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WASHINGTON-After uncovering significant problems in the foreclosure process, the 50 state attorneys general and several federal agencies delivered a 27-page list of demands to the five largest mortgage servicers, requiring upgrades and changes throughout their systems. But many have begun to suggest the government went overboard by setting unrealistic goals, a move that could backfire and give the banks involved more leverage to fight some of the most onerous requirements. Bankers note that the term sheet makes no mention of what they did wrong-leaving it unclear what problems some suggested remedies are meant to correct-and that it treats all the servicers exactly alike.
Banks are almost certain ultimately to sign a settlement, but observers doubt it will resemble this opening offer. “It probably goes too far,” said
The term sheet covers virtually every aspect of the servicing business, detailing requirements for mortgage documentation, interaction with borrowers, relationships with active military personnel, loan modifications, principal reductions, bankruptcy proceedings, short sales and technology systems. It even specifies that servicers should start relationships with retailers like
“It went to a point where I think some provisions would be unconstitutional and certainly subject to a court fight,” said
State AGs and consumer advocates disagree, arguing that they are mostly enforcing existing law. Some even suggested the banks were getting off easy. “This settlement is more than the banks could hope for given the evidence of both illegal and negligence practices,” said
But bank lawyers said there are several new requirements, including a push for principal reductions, the creation of new websites to help borrowers upload modification documents, restrictions on force-placed insurance, and creating a single point of contact for troubled homeowners.
“The proposed settlement terms are very far-reaching,” said
Many observers said the state AGs were starting off strong in the bargaining. “This is a negotiating tactic by the regulators to see how far they can go with the banks and force the banks to settle more than just looking at the robo-signing issue,” Gardner said. “It’s tough to say, because I don’t know where the breaking point is for the banks on what they will agree to.” But privately, bankers are adamant they have no intention of signing the term sheet in its current form. Some observers even question whether the state AGs all agree with the term sheet. “I don’t think the banks will sign on to it and I don’t think the AGs will sign on to it,” said
A spokesman for Miller said the term sheet is a starting point. “Let’s keep in mind that there is no settlement and we have yet to meet face to face with the banks,” said the spokesman,
Servicers are also concerned about language in the term sheet that would make a violation of the settlement an “unfair and deceptive” practice, which raises the potential penalties banks would face. “The real problem from the servicers’ perspective is creating a lot of new legal duties and this is very prescriptive,” said
Privately, many bankers also note that the term sheet does not spell out what they did wrong.
Federal regulators have said they found violations of state foreclosure laws, but the banks have not seen their specific findings. The term sheet also treats the five servicers equally, allowing for no differences among the firms. “My biggest issue with this thing if this were a sincere approach to outstanding issues, you would think they would have done enough of an investigation to figure out what the damages are on a firm-by-firm basis, and that hasn’t happened yet,” Rosner said. “We don’t know which banks or servicers did what wrong.” While the banks are likely to succeed in watering the term sheet down to a workable compromise, they are unlikely to challenge the settlement in court, observers said.
But it bears its own risk for the banks, too.
“The bottom line is in the final analysis very few banks want to end up going to court unless they feel they will be 100% vindicated,” the lawyer said. “In the history of the universe, is this really a time to go to a court to ask for vindication of these issues given the court cases on these issues? The banks have not been that successful on these issues. Is there anywhere they could get a sympathetic judge on these issues?”
Republicans, meanwhile, are coming to banks’ aid. Sen.
In an interview, Rep.
It is unclear to what extent the lawmakers’ comments can affect the enforcement proceeding. At best, it may give bankers more cover to keep fighting for a better deal.