What the Death Penalty and Foreclosure Have in Common

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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]

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