Not everyone likes yesterday's Robosigning Settlement

A bad deal

Dear James,

Wall Street banks fraudulently and illegally foreclose on your house. You get $2,000. The bank gets let off the hook. We'd call that a bad deal.

And yet yesterday, at the urging of the White House, federal regulators along with 49 state attorneys general announced a settlement deal for mortgage servicer abuse that does essentially that. It lets banks off the hook for widespread foreclosure fraud.

Press releases have trumpeted a $26 billion deal which may sound like a lot, but it's a paltry sum when you break down the numbers.

With an average mortgage of $180,000, and loan instruments executed illegally, a family that lost their home will get a check for just over 1% of the value of the mortgage.¹ That is not a victory. The amount of money this deal makes available to help homeowners is an order of magnitude too small and incommensurate with the harm done by the banks.

The estimated $10-$20 billion in the deal for principal reduction would reduce only about 2% of the $700 billion in equity destroyed during the financial crisis. And the banks themselves will only pay $5 billion out of their own pocket. By far the lion's share of the cost will be borne by investors and taxpayers, who had no part in the robo-signing scandal. ²

No doubt the deal is far better than the deal that was offered months ago. And this most certainly is a result of activism from members of CREDO and many of our allies in the progressive movement who worked with progressive attorneys general like New York's Eric Schneiderman, California's Kamala Harris, Delaware's Beau Biden, Massachusetts' Martha Coakley and Nevada's Catherine Cortez Masto to fight a bad deal.

But the final deal, while better, still can't be characterized as a good deal or even as a good first step towards real accountability for Wall Street banks.

The reported $26 billion settlement will not come close to inflicting any real pain on the banks all of which have already reserved the full amounts required from them under the deal. As Robert Reich said, the "$26 billion settlement with banks over mortgage fraud is far short of what they should pay and distressed home owners deserve."³

One in five Americans with mortgages owe the banks more than their homes are worth, and these home owners are underwater by an average of $50,000 each. This is a collective negative equity of nearly $700 billion.⁴

Consider the $700 billion bailout of Wall Street paid for by U.S. taxpayers⁵ and the more than $1.2 trillion in loans⁶ provided by the Federal Reserve to Wall Street banks. Or another way to put the deal in perspective is to compare it to the tobacco industry settlement in 1998 — the largest previous multi-state agreement. That deal was worth $350 billion in today's dollars — more than ten times the size of the mortgage deal.⁷

And that's not even all that's wrong with this deal. The federal government's track record for enforcing settlement terms with Wall Street banks is abysmal. Furthermore, even if the banks follow the terms of the deal, it's quite possible than when all is said and done, not only will the banks have suffered no pain, they may actually come out having profited from their illegal schemes to rip off homeowners. According to the Consumer Financial Protection Bureau, the largest mortgage banks saved $20 billion by taking illegal shortcuts — an amount far greater than the $5 billion out of pocket they will be required to pay in this deal.⁸

All of which adds up to a scenario in which this settlement does literally nothing to deter the banks from engaging in the same fraudulent behavior in the future.

Senator Dick Durbin famously said the Wall Street banks own the politicians in Washington, DC. Today, this could not be more clearly true as we closely examine the deal that the Obama administration cut with Wall Street and pressured state attorneys general to sign.

There has yet to be a full investigation of the robo-signing scandal despite what Reuters called "copious evidence" of "widespread forgery, perjury, obstruction of justice, and illegal foreclosures...." ⁹

By establishing settlement terms before there has been any meaningful investigation, the deal whitewashes the widespread lawlessness of the banks and virtually ensures that no bankers will be held criminally responsible for their part in the robo-signing scandal and foreclosure fraud.

Though the exact terms of the settlement have not been disclosed, we understand that it will not cut off other important avenues to hold the banks accountable. New York Attorney General Eric Schneiderman is co-chairing a federal task force that if fully resourced and left to operate unhindered by the White House could achieve hundreds of billions in reduced principal for underwater homeowners and criminal indictments for bankers who broke the law and helped drive our economy off a cliff. And other state attorneys general can continue investigating Wall Street's role in causing the housing crisis to ensure that the banks that caused the crisis are held accountable for their wrongdoing.

This is the biggest case of fraud in our history. Homeowners deserve justice for crimes committed against them by Wall Street banks that in many cases literally stole their homes from underneath them. Unfortunately, yesterday's settlement doesn't even provide anything close to a down payment on justice.

As the election season heats up, we must be insistent about real accountability for Wall Street crooks. Pressure from activists like us will be even more important in the days to come if we are to achieve any real measure of accountability for Wall Street bankers who profited from their crimes and left the 99% to pay to the price for their reckless disregard.

Becky Bond, Political Director
CREDO Action from Working Assets

1. "The Top Twelve Reasons Why You Should Hate the Mortgage Settlement," Yves Smith, Naked Capitalism, 02-09-12
2. "The Servicing Settlement: Banks 1, Public 0," Adam Levitin, Credit Slips, 02-09-12
3. Twitter, 02-09-12
4. "Mortgage Plan Gives Homeowners Bulk of the Benefits," Nelson D. Schwatz and Shaila Dewan, New York Times, 02-09-12
5. "Wall Street Aristocracy Got $1.2 Trillion in Secret Loans," Bradley Keoun and Phil Kuntz, Bloomberg, 08-22-11
6. "The Wall Street Bailout Plan Explained ," David Stout, New York Times, 09-20-08
7. "FAQ: The foreclosure settlement ," Sarah Halzack and Sarah Kliff, WashingtonPost.com, 02-09-12
8. "Big Banks Save Billions As Homeowners Suffer, Internal Federal Report By CFPB Finds," Huffington Post, 03-28-11.
9. "U.S. AG Eric Holder, DoJ Head Lanny Breuer Linked To Banks Accused Of Foreclosure Fraud ," Reuters, 01-19-12.