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The Soft Underbelly of the Federal and State Attorneys General $25 Billion “Robosigning” Mortgage Settlement with Big Banks

It’s official: The federal government, 49 of the 50 States (all but Oklahoma, the lone hold-out) and the country’s five leading bank mortgage servicers (none other than household names Bank of America, JP Morgan Chase, Citigroup, Wells Fargo, and Ally Financial) announced a February 9, 2012 settlement with said banks regarding foreclosure misconduct and “robosigning” practices. (Here’s a good summary of this mess in The New York Times.)

Unless you’ve been living under a rock (and even if you are, assuming that robosigning put you there), by now you have witnessed the dog and pony show by politicians (with President Obama leading the charge), attorneys general and bank spokespersons – singing the praises of their “landmark” settlement. (Strangely, their smug self-contentment is reminiscent of a scene from a movie in which the equally smug members of an “old boy’s club” retreat to the whiskey lounge of their luxurious cruise ship, tapping their cigars, literally slapping each others’ backs and being exceedingly pleased with themselves. But more on that later.) But what about the soft underbelly of this settlement? This emerges even as the final settlement agreement remains hidden from public scrutiny.

Here are the top three infuriating aspects of this settlement:

  1. It’s nary a drop in the bucket. As The New York Times reported, of 48.5 million mortgages in the U.S., some 10.7 million are “underwater” (meaning the homes have a value less than their mortgage amounts), to an aggregate tune of some $699 billion of negative equity. Compared to those amounts, the $20 billion allocated under the settlement to modify underwater mortgages seem incomprehensibly inadequate. As for the real victims of robosigning? That brings me to my second gripe.
  2. It disrespects the law. As an attorney, I have a nearly devotional respect for the law. Laws must be followed and rules obeyed. I certainly counsel my clients that way. As anecdotal episodes illustrate, banks have engaged not only in reckless behavior and sloppy recordkeeping but in wholesale perjury and forgery amounting to fraud on the courts as well as homeowners. The banks’ actions denied people their right to due process of the law. An attorney who lied to a court would be lucky to keep his or her license to practice law. The banks on the other hand, get a mere slap on the wrist. As Gretchen Morgenson writes for The New York Times: “There’s no doubt that the banks are happy with this deal. You would be, too, if your bill for lying to courts and end-running the law came to less than $2,000 per loan file.” For such wholesale abuse of the law, this is a slap not nearly hard enough. Where does she get the “$2,000″ number? I am glad you asked.
  3. It does next to nothing to help the real victims of robosigning. According to the official settlement executive summary, the average borrower who lost a home to robosigning will receive a one-time payment of approximately $2,000 (depending on the “level of response” — in other words, no one will ever receive the full $2,000). So, even as some are praising the settlement as vindication for those who lost their homes to robosigning, in truth the settlement does almost nothing to soften the blow felt by those victims. This is especially harsh in light of the fact that, as the FAQ of the official settlement website states point blank,” [i]f the mortgage servicers followed the law, many foreclosures likely could have been prevented.” So people whose homes were illegally and fraudulently foreclosed by banks get $2,000 (if they are lucky)? That’s not vindication. Whether or not they were in default on their mortgages, they deserved nothing less than the due process of the laws, properly applied and followed. The remedy should hardly be a token payment.

Perhaps it is time to create new remedies and penalties — harder slaps, so to speak. I wonder what banks would do if States, instead of entering into flawed settlement agreements, adopted laws requiring a bank that is found to improperly foreclose on a home to forgive the mortgage or to pay the value of the home to the wronged borrower.

Will the banks get their comeuppance?

Perhaps. The settlement agreement does nothing to limit homeowners’ (or former homeowners’) rights to sue banks individually or as part of a class. It also contains other significant carve-outs, and grants no immunity from criminal liability. Time will tell if subsequent lawsuits may yet help to right the wrongs committed by the banks. (Remember that movie scene I mentioned above? It was from the 1997 movie, “Titanic.” And we all know how that went down.)