By Yves Smith
North Carolina has posted an executive summary of the foreclosure settlement (hat tip Abigail Field), and it is a a troubling document. The first aspect is the very fact that an executive summary, rather than actual text of an agreement, is what is being released. And it’s not being released for the worst of reasons: the deal has not been finalized. We explained in an earlier post why this is completely outside the pale, and we’ll turn the mike over to Frederick Leatherman for a recap:
David Dayen mentioned that the settlement agreement has not been reduced to writing.
That is astonishing.
Let me repeat. That. Is. Astonishing.
The biggest problem with settlement agreements in particular, and all agreements in general, is reaching a so-called ‘meeting of the minds’ regarding the details and ‘chiseling them into stone’ by reducing them to writing. As I used to warn my clients when I was practicing law, we do not have an agreement until it has been reduced to writing, thoroughly reviewed, and signed by each of the parties. That has obviously not happened in this case.
Experience has taught us that humans dealing in good faith make mistakes, no matter how careful they are, and the potential for mistakes, misunderstandings and subsequent disagreements about the terms of an agreement cannot be overestimated. That potential becomes a certainty when one or more parties to an agreement is dealing in bad faith.
That, my friends, is why we have a law called the Statute of Frauds, which requires that certain types of agreements be in writing or they are invalid and unenforceable.
Needless to say, the odds of misunderstanding rise when you have many parties participating, and when some are very likely to be acting in bad faith (the banks and the Administration).
Second, and even worse, the description of the release in this summary is at odds with what various attorneys general have said about it. See Section VII:
Mortgage Settlement Executive Summary
Mortgage Settlement Executive Summary
This is the critical part:
The proposed Release contains a broad release of the banks’ conduct related to mortgage loan servicing, foreclosure preparation, and mortgage loan origination services. Claims based on these areas of past conduct by the banks cannot be brought by state attorneys general or banking regulators.
The Release applies only to the named bank parties. It does not extend to third parties who may have provided default or foreclosure services for the banks. Notably, claims against MERSCORP, Inc. or Mortgage Electronic Registration Systems, Inc. (MERS) are not released.
This is sufficiently general so that it is hard to be certain, but It certainly reads as if it waives chain of title issues and liability related to the use of MERS. That seems to be confirmed by the fact that made by local recorders for fees are explicitly preserved (one would not think they would need to be preserved unless they might otherwise be assumed to be waived). This is exactly the sort of release we feared would be given in a worst case scenario. The banks have gotten a huge “get out of jail free” card of bupkis.
Now it is possible that AGs can pursue claims against the banks via MERS, since executives of MERS have claimed that MERS members have given MERS an indemnification. But tell me how the liability nets out:
MERS shall indemnify and hold harmless the Member, and any employee, director, officer, agent or affiliate of the Member (“Member Party”), from and against any and all third-party claims, losses, penalties, fines, forfeitures, reasonable attorney fees and related costs, judgments, and any other costs, fees and expenses (“indemnified Payments”) that the Member Party may sustain directly from the negligence, errors and omissions, breach of confidentiality, breach of the Terms and Conditions, breach of the Rules and Procedures, or willful misconduct of MERS, or any employee, director, officer, agent or affiliate of MERS (“MERS Indemnified Claim”). Notwithstanding the foregoing, MERS shall not be liable or responsible under the terms of this Paragraph for any losses or claims VC10052000VA resulting from the actions or omissions of any person other than an employee, director, officer (who is also an employee of MERS), agent or affiliate of MERS.
The Member shall indemnify and hold harmless MERS, and any employee, director, officer, agent or affiliate of MERS (“MERS Party”), for any Indemnified Payments which do not result from a MERS Indemnified Claim and which such MERS Party incurs (i) from the negligence, errors and omissions, breach of confidentiality, breach of the Terms and Conditions, Rules and Procedures, or willful misconduct of a Member Party, (ii) with respect to a transaction on the MERS® System initiated by such Member, or (iii) as a result of compliance by MERS with instructions given by the Member, or its designee, as beneficial owner, servicer or secured party shown on the MERS® System (“Member Indemnified Claim”).
The issue here (at a minimum) is that MERS is arguably responsible for running a terrible database (from what we have been able to infer, it is lacking in normal protocols to assure the accuracy and integrity of information, such as audit trails) and in failing to devise procedures that were permissible in all the states in which it operated. That presumably constitutes negligence. In turn, the MERS members were arguably liable for taking impermissible actions, such as assigning mortgages when they did not own the note, or making assignments after foreclosures had been started. So they were also negligent. How do you net out who was responsible for what, and to what degree, since both parties are likely to argue that their indemnification isn’t operative due to the negligence (and also possibly bad faith) of the other party. Put more simply: even with the indemnification of MERS by MERS members, don’t expect it to be easy to pin liability on banks.
While the full terms have not been agreed upon, this seems to call into question the claim that Schneiderman got a carve-out for his MERS suit (and Biden had separately insisted that he had wanted to be able to add banks to his case against MERS).
But even with all these caveats, it’s hard to read the executive summary, which no doubt was vetted by the bank, Administration and AG sides, as meaning other than what it intends to mean: that the banks have been released of the meteor-wiping-out-the-dinosaurs-and-the-MBS-market liability they were most afraid of, that of the monstrous mess they made in their failure to convey notes as stipulated in their own contracts, and with their failure to use MERS as a mere registry, rather than a substitute for local recording offices. That in turns means that various cheerleaders for this deal, such as Mike “Settlement Release Looks Tight” Lux and Bob Kuttner have badly misled readers in their assertions that the release was narrow and the deal is good for homeowners.
And to add insult to injury, they’ve given thumbs up to a deal that, as Pimco’s Scott Simon put it:
“….treats people’s 401(k)s and pensions,” which hold mortgage securities, “like perpetrators as opposed to victims,…
“Think about this, you tell your kid, ‘You did something bad, I’m going to fine you $10, but if you can steal $22 from your mom, you can pay me with that.”
As we said before, this deal has put a price on fraud and document forgeries, and it’s $2000 per loan. And Democratic party operatives want you to believe that’s just dandy, that we should be happy as long as the masses gets some crumbs.