Blog: Mortgage settlement not all that great

Jessica M. Karmasek Feb. 9, 2012, 2:16pm

WASHINGTON (Legal Newsline) - Federal officials and state attorneys general have come to an agreement with the nation's five largest banks over their mortgage practices, but that doesn't mean everybody has to like it.

On Thursday, federal officials, along with 49 attorneys general, announced they reached a $25 billion settlement with mortgage servicers Wells Fargo & Co., JPMorgan Chase & Co., Citigroup Inc., Ally Financial Inc. and Bank of America Corp. after months of trying to hammer out a deal.

Nearly all of the attorneys general released statements Thursday, praising the "landmark" settlement.

But one blog, Naked Capitalism, argues that the deal just plain "stinks."

Among its top 12 reasons, the blog notes that a price has now been set for forging and fabricating mortgage documents -- $2,000 per loan, it says.

"It's a great deal for the banks because no one is at any of the servicers going to jail for forgery and the banks have set the upper bound of the cost of riding roughshod over 300 years of real estate law," contributor Yves Smith wrote.

On top of that, a bulk of the settlement -- about $20 billion -- is actually "your" money, the blog points out.

"The mortgage principal writedowns are guaranteed to come almost entirely from securitized loans, which means from investors, which in turn means taxpayers via Fannie (Mae) and Freddie (Mac), pension funds, insurers, and 401(k)s," Smith wrote.

Smith argues that if the new federal task force -- co-chaired by New York Attorney General Eric Schneiderman, among others -- was truly serious about the situation, a deal would never have been made.

"You never settle before investigating. It's a bad idea to settle obvious, widespread wrongdoing on the cheap. You use the stuff that is easy to prove to gather information and secure cooperation on the stuff that is harder to prove."

What's worse, the blog argues, is enforcement.

"The enforcement is a joke. The first layer of supervision is the banks reporting on themselves," Smith wrote.

According to the U.S. Department of Justice, which released some details of the multistate agreement Thursday, mortgage servicers are required to collectively dedicate $20 billion toward various forms of financial relief to borrowers.

At least $10 billion will go toward reducing the principal on loans for borrowers who, as of the date of the settlement, are either delinquent or at imminent risk of default and owe more on their mortgages than their homes are worth.

At least $3 billion will go toward refinancing loans for borrowers who are current on their mortgages but who owe more on their mortgage than their homes are worth.

Borrowers who meet basic criteria will be eligible for the refinancing, which will reduce interest rates for borrowers who are currently paying much higher rates or whose adjustable rate mortgages are due to soon rise to much higher rates.

Up to $7 billion will go towards other forms of relief, including forbearance of principal for unemployed borrowers, anti-blight programs, short sales and transitional assistance.

According to the Justice Department, mortgage servicers are required to fulfill these obligations within three years. To encourage servicers to provide relief quickly, there are incentives for relief provided within the first 12 months. Servicers must reach 75 percent of their targets within the first two years.

Servicers that miss settlement targets and deadlines will be required to pay "substantial" additional cash amounts, federal officials say.

From Legal Newsline: Reach Jessica Karmasek by email at

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