|Two Cheers for the SettlementBy JOE NOCERA|
Thirteen years ago, state attorneys general reached a settlement in a huge lawsuit they had filed against the country’s biggest tobacco companies. The companies agreed to pay the states a staggering $246 billion while also limiting tobacco advertising, among other things.
The Master Settlement Agreement, as it was called, was widely heralded as a breakthrough in the fight against the purveyors of cigarettes. But it wasn’t. A year earlier, Congress had failed to approve a more far-reaching effort, one that would have placed tobacco under the jurisdiction of the Food and Drug Administration and set much tougher rules, including standards for regulating secondhand smoke.
The deal struck after that Congressional failure was, like most legal settlements, the product of a negotiation, and revolved mainly around money. It ultimately represented the best the states could get, given both the leverage they had and the constraints they had to deal with. The tobacco companies, it turned out, had leverage, too.
Last week, 49 attorneys general, along with the Obama administration, settled their robo-signing suit against the five biggest mortgage servicers. In some ways, it is the mirror image of the tobacco settlement; even before the ink was dry, liberal groups that prefer the term “banksters” complained that the settlement would fail to inflict a punishment commensurate with the crime.
Nor did the criticisms diminish after the settlement terms were announced. The New Bottom Line, a self-described “coalition of grass-roots, people of faith, homeowners, and workers,” called the settlement a “ paltry down payment.” The American people wanted “$300 billion in principal reduction” instead of the $20 billion or so the settlement was likely to offer, the group added. On Friday, The Financial Times reported that the settlement would even allow the servicers to tap taxpayer funds from already-existing federal mortgage modification programs to lessen their liability. (Both Attorney General Tom Miller of Iowa — who spearheaded the states’ effort — and the Department of Housing and Urban Development, which led the federal involvement, have said the story is wrong.)
But, whatever the flaws of the settlement, it, too, is a product of a negotiation, and it reflects both the strengths and weaknesses both sides brought to the table. Although robo-signing clearly violated the law, prosecuting it would have taken years, and it is highly unlikely that any court would have forced the servicers to pay anything close to the amount the settlement calls for. The threat that they could pull out of the talks and, in effect, dare the states to sue them always hung over the negotiations.
Why did this threat give the banks leverage? Because the real goal of the attorneys general was less to punish the banks than to provide foreclosure relief in the here and now. The prospect of protracted litigation was anathema to them, given the millions of Americans in danger of losing their homes — and the shoddy treatment so many have received from the banks as they have tried to get mortgage modification.
As part of the settlement, the banks agreed, for the first time, to servicing standards that will treat homeowners fairly. Anybody who has seen the foreclosure process up close these past few years knows how important it is to have real standards.
The deal is going to force the banks to pay $2.7 billion to provide lawyers and counseling for homeowners. A full-time monitor will oversee enforcement. And it will push the servicers to — finally! — make principal reductions. There are many experts who believe that principal reduction is the only way to pull the nation out of its housing crisis, yet the banks have been loath to take that route. Under the agreement, banks that swallow losses on principal will be able to take a credit against the liability. Miller says that the goal is to show the banks that principal reduction will not cause the sky to fall — and that they eventually begin doing it of their own volition.
For those who mainly care about seeing the banks punished, there will be other opportunities. The litigation relief the banks won is surprisingly narrow. States and the federal government will still be able to sue for lots of other abuses, including lying about the quality of mortgages that were bundled in toxic mortgage-backed securities.
Indeed, Eric Schneiderman, the attorney general of New York, is leading a joint effort with the federal government to investigate possible securitization fraud. Though he eventually signed onto the deal, Schneiderman had long been critical, because he feared it would give the banks too much relief.
Now he has to put his money where his mouth is. Let’s see if — when his investigation is complete and he is negotiating with the banks — he winds up putting the serious hurt on the banks. Or whether he, too, discovers that leverage works both ways.