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The State That Ate the National Mortgage Settlement

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.

Meanwhile, the side deal that California eventually struck requires Bank of America, Chase and Wells Fargo to provide a total of $12 billion in loan modifications, short sales and other consumer relief to California residents.

The $12 billion for California does not come directly out of the $20 billion in consumer relief nationally, due to differences in how credits for the various forms of relief are calculated.

Still, B of A, Chase and Wells guaranteed billions of dollars more to Californians than were going to be trimmed from the national total if California dropped out of the talks. That suggests that some of California's gain might have come out of the pockets of residents of other states.

But that scenario assumes the five banks would have agreed to a multistate settlement that did not include California. And it's not clear the banks would have signed a deal that left them liable to lawsuits filed by the nation's largest state.

What's harder to dispute is that California's share of the consumer relief funds is disproportionately larger than what other states are receiving.

Through Sept. 30, the five participating banks stated that they have sent $8.9 billion in gross consumer relief to Californians, according to a report issued last month by the settlement's monitor, or 40.9% of the national total. At B of A, Chase and Wells, which have provided the vast majority of the relief to Californians, the state's percentage of their national total was slightly higher than 41%.

For comparison, California is home to 12% of the U.S. population. Since early 2005, California has had 17.7% of the nation's foreclosure completions and 21.1% of the nation's foreclosure starts, according to RealtyTrac data.

Those data suggest that Californians deserved perhaps 15% to 20% of the consumer relief dollars under the settlement.

That estimate increases if one also considers home prices, which are higher in California than in almost every other state.

Because California homes cost more, a 20% fall in home prices wipes out more home equity in California than it does elsewhere. California has 18.2% of the nation's underwater homes but 26.1% of the nation's total negative equity, according to data from CoreLogic.

Still, even if California deserved 26% of the settlement's consumer relief dollars, that's roughly $3.3 billion less than what its residents have received to date.

Bank of America did not respond to a request for comment for this article, while both Citigroup and Chase declined an opportunity to comment.

Ally Financial said in a statement that it "is committed to honoring the terms" of the settlement agreement "and will continue to solicit all eligible borrowers."

Wells Fargo said in a written statement that the geographic distribution of its consumer relief activities "remains consistent with the distribution of its portfolio and also reflects the fact that the financial commitments under the settlement are focused on borrowers who are in a negative equity position."

For its part, the California Attorney General's Office said that the $20 billion pool of relief available to consumers nationwide would have been smaller if California had dropped out of the talks.

"I think there are billions of dollars more that are available nationwide because of what California and the federal government did," Troncoso said.

One State Gets Its Own Watchdog


(1) Comment



Comments (1)
Wait, wasn't political allocation a root cause of the sub-prime lending debacle in the first place. This is more of the same.
Posted by kvillani | Friday, December 28 2012 at 12:04PM ET
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