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Foreclosure Fraud: Scoring the Deal, Continuing the Fight

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The Federal government and the Attorneys General from 49 states have signed a deal with five major banks over charges of fraud, including reported acts of widespread perjury and forgery, in the so-called "robo-signing" scandal.

A few days ago we suggested that any deal be scored against five basic principles: openness, justice, restitution, deterrence, and reconciliation. It's clear that this deal falls short in every category. The best thing that can be said about it is that, thanks to a few tough holdouts led by New York AG Eric Schneiderman, it now allows additional civil and criminal investigations to proceed.

That's far from nothing, and it could be a big deal. But it will only be a big deal if the Administration stops coddling banks and devotes a lot more resources to helping homeowners and upholding justice.

Up to now, the fight has been to prevent the Administration from doing another cushy bank deal. Now that the door's been left open to further action, there's a new fight: to demand that they devote the Federal government's resources to investigating Wall Street crime.

Our own scoring of the agreement follows, based on the criteria we set out last week. Others may have a different opinion. But now that the deal's done, the way forward is clear. To paraphrase Joe Hill, don't mourn or celebrate: Organize.

The Score

Openness: Has the truth been brought to light? Do we finally understand what happened to us, why it happened, and who's responsible?

The agreement trades away the leverage that investigators gained by essentially catching bankers dead-to-rights as they broke laws on a mass scale through robo-signing. That means they can't use that leverage to "sweat" more information out of the banks.

We wrote in our scorecard that "there's a lot we don't know about bank malfeasance," including the guilt or innocence of individual bankers. Sadly, we may never know. This deal appears to end ongoing investigations into "robo-signing." If you see a bank CEO whining on television about his industry's bad reputation, we're not likely to ever learn if he ever personally signed off on criminal behavior. (Which would make him a criminal too, of course.)

There is, however, an upside. We wrote that "any settlement which closes the door to further investigations gets a much lower score." This settlement does allow investigations to move forward in other areas. As the Washington Post notes, it "leaves open the possibility of other lawsuits regarding fair housing and fair lending laws, civil rights claims, and claims dealing with how loans were packaged and sold, a process known as securitization. In addition, it does not shield the banks from any criminal violations that arise."

That's potentially a huge win for homeowners. But it could fall far short of the mark unless we see action out of Washington to support Schneiderman and his colleagues.

We said the key indicators for openness were "continuation of ongoing investigations; commitment of major Federal resources to the Schneiderman co-chaired Task Force and other investigative bodies." The deal does pretty well on those specifics.

Overall the agreement seems to trade away too much for too little where openness is concerned. That was probably a foregone conclusion, given the Administration's proclivities and its past insistence on a deal of this kind. It's now incumbent on the White House to show homeowners that it's fighting for them in other ways.

Justice: The American people should be able to review the deal and know in their hearts that justice has been served, the guilty have been held responsible, laws have been upheld, and we know once again that we live in a society of laws.

We're not there yet.

The first element of justice is making sure that wrongdoers personally pay for their misdeeds. This deal doesn't do that. As Yves Smith points out, it still appears to allow banks to pay for their crimes with other people's money - including your money, both through government-backed Fannie and Freddie securities and pension fund accounts (if you're fortunate enough to have a company pension).

If it's well administered, pension funds and other investors will be able to participate in the negotiations. A well-structured process would allow them to set guidelines for mortgage modifications. Investors could benefit from a slowdown in foreclosures, if it led to a more secure set of loans.

But there's no reason to believe banks will structure the process or administer it well - except in the sense that it serves their interests well by shafting everybody else.

Again, execution is everything. Which means that, once again, we need to keep the pressure the Administration to deliver.

We also said that a good deal must avoid "immunity from criminal prosecution for individuals; immunity from civil suits;" and "financial penalties for individuals." This deal falls short on those indicators, at least for robo-signing itself. But it leaves the door open for all of those actions in other areas of bank malfeasance, which means investigators need to get busy - and the Justice Department needs to get on the side of the angels.

Restitution: Have those that were wronged been made whole?

