How Would States Divvy Up the Foreclosure Settlement?

For the record, I still doubt the 50-State-Less-the-Rule-of-Law-AGs Settlement will happen. A year in, they haven’t even agreed on the underlying guidelines for the settlement, like what they do with MERS.

But this line in the LAT’s coverage made me think of another issue that could kill that settlement.

New York and Delaware have more than a dozen attorneys working full time on their effort. They have subpoenaed or requested information from 13 financial firms, including Goldman Sachs Group Inc. and JPMorgan Chase. [Kamala] Harris would be a key addition to the investigation because California was the location of a vast number of the mortgages and foreclosures that fed into the crisis. She met with Schneiderman in San Francisco last month to discuss participating in the probe.

Harris is weighing whether she would sign on to the 50-state settlement if it gave banks immunity. The main consideration is how much money would go to California homeowners, according to a person familiar with her thinking. [my emphasis]

At least at the moment, the public explanation CA’s Attorney General is giving for her indecisiveness about which side to join is a concern over CA homeowners getting enough out of the settlement.

Now that may just be a convenient excuse to cover political indecision, but it’s a significant point. CA has a tenth of the country’s population, and it was very hard hit by the foreclosure crisis … two years ago.

As the Calculated Risk chart above shows, while California at its worst had the sixth highest percentage of homes in default, it is now 22nd (out of 42 states plus DC) on the list of current percentage of homes in default. So while CA has had the most number of residents go through this shitty process, going forward it might appear to be in much better shape than a lot of other states that weren’t as hard hit by the foreclosure crisis.

But that’s not the entire story. Note, first of all, the reason CA no longer has so many delinquencies:

Some states have made progress: Arizona, Michigan, Nevada and California. Other states, like New Jersey and New York, have made little or no progress in reducing serious delinquencies.

Arizona, Michigan, Nevada and California are all non-judicial foreclosure states. States with little progress like New Jersey, New York, Illinois and Florida are all judicial states.

That is, CA has worked through its delinquencies because its residents (like those of AZ, MI, and NV), have been subjected to the full brunt of the servicer abuses that this settlement is supposed to address, without the opportunity to challenge a foreclosure in court. So if we could measure this quantitatively (precisely what Tom Miller is trying to avoid) CA’s residents would like be even more screwed by the servicer abuses, because no one had an easy way to push back against obvious abuses.

Now look at who–at least as of the first quarter of this year–remains underwater on their house (from this Calculated Risk post). Those states most affected by foreclosures, including CA, still lead the list of states with the highest number of houses underwater, a key indicator for future defaults. The map from the New Bottom Line shows this even more graphically; put FL and CA’s population combined with their high negative equity rate, and they’ve got the largest number of potential foreclosures, over 2 million homes in each (compare that to worst hit on a percentage basis, NV, with 358,241 houses underwater, or IA, with 31,077). Finally, add in the much higher median home price in CA, and it’s clear that Harris ought to be demanding a significant chunk of the settlement funds perhaps in the 15-20% range (nevermind that even that–optimistically $4B–would do proportionately very little in CA).

I originally thought the banks would get to decide how to divvy up the settlement money (which would be prone to abuse in any case). But if the 40-45 AGs who might participate in this settlement plan to decide how the paltry $20B gets split up, then one of the only fair solutions would be for most of those states to give up the right to sue while giving CA and FL the great bulk of the settlement money. That is, a fair solution would have about 20 AGs grant immunity in exchange for little for their own residents.

Is Tom Miller willing to boast of a great settlement only to tell his own constituents (well, his nominal constituents, anyway) they will get nothing?

25 replies
  1. orionATL says:

    more highly informative reporting (as per usual).

    i don’t know why the california ag would not want to tackle the banks – her constituents are going to get a pittance or get nothing.

    she would probably get a huge boost politically, maybe suddenly become “governor material”.

    i’d bet there are political insider considerations holding her back.

    i wonder what an individual (former) home owner would typically get from the proposed settlement.

    as i understand it, california houses are a whole lot more expensive than houses of comparable size in other states.

  2. Still Life Living says:

    Here is evidence (in the form of a lawsuit) of the long-awaited smoking gun in the mortgage/foreclosure market.

    As I see it, what we are going to see is that the TBTF banks will get spanked and have a time-out, but nothing very serious. The government is going to lower everyone’s interest rates to 4% which they think will spur growth. But since homeowners were given something of ‘value’ they will lose something of value, namely the home interest deduction. The addition tax revenues will then be needed to prop up the banks which will have to take write-downs on mortgages because they won’t be getting 11% to 15% on the subprimes they are carrying on the books.

    The gig is up, the system is bankrupt, prepare for 1929 version 2.0. We as real people need to prepare for this. It can be a beautiful thing or utter hell — depending on where you place your bets. (If you think I am wrong, tell me this: should you take on as much debt as possible or should you cash in your 401k/IRA and pay down your debts? Even the best ‘economists’ around can’t tell you which is the rational choice. There is no more driving with the rear-view mirror. We are entering uncharted territory.)

