Inside the AG Settlement: The Big Servicing Settlement with the State Attorneys General Is Being Actively Debated. Mortgage Investors, It Seems, Are Not among Its Biggest Fans

Article excerpt

Some observers heaved a big sigh of relief on hearing news of the $26 billion national mortgage servicing settlement with the five largest mortgage servicers forged by the Obama administration and state attorneys general (AGs). * It was supposed to be a watershed event, covering 3.8 million foreclosures between 2008 and 2011, where the issues swirling around the improper filing of foreclosure documents could be resolved for more than half the mortgages in the nation. * President Barack Obama boasted that the deal the largest such settlement in U.S. history--would "turn the page on an era of recklessness." * The settlement, whose overall value could reach up to $4.o billion just for the five servicers covered by the deal, was being seen as a template that could be used to sign on more servicers. Such an outcome could close the chapter on the whole foreclosure controversy, while still leaving a slew of civil securities suits in place, as well as federal and state criminal investigations into mortgage fraud. * Attorney General Eric Holder touted the benefits of the settlement at a press briefing Feb. 9 outlining the broad parameters of the deal. "[W]ith this settlement, we aren't just holding mortgage servicers accountable for wrongs they committed. We are using this opportunity to fix a broken system and to lay the groundwork for a better future," he said.

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Overview

The details of the agreement did riot emerge until March 12, when 49 states, the District of Columbia and the federal government signed consent agreements with each of the five mortgage servicers in response to specified claims in a complaint filed simultaneously with the U.S. District Court for the District of Columbia.

On April 5, the consent agreements went into effect when they were approved by Judge Rosemary Collyer in the Federal District Court for Washington, D.C.

The attorney general for Oklahoma, Scott Pruitt, signed a separate $18.6 million agreement with the servicers. He denounced the broader agreement for over-reaching the authority of state attorneys general and warned that the terms created questions of fundamental fairness and justice by rewarding homeowners who stopped paying their mortgages over families who continued to make payments even if they were underwater on their loans.

The role played by the Obama administration proved decisive in crafting the final settlement, bringing on board two holdout states that wanted better terms than had been reached in negotiations by an executive committee of the state attorneys general headed by Iowa Attorney General Tom Miller. The holdouts were New York, represented by Attorney General Eric T. Schneiderman, and California, represented by Attorney General Kamala Harris.

As interested parties and analysts began to comb through the legal documents, it became clear the settlement did not satisfy one key private-sector constituency not represented in the negotiations--namely, mortgage investors.

The agreement's terms governing $10 billion in principal reductions for delinquent loans was a key sticking point for mortgage investors.

Under the deal, principal reduction on the primary mortgage occurs in tandem with principal reductions on second-lien or home-equity mortgages. This essentially pits two groups against one another because many primary mortgages were securitized and owned by investors, while home-equity loans were generally held on the bookS of banks.

Under bankruptcy laws governing first and second mortgages, as well as under the terms of securitization deals, second mortgages should generally be wiped out entirely before first mortgages incur any losses because they are subordinate claims.

The Association of Mortgage Investors (AMI), Washington, D.C., is reserving the right to file a lawsuit challenging the settlement, according to Chris Katopis, the association's executive director. …