As states gear up to finalize a national mortgage servicing settlement, some are looking to avoid the painful lessons of a 2008 mortgage deal that failed to deliver the help promised to desperate homeowners.
Nearly four years ago, 11 states settled with Countrywide, the giant subprime mortgage lender acquired by Bank of America in 2008 that was accused of knowingly making unaffordable loans that hurt homeowners. The bank agreed to provide up to $8.4 billion in assistance to 400,000 borrowers struggling to keep their homes, but as of October 2011, only $237 million has been paid out.
Given the Countrywide settlement's underperformance, some states are hesitant to join the $25 billion servicing settlement currently being negotiated between state attorneys general, the Obama administration, and five of the nation's largest banks. The states have until Monday to decide if they will sign on to the deal, according to the Iowa attorney general's office.
"Based on our experience with the Countrywide settlement, if we ever do a deal of that magnitude again we will be looking for a built-in enforcement system that includes strong penalties for nonperformance ... You know, once bitten, twice shy," said a source who works for the attorney general of one of the states that signed onto the Countrywide deal and is deciding if it will join the current settlement. The source is not authorized to speak on the record.
The current settlement grew out of the "robo-signing" scandal of 2010, in which banks are alleged to have systematically forged documents and wrongfully foreclosed on homeowners. Under the proposed deal, five of the nation's largest banks -- Bank of America, Wells Fargo, JP Morgan Chase, Citi and Ally Financial -- would provide $25 billion in assistance to needy homeowners by changing the terms of their mortgage, refinancing their mortgage, or reducing the amount of principal owed on their mortgage.
Five states -- California, Nevada, New York, Massachusetts, and Delaware -- left the negotiations last year over concerns that the deal would be too soft on banks and deliver too little to homeowners. To date, none of those states have rejoined the talks.
The Obama administration, which is pushing states to sign on the new settlement, agrees that the Countrywide deal has underwhelmed. "The Countrywide settlement has not delivered the relief it was designed to deliver," said Department of Housing and Urban Development Secretary Shaun Donovan on a call with reporters on Saturday. But the new deal will hopefully avoid repeating that mistake, Donovan said.
Under the Countrywide deal, Bank of America did not have to actually provide $8.4 billion in help to homeowners. Rather, the terms were such that the bank simply had to offer assistance, irrespective of whether the offer would actually help the borrower or whether it was ultimately accepted.
"Bank of America could just mail a letter to a homeowner, and get credit for helping that borrower, even if the person didn't take them up on the offer," said the source in the office of one of the attorneys general who signed on to the deal. "And there were folks who would take Bank of America up on the offer, and maybe make one payment under the new loan terms and then default on the second or third payment. The bank quickly foreclosed on them, but the bank still got credit because it offered the help to the borrower."
Under the new deal, the banks will not receive credit for helping borrowers until there is clear evidence that the homeowner has benefited from the assistance. "There will be no credit for principal reduction unless it has happened, has actually occurred, and that homeowner was able to stay in their home and pay on their new mortgage for at least 90 days," Donovan said.
Another problem with the Countrywide deal is that it does not enable the states to hold the bank accountable to its promise to help homeowners, said Kevin Stein, associate director of the California Reinvestment Coalition, a collection of nonprofits that advocate for consumers. "Perhaps the terms weren't tight enough, so that poor performance is still in compliance. Because if the terms were tight and Countrywide wasn't complying, the states could go back in to reinforce it."
Some states are so frustrated with the Countrywide settlement's lack of effectiveness that they want out of the deal altogether. In the last year, both Nevada and Arizona have asked the courts to excuse them from the settlement so that they can go after Bank of America independently.
Bank of America maintains that it is fulfilling its commitment under the deal. "The bank is on track to reach the nearly 400,000 estimated offers ... and offers to date have amounted to $14.1 billion in potential savings," said Bank of America spokesman Rick Simon.
Nevertheless, both states and the Obama administration are determined to employ a different structure this time around. They plan to implement stronger enforcement measures, imposing financial penalties on banks that do not meet their obligations, according to Patrick Madigan, Iowa Assistant Attorney General and one of the current settlement's negotiators.
"Under the servicing settlement, the banks are obligated to provide the assistance to homeowners," Madigan said. "Whatever they don't do converts to cash that they must pay, plus an additional penalty of 25 to 40 percent, so the banks are highly incentivized to perform."
Additionally, the servicing settlement has a monitor to enforce the agreement, which Madigan says is key to making sure banks comply with the deal. "This agreement has a very robust enforcement mechanism, including an independent monitor. State attorneys general having a monitor over national banks is a significant achievement all by itself. There is no comparison between the enforcement and monitoring of this case and Countrywide."
The Obama administration appointed North Carolina Banking Commissioner Joseph Smith as monitor, whose track record impresses consumer advocates. "They've appointed somebody I have a lot of respect for," said Ira Rheingold, president of the National Association of Consumer Advocates.
But Rheingold cautioned that the effectiveness of the deal cannot be assessed until several years after its implementation.
"What happens after the deal is reached is what really matters, he said. "We won't know whether it's good or bad until a few years down the line, and it won't be good if it ends up dependent upon the banks good faith to act appropriately."