What Do You Call a “Cornhusker Kickback” for California?

Remember the “Cornhusker Kickback“? That was the $45 million in expanded Medicaid funding Ben Nelson demanded from the Obama Administration before he’d support Health Insurance Reform. The special treatment for Nebraska gave the reform effort a tawdry feel.

And just as importantly, it did nothing to improve Nelson’s popularity in his own state. When he announced he would not run for reelection in December, reporters pointed to the Cornhusker Kickback as one issue that was making his reelection increasingly unlikely.

Nelson obtained a huge controversial provision in that legislation — derisively called the “Cornhusker Kickback” by GOP opponents — that called for the federal government to pay Nebraska’s costs for Medicaid expansion, potentially saving the state tens of millions of dollars annually. The provision was ultimately killed, but Nelson still paid a political price. Nelson adamantly denied that he traded his support for the Democratic health plan in exchange for the special provision, yet his standing back home took a big hit. Nelson proved to be the 60th and deciding vote for the Democratic health-care package.

Yet it seems like Obama’s trying something similar in his effort to get CA’s Kamala Harris to join in his foreclosure settlement, with $10 billion in aid slated for CA’s struggling homeowners.

Banks and government negotiators have cleared a big hurdle in efforts to resolve allegations of widespread mortgage-related misdeeds, agreeing on terms for a settlement that are being circulated to the 50 US states for approval, state officials and a bank representative say.

The proposed pact would potentially reduce mortgage balances and monthly payments by more than $25bn for distressed US homeowners, these five people said.

The tentative agreement still must be approved by all 50 state attorneys-general, and negotiators have previously missed proposed deadlines. Participants described the proposal terms as set, meaning the states will be asked either to agree to them or decline to participate.

The amount of potential aid is contingent on state participation and would decrease significantly if big states do not sign the agreement. New York and California are among several states that have voiced concerns about the terms of the proposed deal with Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial. New York and California are particularly concerned with the part of the deal that would absolve the banks of civil liability for allegedly illegal mortgage-related conduct.

California borrowers would be eligible to receive more than $10bn in aid if the state were to agree to the terms, according to several people involved in the talks.

Don’t get me wrong. In this case, there’s good reason to give CA a disproportionate part of the settlement funds. As Harris noted when she withdrew from the settlement talks last year, between CA’s size and the severity of the foreclosure crisis, it needs the most help.

With 2.2 million California homeowners underwater on their mortgages–and a troubling surge in foreclosures in my state over the last two months–I am writing to communicate my decision that my office will now devote its resources to establishing an independent path forward to resolution.

California is hurting. We have the most homes and most home borrowers in default. During the period we have been negotiating, more than 560,000 additional homes in California have fallen into the foreclosure process. When we began this process 11 months ago, five of the ten cities hardest hit nationally by foreclosures were in California. Today, eight of those ten hardest-hit cities are here. And, recently, at the same time that we have been negotiating in good faith, foreclosures in California have surged again.

Part of the problem is that the settlement remains far too small. Even assuming CA got to provide that $10 billion to homeowners, the underwater homeowners Harris mentions would each get less than $5,000 of modification. That’s not chump change, but it’s also not nearly enough to get many of those homeowners above water again, meaning they’d still be at risk of defaulting.

But it also appears CA can’t just offer aid to all the struggling homeowners: the banks get to pick and choose which loans to modify (they get extra credit for those they modify this year–effectively, before November’s election).

Then there’s the problem of how this will affect other states. While negotiating a settlement that gives 40% of the relief to CA might make the inadequate settlement look better to Harris’ constituents (that remains to be seen), as other states realize they’ve just given banks immunity for years of crimes but gotten little relief of their own, the settlement as a whole risks acquiring a bad taint quickly. After CA gets 40% of the settlement, what will be left for FL or NV?

In truth, the settlement still remains far too small to do much good (it remains smaller, remember, than the money Obama left on the table in HAMP). And it gives the same banks that have violated the terms of previous settlements all the cards in how to implement this one.

27 replies
  1. JTMinIA says:

    Forgive me, please, if the answer is in something that you linked to and I just didn’t read it, but would the proposed federal settlement block local municipalities from getting all the lost fees for mortgage transfers? That’s part of what annoys me the most about MERS. You are supposed to register every mortgage transfer with the locals and pay a fee; by creating MERS, the banks decided that they’d just track it themselves and not pay the fee. Well, some of us on the ground want that money … you know, for stuff like schools. So I’d like to know if the proposed federal settlement will make it harder or impossible for us locals to ever get the owed fees. Money to the states is not the same things as money to the locals. Thanks.

  2. emptywheel says:

    @JTMinIA: I’m not sure yet. I’ve seen that it’s fairly broad immunity, so it may well do that. (Two registers here in MI are suing, and that’s at the state level, so I presume something like that would be excused.)

  3. P J Evans says:

    $5K is barely enough to find a new place to live and move in, in many places – and if you don’t have a job, it’s even less help.

    Mr O needs some advisers who aren’t in the 1% and don’t live inside the Beltway. And who he will listen to on economics for the 99%.

  4. allan says:

    Even in the unlikely event that all 50 AGs sign off on this POS, how can they possibly have the authority
    to nullify the state and local laws governing mortgages, fees and taxes?

