It's not the strongest action possible—which would and should be sending some bankers to prison for fraud—but it's action.
NEW YORK -- The Obama administration is seeking to force the nation's five largest mortgage firms to reduce monthly payments for as many as three million distressed homeowners in as little as six months as part of an agreement to settle accusations of improper foreclosures and violations of consumer protection laws, six people familiar with the matter said.
Described as a "shock and awe" approach, the deal would accomplish the four goals set out by state and federal policy makers and regulators as part of their multi-agency investigations into abusive mortgage practices by the nation's largest financial firms: punish banks for violations of state law and federal regulations; provide much-needed assistance to distressed borrowers; stabilize a deteriorating housing market; and dissuade firms from abusing homeowners in the future.
The modified mortgages could cost the five financial behemoths -- Bank of America, JPMorgan Chase, Citigroup, Wells Fargo and Ally Financial -- as much as $30 billion, according to sources. Combined, the five firms handle three out of every five home loans, according to newsletter and data provider Inside Mortgage Finance.
It also could lead to reduced mortgage payments or lowered loan balances for nearly two-thirds of the 4.7 million delinquent homeowners who have yet to fall into foreclosure, according to data provider Lender Processing Services....
While most of the federal agencies involved in the probe are near agreement on the outlines of a settlement, a few holdouts remain -- most notably national bank regulator the Office of the Comptroller of the Currency, sources familiar with the internal deliberations said. The nascent Bureau of Consumer Financial Protection, a unit of the Treasury Department, is involved in the discussions, as is the Federal Deposit Insurance Corporation and the Department of Housing and Urban Development. The Justice Department is leading the talks. The OCC appears likely to not participate in a joint federal action, sources said.
The idea is nascent enough, according to HuffPo, that the 50 state attorneys general pursuing a separate investigation haven't yet begun negotiating with the lenders or agreed on a "single strategy to penalize banks that broke state laws in pursuing improper foreclosures." This poses a problem, with Obama and Treasury Secretary Timothy Geithner reportedly pushing for a quick resolution.
People involved in the state discussions said they don't even know the full extent of the so-called robo-signing scandal or other possible violations of state law because they haven't conducted an in-depth investigation.
At least one attorney general, New York's Eric Schneiderman, has voiced concerns about signing on to any agreement that forces him to give up his right to pursue mortgage-related violations of his state's laws in order to participate in what is widely acknowledged to be a multi-billion dollar deal, sources said.
There's been little discussion among the state officials over what claims they'd release banks from in exchange for agreeing to penalties and a requirement they improve their dealings with homeowners, these people said.
Schneiderman wants to probe improper lending practices; failures to follow state laws when banks bundled home loans into securities; and allegations of deception by lenders who sold investors now-toxic mortgages.
Buy-in from the AGs is going to be critical, and those AGs like Schneiderman who want to see state law enforced to the fullest could be hard to appease. The agreement would also require the banks' cooperation. The program would have to have much more oversight from Treasury than we've seen in the fiasco that is HAMP in order to actually meet those goals and to force the banks to abide by new rules, pay substantial penalties, and still be under the threat of liability from the states.
There should be two key considerations in any settlement agreement here: relief for homeowners—relief that puts them in no further jeopardy—and the rule of law. One of them, likely the latter, will probably be sacrificed to keep the banks happy.