How will the AGs enforce the mortgage settlement?

By Felix Salmon
March 27, 2011
Alex Ulam has a must-read article in American Banker which shows the biggest pitfall likely to face the mortgage servicers' settlement with state attorneys general: enforcement.

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Alex Ulam has a must-read article in American Banker which shows the biggest pitfall likely to face the mortgage servicers’ settlement with state attorneys general: enforcement.

AGs in general are much better at prosecutions and at negotiating settlements than they are at keeping close tabs on banks to make sure they’re doing what they agreed to do. On top of that, banks find it much easier and cheaper to simply deny allegations that they’re violating the terms of a settlement, and to fight those allegations in court, than they do to actually fix what’s broken.

The problem seems to be that banks are not entering into these settlements in good faith — as is evidenced by the banks’ behavior following a smaller settlement in 2008.

According to the settlement, a loan mod offer made by B of A in its role as servicer could be turned down if the investor or group of investors that actually owned the mortgage failed to approve the modification. But B of A was in charge of securing investor approval for the loan modifications.

Investor disapproval turned out to be one of the major reasons B of A gave when denying modifications to homeowners eligible for the National Homeownership Retention Program, according to the Arizona and Nevada suits. (Investor disapproval also has been a common reason that servicers have given for denying loan mods under Hamp.) But, according to the Nevada and Arizona AGs, while B of A refused to approve loan mod requests on the grounds that investors would not approve them, the bank, in fact, had in some instances received the delegated authority to make such decisions…

One investor in mortgage securities covered by the Countrywide settlement said that B of A never went through the procedures for obtaining approval or disapproval on loan modifications on the mortgages in the securities he owned.

“I know of absolutely no attempt by Bank of America to reach out to investors either through formal or informal channels,” said William Frey, the CEO of Greenwich Financial Services, a money management company.

This goes back to my conversation with Michael Barr back in November. He was fully cognizant of the issue, saying that “institutions are resistant to change and have difficulty implementing”; I was skeptical that the government had the ability to force these huge organizations to change. (In fact, I’m increasingly of the view that huge organizations simply can’t change that radically and that quickly, no matter how many incentives there might be to get them to do so.)

In any case, if and when any settlement is announced, the first order of business will be to look very closely at the enforcement mechanisms built in to it. If there’s anything less than a dedicated watchdog devoted to holding banks’ feet to the fire in such matters — and which is able to take complaints directly from the public — then I fear that nothing much will happen in reality, and Barr’s dreams of having real change by the end of this year will end up being dashed.

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