In the Wild West of the ongoing mortgage mess, there’s a new sheriff in town. And he’s not handing "Get Out of Jail Free" cards in return for a $25 billion check.
The appointment of New York Attorney General Eric Schneiderman to head a special task force that will investigate mortgage fraud marks a turning point in a year-long effort to resolve a wave of legal challenges to abusive and illegal foreclosure practices.
After a year of talks aimed at a settlement with five big banks — Bank of America, JPMorgan Chase, Wells Fargo, Citibank and Ally Financial (formerly GMAC) — attorneys general in all 50 states this week have been are poring over the 100-page draft of a the $25 billion deal requiring bankers to commit to modify problem loans that they have been slow to do until now. Under the proposed terms, the banks would also agree to follow strict foreclosure guidelines and procedures and contribute as much as $5 billion to foreclosure relief programs.
On Wednesday, President Barack Obama tapped Schneiderman to co-chair a joint federal-state task force to pursue criminal charges related to abusive mortgages and the bundling of those loans into investments. Some observers suggested the appointment was intended to blunt Schneiderman’s opposition to the multistate settlement. Schneiderman has said he's not about to let bankers off the hook.
"My concern ... has always been to make sure that we're not releasing claims that obviously now are even more important to me because I'm investigating them," he told reporters Wednesday.
From the beginning of the settlement talks, the five big banks have been holding out for a blanket waiver of legal liability to protect them from future lawsuits or prosecution. The creation of Schneiderman’s task force makes that blanket waiver extremely unlikely. It may even collapse the deal, JP Morgan Chase Chief Executive Officer Jamie Dimon, told CNBC.
“My own read is (the creation of the new task force) has a pretty good chance of derailing it,” said Dimon.
The proposed settlement was also dealt a major blow Wednesday when California Attorney General Kamala D. Harris said its terms would limit her ability to bring civil charges against mortgage lenders that wrongfully foreclosed on homeowners.
"We've reviewed the details of the latest settlement proposal from the banks, and we believe it is inadequate for California," said Shum Preston, a spokesman for Harris
As ground zero for the mortgage meltdown, California is critical to the approval of any settlement. Roughly one in four of all foreclosures are happening in the state and ten of the top 20 metro areas with the highest foreclosure rates in 2011 are there according to RealtyTrac.
From the early stages of the talks, Schneiderman and a handful of other state AGs have resisted any deal that would let banks off the hook for a variety of claims by homeowners and investors who bought bonds backed by home mortgages. In August, Iowa Attorney General Tom Miller, who is leading the state group, booted Schneiderman from the executive committee of federal and state officials because he steadfastly opposed any deals that would end investigations into mortgage fraud.
Schneiderman holds several powerful legal cards that the other 49 AGs don’t. New York’s anti-fraud Martin Act gives him broad subpoena powers other state prosecutors lack. Some New York state securities laws apply to Wall Street firms based in the state. Many of the pools of mortgages that were chopped up into bonds are held in trusts registered in New York.
Delaware, another AG holdout, has securities laws that apply to the corporate registrations of many of entities involved the mortgage mess. Massachusetts has successfully sued other smaller players in the mortgage mess. In September, Massachusetts Attorney General Martha Coakley broke with the talks to file her own lawsuit against the five banks.
From the beginning, critics have argued that the White House has been too eager to see a settlement and too willing to help the five big banks get the immunity they’re seeking.
“The Obama administration has been more concerned with settling quickly than with settling in a way that moves the ball forward for homeowners,” said Diane Thomsen, an attorney with the National Consumer Law Center.
It remains to be seen whether the new mortgage fraud task force will produce results. The Obama administration already created a Financial Fraud Enforcement Task Force in November of 2009 that tapped 20 federal agencies, 94 U.S. Attorneys offices and state and local partners. Though the group has won a number of cases against smaller players, it has yet to win any high-profile convictions.
In June, Sen. Charles Greassley (D- Iowa) described the task force as “a press release collection agency utilized by the Justice Department to collect examples of investigations of prosecutions that would otherwise have been brought.”
Neil Barofsky, a former federal prosecutor who served as the special inspector general of the Troubled Asset Relief Program and worked with the 2009 task force, shared those doubts.
“I'm a little puzzled by it," he told Reuters. "Here we are three years later, launching what seems like a very similar effort, except now co-headed by a state attorney general."
"Does it mean they haven't really been working on investigating the causes of the financial crisis for the last three years?" he said. "Or is it a statement that the last three years of investigating done by the Department of Justice has been ineffectual and needs to be reworked?"
Related:
Proposed mortgage settlement offers little relief for homeowners
Obama: New push to aid homeowners
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