A quick fix to the foreclosure crisis is unlikely despite growing pressure for some sort of settlement, which could form the basis of such a solution; from lenders, politicians and others.
Efforts to provide a solution to the foreclosure crisis have been stalled for months because of media reports that the paperwork in tens of thousands of foreclosures was done improperly. This has prompted an investigation of mortgage servicing companies and lenders by attorney generals in all fifty states.
Representatives of the attorneys generals and lenders are now trying to negotiate a settlement that could theoretically lead to a foreclosure crisis solution. The negotiations were revealed at a US Senate Banking committee hearing on foreclosures on Nov. 16, according to news reports.
From the representatives’ testimony it appears that any sort of agreement is still months away. Bank of America CEO, Brian Moynihan (who apparently represents the lenders) told the committee that lenders would like a quick settlement. Yet, Iowa Attorney General Tom Miller (who is heading the states’ mortgage investigation) said it could take up to a year to work out such a settlement.
Investigation Unlikely to Stop
Miller and Moynihan’s statements indicate that the state investigations of lenders and negotiations between lenders and attorney generals are likely to continue. It is hard to see how these negotiations can lead to any sort of meaningful solution to the foreclosure crisis even if they are successful.
The first and biggest obstacle to a successful agreement would be the political climate. Popular opinion is running decidedly against banks and the mortgage industry. Any sort of settlement in the lenders’ favor is likely to be seen as kowtowing to bankers and Wall Street. That would be political suicide given the present political climate so it is unlikely that most attorney generals who are elected officials would sign off on it.
Other obstacles include the scope and complexity of the problem there are hundreds of lenders, law firms, mortgage service companies and other businesses involved in the foreclosure crisis. It is highly likely that many of them will seek their own settlements with state governments. It is also highly likely that some state attorney generals will seek their own deals with lenders for their own purposes.
Civil Lawsuits Could Complicate Matters and Sink Deal
Any sort of deal made by the attorneys general would only cover criminal and civil legal actions brought by the states. It would not cover any possible federal legal action or civil suits brought by private attorneys and individuals.
There is a strong possibility that evidence of foreclosure wrong doing will lead to civil lawsuits including class action lawsuits against the lenders. Any settlement between attorneys generals and lenders could be seen as an admission of wrongdoing and fuel civil lawsuits.
It is also unclear if such a settlement would be legally binding. Consumer advocates, lenders, investors in mortgage backed securities and others could challenge it in court. This could delay the settlement for months or even years. There is also the possibility that the settlement could be thrown out by courts which would reignite the dispute.
Numerous civil lawsuits challenging the foreclosure process have already been filed in states such as Florida. Bloomberg Businessweek reports that North Carolina attorney O. Max Garner III is organizing a nationwide network of attorneys to fight foreclosure. This network could conceivably challenge any sort of deal.
Attorneys are also threatening to sue lenders on half of investors who lost money in mortgage backed investments. These lawyers would undoubtedly challenge any settlement that didn’t reimburse investors for their losses.
Unclear How Settlement Would Affect Mortgage Market & Homeowners
It is also unclear how such a settlement would affect the mortgage market and home sales. The home sales and mortgage markets are at a virtual standstill right now because of the economic downturn.
A successful settlement could put hundreds of thousands of foreclosed homes; which are currently in legal limbo, back on the market. This would probably drive down home prices but could increase the number of home sales and new mortgages.
The failure to workout a deal and ongoing state investigations of the mortgage business would make the foreclosure situation worse. The ongoing investigations will cloud title on foreclosed homes which will make them hard or even impossible to sale.
It could also be harder to work out deals to help persons stay in foreclosed homes through mortgage modification. Such efforts rely upon clear title and the cooperation of a mortgage holder. It is hard to see how such settlements can be made when it is hard to determine who holds a mortgage upon a home.
Foreclosure Crisis Likely to Continue
The foreclosure crisis and the conflict between states attorney generals and mortgage lenders will continue for the foreseeable future. This means that no quick fix or solution to the foreclosure crisis is likely anytime soon.
Nor is a federal solution to the problem probable because foreclosure processes are different in each state. No federally imposed mandate or process would be binding unless both lenders and homebuyers would agree to it. Even then such a settlement would have to comply with state laws governing foreclosures. This means that is unlikely that either President Obama or Congress will get involved in these negotiations.
The most likely scenario is that this process will drag on for months and eventually collapse. Instead of one grand solution expect individual settlements between the mortgage lenders and the state attorney generals.