Bank Settlement Highlights the Feds’ Foreclosure Flop

Go ahead and hate the deal the federal government and 49 of the country’s 50 attorneys general just finalized with five of the country’s largest banks over foreclosure fraud. There’s plenty to dislike about the settlement, starting with the price tag: $26 billion. That’s a slap on the wrist given the reckless, sometimes criminal behavior of the banks, and a pittance compared to the trillions of dollars homeowners collectively lost during the subprime debacle. Wade into the fine print and the deal seems even more disappointing. One settlement site says that it can take up to three years for homeowners to know if they’re even eligible for a cash payment. Victims losing their home in a foreclosure can expect a cash payment of between $1,500 and $2,000—enough to maybe cover the costs of a rented truck and storage once they got the boot.

Be mad, but make sure to be angry at the right people. Bank regulators in Washington, and not the country’s attorneys general, should have been cracking down on banks that were routinely evicting people despite incomplete documentation. It’s the U.S. Justice Department and other federal agencies that should have gone after the banks when they were caught fabricating legal papers and routinely “robo-signing” thousands of affidavits at a sitting. The Obama administration also might have added teeth to HAMP (Home Affordable Modification Program) rather than relying solely on incentives, which explains why HAMP has helped only a small fraction of the 3 million to 4 million homeowners it was created to help.

“The attorneys general shouldn’t be here, but Obama fell down on the job,” says Prentiss Cox, who in 2006 led the successful case against Ameriquest, an investigation that cost the lender $325 million in fines, when he ran the Minnesota attorney general’s consumer-enforcement division. (He now teaches at the University of Minnesota Law School). “The Obama administration abdicated responsibility. So while many of us are colossally disappointed with where we are, you can’t blame the AGs. The AGs were at least willing to step to the plate.”

And the AGs did a pretty good job, all things considered. As written, the final deal pertains only to the wrongs the five banks (Wells Fargo, Citigroup, JPMorgan Chase, Bank of America, and GMAC/Ally) committed while booting people from their homes. It won’t tie the hands of any AG seeking to investigate subprime frauds beyond the foreclosure mess. The country’s more aggressive AGs, such as Delaware’s Beau Biden (the vice president’s son) and New York’s Eric Schneiderman, can still pursue claims against the banks over origination (fraud committed when making the subprime loans in the first place) or securitization (the packaging of these loans by the large Wall Street firms and the deceptive means they often used to peddle them to unsuspecting customers).

“I’ve said from the start,” Beau Biden told me back in September, “I’m only willing to sign off on a deal if it allows us to continue looking into misconduct in the areas of securitization and origination.” The deal also doesn’t prevent individuals from suing their bank or stand in the way of the many private class-action suits that have been filed over improper foreclosures.

And the deal is about more than just money, even if the dollar amount seems about the only issue most people are focusing on. It’s little solace to those who have already been unfairly booted from their home, but it establishes the steps that any bank must take before seizing someone’s home—or face the consequences of more legal action. It will help those millions of people still facing foreclosure, which has been a priority of old hands in the fight against subprime abuse such as Ira Rheingold, executive director of the National Association of Consumer Advocates.

“The most important thing for people like me is fixing the damn system,” Rheingold says. “It’s making sure people who can save their homes have the right to save their homes.” And with the sigh of someone who has been fighting this fight for a long time, Rheingold adds, “I think sometimes we lose sight of what’s possible to achieve.”