The Multistate Foreclosure Settlement

The New York Times came out with a strong editorial urging state AGs and the Administration not to rush into the proposed multi-state settlement deal. I think it’s worthwhile reviewing what we know about the deal and the arguments for and against it.  Let’s start with the facts that we know.  There aren’t many that are publicly confirmed; the Administration, the AGs leading the multi-state settlement, and the banks very much want to avoid public comment on the deal–they want to present it as a fait accompli.  As a result, there hasn’t been definitive reporting on the contents of the term sheet currently circulating among AGs.  It appears, however, the the deal has the following features.

Some 16 banks that do mortgage servicing will:

  1. contribute a total of $5 billion in cash;
  2. contribute total of mortgage assets with a face value of $20 billion, but a market value considerably lower;
  3. agree to uniform servicing standards.

In exchange, the state and federal authorities signing on would give the banks:

  1. a release of all servicing claims;
  2. a release of all origination claims, including discriminatory lending claims;
  3. a release of all MERS claims against the banks, leaving MERS Inc. as a potential defendant for MERS related issues (MERS Inc. has no financial assets of note.)

Perhaps $20B of the money would be used for principal write-downs and for interest rate reductions (via refinancings, which have the added benefit of relieving the banks of rep and warranty problems on the old loan) on the loans owned by these banks, which is less than 10% of the first lien loans in the U.S.

Let’s start with the argument for this deal and then consider why it is wrong.

The defenders of the deal make no bones that it is perfect.  Instead, they make two related arguments for the deal:  Too-Big-to-Fail and Exigency.

  • The Too-Big-to-Fail argument is that the US housing market is too fragile and can’t afford anything upsetting status quo; it is necessary to close some sort of deal for stability’s sake.
  • The Exigency argument is that every day of delay means more foreclosures, so it’s imperative to close the deal fast to get help to homeowners.

So what’s wrong with these arguments?

Find out here…