The Mortgage Deal with the Devil

The long-awaited mortgage deal between the federal government, 49 state attorneys general, and five big banks that was announced Thursday is pretty thin gruel, but it could have been a lot worse.

Under the deal, the banks will provide relief to homeowners in a deal variously described as ranging from $25 billion to more than $40 billion. But a look at the fine print suggests that only about $5 billion cash will actually change hands. Some $1.5 billion will go directly to homeowners who went through foreclosure, with each receiving about $2,000. Other cash will go to states to help distressed homeowners.

The rest of the money will be granted in the form of “credits” to banks that refinance loans or reduce principal amounts of underwater mortgages. But this is, in fact, funny money. Much of this write-down has already been taken by the banks, which know that an underwater mortgage is worth far less than its nominal value.

In exchange for agreeing to refinance loans, the banks will get protection from penalties narrowly related to the “robo-signing” scandal, in which an assembly line of clerks certified that mortgages had been properly recorded and transferred when in fact they were not.

The Obama administration dearly wanted this deal so that it could demonstrate greater help for homeowners and, in turn, relieve the damaging impact of the housing collapse on the economic recovery. The administration’s main programs to date, the Home Affordable Mortgage Program and later the Home Affordable Refinance Program have been notable failures because they were voluntary to the banks. Bankers got to decide who qualified, and the most seriously underwater homeowners were not eligible. Housing prices have continued to decline.

The actual relief under this latest deal is a drop in the bucket measured against the $700 billion by which mortgages are underwater. The best thing that can be said for the deal is that it could be a down payment for much deeper homeowner relief, if state attorneys general and the newly activated federal prosecutorial task force get serious about bigger criminal and civil suits against banks.

That hope was almost precluded by today’s agreement. The banks bargained hard for broader protection against future liability. They didn’t get it mainly because progressive state attorneys general held out for the right to continue investigating, filing civil suits, and criminal prosecutions. Last week, as if to demonstrate his seriousness, New York’s Eric Schneiderman filed a suit against Mortgage Electronic Registration System (MERS), the largely illegal electronic mortgage transfer and recording system set up by the big banks to expedite mortgage securitization.

Obama wanted to announce this deal in his State of the Union address, but for the past couple of weeks, there has been a standoff, with the banks pressing for more immunity and Schneiderman reserving the right to prosecute and litigate.

In the final deal, whose actual text has not been made public, Schneiderman appears to have won big. According to press releases both by the Obama administration and by Schneiderman, banks get immunity from further legal action only narrowly related to the robo-signing mess and are still liable for other mortgage-related offenses.

Thanks to pressure from Schneiderman and four other progressive attorneys general, it’s still open season for all other civil and criminal liability related to fraudulent activities by banks and their confederates in the creation, packaging, and marketing of mortgage-backed securities whose abuse was at the heart of the financial collapse.

The question now is whether federal and state law-enforcement agencies will use the authority they have. For the first three years of the Obama administration, the feds have gone far too easy on the banks. Though Schneiderman has been added to a newly activated federal task force, it remains to be seen whether the same Justice Department and Securities and Exchange Commission (SEC) that declined to take vigorous action have truly reversed course.

Ideally, we didn’t need this settlement now. It would have been better for prosecutors to mount more cases, not just related to robo-signing and MERS but aimed at the fraud at the heart of mortgage securitization. Then, prosecutors could extract penalties that more accurately fit the crime—specifically fines and mortgage relief as restitution, well into the hundreds of billions of dollars.

This is said to be Schneiderman’s goal, both in agreeing to join the settlement once it was revised so as not to tie his hands and taking part in the Justice Department task force.

As details of the settlement became known, the reaction in the progressive community has been mixed. Some of the advocacy groups that have been pressing for a much tougher settlement offered guarded praise for the deal but only as a down payment. Robert Borosage of Campaign for America’s Future called it “a relatively small ante by the banks handed out before the real cards are seen.”

In the progressive blogosphere, the reaction has been harsher. Dave Dayen, who has been covering the negotiations on, described the payment of $1,500 to $2,000 to homeowners wrongly foreclosed upon as “Sorry we stole your home, here’s two months rent.”

The settlement is (barely) better than nothing only if pressure is kept on the Obama administration to view it not as an end but as a beginning. The signs are good that Schneiderman and the other progressive attorneys general see it that way. But it will take quite a deathbed conversion for the Justice Department and SEC to reverse their record of the past three years.