chances are remote for any "global" settlement with the banks.
Failure to reach a comprehensive settlement would be bad for the housing market, homeowners, investors in mortgage-backed securities, and even the banks themselves.
"There are so many different parties involved that I question the do-ability of a global settlement," said Bert Ely, an independent banking consultant.
Paul Miller, a bank analyst with FBR Capital Markets, said the banks ultimately might reach a settlement with requirements for loan modifications greatly watered down.
"The banks have a mess on their hands and they know that," Miller said. But he said that because banks fear the costs of the loan modifications the proposal would require, "I just don't see how banks can sign this document."
The AGs' 27-page proposal leaked out last week. Much of it deals with imposing what appear to be strict new standards of conduct for banks and requires far more loan modifications on terms that make it likely that homeowners can keep their homes. The settlement would be with Bank of America Corp., Wells Fargo & Co., JPMorgan Chase & Co., Citigroup and GMAC/Ally Financial Inc.
Missing from the document, however, are proposals for make-or-break issues such as:
• The dollar amount of penalties the servicers would pay, and where money from the penalties would go. The document lists no amount, but a figure of at least $20 billion has been widely discussed.
• The extent of loan modifications required, particularly principal reductions cutting the basic amounts owed.
• Whether the banks and their personnel may get immunity from potential state and federal criminal prosecution for filing forged or fraudulent documents in foreclosure cases.
• A seemingly obscure but vital question — what would happen with mortgages held in the name of the Mortgage Electronic Registration Service, a company established by the big loan servicers. MERS claims to hold the title to about half of all home mortgages, and vast numbers of foreclosure actions have been filed in MERS' name. But in recent months courts around the country have ruled that MERS lacks legal standing to foreclose. (A few courts, however, have ruled that it does.)
• A factor that has led to a sharp reduction in recent months in the number of foreclosures — court rulings around the country holding that banks cannot foreclose when they are missing crucial, authentic documents proving ownership of the mortgages.
Foreclosure tracker RealtyTrac reported Thursday that foreclosures in February 2011 were down 27 percent from the same month last year. The report attributed nearly all of the decline to the court rulings, which have led banks to hold back on filing foreclosure cases.
BREEDING MORAL HAZARD?
In a press conference earlier this week, Iowa Attorney General Tom Miller, who led an investigation on behalf of the 50 states' attorneys general, predicted that a broad settlement could be reached within about two months.
Staff members of several AGs, who asked not to be identified, said that crucial issues were left out because differences among state and federal regulators remain so strong that they haven't been able to agree on proposals. The Office of the Comptroller of the Currency and the Fed didn't participate.
Miller said the agreement was worked out jointly with federal agencies including the Federal Deposit Insurance Corp, the newly created Consumer Financial Protection Bureau and Justice Department.
Bank opposition to the proposal emerged quickly. On Tuesday, Brian Moynihan, chief executive of Bank of America, the largest U.S. servicer, said at a meeting with analysts and investors that he opposes widespread principal reductions for homeowners in default.
Moynihan, executives at other banks and OCC officials contend that such modifications could be unfair to homeowners who have kept current with their payments. They also say it might induce some who can afford current payments to default in expectation that they would be able to negotiate a better deal.
MISSING DOCUMENTS STILL A PROBLEM
It is also unclear how any settlement between regulators and the banks could undo recent court decisions banning banks from foreclosing when they lack vital documents proving ownership of the mortgages.
In the chaos of the housing boom, many loan originators never bothered to pass on those documents to investor trusts that bought securitized mortgages.
Before the rulings the banks had tried to get around the problem by filing fake mortgage assignments, often drawn up just before or after a foreclosure proceeding began.
Joe Klein, an attorney with Legal Aid of Collier County, Florida, who represents large numbers of low-income homeowners, contends that almost without exception the mortgage assignments banks filed in his cases weren't authentic.
The court ruling could leave the status of hundreds of thousands of homes and mortgages in limbo indefinitely.
Legal experts say they doubt that a settlement between regulators and the banks could overcome the obstacles posed by the court decisions. Only an act of Congress could do that, they say. But there has been no sign of interest by lawmakers in taking on the issue.
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