That incredible shrinking foreclosure settlement

I checked in with Citibank the other day to see how they were doing on their promise to reduce principal on loans for qualified underwater borrowers.

The bank had made that promise as part of a highly touted national settlement of foreclosure fraud charges with state attorneys general back in February.

One thing the bank did not agree to, apparently, was any sense of urgency.

A bank representative told me they had taken a couple of months to get set up and were now in the process of reviewing their borrowers’ files.

He said he thought they would be done by mid-August.

One thing we know for certain: without a tough independent monitor to track what the banks are doing, and not doing, they’ll take their time to produce little help for troubled borrowers.

We know that from the banks’ past poor performance in the administration’s various foreclosure aid programs.

But now state politicians are threatening to grab the cash that banks paid as part of the settlement – money that was supposed to be used to pay monitors to oversee the banks’ compliance with the settlement, along with hiring more housing counselors that could guide homeowners to assistance where it was available and providing legal advice.

At issue is the relatively small amount of cash penalties the banks actually had to turn over in the $25 billion settlement– about $5 billion– with half of that supposed to go to state attorneys general for new foreclosure assistance.

Another $20 billion consists of a dubious and highly complex system of credits given to the banks for taking actions to help homeowners, some of which they were already supposed to be doing.

The national mortgage settlement has always been mainly a PR stunt for the state attorneys general and the Obama administration, to try to make up for their shameful collective failures to protect homeowners from the bankers’ continuing fraud and sloppiness in the foreclosure process, or to hold bankers accountable.

The investigative outfit Pro Publica delved into what they called the “billion-dollar bait and switch,” with states planning to divert $974 million from the settlement to their general funds to cover serious budge deficits arising, ironically, from the Great Recession, which was caused by the bankers’ out of control speculation.

Among those that are looting money that was supposed to be targeted at helping those facing foreclosure are states that have been particularly hard hit by foreclosures, including California and Arizona. Those states got more money from the settlement to compensate for their residents’ victimization by the biggest banks in the foreclosure process.

In California, Governor Jerry Brown now intends to use the state’s $411 million settlement proceeds to help plug a severe budget gap, in particular to pay for existing housing programs, but no new foreclosure assistance initiatives.

You would think diverting the proceeds of a legal settlement would be illegal. But apparently states have the power to raid the settlement funds, having done so in 2003 with fancy financing schemes to get state officials’ hands on funds that were supposed to be targeted for health care costs from a 1998 settlement with tobacco companies, the San Francisco Chronicle reported.

State budget problems brought on by the 2008 financial collapse are enormous, but no more compelling than the continuing failure of our elected officials to grapple with the foreclosure crisis. That failure is now underscored by the hollow ring of the state AGs’ promises, and compounded by governors’ betrayal of  those promises.

 

 

A "landmark" we still can't see

For the most part, the big media and housing nonprofits have bought the government’s hype on the recent foreclosure fraud settlement, lauding it with great fanfare as a historic landmark.

It’s a good thing that not all our national landmarks are as phony as that settlement has turned out to be.

If they were, none of them would still be standing.

If big media had taken a more objective view, rather than just copying the authorities’ press releases, they might have chosen another, much less dramatic description, such as “yet to be released.”

The best description might take a few more words: “designed to make the Obama administration and state attorneys general look like they’re doing something while letting banks off the hook and leaving homeowners out in the cold and taxpayers and investors holding the bag.”

The settlement continues to raise more questions than it answers. For example, California’s attorney general Kamala Harris announced that the state would get $18 billion in foreclosure relief from the national settlement.

But then a couple of days later, Jeff Collins of the Orange County Register reported that Harris hadn’t offered a complete explanation.

As it turns out, the state might get only $12 billion.

The amount, Harris’ people explained to Collins, depends on which of two methods you used to calculate it.

“There are two sets of numbers,” said Linda Gledhill, a Harris spokeswoman told Collins.

Hah! Who knew?

One method calculates the cost of the settlement to banks, which as explained in the settlement’s “executive summary” are required to provide $25.2 billion in a variety of forms of assistance to borrowers. But providing that assistance doesn’t actually cost them $25 billion.

Apparently the settlement only requires the banks to pay out $5 billion in cash, with the balance consisting of a yet to be released complex system of credits that the the government will give the banks credit for offering the assistance, with details yet to be announced.

Meanwhile, the Financial Times (registration required) has been parsing the sparse publicly available details about the settlement. Their prognosis: The settlement shifts the costs of modifying mortgages from the banks to the taxpayers and to investors who bought securitized mortgages. As a result, it resembles another bailout more than it does a settlement.

Neil Barofsky, the former Inspector-General of the Troubled Asset Relief Program told the FT:

“If the banks are doing something under this settlement, and cash flows from taxpayers to the banks, that is fundamentally an upside-down result.”

And keep in mind that the actual settlement agreement still hasn’t been released yet, more than ten days after it was announced. What exactly is the hangup?

Do the authorities really expect us to take their word for it? How gullible do they think we are?

Remember how the 2008 bank bailout started: a three-page document submitted by the treasury secretary.

As my colleague Harvey Rosenfield warned when the President first announced the settlement, we’ll be in for a lot of surprises when the actual settlement is actually released, whenever that will be.

And something tells me they won’t be the good kind of surprises.