Category: Featured Articles Created: Wednesday, 11 December 2013 Written by Delaney Rohan
After over a year and a half of negotiations, a national mortgage settlement agreement between state officials and five of the nation's biggest lenders appears to have been finalized.

The settlement is between officials from 49 states and Wells Fargo, Bank of America, JP Morgan Chase, Ally Financial, and Citigroup. It addresses claims that banks routinely used fraudulent practices such as robo-signing to wrongfully foreclose on hundreds of thousands of mortgages. Accordingly, the agreement contains several provisions that entitle certain homeowners to $25 billion in relief. As Bloomberg News reports:

"The agreement will direct $17 billion to writing down debt to buffer about 1 million homeowners from foreclosure through mortgage forgiveness, forbearance or loan modification programs, according to Housing and Urban Development Secretary Shaun Donovan. About 750,000 borrowers may get direct payments of as much as $2,000 to compensate them for servicing errors."

Proponents of the agreement are heralding it as a sign of national atonement, and their rhetoric is being used by unwitting journalists when framing the issue. For instance, The Boston Globe's editorial board argues:

It provides "better mortgage practices, relief for those who lost their homes to improper foreclosures, and, most importantly, mortgage modifications for more of those who are still at risk."

The agreement, proponents and journalists alike argue, compels banks to begin processing backlogged foreclosures, regulates future lending practices, and provide banks the framework needed to begin making modifications on existing loans. As Prashant Gopal and John Gittelsohn of Bloomberg News write:

"The backlog of foreclosures has trapped homeowners in properties they can no longer afford, depressed neighborhood prices by increasing the number of abandoned homes and led banks to tighten mortgage credit standards because of uncertainty about the cost of their potential obligations."

"The settlement," the AP reports, "would end a painful chapter that emerged from the 2008 financial crisis, when home values sank and millions edged toward foreclosure." Moreover, the AP continues, it "promises to reshape long-standing mortgage lending guidelines. It would make it easier for those at risk of foreclosure to make their payments and keep their homes."

Moreover, The Boston Globe editorializes, "even if, in a moral sense, major mortgage firms deserve to feel even more of a sting for robo-signing and other irregularities, there's also a greater cost to letting these disputes drag on endlessly." That cost "will be paid not by bankers," the Globe continues, "but by families and businesses seeking loans."

Here, the agreement is understood as the 'final chapter' of a narrative of corruption and fraud. The agreements' provisions, while 'painful,' allow the real estate market to begin moving forward.' Indeed, they serve 'the good of the nation.'

But there are several reasons why this agreement is grossly inadequate.

Firstly, it fails to provide homeowners with anywhere near the amount of relief they deserve. With over 10 million homes currently in foreclosure and a total debt of around $750 billion, the $25 billion settlement pales in comparison to the amount needed to provide relief. As George Goehl of the National People's Action – a coalition of community housing groups – is quoted in the Seattle Times, "Anything less than $300 billion is a win for the 1 percent that lets the banks off too easily and falls short of helping both middle-class families and communities targeted most by big bank fraud." Accordingly, those most invested in adequate remuneration will be forced to cut their losses. As Richard Eskow writes:

"A lot of people got shafted by the banks: borrowers, mortgage investors, and bank shareholders. Housing Secretary Shaun Donovan suggested this weekend that mortgage investors - many of whom are state and local governments, or the retirement funds of ordinary working Americans - will have to take the lion's share of the loss as part of the deal."

Secondly, the agreement actually incentivizes banks to deny relief to the most troubled of homeowners. Consequently, for these individuals – despite the fact that their loans are both fraudulent and overvalued – the agreement makes impending foreclosure all but inevitable. As Loren Berlin and D.M. Levine note:

"Under this proposal, the banks would collectively pledge to provide roughly $25 billion toward helping troubled homeowners. But the banks would receive greater credit toward satisfying the terms of the deal when they help borrowers who owe less than 175 percent of the value of their homes. Helping borrowers who owe more than 175 percent would qualify for less credit, according to the draft of the proposed settlement."

Thirdly, the agreement may lack adequate mechanisms of enforcement. This is made clear if we look at the Department of Justice's announcement regarding enforcement provisions:

"Compliance…will be overseen by an independent monitor, Joseph A. Smith Jr. Smith has served as the North Carolina Commissioner of Banks since 2002… The monitor will oversee implementation of the servicing standards required by the agreement; impose penalties of up to $1 million per violation (or up to $5 million for certain repeat violations); and publish regular public reports that identify any quarter in which a servicer fell short of the standards imposed in the settlement."

As Bruce Judson points out, how, in what way, and to what extent these penalties will be enforced is anybody's guess:

"The language of the Justice Department press release raises two central questions. First, what does "up to" mean? Does the independent monitor have discretion over the size of each penalty? This could effectively make the million dollar figures announced by the Justice Department meaningless. Banks have argued that the tens of thousands of robo-mortgage signatures and well-documented servicing errors were all technical violations that harmed no one. Undoubtedly, they will argue that any single violation was a meaningless error.

This provision would have real meaning if we applied the same standard our nation has applied in other areas: a zero tolerance rule. What would happen if each bank knew that any violation would result in a minimum fine of $1 million? I suspect bank behavior would change significantly.

Second, can banks contest these fines? Have the banks agreed that they will pay any fines assessed by the independent monitor? If not, then once again the provisions have the potential to be meaningless. The monitor will assess fines for violations and the banks will challenge the fines through whatever venues, the courts or otherwise, have been established by the settlement. The judgment and ability of the independent monitor to set fines will have been eviscerated."

A culture of secrecy further makes vague provisions ostensibly designed to reform lending and foreclosure practices. Again, Judson helpfully points out:

"Every reporter, representing news outlets including The Huffington Post and the New York Times, who has sought to understand these critical points has been rebuffed with a deafening silence. No interviews have been granted. No details have been released. As a result, one is forced to ask: Do the enforcement details actually exist?

At this moment, the nation has no idea whether this settlement is meaningful, or whether it is an extreme example of public officials misleading the public with false promises of bank compliance ensured by stiff penlalties [sic], when the actual penalties have the potential to be meaningless."

Fourthly, there is no way to make sure states use funds allotted under the agreement as they are intended: to provide relief for underwater homeowners. Indeed, misuse has already been made apparent. As the Huffington Post reported on Saturday, Wisconsin Governor Scott Walker plans to use $140 million of the funds to offset budget cuts, while Missouri Attorney General hopes to deposit $196 million into the general state fund. For each state, the amount diverted makes up roughly 20 percent of the totals provided under the settlement agreement.

Thus, the agreement gives banks the political and judicial fodder needed to absolve themselves of any past wrongdoing. Alternatively, state and federal officials can triumphantly hold up the agreement as a beleaguered symbol of holding banks' feet to the fire. And although past and future robo-signing-related cases of fraud are not exempt from the agreement, it nonetheless leaves far too many homeowners with insufficient relief, inadequate relief, or foreclosure. For others heavily invested in fairly correcting the repercussions of a mortgage-backed market propped up by fraud, the agreement neither ensures just compensation nor the proper regulation.

Contact Delaney Rohan at