Federal Government Moves Towards Mortgage Fraud Settlement With Banks That Still Refuse To Play By The Rules

The federal government’s case against banks for duplicitous and potentially illegal mortgage practices may be reaching an unsatisfactory final settlement even as one of the largest perpetrators of foreclosure fraud takes outrageous steps to block further investigation into their actions at the height of the housing crisis.

Tens of millions of homeowners remain “underwater,” owing more on their mortgages than their home is worth, and recent data reveals a continued decline in nationwide home values. Housing is arguably the most integral nuts-and-bolts element to a broader economic rebound, but there appears to be nothing approaching a sustained recovery in the works. And as housing stagnates, the drain of foreclosure continues to hammer away at some of the hardest hit regions and cities in the country.

The federal government, however, is eager to sign off on a major settlement with some of the nation’s largest banks that would enforce a $25 billion fine related to foreclosure abuses during the housing crisis.

In what would be a political coup months before the November presidential election, the Obama administration has reportedly come to terms with banks on a $25 billion penalty that would distribute most of the money to victims of foreclosure fraud and abuse.

While some call the potential agreement a victory against the banks, who had lobbied for more lenient terms, details of the legalities involved in the government’s settlement could let banks off the hook with a legal release for fraud and abuse related to “robosigning,” a charge at the heart of many additional lawsuits and civil cases brought by state attorneys general.

The Obama administration, state attorneys general, and, perhaps, the nation’s largest banks are close to a final settlement on the years-long struggle over allegations of massive foreclosure fraud, according to several sources familiar with the talks. And the final details of the arrangement, according to the source who revealed them, will apparently not preclude prosecutors and regulators from taking legal action against many of the common abuses during the house bubble. It remains to be seen whether all parties will ultimately sign off on the language.

The settlement is worth $25 billion, a sum which will be distributed to homeowners who were wrongfully foreclosed on as well as those who remain underwater. In addition, banks could still face future legal action over 12 specific violations.

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According to Mike Lux, who originally reported the settlement for The Huffington Post, the release will be “almost entirely confined to robosigning cases” — meaning that banks will likely not see further punishment from the states for foreclosure fraud. Robosigning fraud is perhaps the easiest type of misconduct for prosecutors to target.

That said, their legal liabilities on the federal level remain vast, even after handing over $25 billion for homeowner relief.

The announcement is, in some regards, a victory for the few state attorneys general who, over the course of several months, refused to sign off on a quick and limited settlement with the big banks.

Unanswered questions remain, such as how the apparent settlement of the government’s sole major fraud case against banks and lenders tied to the foreclosure crisis will affect the promise made by President Obama in Tuesday’s State of the Union to create a new “mortgage crisis” investigative unit headed by New York Attorney General Eric Schneiderman, a leading figure in the fight to hold banks accountable for abuse.

The flurry of movement from the Obama administration on mortgage fraud comes after years of criticism from activists and experts alike that the President’s stance against aggressive criminal probes of the banking industry and documented foreclosure abuse was misguided.

But even the latest push from the White House in an election year depends largely on cooperation from the banks themselves, the very entities that stand to lose the most if a more competent campaign against mortgage fraud is taken by the government. The legal release for “robosigning” cases in Friday’s abuse settlement is evidence that the administration may still be unwilling to take a hard line against the most pervasive form of foreclosure abuse carried out by the financial industry.

And the banks themselves are more than ready to fight back through any means necessary or available.

A shocking report out of Arizona, one of the states included in the 50-state fraud case against mortgage fraud, finds that Bank of America is seeking to shut down the state’s ongoing investigation of foreclosure abuse and alleged fraud committed by BofA during the housing bust.

Their tactic? Give belated cash assistance and mortgage relief to homeowners contacted by the state and force them to sign a document barring them from revealing the deal or publicly criticizing the bank.

Arizona’s Republican attorney general, in the midst of an extensive investigation into abuses by Bank of America’s Countrywide mortgage unit, discovered the bank’s secret agreements with homeowners that had come forward and revealed the documents in court.

In addition to cash, loan relief and a ban on public criticism, the bank also demanded that homeowners delete previous statements on Facebook or Twitter that “defame, disparage or in any way criticize” BofA. The Arizona attorney general says the deals are hindering his investigation.

Bank of America Corp. is impeding an investigation of its loan modification practices by negotiating settlements with borrowers who must agree to keep them secret and not criticize the bank in exchange for cash payments and loan relief, Arizona officials say.

