Regulator Stands In Way Of Potential Multi-Billion Dollar Mortgage Settlement
The Obama administration is seeking to broker a deal that would have the nation's largest mortgage lenders agree to pay as much as $30 billion in fines to settle state and federal claims that they abused borrowers and illegally foreclosed on homes, according to state and federal officials engaged in the talks.
Under the terms of the proposed deal under discussion, the government would apply the fines toward an expanded relief program for troubled homeowners, while focusing on broad loan forgiveness. Some 27 percent of all homeowners with a mortgage now owe the bank more than their properties are worth, according to real estate site Zillow.com, amplifying calls to shrink mortgage balances.
The fact that the administration is now pursuing such a course reflects the widespread consensus that the President's signature anti-foreclosure program has been a disappointment, leaving millions of American households vulnerable to losing their homes in the face of persistently high unemployment.
The Obama Treasury has long resisted pressure from housing advocates to adopt a new program that would include writing down principal balances, arguing that this would unjustly reward people who bought more expensive homes than they could afford, while forcing banks to absorb fresh losses.
But given intensifying worries about a continued drop in housing prices, and amid public perception that major banks have avoided justice for their role in the national real estate calamity, the administration is seeking a new approach to keeping more families in their homes, the sources said.
A final agreement remains far off, the sources emphasized, and would require complex compromises between a diverse set of players with conflicting interests, making prospects for a deal highly uncertain. Indeed, state and federal officials have yet to begin negotiations with major lenders, but are still at the stage of formulating their own proposals.
Officials at the Federal Deposit Insurance Corporation, the Federal Housing Administration, and those now creating a fledgling consumer financial protection bureau are inclined to seek as much as $30 billion in fines, making those funds available to provide relief to borrowers at risk of losing their homes.
State attorneys general are intent on imposing larger fines on the nation's five largest mortgage companies, the sources said. Last year, attorneys general in all 50 states launched an investigation into claims that mortgage lenders improperly foreclosed on homeowners without proper documentation.
The Office of the Comptroller of the Currency, which oversees the nation's largest banks, intends to pursue its own settlement with lenders, a track distinct from the talks conducted by its federal counterparts, the sources said. The OCC, eager to protect major banks from expensive fines, is seeking to limit the terms to $5 billion, while also ensuring that lenders retain wide latitude in how to administer relief for homeowners, the sources said.
That position is certain to infuriate housing advocates and delinquent homeowners, whose struggles to secure lower monthly payments from mortgage companies under the administration's relief program have become legion. The OCC declined to comment.
The settlement under discussion would end the multi-agency probe launched last fall that investigated breakdowns in the handling of mortgages. Officials at the Federal Reserve have said the review found "significant weaknesses" in various aspects of how lenders service mortgages, which involves collecting payments, modifying delinquent loans, and foreclosing on borrowers upon default.
The top official at the OCC told a Senate committee last week that his agency found that a "small number" of foreclosures should not have occurred. One Fed official separately said the findings were part of a "deeper, systemic problem" in how firms process mortgages and deal with homeowners.
Officials at the White House, Treasury, the Federal Reserve and other agencies with interests in the outcome declined to comment.
The Wall Street Journal first reported news of talks toward a possible settlement with a story published Wednesday night on its Web site. The paper cited unidentified sources who said the administration was angling for a package of fines and loan relief reaching $20 billion.
Federal agencies and state prosecutors are still wrangling over how they would collect the fines and what precisely that money would be used for, the people involved in the negotiations said.
Under the terms being discussed, mortgage lenders would be forced to forgive balances not only on primary mortgages, but also on second mortgages such as home equity lines of credit. The sources said that would accomplish two key goals: expanding relief to homeowners while punishing the lenders who allegedly forced people out of their homes in foreclosure proceedings without legally required documentation.
The four largest mortgage companies -- Bank of America, Wells Fargo, JPMorgan Chase and Citigroup -- collectively handle the bills on more than $5.7 trillion worth of home loans -- more than half of all outstanding mortgages, according to Inside Mortgage Finance, a trade publication and data provider.
The vast majority of those loans are owned by other parties such as investors and the government-backed mortgage companies, Fannie Mae and Freddie Mac. The four large banks simply send out monthly bills, collect payments, and process foreclosures when borrowers fall behind.