  5. PeasantParty says:

    Once again the Great Pretender is negotiating from the wrong side of the table. None of this will solve the problems and will still leave Deeds of Trust scattered in the tornado aftermath. The banks will still have a claim to almost all the property in the US without actual documents to back it up!

    How Many More Times do the taxpayers have to pay for those mortgages?

    Shut the CDO/Mortgage derivitive door and LOCK IT!

  6. matt carmody says:

    Nelson’s deal gave the reform effort a tawdry feel?
    The entire sham was a slimy giveaway to the insurance industry that let every single person who had hoped for change know that the only change in the White House was in the melanin level of the occupants. Ideology and loyalty to the plutocracy hadn’t changed a whit.

  7. PeasantParty says:

    Why doesn’t anyone address the forced Mortgage Insurance that homebuyers have to purchase in case of default? Why aren’t the banks cashing in, or are they?

    Is this another known unknown?

  8. bmaz says:

    @JTMinIA: The FRAUD committed on local county recorders offices has always been one of my prime arguments in this mess. Collectively, the amounts are simply huge. and it IS a drag on all kinds of governmental function at the county and local level.

    Re name: Sacramento Shuffle?

  9. rugger9 says:

    I just sent my AG Harris a little note reminding her that 1) the banks don’t live up to the terms of the deals they strike, 2) the NV AG Masto sued because of it, 3) trading homeowners rights for future political considerations will be seen universally as a sellout especially since no investigation by this group has been conducted to find the depths of the fraud, 4) no amount of money can buy enough lipstick for that pig, and 5) backroom deals like this don’t yield good policy.

    The only thing I can see is that Rahm / Daley in their arrogance think they can fool us and still get the bankster money. As I noted before in a prior thread, that attitude and policy ignores reality: the banksters will not give Obama the money they give Rove and Koch and Gramm, et al., and we are already quite clear on the concept that we are getting ripped off which means there will be no foolin’ here.

  10. P J Evans says:

    I think harris is smart enough to not buy into the offer, but I suspect that she’s being pressured to take it. (I suspect WF is in much worse shape than they will admit.)

  11. rugger9 says:

    @P J Evans: @P J Evans: #12
    I’d certainly hope so for her sake as well as ours. It’s really a no brainer if the banksters can be brought to heel for the millions of registered voters being hosed by them.

  12. CA Realtor says:

    If the idea behind a settlement is to make an injured party whole or to sanction criminal acts to prevent recidivism, what you’ve described as a ‘settlement’ is a complete failure as it does neither.

    On a $640,000 mortgage, five thousand dollars is a rounding error, it doesn’t even qualify as chump change. It doesn’t take real estate expertise figure out why it is completely inadequate and wrong to give five grand principal reduction to someone who refinanced their mortgage in 2006 & 2007 (each time taking out an additional hundred grand to live on) and now the owner cant afford the payments on the $640,000 mortgage on the house that appraised for $800k in 2007 but is only worth $575,000 today. Without the loan’s initial teaser rate and a new hundred grand cash out refinance each year the owner never could afford the payments to begin with. So what exactly is a five thousand dollar principal reduction going to do?

    If anything this ‘settlement’ sends the message that in America if you’re a spendthrift or a criminal banker the government will bail you out and if you’re a saver and a prudent person, you get to pay for it!

  13. P J Evans says:

    @CA Realtor:
    The people I know who had their house sold: it was refi’d in 2004 for about 500k and the minimum bid at the sale was 255k. The entire neighborhood has lost about 30 percent (at least) of its value in the last 6 years. (Because, as you should know, the price slide started in 2006. Even in 2007 you weren’t going to get 100K out over the previous year.)

  14. CA Realtor says:

    @P J Evans:
    The market peaked 2005-2006 however I can’t stress enough, it really depended on the area and the price range. When a market peaks it doesn’t just stop on a dime and then start declining. Usually market velocity slows first (number of sales) and then as a result prices start to decline. Also, even after a market peaks in say an A neighborhood, prices may continued to appreciate in a B or C neighborhood because they are still relatively cheaper.

    For purposes of a refi appraisers can look at sales up to 6 months back so in a declining market often appraisals come in for much more than they would actually sell for on the open market. In my opinion, refi appraisals peaked in the NE area of Los Angeles in 2007. Many of the mortgages at that time were negative amortization loans. If you only paid the minimum payment due, 5 years later your original principal balance would be 10-12% higher. Combine that with declining values and you have a big problem that a five thousand dollar principal reduction cannot help.

  15. Gitcheegumee says:

    The Daily Docket: FDIC Says BofA Owes Colonial $900M

    Wall Street Journal (blog)‎ – 4 days ago

    … Corp. says Bank of America Corp. owes the failed Colonial Bank $900 million. … The Daily Docket: FDIC Says BofA Owes Colonial $900M …

  16. ScottFree says:

    @emptywheel I have been emailing the AG in Vermont about this and he says that the agreement is entirely civil and does not give any criminal immunity.

  17. bmaz says:

    @ScottFree: That does not mean that much though, as criminal charges are so rarely pursued, and are at the discretion of prosecutors that may have political motivations for not pursuing them. Abrogating the ability of individuals to pursue their own damage relief and the ability of counties to recover fees and penalties they were defrauded out of, is simply unconscionable. Further, prosecutors would be deprived of the ability to leverage civil cases to bolster their criminal cases. So, the Vermont AG’s platitudes are not particularly reassuring.

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