Is Foreclosure Settlement Déjà Vu All Over Again?

To understand why, let’s flash back to 2008, the last time we saw a massive, multi-state settlement sponsored by the AGs. Back then, the target was Countrywide, and the lender was being sued from all sides by AGs over predatory lending practices. The proposed solution back then, as it has been in every regulatory effort to solve the housing crisis to date, was widespread loan modifications (this is why you’ll notice that the cover of Way Too Big to Fail features Uncle Sam futilely swinging a hammer labeled “Loan Mods” at the problems that keep popping up in a game of Mortgage Crisis Whack-a-Mole).

With great fanfare, the AGs announced in October 2008 that they had reached an $8.6 billion settlement with Countrywide, in which Countrywide would modify 400,000 loans. What I soon realized was that this would not be a cash payment of $8.6 billion — instead, most of that figure consisted of, you guessed it, principal writedowns and other loan modification “credits.” The only problem was that 88% of the mortgages that Countrywide had agreed to modify were no longer owned by Countrywide, meaning that the bulk of the costs of this settlement would be born by others.

The settlement resulted in a lawsuit by Greenwich Financial Services on behalf of unnamed bondholders that essentially said, “hey, we actually have contracts with Countrywide that say they can’t modify loans willy-nilly and take money our of our pockets without compensating us.” The lawsuit put Greenwich CEO Bill Frey in a position to be a spokesperson for aggrieved bondholders, thrusting him into the spotlight and the crosshairs of controversy. The banks’ response was to begin a massive lobbying effort that led to the passage of the Servicer Safe Harbor in 2009 – a provision that in its original form said that banks could ignore its contracts with investors in the interests of public policy. Only the Senate’s fears that such a law would run afoul of the Takings Clause of the 5th Amendment (I wrote a feature-length article on this issue), and a last-minute lobbying effort by bondholders, led to the provision being severely watered-down before it passed in its final form.

You can check out the article in full here…