Last month, most states’ attorney generals took to the news media proclaiming a massive settlement with five large mortgage banks, to the tune of $25 billion nationwide. The charge that the states pursued centered around “robo-signing” — fraudulent signing of documents needed in the course of processing mortgages — but included other “other servicer-related problems,” as Rhode Island AG Peter Kilmartin’s FAQ on the topic puts it. Rhode Island’s estimated share of the take is $172 million, broken out as follows:
- $153 million for “borrower relief through principal reduction, short sales, anti-blight measures, borrower transition efforts, etc.”
- $7 million for “refinancing for underwater borrowers”
- $3 million for “payments to borrowers for mortgage servicing abuse” processed through the state government
- $9 million for “state foreclosure prevention efforts such as help lines, mediation, legal aid, etc.”
- $1 million “to the [RI] Department of Business Regulation as the state agency for regulating and licensing the banking industry”
This all sounds wonderful for buyers and bureaucrats, alike, but since it was a settlement, one has to wonder why the banks considered it to be worth so much money to resolve the issue in a way that cuts in payments to state governments. Consider the list of things that the settlement does not do:
- Release any criminal liability or grant any criminal immunity.
- Release any private claims by individuals or any class action claims.
- Release claims related to the securitization of mortgage backed securities that were at the heart of the financial crisis.
- Release claims against Mortgage Electronic Registration Systems or MERSCORP.
- Release any claims by a state that chooses not to sign the settlement.
- End state attorneys general investigations of Wall Street related to financial fraud or the financial crisis.
The curiosity expands when one learns that, according to Kilmartin’s public information officer, Amy Kempe, “we are not a robo-signing state, we would not be able to pursue criminal or civil charges for that element” without having been part of the settlement. What did the banks gain by handing out this cash?
That question is not so easy to answer. Government spokespeople want to turn the question around to the money that they brought in, and industry lobbyists aren’t inclined to tout their good deal, if it was one, or to create political difficulties, given ongoing negotiations on other matters. In the case of Rhode Island, they gained very little — essentially, an extremely narrow range of immunities from lawsuits specifically in the name of the attorney general’s office. To some degree, in other words, the settlement is an indication of how little $172 million means to the five affected banks.
Most of all, though, the settlement got the AGs off the banks’ back on this particular issue. Individual and class-action lawsuits will come as they may, but state governments have the power to legislate and to arrest.
To be sure, the banks are easy villains. (And the adjective isn’t meant to diminish the accuracy of the noun.) But the AGs and the governments they represent aren’t exactly victims, and the public would be wise to be suspicious of their ability to band together to extract large payments and to implement regulations through the threat of lawsuits.