A Direct-To-Consumer Deal
The $25 billion mortgage agreement, which grew out of the robo-signing scandal, is the largest multistate deal since the national tobacco settlement of 1998. But the mortgage settlement was structured quite differently than the tobacco deal, where corporations cut checks directly to the states based on an agreed-upon formula.
A comparatively small part of the mortgage settlement works that way, but most of it does not.
The 49 participating states and the District of Columbia — Oklahoma didn't sign on — receive a total of $2.5 billion in direct cash payments. Each state's allocation was determined based on a straightforward formula that takes into account the state's share of foreclosure starts nationwide, in addition to its portions of seriously delinquent loans, residential loans serviced, and mortgages where the homeowner owes more than the home is worth.
California's allocation of that money is $411 million, or 16% of the nationwide total. That's in the general range that one might expect, given the state's size and its concentration of soured mortgages.
But a much larger part of the national settlement — $20 billion — is earmarked for consumer relief. That category includes short sales, refinances, and mortgage modifications, some of which involve principal reductions. The states themselves never receive these funds. The banks make arrangements with homeowners and credit the funds directly to customer accounts.
Iowa AG Miller, a Democrat, and some of his fellow attorneys general were determined to strike a deal that would require the banks to begin granting principal reductions, which were not yet happening on any large scale.
But to get there, Miller faced a Herculean task — trying to satisfy the interests of 50 different states, including both Democratic and Republican elected officials. While California and some other states were fighting for the largest possible share of the money, Democratic attorneys general from New York, Delaware and Massachusetts were pushing to preserve certain legal claims under the settlement.
(Later on, K&L Gates, a law firm, would title a report on the agreement "The Success of Herding Cats.")
The deal that Miller and federal representatives reached with the five banks — in addition to Bank of America, Chase and Wells Fargo, Citigroup (NYSE: C) and Ally Financial signed onto the agreement — did not include any requirement regarding how much of the consumer relief funds were to be distributed in each state.
That lack of specificity provided bargaining space for Harris, the California AG who broke off to hold separate talks with the banks.
California Flexes Its Muscles
Harris, now a rising star in the Democratic Party nationally, declined through a spokesman to be interviewed for this article. But people who know the attorney general describe her as a tough-as-nails negotiator. At one point she walked away from the negotiating table, according to a source familiar with the talks.
Harris' office had laid groundwork for these negotiations by creating a Mortgage Fraud Strike Force in 2011. That team of prosecutors made more credible the threat that she might ditch the negotiations and file suit against the banks.
During the final week of talks, it remained unclear whether California would sign on to the settlement.
Reuters reported on Feb. 6, three days before the settlement was announced, that California's participation would grow the size of the deal by $6 billion to $8 billion. The California Attorney General's Office confirmed that account.