Back when I was a teenager, I lent my funky old electric guitar to my friend Tony. Tony lent it to Bill, and Bill pretty much lost it. Those were some fairly hazy times.
One day, I called Tony and told him I needed it back. He called Bill who told him it was lost. They then decided to give me an old, broken electric keyboard instead.
And that, my friends, is the story of the mortgage banking settlement now underway across this country.
Let’s review. Banks and mortgage lenders like the infamous Countrywide originated millions of housing loans which they then bundled into securities (MBS) and sold to investors. Investors paid servicers, sometimes the originating banks themselves, to manage the loans.
Problem 1: when you sell a loan, you tend not to take your underwriting or your paperwork too seriously. Sort of like how Tony didn’t spend a lot of time thinking about whether Bill would take good care of my guitar.
Problem 2: the housing bubble burst and loans started to default.
Problem 3: because of the shoddy work done by originators, not to mention the attempt to cover up that shoddy work with forgeries (robo-signers), establishing ownership of the loans became problematic to say the least. And you can’t foreclose if you can’t document ownership of the loan.
So what’s the best way out of this mess?
Well, the fastest way is for the banks to get off the hook with a big, national settlement. They pay a fine and they’re held harmless— indemnified— against further legal action for all their screwups.
But is that the best way? Eric Schneiderman and Beau Biden think not, and I think they’re right.
Schneiderman and Biden are, respectively, the NY and DE state Attorneys General and they are essentially saying “just hold on a minute” to the majority of AGs pushing the national settlement (disclosure: I used to work for Biden’s dad, the VP).
Right now, the two AGs are pressing a case that will allow investors, borrowers, and the public to get the facts about another suspiciously cushy deal between Bank of America, which (for reasons I’ll never understand) bought Countrywide, and a small group of 22 investors.
If Schneiderman and Biden prevail, they will preserve the rights of far more investors left out of but bound by the deal…a deal which could force them to accept pennies on the dollar, and does nothing to advance the loan modifications that would benefit both borrowers and investors, not to mention the macroeconomy.
If they fail, or give up as powerful forces would very much like them to, then once again, a bank rides off into the sunset, with barely a nick. As David Dayen of FDL reports, the deal Schneiderman and Biden are trying to block:
“… would release BofA and its trustee, Bank of New York Mellon, from liability on a broad range of violations of securities statutes, including the agreements made with investors, the representations and warranties contained within and overcharging of fees by BofA. This would apply to almost all Countrywide MBS.”
(Dayen’s been doing great work following this case. Ditto Yves Smith.)
But this case is really a microcosm of two AGs bigger target: they’re ultimately trying to block a much larger sweetheart deal between the banks and law enforcement officers representing virtually every other state in America. Under the proposed settlement, the banks that created the market for toxic loans, and sold trillions of dollars of securities backed by those loans, would get off the hook for around $20 billion.
A lot of people would like Schneiderman and other renegade AGs to get out of the way and let the grownups handle this by themselves. Problem is, that leaves the investors out of the deal and when you leave the investors out, you leave the borrowers out. That’s because investors have no incentives to deal with the borrowers— to modify loans, for example— if the settlement doesn’t include them.
Schneiderman’s key insight here, and one that anyone interested in actually fixing this problem should support, is that until you bring in all the relevant stakeholders, you’ll neither clean up the mess—e.g., the excluded investors would pursue legal action in the BofA case noted above— nor mete out the relevant punishments of the relevant magnitudes to actually impose some discipline. The way things have gone so far, no wonder banks have been sloppy at best and fraudulent at worst. No one’s held them accountable.
I’m sure old Tony and Bill were glad to fob off that old, broken Casio keyboard on me, and put the whole lost guitar incident behind them. But it was a bad settlement, and I shouldn’t have settled for it.