Homeowners owe more than $700 billion in non-existent home value because they were hyped and manipulated into believing real estate was a "can't-miss investment" that would "go up forever." Does a deal valued at $25 to $39 billion make them whole? Of course not. Nor does a $2,000 check as laid out in this agreement make up for losing your home because it was foreclosed upon illegally.

That said, it's also true that if you get a billion here and a billion there the, to paraphrase John Paul Getty, pretty soon you're talking about real money. How can this become real money? The deal says that some of those funds will go to legal aid for borrowers. If homeowners get the right kind of legal aid, with smart lawyers who know the rules, that's not a small thing by any means. But once again, that means vigilance to ensure that it happens.

Investors deserve restitution, too. Some of them were defrauded into buying mortgage-backed securities based on deceptive statements. Others bought shares in US banks because key information was hidden from them by bank executives. That means that, here too, the best chance for achieving justice is by pushing through the doors that this deal now opens to further legal action.

Legal action for everyone who was wrong must address every category of bank crime, great and (relatively) small, including but not limited to:
  • Defrauding homeowners with fraudulent statements and claims, by concealing information from them at the time of sale, or hiring appraisers to inflate their home's current and projected value;
  • Defrauding investors by concealing the true worth(lessness) of mortgage-backed securities;
  • Defrauding investors by make false or mislead statements about their bank's financial condition in annual reports, investor calls, and media interviews;
  • Other misdeeds that may yet come to light, or which I've inadvertently left out.
We said the indicators were "Scope of settlement relative to misdeeds being settled; ability for further civil suits; as much as possible, avoid having third parties pay for the misdeeds of others; retain as much leverage as possible to obtain additional restitution."

Regarding robo-signing itself, this deal isn't strong on any of these. That means we need to move full-speed-ahead on the other categories of bank crime. One could almost be grateful there are so many others to work with.

Deterrence: Has the punishment been proportional to the crime? Is it severe enough to deter future criminal behavior?

Again the answer is: Not yet.

When it comes to their rampant lawbreaking around robo-signing, bank executives just dodged a bullet. But they're still vulnerable on other forms of personal wrongdoing.

Once again, it's all in the execution. The public has to keep the pressure on the White House to back Schneiderman and others in their investigations. Otherwise bank executives will have gotten the message that they'll never pay for breaking the law and enriching themselves with ill-gotten bonuses.

They'll even get to keep the money!

Schneiderman's MERS suit is a particularly important element of the deterrence process for a number of reasons. MERS' shell-game corporate structure needs to be broken up, and wrongs committed through this shadow entity must be punished. Otherwise the mechanism will remain in place for future abuses.

Reconciliation: When major crimes disrupt a nation, the final element is reconciliation -- the restoration of social calm, renewed trust between the parties involved, and a return to confidence in the institutions of government.

As we have now said ad nauseum: We're not there yet. When we laid out our scorecard we discussed South Africa, where some observers were astonished by the generosity and clemency displayed by President Mandela and his government after apartheid ended - only because their Truth and Reconciliation Commissions were not empowered to grant forgiveness to anyone who didn't admit what they'd done wrong.

We haven't seen the official language that the parties will use, but if they're allowed to "neither admit nor deny wrongdoing" it will be a grave disservice to the American people.

There's already a website, presumably government-created, which announces this deal. The picture is of a happy, beaming family in front of their beautiful home. You'd think this deal was "morning in America," not the result of a massive crime wave that created millions of human tragedies.

If the entire process follows this chirpy tone, and if no apologies are offered, justice will not be served. No family that's lost its home will be buying another one with $2,000. On the other hand, if some families can keep their homes because of this deal that will be terrific. But again, that depends on the execution of this deal.

(It's also striking to see a well-to-do white family used to portray the victims of actions that disproportionately targeted minority families and lower-income households of all races.)

Clearing Government's Name

We wrote that "the institutions of government have been soiled by this process. Most Americans believe that their government has failed them under both political parties, as far as Wall Street is concerned."

The Washington Post calls the agreement "a key election-year victory for the Obama administration". I'm not so sure - not if families and communities don't get real relief. And they won't - not unless concerned and active citizens press the Administration to provide Schneiderman and his colleagues with the resources they need.

As we were saying: Don't mourn, organize. The fight has just begun.