Tucson Land Use Law Blog : Tucson Land Use Lawyer & Attorney : Fleishman Law Firm : Tax Liens, Foreclosures, Zoning

Arizona will receive $1.6 billion of the purported $25 billion joint federal-state settlement with the nation's five largest mortgage servicers for their role in wide-spread servicer and foreclosure abuses.  Arizona Attorney General Tom Horne's decision to join the broad settlement also means that his office has reached an agreement with Bank of America over allegations that it has violated an earlier consent agreement that was reached with Countrywide and allegations that Bank of America has systematically violated Arizona's Consumer Fraud Act. 

The agreement requires Bank of America to pay $10 million to the Arizona Attorney General to be used to: (1) avoid preventable foreclosure; (2) mitigate the effects of the mortgage and foreclosure crisis in Arizona; and (3) enhance law enforcement efforts to prevent and prosecute financial fraud or unfair or deceptive acts or practices, and/or provide compensation for harm resulting from conduct alleged in the lawsuit. The agreement also requires Bank of America to pay the Attorney General’s costs and attorneys’ fees incurred in the lawsuit.

Bank of America has also agreed to the following Arizona-specific provisions, which are not included in the broad federal-state settlement: (1) retain an unaffiliated third party to maximize the response rate for loss mitigation programs; (2) confirms that even borrowers who were previously denied for or defaulted on loss mitigation will not be prevented from applying again solely because of the previous denial or default; and (3) requires Bank of Ame to report Arizona-specific information about modifications and other assistance provided to Arizona borrowers.

Arizona’s estimated $1.6 billion share of the global settlement is broken down as follows: 

• $1.3 billion principally for principal reduction, but also including a menu of other relief to homeowners (how this will actually be implemented obviously remains to be seen).
• Arizona’s borrowers who lost their home to foreclosure from January 1, 2008 through December 31, 2011 and suffered servicing abuse will be eligible for an estimated $110.4 million in cash payments to borrowers, estimated at approximately$2,000 per borrower.
• The value of refinancing loans to Arizona’s current, underwater borrowers will be an estimated $85.8 million.
• The state will receive a direct payment of approximately $102.5 million (yet no mention of what this $102.5 million will be used for).

While the global settlement does not grant any immunity from criminal offenses and will not affect criminal prosecutions, as far as allegations of servicer abuse, including robo-sigining and dual-tracking go, the five largest banks have the green light to push through many of the foreclosures that have been stalled while this agreement was hammered out.  The agreement also does not prevent homeowners or investors from pursuing individual, institutional, or class action civil cases against the five servicers. The pact also enables state attorneys general and federal agencies to investigate and pursue other aspects of the mortgage crisis, including securities cases, which may be the next big fish to land.

The final agreement will be filed in the form of a consent judgment in U.S. District Court in Washington, D.C. and will have the authority of a court order. The consent judgment will require that Arizona’s share of the state’s direct payment be used by the Attorney General to carry out the purposes of the settlement, including to avoid preventable foreclosures, to remedy the effects of the mortgage and foreclosure crisis, and to enhance law enforcement efforts to prevent and prosecute financial fraud and unfair or deceptive acts or practices.

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Democrats on the House oversight committee have apparently been pushing to subpoena the Federal Housing Finance Agency ("FHFA") to obtain an analysis looking at what effects principal reductions would have on Fannie Mae and Freddie Mac. 

As HousingWire has reported, FHFA Acting Director Edward DeMarco has long defended the agency's policy of keeping Fannie and Freddie mortgage servicers from writing down principal.  "We have been through the analytics of the underwater borrowers at Fannie and Freddie, and looked at the foreclosure alternative programs that are available, and we have concluded that the use of principal reduction within the context of a loan modification is not going to be the least-cost approach for the taxpayer."  It turns out that Mr. DeMarco's agency has yet to produce an analysis, which was requested last year by Democrats.

Several Democrats have cited a recent White Paper from the Fed allegedly acknowledging the need for principal reduction to coerce borrowers into staying in their home and provide a boost to the overall economy.  However, Fed researchers "admitted the potential benefits would be hard to quantify." 