  3. MadDog says:

    It would be interesting if someone had the data on what percentage of delinquent and foreclosed home loans in places like California came from which banks.

    Both B of A and Wells Fargo were/are big players out West, and at one point in time, both B of A and Wells Fargo were headquartered in California. Wells Fargo’s headquarters is still in California – San Francisco.

  4. Bob Schacht says:

    EW,thanks for another fantastic piece of analysis! I’m still wondering if Dodd-Frank is going to come into play here.

    I think at least one of these TBTF banks SHOULD fail, as a pointed warning to the others to shape up. Unfortunately, I think the effect this is having is to make banks even more gun-shy about mortgage qualifications. After a decade or more of almost-anything-goes, since the bubble burst, Banks have significantly raised their requirements for mortgage lenders, meaning that today, I could not get the home loan I got two years ago, even though my financial status has not changed. I have not seen any analysis of this problem. The housing market will continue to be depressed as long as the banks continue to be really tight with their mortgage requirements, because too many people can’t meet those requirements. Banks may be able to get money for free from the Fed, and mortgage rates are at historic lows, but it doesn’t matter if you can’t qualify for the loan.

    Bob in AZ

  5. Sojourner says:

    There is a post up on another site that Berkshire Hathaway (Warren Buffett) intends to invest $5 billion in Bank of America… What does he know that no one else knows?

  6. oldtree says:

    Marcy, you are brilliant and shine brighter than most of us can imagine. However, you have made assumptions in this article that are simply not based on fact. They are based upon statements of the parties that have everything to lose if their scheme is found out.
    There is simply no evidence that a foreclosure is proper any longer. The claim of ownership of all the pieces of paper indorsed and assigned properly is about 1% of loans, and only those that are very, very new.
    There is no discovery involved, and there is no investigation pending at this time by the AG’s as a group, and there never has. This has been stated by AG’s involved with the alleged investigation.
    We must stop assuming that any homeowner owes a debt unless it can be proven with original documents. The concept of non judicial foreclosure is one that is likely to be a violation of due process because the legal owner never comes before the court.
    It is only for judges to make legal assumptions. When you accept any of the statements by parties that are now known to have lied about each phase of the document recordation, securitization, or simply finding whom if anyone has a beneficial interest. Today we see the fraud inherent with the AHMSI suit against LPS/DOCX, the agreement alllowed parties to pretend they had personal knowledge, and thus sign legal documents to dispossess real owners.
    It is truly shocking to see anyone agree that the banks who have created 50 or so trillion in fictional paper, would have a right to foreclose after;
    1. not having lent the money and claiming they did in the Deed and note.
    2. not having transferred instruments to alleged trusts that are found to have mostly not existed due to their inherent violations of the law governing the creation of trusts
    3. That a mortgage and its monetary instrument can not be sold several times at once.
    4. that the concept of selling a mortgage and note in a one to one to one sale (Chain of title) ended 15 years ago (appx)
    5. That when called upon to prove the claim of ownership, the banks are unable to provide proof under UCC or state statutes.
    6. That the claims of every party claiming a homeowner is in default is only hearsay under rules of evidence.
    7. That in no circumstance can anyone prove damages occured to any party because of the broken chain of title.
    8. That a loan with improper origination will never have a clear chain of title until adjudicated by a trier of fact.

    Long ago we assumed our country meant us well. There is no reason to believe this any longer when our president is actively trying to interfere on behalf of the banks to force a solution that allows organized crime legitimacy.

    Please, don’t assume anyone is in default. And for those of you that are being harrassed, NEVER admit you owe anyone anything. Make them prove it, because in 99% of the cases, they can not, because they do not. If they provide something claiming to be proof, challenge it. In 99% of the cases, the proof is created on the spot by companies like DocX, LPS, T.D. Service Company, etc.

  7. Cregan says:

    I think the real cause of the mortgage fiasco is on display right now.

    Lots of news articles about how the Administration is coming up with a plan so that those behind in payments or lacking equity can refinance their homes.

    Later, when those go bust, you will hear a lot of angry protests about banks forcing unknowing saps to have taken the loans.

  8. rosalind says:

    thx, ew, for the reminder to write my AG Harris. CA unemployment at 12% factors in considerably to any path forward Ms. Harris may be considering.

  9. rugger9 says:

    For orionATL: CA real estate (depending on where you are) can be pricey, it’s 350 dollars or so per sf in my neighborhood, and we aren’t high rent.

    As far as Kamala goes, doing nothing is worse for her ambitions than taking on the banksters with the law and clear evidence on her side, because everyone on CA will see that she has been bought off by the promise of political donations. Note to Kamala: banksters don’t usually give to Ds, let Obama know too.

