A long anticipated draft settlement between the nation's largest private mortgage lenders and US states has been announced, but it doesn't look good for industry critics who hoped the banking giants — Bank of America, JPMorgan Chase, Wells Fargo, Citibank and Ally Financial —would suffer full investigations and payouts equal to the damage they caused to homeowners and the overall economy. The deal would still have to be accepted by the states.
UPDATE: George Zornick writes at The Nation:
Obama Is on the Brink of a Settlement With the Big Banks—and Progressives Are Furious
For months, a massive federal settlement with big Wall Street banks over their role in the mortgage crisis has been in the offing. The rumored details have always given progressives heartburn: civil immunity, no investigations, inadequate help for homeowners and a small penalty for the banks. Now, on the eve President Obama’s State of the Union address—in which he plans to further advance a populist message against big money and income inequality—the deal may be here, and it’s every bit as ugly as progressives feared.
UPDATE: Wall Street Accountability Advocates to Obama: Stand Against a Sweetheart Deal With the Big Banks
In a statement, Robert L. Borosage, co-director of the Campaign for America’s Future, had this to say:
“Americans from across the political spectrum are angry that the Wall Street banks blew up the economy and got bailed out, while home owners and taxpayers were stuck with the bill.
“This is a fundamental question of justice and democracy. The law is respected only if it is enforced. Cutting a settlement with the banks before there is an investigation violates our basic sense of justice. No one who robbed a bank would be offered immunity, a modest fine and no admission of guilt – before there was an investigation into who stole the money and how much they took.
“And there is a fundamental question of whether the democracy can hold the wealthiest few accountable. Americans are increasingly cynical about politicians, believing that Wall Street can buy and sell Washington. This is destructive to our democracy. The President’s campaign will highlight his commitment to fair rules and a fair shot for every American. A sweetheart deal with the banks would be a glaring contradiction to that theme. Any deal, enforced over the objections of the most independent Attorneys General, like New York’s Eric Schneiderman, will fail that test.
“What the people want is clear: Investigation before immunity. Penalize the perpetrators, not their victims. Any settlement must have sufficient scope to deal with the scale of the problem. There is an estimated $700 billion of negative equity in underwater homes. While 1 million homeowners have been helped by efforts to save homeowners, 10.7 million homeowners are underwater and that does not count people who have already suffered foreclosure. The top six banks paid bonuses worth $140 billion last year alone, or $420 billion over the last three years. They hold assets of $9.5 trillion. The rumored settlement of $25 billion is barely a slap on the wrist.
“It is vital to this country that the banks are made accountable. It is vital that they do not see the law as simply a minor price of doing profitable business, a speed bump on the way to their bonuses.
As Simon Johnson writes at Politico, the Obama administration is in danger in pushing this failed policy at just the wrong time:
The Obama administration has continued to press for a small-scale settlement of the alleged abuses around mortgage practices, repeating and compounding the mistake. The White House has routinely overlooked voters’ dismay at its favoring “too big to fail” banks. But given how its electoral base is now reacting, this time may be different — because a lack of enthusiasm among Democratic voters in swing states could cost President Barack Obama reelection.
The Obama administration’s pattern of behavior is unmistakable. Its first, and worst, decision was to keep the management and boards of big banks in place — despite the fact that these financial institutions had been driven into the ground by incompetence, greed and notoriously failed governance.
And AFL-CIO President, Richard Trumka, had this to say in response to reports about the deal:
Obama's campaign will highlight his commitment to fair rules and a fair shot for every American. A sweetheart deal with the banks would be a glaring contradiction to that theme. Any deal, enforced over the objections of the most independent Attorneys General, like New York’s Eric Schneiderman, will fail that test.
The economy is currently weighed down by $750 billion in negative home equity, so relief on a massive scale is needed to lift home values and stimulate the economy by increasing consumer demand. A comprehensive settlement must force banks to write down underwater mortgages. A sum significantly larger than the rumored $25 billion is needed for the economy to grow and create jobs.
Specifically, the administration must stand strong against the big banks and insist on:
1) A full and thorough investigation into problems tied to the residential mortgage-backed securities (RMBS) market, and
2) A guaranteed minimum amount of money set aside for reducing the mortgage principal of "underwater" homeowners in key states impacted by the foreclosure crisis.
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This is an opportunity for the administration to demonstrate leadership and show that it has the political will to do what's right for homeowners and right for our economy.
