With the news Wednesday that Massachusetts Attorney General Martha Coakley has “lost confidence” in the multistate AG talks with five big banks and is revving up to sue, coupled with last week’s announcement by California AG Kamala Harris that she’s also dropping out of talks and launching her own investigation, I’ve been wondering what shape an AG suit against mortgage lenders would take. I reached out to both the New York and Delaware attorneys general offices, since they were the first to start talking about filing their own cases. They didn’t return my calls. But according to the bank lawyers I talked to (caveat emptor), there’s a huge gap between the wrongs the states will be able to show and the relief for troubled homeowners that they say they want.
“There’s a fundamental disconnect between what they want and they claims they might have,” one bank lawyer said.
Let’s put aside securities fraud claims the states may have for troubled mortgage-backed securities, since those have nothing to do with the robosigning revelations that led all 50 states to enter talks with Bank of America, JPMorgan Chase, Wells Fargo, Citigroup, and Ally Financial a year ago. The basis of the talks has been deficiencies in the foreclosure process. Mortgage servicers took all sorts of shortcuts as they pushed an unprecedented surge of homeowners into foreclosure beginning in 2008. It’s pretty much undisputed that foreclosure law firms filed untold numbers of false certifications and deficient affidavits with the courts in states that require foreclosures to be approved by a judge.
There are also myriad problems with mortgage documentation, as MBS investors have discovered when they’ve reviewed underlying loan files. The chain of ownership is another potential area for AG claims. The Mortgage Electronic Registry System, a database set up to facilitate mortgage loan trading, has spent the last two years fending off all sorts of homeowner claims that it has either engaged in a conspiracy to force homeowners into foreclosure or else is responsible for administrative fiascos.
These are not trivial claims. It’s a big deal to submit a false affidavit to a judge. Most states have criminal or civil laws (or both) barring false certification. State AGs could certainly fashion unfair or deceptive acts cases against mortgage servicers, and they could assert big money demands, based on statutory damages for each robosigned document. Bank lawyers are skeptical that damages based on deficiencies in the foreclosure process would net the states the $20 billion the banks are reportedly willing to pony up in the multistate settlement. (The banks, of course, want releases beyond their liability for foreclosure deficiencies, which is both why they’re willing to pay that much and why some AGs say the proposed deal is letting them off too easily.)