Why a Judge Should Reject the Mortgage Settlement

We’ve written a lot about the mortgage settlement’s flaws over the past several weeks, but the one serious chance that exists for avoiding the mess it creates is for the U.S. District Court of DC to reject the settlement. In a piece for RealClearMarkets on Thursday I laid out the case that MBS investors could make in urging a judge to order the settlement renegotiated or at least prevent the banks from using investor money to pay for the settlement. Here is the heart of the matter:

The second complaint from MBS investors will be that they are innocent of any wrongdoing in this matter. There are eight counts in the complaint filed against the banks for the mortgage settlement including: unfair and deceptive loan servicing, foreclosure processing, and loan origination practices, violations of the False Claims Act and Servicemembers Civil Relief Act, and various misconduct relating to homeowners in bankruptcy.

MBS investors have no authority over how foreclosures are processed or whether the right fees are being charged. The investors rely on the servicers to do their job as much as the homeowners. It is purely the banks at fault in this regard (even if the overall settlement fine doesn’t fit the crime). Vincent Fiorillo, a portfolio manager at DoubleLine Capital and AMI’s board president, says, “The banks are trying to pay [their] fines with our money.”

If it is true that investors were not responsible for any of these process abuses or failures, then banks are shifting their liability on to an innocent party.

See here for the full column. If the courts don’t invalidate the settlement then be on the look out for other banks being forced to join the settlement by their regulator. PNC, US Bancorp, SunTrust and others are being talked about as possible banks that would agree to the same servicing standards and pay into the fines and modifications. The thing to watch for will be whether these banks join willingly, or if their regulator strong arms them into joining.

Finally, below is an interview I did on RT covering the MBS investor case against the settlement:

As a side note, if a judge rules that banks have to use all of their own money for principal writedowns, refinancies, and short-sales it does not change the fact that the settlement is political extortion and that the settlement has nothing to do with robosigning. For that reason it should be rejected entirely.