Adam Levitin on Servicing Fraud Settlement

Adam Levitin has an interesting post on the settlement negotiations.  Read his whole piece.  I’ve put a snippet below.

Every week that is spent on negotiations that get nowhere lets the banks run the clock a little further. So the banks will try to stay at the negotiating table as long as possible without every actually conceding anything. But that’s the strategy here–run the clock to avoid principal reductions. What terrible is that this strategy seems to be working–the CFPB has been shut out of negotiations because the Wall Street Journal and Congressional Republicans have made such an issue over the CFPB. (This might turn out to be short-sited, but that’s another story.) And this ties in perfectly with the PR spin: the line coming out of the banks hasn’t been an objection to $25B in fines. It’s been an objection to principal reductions. The hackneyed moral hazard objection has been trotted out (despite the banks’ doing some principal reduction mods already) and we’ve had Moynihan (BoA), Stumpf (Wells), and Jaime Dimon (JPM) saying that principal reduction mods are “off the table.” Listen to the banks. Their rhetoric says it all–the game here is about the principal reduction mods, not about the servicing standards or the $24B fine. It’s about the cost of the principal reduction mods. (There might be some ancillary issues like the number of mods, but it’s really gotta be about cost.) Now lets be clear. Principal reduction mods are not about correcting robosigning. Robosigning is what’s gotten the most media attention, but that’s not the only issue around. There are a host of other flat out legal violations (just consider the $20M jury verdict in the Servicemembers Civil Relief Act cases to get a sense of what these violations cost-1,000 verdicts is $20B). There’s another panoply of questionable, but perhaps not illegal acts (e.g., MERS issues). And if you want a doozy, how about the many loans that are endorsed like simply to Deutsche Bank as trustee, rather than Deutsche Bank as trustee for a particular trust (Deutsche is trustee for over 2,000 RMBS trusts). That didn’t fly in a North Carolina appellate court, and it wasn’t a fluke endorsement (and there are worse problems than that in terms of endorsements). And then there’s also lots of good policy reasons for pushing principal reduction modifications. Principal reduction modifications start to address the $750B in negative equity in this country and help the housing market to clear without the inefficiencies and social externalities of foreclosure. And of course principal reduction mods make the banks pay an appropriate price (and in an appropriate form) for the economic and social harms they caused with the housing bubble and foreclosure aftermath, including threatening our fundamental property title systems via corner cutting on paperwork. Finally, consider what it means that we’re even seeing an eye-popping figure like $160B. It might be out there just to push the banks toward settling. But the amount of shit that the feds and AGs must think there is to come out with a number like that down on paper (especially for an agency under as much scrutiny for an sign of going off the rails as CFPB) makes my skin crawl. I worry that we don’t have any handle on just how much rot is in the system and that we’ve been papering over it as the stock market rebounds


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