Given that Fannie Mae and Freddie Mac already owe the Treasury roughly $151 billion in bailouts, it should come as no surprise that many are rightfully concerned about principal reductions, even if the pain of such reductions would be spread across the American populace.  DeMarco believes instead, Congressional action is required to force him to write down principal on loans held by Fannie Mae and Freddie Mac.  Between the two government sponsored agencies, the total of underwater mortgages is currently about $303 Billion.  The estimated loss to both agencies for principal reductions would amount to $101.7 Billion.  The scope of such a principal write down would cause great havoc for Fannie Mae and Freddie Mac's accounting, which would require immediate accounting losses. 

Interesting though, in the third quarter of 2011, servicers cut principal on 10,722 modifications, roughly 7.8% of all workouts during the period, according to the Office of the Comptroller of the Currency.  That is not an insignificant number, given the general reluctance of any servicer to consider a principal reduction.  While this number is interesting, it does not say exactly who is doing the principal reductions.  Either way, Fannie Mae, Freddie Mac, and many, many banks continue to face the specter of continued downward pressure on home prices, which will create additional underwater owners, which creates greater incentive to walk away (especially in non-recourse states).  We are no where close to getting out of the thicket on this one.   

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A new federal federal task force, dubbed the "Residential Mortgage-Backed Securities Working Group" led by New York Attorney General Eric Schneiderman has sent subpoenas to the 11 largest financial institutions in the past few days as part of its investigation into possible residential mortgage-backed securities fraud. 

Attorney General Eric Schneiderman who was cast off the central negotiation committee of Attorneys General trying to crack down on several securitization issues related to the major banks, seems to be gaining a foothold in his attempt to forge his own settlement with the major banks outside the realm of the federal regulators and AG Tom Miller's crew. 

Schneiderman will be joined by Delaware AG Beau Biden, Massachusetts AG Martha Coakley, Nevada AG Catherine Cortez Masto, California AG Kamala Harris and Illinois AG Lisa Madigan, several of whom refused to bow to continued pressure to try and settle legacy issues surrounding the robo-signing scandal and other securitization issues.

It is very interesting that President Obama allegedly formed this task group, which he announced during his State of the Union address Tuesday.  President Obama has come under increasing pressure to do something substantive about the ongoing foreclosure crisis, which has not been curtailed in the slightest by the introduction of yet another acronym. 

U.S. Attorney General Eric Holder said 15 lawyers and investigators are working with the group. The FBI will add 10 agents, and another 30 lawyers and staff will join the group, along with the

The SEC will also participate. SEC Director of Enforcement Robert Khuzami said there "would be no stone unturned, no dark corner unexposed to the light."

Schneiderman, in a clear shot across the bow to the major banks commented: "We have jurisdiction to go after every aspect of the mortgage bubble and the crash of the financial market . . . We have jurisdiction over every MBS issued over the last decade with Delaware and New York joining the group."

Secretary of the Department of Housing and Urban Development, Shaun Donovan, has also made clear the investigation and ongoing settlement negotiation between other state AGs and mortgage servicers over foreclosure problems would be separate and any charges would not release the banks from liability in the robo-signing scandal.

"It became clear very quickly that Eric [Schneiderman] and I shared a vision that it would be a grave injustice to hold these institutions accountable and potentially have hundreds of billions be paid to private investors and pension funds but not make sure homeowners who hold those loans who depend on being able to get those loans fixed to be able stay in those homes," Donovan said.

Iowa Attorney General Tom Miller, who has been heading up the mortgage servicer investigation, has said the resulting settlement would not release the banks from securitization or lending liabilities.

This is going to produce a very interesting political sideshow as AG Tom Miller tries to keep his band of AG's together, while Schneiderman forges ahead with the new found support of the Obama administration, which it seems only recently, was looking to help the major banks and servicers find a quick settlement to documented abuses that have been alleged by the AG's for some time now. 

