There is so much news—mostly ugly news from the consumer point of view—about the foreclosure crisis, but it seems one of the most important initiatives taken against the banks that caused the crisis has been all but overlooked. For a period of months, the federal government and most of the states' attorneys general have been negotiating with the banking industry over appropriate sanctions and penalties that should be imposed for lender misconduct during the foreclosure process.
As if foreclosure against one's home wasn't bad enough, the process has been replete with horror stories about astonishing practices and ridiculous mistakes banks have made while seizing or attempting to seize residences of delinquent mortgagees: Lost papers, robo-signing, wrong addresses resulting in the commencement of foreclosure proceedings against completely innocent parties, and even outright forgeries. You name it, it happened. Maybe we should expect all that given the unprecedented volume of foreclosure activity, but every American is entitled to due process before their property is taken from them—very often that's not happening and there's no excuse.
The situation grew so dire that earlier this year foreclosure proceedings essentially came to a halt. However, they were rekindled with a vengeance in August and are now occurring at a record pace, while in the background a settlement for the aforementioned abuses and mistakes is in the works. And on Wednesday, the Office of the Comptroller of the Currency announced the formation of an independent board to review all the foreclosures at major banks in 2009 and 2010. The announcement included the following statement: "The Independent Foreclosure Review is providing homeowners the opportunity to request an independent review of their foreclosure process. If the review finds that financial injury occurred as a result of errors, misrepresentations, or other deficiencies in the servicer's foreclosure process, the customer may receive compensation or other remedy."
[Related Article: Millions Eligible for Foreclosure Reviews]
The situation reminds me of another hotly debated American issue: the death penalty. Stay with me. Supreme Court Justice Potter Stewart famously found the death penalty to be unconstitutional in 1973. He argued, "These death sentences are cruel and unusual in the same way that being struck by lightning is cruel and unusual"—meaning that the penalty was harsh and random because different states applied different rules were at various times when deciding whom they would execute. In a way, the foreclosure crisis is similarly harsh and random. That's why the OCC and others are so engaged in the issue.
Indeed, pressure for a speedy settlement has been coming from all sides. The Obama administration sees it as a way of striking a blow on behalf of beleaguered borrowers; the banks want to clean things up and get the past behind them, and most, but not all, state regulators think that removing clouds such as this will stimulate new lending.
Although no one knows for sure, early indications suggest that the amount of the settlement will be about $25 billion, consisting of approximately $5 billion in cash and some $20 billion in workout funds set aside to prevent further foreclosures by refinancing some borrowers at lower principal amounts. The cash would be used to reimburse federal and state regulators, pay for programs at both the federal and state level to help borrowers who are in trouble, and "help out" people whose homes were foreclosed upon since September of 2008 with a one-time cash payment of $1,500 (alas, a pittance, but at least a gesture).
If there is a deal, and if it's made on terms close to what have leaked out so far, it's fairly safe to say that no one will be happy.
Critics on one side say that the deal is too small, and that because the settlement would include a release for the approximately fourteen banks involved, it would prevent further—quite possibly justifiable—legal action, and do little to solve what is seen as the systemic problem of not just bad mortgages, but also bad mortgage procedures. And they're right.
Critics on the other side argue that writing down principal amounts for some borrowers as a result of government action taken nearly four years into the crisis only serves to encourage others who are close to default to stop paying in the hope that they'll get lucky and there will be some problem with their documentation. They also argue that punitive measures don't work, and that the settlement is nothing more than punitive because it doesn't relate to the merits of any given foreclosure proceeding. In essence, borrowers should damn well be responsible for their mortgage payments irrespective of paperwork problems. Worse, they say, the level of uncertainty created among financial institutions by what they view as a haphazard and politically driven solution is likely to curtail lending, rather than to stimulate it. There is merit to this position as well.
So what to do? Some settlement is necessary and should be done quickly. Any relief for foreclosure victims, in particular those who truly are victims, is probably a good thing given America's lousy economy and terrible housing situation. But how do you make it happen without causing huge controversy?
The attorneys general of five states have already abandoned settlement negotiations in favor of seeking their own remedies against the banks. These include Beau Biden in Delaware and Kamala Harris in California. Last week Biden brought suit against MERS, Mortgage Electronic Recordation Systems, Inc., a company set up by the banks (and Fannie Mae and Freddie Mac) in the '90s to streamline mortgage procedures in order to facilitate, among other things, easy securitization. Biden's suit claims that MERS engaged in deceptive practices, not by inducing borrowers to take out loans that they shouldn't have, but rather by constructing a process that severely hampered borrowers from pursuing their rights. MERS routinely took nominal ownership of mortgages written by its constituent banks, thereby undermining the traditional state system of mortgage and property ownership records keeping. In other words, a buyer of a mortgage-backed security—if he ever looked—would see that everything was owned not by any individual, but rather by MERS.
[Related Article: Delaware AG Sues Mortgage Registry]
I think Biden has uncovered the belly of the beast, and that he and others should be allowed to pursue their initiatives against systemic problems involving mortgage procedures.
In the meantime, it's best for the country that the settlement go forward quickly at whatever number with whatever mechanisms are agreeable to both sides. Enough time has been consumed arguing about numbers and mechanisms. It's just throwing more darts at the dartboard anyway. Frankly, there is no right way to do a settlement, and no right number that will really solve the problem. No one will get what they deserve; they will only get what they negotiate.
That said, the settlement should not include a blanket release. The banks should only be released from money claims, not from the necessity of making procedural reforms if the states prevail in their ongoing initiatives in court and otherwise. Further, I encourage all currently nonparticipating attorneys general to join the settlement and strongly suggest that those who are seeking further relief act in unison rather than filing separate actions in each state.
We need to get a settlement together, put numbers and mechanisms behind us, and let the state AGs do what they will to attack MERS and other integral parts of the mortgage procedure and foreclosure establishment in an organized and efficient manner in order to reform a systemic problem. In fact, I believe that the entire real estate and mortgage meltdown was more the result of systemic issues—in lender behavior, regulatory perspective, and borrower attitudes—than the result of natural economic forces. And although it's difficult to be verbally precise about exactly what the systemic problem is, I once again return to the words of Mr. Justice Stewart (about a very different subject): "I know it when I see it."
Adam Levin is Chairman and cofounder of Credit.com and Identity Theft 911. His experience as former director of the New Jersey Division of Consumer Affairs gives him unique insight into consumer privacy, legislation and financial advocacy. He is a nationally recognized expert on identity theft and credit.