On the Servicing Settlement

Frank Pasquale

[The settlement] cover[s] robosigning and overbilling in foreclosures. Given the relatively narrow scope of this settlement, it’s not surprising that the dollars involved are quite small compared to the overall harms created by the housing bubble and aftermath.

The formal price tag for the settlement is $25 billion, although it is projected to accomplish up to $40 billion in relief. Only $5 billion of that is hard cash contributed by the banks. Let me repeat that. The five banks involved in the settlement, which have a combined market capitalization of over $500 billion, are putting in only $5 billion. That’s less than 1% of their net worth. And they are admitting no wrongdoing. To call that accountability is laughable. . . . $32 billion of the settlement is being financed on the dime of MBS investors such as pension funds, 401(k) plans, insurance companies, and the like—-parties that did not themselves engage in any of the wrong-doing covered by the settlement.

The Obama administration’s record of prosecuting elite financial frauds is worse than the Bush administration’s record, which is a very large statement. This fact is demonstrated by a November report by Syracuse University’s Transitional Records Access Clearinghouse (TRAC), “Criminal Prosecutions for Financial Institution Fraud Continue to Fall.” The truth is that neither administration has prosecuted any elite CEO for the epidemic of mortgage fraud that drove the ongoing crisis, in contrast to over 1,000 elite felony convictions arising from the Saving & Loan debacle in the 1980s.

Yet today's ongoing crisis caused losses more than 70 times greater than the S&L debacle, and the amount of elite fraud driving this crisis is also vastly greater. Bank CEOs leading what I call "accounting control frauds” now do so with impunity. . . . The [staffing level of the current Obama administration] working group does not pass even the most generous laugh test. No one who has ever been involved in a successful, complex criminal investigation of a large organization could take it seriously.

Ideally, we didn’t need this settlement now. It would have been better for prosecutors to mount more cases, not just related to robo-signing and MERS but aimed at the fraud at the heart of mortgage securitization. Then, prosecutors could extract penalties that more accurately fit the crime—specifically fines and mortgage relief as restitution, well into the hundreds of billions of dollars. This is said to be Schneiderman’s goal, both in agreeing to join the settlement once it was revised so as not to tie his hands and taking part in the Justice Department task force.

We've now set a price for forgeries and fabricating documents. It's $2000 per loan. This is a rounding error compared to the chain of title problem these systematic practices were designed to circumvent. The cost is also trivial in comparison to the average loan, which is roughly $180k, so the settlement represents about 1% of loan balances. It is less than the price of the title insurance that banks failed to get when they transferred the loans to the trust. It is a fraction of the cost of the legal expenses when foreclosures are challenged. It's a great deal for the banks because no one is at any of the servicers going to jail for forgery and the banks have set the upper bound of the cost of riding roughshod over 300 years of real estate law.

Settled into a new life -- one with a low credit score in the 500s that makes buying a car or even connecting utilities a more expensive proposition, in a neighborhood populated mostly by senior citizens instead of middle-class families with kids -- Monica Zapata's anxiety is under control. Ricardo Zapata has a new job managing a Cuban restaurant. The family has a lot less money and little hope of owning a home again in the next decade. Those aren't the things that sometimes leave Zapata fighting back tears. . . . "I try to be a grateful person, really I do," said Monica Zapata. "But it's almost a slap in the face when you consider everything we've been through."

[T]he most egregious aspect of all this may be the reporting: stories repeatedly use innocuous words that obscure what really happened here. For example, so-called "robo signing" is massive, systematic, fraudulent, criminal conduct. This is where banks themselves or their contractors sign legal documents to file in court swearing under oath that the facts are true and therefore support the legal application to take someone's home away from them, i.e., foreclose.

Can you think of anything more despicable? Lying under oath to get someone thrown out of their home and onto the street. That's what robo-signing means and what it obscures every time that word is used. Then, there's always someone saying, basically, no harm, no foul because it's just a "paper work" problem and these people are all delinquent and "deserve" to be thrown out on the street. Really? Since when does saying "trust us" while we lie to you under oath make illegal conduct acceptable?