But the four largest mortgage companies do own an enormous portfolio of loans that have worked against their incentive to provide homeowners with meaningful relief: They collectively hold more than $400 billion in second mortgages.
Housing experts assert that mortgage companies have been largely unwilling to shrink principal balances on first mortgages, because they understand that that this would trigger huge losses on the second mortgages they own themselves.
The OCC is opposing a settlement that would entail large-scale write-downs of mortgages precisely because of concerns about this very scenario, the sources said.
State and federal regulators seeking more stringent terms say they are concerned that if mortgage companies are given too much leeway in selecting which loans to forgive, they will simply write down the principal balances on those mortgages owned by some other party, while sparing their own portfolios, the sources said.
These officials are now seeking to avoid that outcome with a proposal that would have federal or state agencies collect the fines and place the money in a new fund that would be tapped to finance mortgage relief for homeowners.
But none of these terms have been agreed to among the multiple federal and state agencies at the table.
The OCC has already begun a process toward resolving the allegations lodged against the banks that it regulates, recently sending draft orders detailing improper and illegal practices that the firms would have to end, according to people familiar with the matter. The draft orders, which are not public, have been shared with some federal agencies, the sources said.
One source said the OCC was effectively aiding the banks in delivering the orders by handing them valuable information about its findings, thus allowing mortgage companies more time to marshal a defense.
The OCC has also shown reluctance to share its detailed findings and documents with other federal regulators, said people familiar with its actions. As the primary regulator for the nation's largest lenders, the OCC is privy to more inside information than its counterparts, giving it substantial power in shaping the contours of any negotiation.
Despite the OCC's separate tack, state and federal officials say they remain hopeful that a unified settlement can ultimately be reached. Even if the OCC goes it alone, the other federal agencies could join with the states to reach one massive settlement, the sources said. At worst, they said, each agency would reach its own settlement with the targeted institutions.
The states appear to hold much of the power, officials said. State attorneys general, who are much closer to homeowners given their proximity, constantly hear allegations of bank misconduct. And they have been here before: In 2008, 11 states reached an $8 billion settlement with Countrywide Financial to settle predatory lending allegations.
If state officials decide to buck their federal counterparts and pursue a more punitive set of fines, they could force the banks to endure many more months of investigations. That prospect could entail more lawsuits, myriad negative headlines and a steady drip of potentially damaging revelations.
The states have begun to formulate their own possible settlement strategies, according to the sources. But they are presently only looking at the five largest mortgage companies -- Bank of America, Wells Fargo, JPMorgan Chase, Citigroup, and Ally Financial -- while promising to examine other large mortgage firms over time. Whatever deal they reach would hit those firms much harder than any proposed federal settlement, which targets the 14 largest mortgage companies.
But while the states appear to have strong tools they can wield to encourage banks to negotiate, their ultimate ability to prosecute in the event no settlement is reached was diminished by a 2009 Supreme Court case -- Cuomo v. Clearing House -- that restricted their ability to examine national banks for potential violations of state laws. The OCC oversees national banks.
The Supreme Court said states can pursue legal action against national banks for violations of state law, but they are expressly barred from examining those institutions to find such violations in the first place.
In effect, the states find themselves dependent upon the very banks they are targeting to hand over documents (with the exception of Ally, which is a state-regulated bank). Though the OCC has documents detailing bank violations, it has so far opted not to share them with state authorities, the sources said.
The OCC's acting chief, John Walsh, last week told a Senate committee that the agency had found a "small number" of wrongful foreclosures during its review.
But Walsh said the review was limited to 2,800 mortgages that experienced foreclosure last year. By comparison, nearly 2.9 million homes received a foreclosure filing in 2010, according to RealtyTrac, a California-based data provider.
Some officials pointed to the difference and suggested that whatever the OCC found could be multiplied by 1,000 to give an accurate scope of the widespread problems in mortgage servicing that lead to wrongful foreclosures.
Shahien Nasiripour is a business reporter for The Huffington Post. You can send him an e-mail; bookmark his page; subscribe to his RSS feed; follow him on Twitter; friend him on Facebook; become a fan; and/or get e-mail alerts when he reports the latest news. He can be reached at 646-274-2455.