Lack of Leadership Prolongs Mortgage Settlement Talks
The backlash against an aggressive mortgage servicing settlement reached new heights on Wednesday as two state attorneys general vocally opposed the proposed deal.
Many believe the government went overboard by setting unrealistic goals, a move that could backfire and give banks more leverage to fight some of the most onerous requirements.
If state attorneys general prevail in settlement talks with mortgage servicers, Elizabeth Warren would gain new authority to determine if borrowers should get principal writedowns.
PHThe 27-page term sheet handed to the five largest mortgage servicers last week is a detailed, dense list of requirements that, if implemented as proposed, would fundamentally change the relationship between servicers, investors and borrowers.
Federal agencies are set to establish sweeping new servicing standards not by legislation or regulatory process, but by a major action against the top five mortgage servicers.
Regulators issued a tough opening salvo in settlement talks with the largest servicers, presenting them with a 27-page term sheet that would force major changes to the industry.
PHWhile some reports claim an agreement on the proper punishment for large servicers is imminent, the truth is nothing is yet set in stone, and the situation is changing daily.
WASHINGTON — As state and federal officials struggle to reach a global settlement with the largest mortgage servicers over problems in the foreclosure process, regulators have grown frustrated with the lack of leadership on their side, saying no one is making an effort to corral the multitude of agencies involved.
Some regulators have called on Treasury Secretary Tim Geithner to get more involved, but several sources said he has tried to distance himself from the process over concerns about some of the provisions being sought, such as principal writedowns, and a reluctance to interfere with an enforcement action.
Others had hoped that the Financial Stability Oversight Council, which was created last year to help regulators take joint action against systemic problems, would be a sounding board to work out disagreements among the agencies. But the FSOC has largely stayed out of the issue.
As a result, the settlement process has dragged out as infighting between various players has intensified, with no clear resolution in sight.
"There is just no leadership," a source close to the process said. "It's not even herding cats, because no one is trying to herd them."
The most public face on the deal has been Tom Miller, Iowa's attorney general, who represents the 50 state attorneys general involved in the process. But some fellow AGs have turned against the 27-page settlement term sheet delivered to the top five mortgage servicers, and Miller has acknowledged he is not in charge.
"That's why this is a good relationship," Miller said at a press conference last week. "Nobody is driving the bus. Or to put it more certainly, each agency gets an hour to drive the bus … but nobody is really in control."
Although some Treasury Department officials have been involved in the talks, several players have sought for Geithner to take a more active role in putting a settlement together. But sources said the Treasury chief does not feel it is appropriate for him to be involved with an enforcement action. Geithner also has substantive concerns about what the state AGs have proposed, including the term sheet's push for more principal reductions and other prescriptive requirements that could drag out the foreclosure process. Sources said Geithner has taken those concerns to the White House.
A Treasury spokesman denied those assertions.
But observers said they do not understand why Geithner doesn't take a stronger public role in the process given the breadth of the settlement and its potential impact on the economy.
"This settlement will have a negative effect on the economy when the recovery is fragile, and the Treasury secretary should be looking out for the broad economy," said Phil Swagel, a professor at the University of Maryland School of Public Policy and a former Treasury Department official in the Bush administration. "It would be appropriate that the Treasury secretary should take a lead role."
Jo Ann Barefoot, co-chair of Treliant Risk Advisors and a former deputy comptroller at the Office of the Comptroller of the Currency, agreed Geithner should be more involved.
"I think he has a leadership voice in what's going to be good for the economy, and this is a big issue," she said. "There are questions here about appropriate process. Is it appropriate to be extracting penalties that aren't designed to go to the people who were harmed? There are important legal topics on that. Secretary Geithner has a role to play talking about what is going to be short- and long-term helpful to the economy."
But others said it would be inappropriate for a cabinet officer to be involved with an enforcement matter.
"This is regulation and enforcement. He should step back — this is not his job," said Ernest Patrikis, a partner at White & Case LLP.
Even without Geithner, some involved with the process had thought the FSOC would take control. The council was created by the Dodd-Frank Act to help combine the resources of all the federal financial agencies to detect and resolve systemic problems. Headed by the Treasury secretary, it includes top members of the Federal Reserve Board, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency, Federal Housing Finance Agency, the Consumer Financial Protection Bureau and the Securities and Exchange Commission.
But Treasury officials have said the FSOC is not an appropriate venue for the settlement talks, since the Justice Department, state AGs and the Department of Housing and Urban Development are also involved.
Some observers are baffled by that decision, saying it undermines the very point of creating the council.
"If everybody believes the foreclosure process and loan servicing could present a systemic risk to the economy, why isn't the administration following the dictates of Congress under the Dodd-Frank act to address such issues in the FSOC?" said Laurence Platt, a partner at K&L Gates. "The sole purpose of the FSOC was to coordinate government initiatives on issues related to systemic risk to the economy. The idea there could be unsynchronized moving parts in the administration on something as important as loan servicing and foreclosure is troubling."
So far, however, the FSOC, which had its fourth meeting Thursday, has only discussed the foreclosure investigation briefly. If it were more involved, it would likely be able to help coordinate the process better, observers said.
Currently, federal banking regulators — the Fed, FDIC and OCC — are proceeding with their own cease-and-desist orders against the top 14 mortgage servicers, as the state AGs, Justice, Treasury, CFPB and HUD proceed with separate negotiations with the top five servicers.
All the agencies hope the two processes can eventually be coordinated, but a final decision has not been made. The banking regulators have become restive as they see the state AG process' unwind, with some agencies appalled by the term sheet that the banks were offered. They said the demands went too far and would slow the foreclosure process considerably. If the state AGs and other federal enforcement agencies cannot agree soon on a way forward, the bank regulators may proceed with their own actions.
Many observers said the situation cries out for someone to take charge.
"Everyone is out there saying their own thing without one single voice on this matter," said Cliff Rossi, a professor at the University of Maryland Robert H. Smith School of Business. "I would have thought you would have seen greater unity and a willingness to have one focused regulatory response, because they all seem to be in a situation where they are uncomfortable with what the state AGs have come out with."
Michael Barr, a former Treasury assistant secretary for financial institutions in the Obama administration, said the FSOC has been involved, but he emphasized that the settlement was broader than the council's members.
"We put Justice in the lead on negotiating a settlement because that's the traditional role of negotiating a settlement," said Barr, "Treasury played a very strong role … and in keeping informed they reported to the FSOC. So I think the FSOC has been quite involved in the process and will continue to be but not all the people involved in the FSOC are involved in the settlement and not all the people in the settlement are involved in FSOC."
Kevin Jacques, Boynton D. Murch Chair in Finance at Baldwin-Wallace College, disagreed.
"I don't see where the leadership is coming from and yet you have all these parties putting this on institutions," Jacques said. "The reason this troubles me is, one, you need coordination among the agencies. Two, the more perspective you have and the more parties you have involved, the more you have potential for one group to say, 'No I don't believe in this.' You have greater possibility for this to not move forward and greater possibility for unintended consequences."
But there may be an upside for bankers who are involved with the negotiations and who have already put political pressure on the state AGs to back down. Without a strong leader on the other side, they have more leverage, Jacques said.
"When you have as many different entities with as many different viewpoints, then, surprise — you are going to have disagreement, especially when you don't have a leader leading that side," Jacques said. "So if I was the banks, I would make a counteroffer."