Naked Capitalism's Yves Smith was indignant, pointing out that Obama is poised to use this deal to point towards "bank accountability" when it would, in her mind, be the opposite:
It’s yet another gambit designed to generate a campaign talking point while making the underlying problem worse.
Obama’s latest housing market chicanery should come as no surprise. As we discuss below, he will use the State of the Union address to announce a mortgage “settlement” by Federal regulators, and at least some state attorneys general. It’s yet another gambit designed to generate a campaign talking point while making the underlying problem worse.
The president seems to labor under the misapprehension that crimes by members of the elite must be swept under the rug because prosecuting them would destabilize the system. What he misses is that we are well past the point where coverups will work, and they may even blow up before the November elections. If nothing else, his settlement pact has a non-trivial Constitutional problem which the Republicans, if they are smart, will use to undermine the deal and discredit the Administration.
To add insult to injury, Obama is apparently going to present his belated Christmas present to the banking industry as a boon to ordinary citizens. He refused to appoint a real middle class advocate, Elizabeth Warren, to the Consumer Financial Protection Bureau, but he’s not above stealing her talking points.
Earlier today the Associated Press reported:
The nation's five largest mortgage lenders have agreed to overhaul their industry after deceptive foreclosure practices drove homeowners out of their homes, government officials said Monday.
A draft settlement between the banks and U.S. states has been sent to state officials for review.
Those who lost their homes to foreclosure are unlikely to get their homes back or benefit much financially from the settlement, which could be as high as $25 billion. About 750,000 Americans — about half of the households who might be eligible for assistance under the deal — will likely receive checks for about $1,800.
Others, however, would fret and perhaps re-phrase the AP report to read instead, "as low as $25 billion." Van Jones, of Rebuild the Dream, and George Goehl, of National People's Action, in an op-ed today, called for the settlement to be no less than "$300 billion," calling something closer to $20 billion "an astonishingly small fraction of what's needed."
Add up all the underwater homes in America, and there's an estimated $700 billion in negative equity in the country, according to a recent study. If banks fix what they broke and write down principals for all underwater mortgages, this would free up millions of people to pump billions of dollars back into local economies, create jobs, and ultimately generate revenue to help invest in things that will help our economy grow.
In addition, they say, the settlement must not preclude further investigations into the robo-signing debacle and the creation of the mortgage crisis that left millions underwater or out of their homes after what they claim were illegal foreclosures.
As the AP report continues:
Critics, including some members of Congress, say they want a thorough investigation of potentially illegal foreclosure practices before a settlement is hammered out.
"Wall Street again is trying to pass the buck. Instead of criminal prosecutions, we're talking about something that's not more than a slap on the wrist," said Sen. Sherrod Brown (D-Ohio), who has been critical of the proposed settlement.
Yves Smith, writing at Naked Capitalism, gets into the details of the proposal (though she acknowledges its impossible at this point to have a precise understanding of what the final deal looks like):
...previous leaks have indicated that the bulk of the supposed settlement would come not in actual monies paid by the banks (the cash portion has been rumored at under $5 billion) but in credits given for mortgage modifications for principal modifications. There are numerous reasons why that stinks. The biggest is that servicers will be able to count modifying first mortgages that were securitized toward the total. Since one of the cardinal rules of finance is to use other people’s money rather than your own, this provision virtually guarantees that investor-owned mortgages will be the ones to be restructured. Why is this a bad idea? The banks are NOT required to write down the second mortgages that they have on their books. This reverses the contractual hierarchy that junior lien-holders take losses before senior lenders. So this deal amounts to a transfer from pension funds and other fixed income investors to the banks, at the Administration’s instigation.
Another reason the modification provision is poorly structured is that the banks are given a dollar target to hit. That means they will focus on modifying the biggest mortgages. So help will go to a comparatively small number of grossly overhoused borrowers, no doubt reinforcing the “profligate borrower” meme.
And NPR reports this morning on another prominent government figure who has resisted appeasing the banks:
New York Attorney General Eric Schneiderman is raising objections, and may reject the settlement because he believes authorities have done too little to investigate the role of big banks in the financial crisis.
On a ride with the attorney general in his state-issued SUV, we pass the site of the Occupy Wall Street protests. Schneiderman didn't take part in the protests, but he agrees with some of the message.
"People aren't sure what happened, but they know that ... this was a man-made catastrophe, [and] that there are people who caused the bubble and the crash," he says.
This sentiment is echoed by Jones and Goehl, when they write, "The banks got their bailout. Now we need a strong and fair settlement to help Americans drowning in underwater mortgages."