Almost three years after the collapse of the housing market, the country is mired in a slump, with residential real estate prices still dropping and home foreclosures rising. Now the attorneys general of all fifty states are collectively seeking a grand bargain with the big banks—a negotiated settlement of the foreclosure crisis that would protect embattled homeowners from the bankers’ cruel, often illegal shakedown tactics. One wants to say to the AGs, Good luck. They are trying to tackle continuing injustices that Washington policy-makers and prosecutors have largely evaded. Their odds of success, however, are not promising.
The foreclosure scandal weighs heavily on the economy. Housing has traditionally been the sector that leads recovery, but in its crippled condition it can’t. This could last for many years if government does nothing to hasten a cleanup. A late 2010 analysis by CoreLogic found 11 million homeowners underwater—with mortgage debt worth more than their houses. A large portion are headed for foreclosure, but the sooner these cases are resolved, the sooner the housing market can pick up again.
That’s the context driving the AGs in their attempt at a unified challenge to the status quo. Shocking incidents keep piling up in local politics, often brushed aside by federal officials as bureaucratic sloppiness: Banks that double-cross consumers with false promises to adjust mortgage terms. Banks that have no evidence to prove they have a legal claim on a property but foreclose anyway. Foreclosures executed on the wrong homes or on homeowners not in default. It’s a reckless, abusive mess—much like the poorly regulated financial chaos that brought down the economy in 2008.
Many of these transactions were illegal on their face, so local judges began to resist by refusing to approve them. The vast number of illegalities suggested to some AGs not random errors but a general pattern of callous manipulation. The banks, it seemed, were stringing along endangered debtors, parasitically sucking more money out of them through late-payment fees or other dubious add-ons. When homeowners were finally tapped out, having exhausted savings for retirement or college, the banks finally foreclosed, collecting even more fees.
Attorneys general in Nevada and Arizona have filed new lawsuits against Bank of America that flesh out these allegations—story after story of consumers swindled by BofA’s tactics, “misrepresenting…making false promises…misleading…falsely notifying.” The two states make an additional charge: that BofA also violated the settlement terms of the lawsuit the states filed against it three years ago, when the bank promised to correct its irregular behavior. BofA made similar legal promises in settlements with dozens of state governments but continued the same ruthless tactics [see Alex Ulam, “The BofA Mortgage Settlement Fiasco,” November 1, 2010].
Now the fifty AGs, led by Tom Miller of Iowa, hope to get more secure results. Don’t count on it. As this issue went to press, their executive committee was meeting to negotiate with major banks for the first time. A lot of loose talk in the press has suggested their goal is tougher rules for the banks, which would agree to pony up a foreclosure relief fund of $20 billion or more.
That may sound like a lot, but it’s actually a drop in the bucket. Elizabeth Warren, slated to head the new Consumer Financial Protection Bureau, recently informed the AGs that the banks had saved more than $20 billion just since the crisis began by underserving homeowners in various ways. Serious relief for the minimum number of homeowners in need (about 3 million) could cost something in the range of $135 billion, according to Warren’s bureau. Even so, it’s not at all clear that Republican AGs (or even most Democrats) will agree on an aggressive strategy, or that bankers will go along with paying for a major write-down of mortgage losses. They have successfully resisted this so far. The one thing banks might go for is agreement by all the states that they won’t pursue more lawsuits on their own. New York Attorney General Eric Schneiderman, who is skeptical of the deal, is concerned that it would give away a state’s right to pursue further action. He may persuade others.
The states are in a political box much like President Obama’s. He wanted to help homeowners without hurting the bankers. That stance produced a series of weak proposals, which housing advocates correctly predicted would fail to solve the mortgage problem. In a caustic New York Times op-ed, Neil Barofsky, now retiring as inspector general of the Troubled Asset Relief Program, said Obama’s rescue plan on foreclosures was doomed from the start because Treasury Secretary Tim Geithner ignored Congress’s instructions to protect struggling homeowners. The Treasury, he said, gave hundreds of billions to the big banks, “with no strings attached.” The AGs, as a group, likewise have very little leverage to use on the bankers. They won’t get any unless they first undertake a get-tough investigation that makes the case for aggressive legal action—that is, some go-to-jail prosecutions as well as civil lawsuits to recover damages for injured consumers.
The foreclosure scandal, though complicated, is really an old-fashioned law-and-order issue. Government should start treating it like one. Send a few bankers to jail, or at least call them before a grand jury. Stage a few perp walks for TV. Then start the negotiations. Until that happens, the crooks will be calling the shots.