“Weeks to Go” on $25 Billion Bank Settlement

According to “sources close to the matter,” the state attorneys general and the country’s five major lenders could be “within weeks” of reaching a settlement to settle foreclosure fraud allegations associated with last fall’s robo-signing debacle[1]. Yeah, right. That’s what they said several weeks ago when the number was $20 billion as well. However, if you believe these sources, the situation is different this time because the administration wants closure and has upped the pressure on both sides to reach an accord. GMAC Mortgage, Bank of America, Citigroup, JPMorgan Chase and Wells Fargo have one more chance to make it work, say the sources, before “the negotiations splinter off into separate settlements between individual states and individual servicers.” This has the potential to be far more costly for the lenders than a big settlement due to the increased legal costs of fighting multiple suits on multiple fronts, but if the banks cannot get protection from future litigation as part of the package, it’s unlikely that they’ll agree to a deal. New York AG Eric Schneiderman has already left the bargaining table along with California AG Kamela Harris, and other AGs have threatened to walk as well if they do not feel their states are adequately compensated. Without all AGs in on the agreement, it may not be worth it to the lenders to settle anyway.

Currently, the talks hinge not just on future liability and principle reductions, but also on whether or not banks will help underwater borrowers refinance at lower rates. If the lenders agree, California’s Harris might return to the table, which is critical to the success of the settlement[2]. Without New York or California in the mix, the lenders stand to lose too much to agree to a big settlement. Given that California has more than 2 million underwater borrowers, however, underwater refinancing might bring Harris back.

Are you buying that this time they’re really close to a settlement? Should there even be a settlement, or should each state tackle the “big five” on its own?

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[1] http://www.dsnews.com/articles/state-attorneys-general-and-servicers-set-to-strike-25b-settlement-2011-10-31

[2] http://online.wsj.com/article/SB10001424052970203707504577010421094503502.html?mod=googlenews_wsj

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