The Arizona Attorney General’s office is asking a court to block those aspects of the settlements and require the bank to turn over all the agreements. The bank denies any wrongdoing.

One 2011 accord involving a borrower facing foreclosure who defaulted on a $253,142 mortgage included a $5,000 payment, plus $7,500 for legal fees, and the defaulted payments were waived and the loan was modified to a 40-year term with a 2 percent interest rate, court documents show. The terms of the original loan and the borrower’s complaint about the lender weren’t described in the documents.

The borrower “will remove and delete any online statements regarding this dispute, including, without limitation, postings on Facebook, Twitter and similar websites,” and not make any statements “that defame, disparage or in any way criticize” the bank’s reputation, practices or conduct, according to documents filed in state court in Phoenix. The borrower’s name and address were redacted.

Bank of America attorneys argue that borrowers don’t have to sign the agreements to get a loan modification and deny that settlements hinder the state’s probe. Borrowers can be subpoenaed to disclose the accords, and the Charlotte, North Carolina-based bank won’t enforce the non-disparagement provision if they talk to investigators, the bank’s lawyers have said in court filings.

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Matthews contends that under the terms of the settlements, even if subpoenaed, borrowers can’t reveal any unflattering information about the bank. They couldn’t talk about misrepresentations the bank made about loan modifications, which is what the state is investigating, she said.

“These agreements have completely silenced even the most communicative consumers,” Matthews said in the filing. “The settlement agreement purposefully makes it impossible, legally and practically, for a consumer signing it to come forward, voluntarily and promptly, to provide evidence in this case.”

Arizona officials have previously run into conflict with Bank of America during the state investigation into foreclosure abuse. This past summer, the state attorney general’s office complained that the bank would not grant interviews with former employees and that there was reason to believe the bank would “interfere” in the ongoing investigation.

As the blog Naked Capitalism points out, Bank of America’s latest ploy to dodge accountability seems to be a routine racket operation, a stunt where unwitting participants are bullied into acquiescing to a more powerful entity’s demands. Even the bank itself admits that their actions in the Arizona case are a “limited” operation tailored to their needs in that particular situation.

This is all very entertaining. Remember, first, that it is not uncommon for parties to put provisions in contracts that are not enforceable in the hope they can snooker the unsophisticated into thinking they have to respect them. For instance, some landlords will try putting a “no roommates” clause in their rental contracts when New York city rent regulations allow tenants to take roommates. In addition, many confidentiality agreements contemplate that the parties might be compelled by judicial order to break the agreement; they contain clauses requiring the party subpoenaed to inform the other party to give them the chance to try to block the order. But there was apparently no language like that in these provisions that would clue presumably unsophisticated borrowers into the idea that these agreements could be superceded by court action.

Bank of America has amusingly adopted contradictory responses to being caught out. On the one hand, its formal response argues that these gag orders are “plain vanilla” that it uses “on an every day basis to resolve disputes”. In other words, this sort of language is perfectly routine and BofA use it all the time. Yet it ALSO said it uses it on a “limited” basis to settle disagreements and forestall costly lawsuits.

For some, Bank of America’s rampant history of fraud, abuse and lack of cooperation with government investigations and regulations is cause enough to dissolve the company entirely.

The advocacy group Public Citizen has delivered a petition to U.S. Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke that called on them to use the authority granted them in the Dodd-Frank financial regulatory legislation to break up Bank of America. The group says that the nation’s second-largeest bank is “too large and complex to manage or regulate properly” and poses a “grave threat” to the American economy.

Advocacy group Public Citizen is filing a petition today urging the government to break Bank of America Corp. into smaller companies, saying the Charlotte bank poses a “grave threat” to the financial system.

In a petition to U.S. Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke, the group says the Dodd-Frank financial reform law passed in 2010 gives regulators the authority to do so.

Public Citizen is also hosting a conference call with academics today to “sound the alarm bells” about what they call “too-big-to-fail” banks and discuss specific policy measures that could be used to achieve their goals.

“Bank of America is too large and complex to manage or regulate properly, and its financial condition is poor and could deteriorate rapidly at any moment, potentially causing the market to lose confidence in the bank,” according to the two-dozen-page petition.

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The petition does not advocate a particular course of action, but says that “publicly available information is sufficient to show that financial regulators must take dramatic, assertive action to foreclose the possibility of catastrophic damage from Bank of America and fulfill the purposes of the Dodd-Frank Act.”