The task force represents the Obama administration’s attempt to address complaints from the "Occupy" part of his constituency that it has simply failed to address the housing crisis or bring banks to account for causing it through subprime home loans that were repackaged and securitzed and sold to investors. Critics correctly point out that the Obama administration's attempts to solve the problem through government-sponsored refinancing programs and gentle begging to the banks, have been ineffective.  This is going to be a campaign issue and if the Obama administration is not going to try to spin, the Republicans certainly will.  It has been over three years since the credit crunch in earnest and the housing market had started its full-force downward spiral, and little has changed.  Not surprising to see yet another attempt by the administration to try and appease another part of the base. 

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When it rains, it pours.  The fallout from the artificially generated housing bubble and the attendant financial crisis is really starting to take hold against the various major players in the banking industry.  It seems everyone with any stake in the mortgage meltdown, from individual home owners to purchasers of mortgage-backed securities, are seeking their pound of flesh from the likes of Bank of America, JP Morgan Chase, CitiBank, Ally Financial, Wells Fargo, UBS, Goldman Sachs, Deutsche Bank, and others.

The New York Times broke the story yesterday that the Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac, the failed government agencies relegated to taxpayer-backed conservatorship three years ago, is set to file lawsuits against twelve of the major banks.  The suits will argue the banks, which assembled the mortgages and marketed them as securities to investors, failed to perform the due diligence required under the nation's securities laws and missed evidence that borrowers' incomes were inflated or falsified.

The FHFA issued sixty-four subpoenas last year to issuers and servicers of mortgage-backed securities - one of the largest investigations to date of alleged securities fraud stemming from the housing bust.  The FHFA, with subpoena power, has a huge advantage over private investors, which have had a harder time gaining access to the loan files, critical to filing lawsuits against the banksters.  The suits are likely to be filed now because regulators are concerned that it will be much harder to make claims after a three-year statute of limitations soon expires.

In the heyday of loan originations and sales into the secondary market, Fannie and Freddie couldn't purchase those loans directly, but they were allowed to invest in slices of "private-label securities" that were backed by subprime and other risky loans, but were rated as safe AAA investments by the ratings agencies.  Indeed, Fannie and Freddie were among the largest investors in those securities.  Freddie and Fannie began increasing their purchases of private-label securities early last decade in order to boost profits while satisfying government mandates to support affordable housing.  By law, Fannie and Freddie were required to back loans to low-to-moderate income borrowers, and the private-label securities were counted toward those goals. In 2005 alone, Freddie Mac purchased $180 billion in private-label securities, up from $24 billion four years earlier.

In the the lead up to the financial crisis, “the market was so frothy then it was hard to find good quality loans to securitize and hold in your portfolio,” said David Felt, a lawyer who served as deputy general counsel for FHFA until January 2010. Moreover, the private-label securities carried higher yields at a time when the two mortgage giants could buy them using money borrowed at rock-bottom rates, thanks to the implicit federal guarantee they enjoyed.  According to Felt, “Fannie and Freddie thought they were taking AAA tranches, and like so many investors, they were surprised when they didn’t turn out to be such quality investments."  This despite the fact that Freddie was warned by regulators in 2006 that its purchases of subprime securities had outpaced its risk management abilities, but the company continued to load up on debt that ultimately soured.

Fannie and Freddie still hold billions of dollars in mortgage securities backed by more shaky home loans like subprime mortgages, Option ARM and Alt-A loans.  Sadly for the American taxpayer, these securities have been among the poorest performing mortgages.  The U.S. government has spent $141 billion to keep Fannie and Freddie afloat. Freddie Mac allegedly estimates its total gross losses stand at roughly $19 billion, while Fannie Mae allegedly estimates its losses at nearly $14 billion.

While the FHFA has been making noise about pursuing the banks for some time, as Naked Capitalism has reported, "the overarching story remains the same: the more rocks you turn over in mortgage land, the more creepy-crawlies emerge."  In Arizona, when you turn over rocks in the desert, you often find scorpions.  They creep and crawl and they pack a mean sting.  It remains to be seen just how many stingers the Too Big To Fail camp have.

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