The Administration’s po-faced insincerity on the mortgage crisis front is wearing thin now that other authorities are taking action against the worst abuses.
Yesterday, we had the sorry spectacle of Treasury Secretary Timothy Geithner, under questioning by Congressional Oversight Panel commissioner Damon Silvers, maintain that the Treasury really had very little power to require banks to engage in certain types of behavior under the Treasury mortgage modification program, HAMP (see the testimony starting at 101). Silvers made it quite clear that he did not buy Geithner’s claim. If you think I am reading more into Geithner’s response than is warranted, he had a longer form discussion with a small group of bloggers last August and made a similar argument when asked why Treasury had done nothing when servicers were clearly gaming HAMP. I pointed out that there was a big difference between narrow authority and broad authority, and pointed out that Treasury had lots of leverage over banks, starting with REMIC violations. He pointedly ignored the REMIC issue.
So we now have the spectacle of two state attorney generals who see mortgage modification abuses large and persistent enough to warrant filing lawsuits against Bank of America. And both their press releases and media reports on the lawsuits (sadly, the filings themselves do not yet appear to be online) make clear that some of the alleged violations took place in connection with HAMP.
So why is Treasury playing what amounts to “see almost no evil, hear almost no evil, see almost no evil” as far as HAMP in particular and banks in general are concerned?
Geithner does acknowledge problems, then either plays them down or says that they are the result of other factors. For instance, the latest argument from the officialdom is that the high level of foreclosures is to a significant degree due to high unemployment. While that is narrowly accurate, it’s also terribly convenient. It alleviates regulators like the Treasury of the obligation of looking how much servicer abuses such as erroneous application of payments and pyramiding junk fees are contributing to foreclosures. Similarly, high foreclosure rates also contribute to high unemployment. Foreclosures, particularly ones that could be avoided by doing a principal mod with a viable borrower, depress housing prices. Low and potentially falling housing prices impede housing sales generally, making it hard for homeowners to move if they get a job in another city. And a weak housing market has a general economy-depressing effect, which affects the job market. In other words, the causal link between unemployment and foreclosures is not one way.
So with Treasury having more than a bit of egg on its face with HAMP, with getting tough on banks a popular move, with the Administration in desperate need of courses of action to help boost the economy that don’t require budgetary approval from the tight-fisted incoming Republicans in Congress, you’d think reining in the worst servicer abuses would be a no-brainer. Pick on the worst outliers, hope the rest of the industry gets the message, and if not, engage in another round of public executions. But that strategy would require a bit of backbone, a quality sorely lacking in the Obama Administration.
The lawsuits against Bank of America and its affiliates make a mockery of Treasury’s passivity. They are broadly similar, both the result of investigations spurred by borrower complaints. The Arizona litigation, filed by Terry Goddard, charges Bank of America with consumer fraud as well as violation of a consent decree entered into in March 2009. The Nevada suit focuses on alleged deceptive practices in mortgage servicing, particularly in mortgage mods and foreclosures.
The statement of the Arizona AG Goddard says that the lawsuit seeks “restitution to eligible consumers and civil penalties, attorneys’ fees, and costs of investigation to the State” as well as fines of as much as $25,000 for each violation of the 2009 consent decree and up to $10,000 per violation of the Arizona Consumer Fraud Act.
Both suits include a litany of complaints heard throughout the HAMP process: homeowners told they had to default when in fact current borrowers were eligible; borrowers under consideration for mods advised that their house would not be foreclosed upon when BofA was moving forward with the foreclosure process; falsely promising to take action on mod applications within a specific time period; telling consumers that their mods would be made permanent if they successfully completed the trial period, then denying the permanent mod and giving deceptive reasons for the turndown; incorrectly informing credit bureaus that borrowers had defaulted; engaging in bait and switch on mod terms.
The language in the press release was scathing: “misleading and deceiving consumers…callous disregard…truly egregious”.
The New York Times story on the suits points out that the Arizona attorney general Goddard’s term ends in January. The parallel filings, in two neighboring states that have among the highest foreclosure rates in the nation, will hopefully make it hard for his successor to back down (how can an incoming AG retreat from a case if the one in Nevada moves forward and garners favorable press? While AGs can and do kowtow to bankers, it will be harder to do so with the lights turned up this high).
These lawsuits also serve to keep pressure on Iowa attorney general Tom Miller, who is leading the 50 state AG probe. Although Bank of America may turn out to be the worst actor, newspaper reports on HAMP abuses have reported of similar dubious conduct by other major servicers, suggesting that additional banks should also be targeted once the litigation strategy is perfected on Bank of America.
Despite Miller’s assurance that his group will seek criminal indictments where warranted, it isn’t clear that MIller will be aggressive. I was concerned when I heard him speak positively about his dealing with Michael Barr of Treasury in the first Senate Banking Committee hearings on foreclosure abuses (as in it seemed sincere rather than pro forma). Those concerns have been further stoked by reports that Miller has said privately that he does not think the fraud is serious and he anticipates everything will be worked out.
Action on the state level is the best hope to rein in banking industry abuses. Hopefully observers will recognize that the actions of the Nevada and Arizona state attorneys general make a mockery of the Treasury’s failure to seek redress and will also set a benchmark for possible measures against other banks.
Update: Here is the link to the Arizona complaint, hat tip Lisa Epstein. I’ve only skimmed it, but it has multiple references to commitments Bank of America made under the HAMP program, again raising the question of Treasury’s failure to take action.
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