    As far as why we are here let’s go back in time….

  10. Rpm says:

    “CA’s residents would like be even more screwed by the servicer abuses”

    Coastal Calif is still in a massive RE bubble and while the government has tried to slow the losses those losses mainly have been concentrated in the desert and inland locations which comprise the lower price points. The big problem is the coastal properties whose prices have been pumped up going back to 89. The coming down leg in RE asset prices here will take out the banking system. Calif is the problem and its massive and clearly beyond what most Americans can understand.
    We also have the continuing FHA low down 3.5%
    financing creating hundreds of instant upside homeowners. Most if not all the homebuyers since 2008 are currently upside down and will be another foreclosure wave in the future. I will include a link to DQ list of zips here in the SF Bay area, just take a look at the medium home prices in these zips and realize that most have family incomes less then 75K, then you will start to get a peek at the coming leg down. Also so many folks have stopped making home payments and haven’t heard a word from any bank. My neighbor who bought in 2005 for 570K with a no down loan s hasn’t made a house payment in over a year!!! Lots of these stories.

  11. rugger9 says:


    In days of yore, banks lent money to those who could repay it, and hedged their bets on home pricing by the PMI. This was insurance that covered the 20% of the home price a bank [presumably based on lots of research] would expect to lose on a quick sale if the borrower coughed up a financial hairball. If 20% were put down, no insurance would be needed. When Shrub extolled the virtues of home ownership in the SOTU [which I agree with, it leads to better neighborhoods], the banks took tha as a signal to lend lend lend. In spite of what the RW Wurlitzer says, no one was forced to lend anything, these were all business decisions. And, there was a real house tied to the loan. What was now available (after Glass-Steagal was repealed) was the ability to package the iffy loans into MBSs with the solid ones, get the S&P/Moody’s blessing as AAA [there are houses tied to these], and to duck the recording fees, run everything through MERS, the legality of which has not been litigated as far as I know. So the transactions weren’t legally recorded anywhere, which is the basis dating back to common law for proof of ownership.

    As a side element to the bubble, lots of ads floating around then on “spend-your-way-to-wealth” and no-money-down loans, and flipping your way to wealth in real estate, etc., fueling the consumption and speculation bubble, plus leaving a lot of people without the resources to defend themselves when the piper came to be paid.

    In addition, to continue hedging the exposure, CDSs were created to bet against the loans, more CDSs were created to bet against the bets, in a serious recursion loop without a logical stop point. So the dollar tied to the house has now bubbled into 5-6 or so, all on speculation. It’s worth noting that the speculators were by and large bankster friends or other banks, and they wanted their money back.

    So Paulson tried the three-page TARP version 1.0 for 800 billion dollars, and Timmeh and Helicopter Ben have shoveled trillions in taxpayer dollars at the banks, with no small business lending or consumer support that would have risen the tide for all. The money went to the speculators to cover their so-called losses. We simply do not have enough money to cover all of the margin calls, no matter how much the Federal Reserve prints. Anyone seen any tracking of the money supply since the middle of the Bush Administration? M1 might still be there, but the amount of paper $ out there was curiously dropped (M2 I believe).

    The only way the banksters get away with this [and B of A may really be too far gone to save, using the rule that doubles what they’ve admitted to already as liabilities], is for the federal government to pre-empt state and local action via this “settlement” that would cap liabilities for bad behavior. Anyone that signs off on this, signs their political death warrant. The TEA party will hammer it, no amount of Koch money will rescue a candidate [see Fiorina, Carly, and Whitman, Meg] that so brazenly sells out Main Street, even with the Wurlitzer now saying Main Street = Wall Street.

  12. emptywheel says:

    @oldtree: The term “in default” measures only whether the peple in a home have paid the terms of their home. They own money to someone–based on fraudulent bases, often, but they did get a loan.

    And observing that a lot of people have been foreclosed on–legitimately or, more often, not–is not an endorsement of the process there.

    ALl this is just an observation that there are realities abotu the way the foreclosure crisis has affected states differetly that will be one more reason they’re unlikely to come up with a plan.

  13. emptywheel says:

    @Cregan: I guess you think returning to the model of the past, where people did mods to keep the value of loans, is a bad idea?

    While the Admin plans are insufficient and actually NOT designed to keep people in their homes (rather, they’re another form of extend and pretend), if the Admin geuininely did implement a plan that brought about real modifications, it would have a tremendous effect on the economy.

  14. emptywheel says:

    @rugger9: Agree with all of that–but eventually a lot of it is either going to crash anyway, or we need to find a way ot let people squat into ownership.

    My long overdue links post has one on Detroit not being able to do anything about squatters. Which is not surprising, but given what a problem squatters in the absence of governance will be, it’d be nice to empower localities to at least extend their governance.

  15. rugger9 says:

    If the bank fails to prove ownership of the note, the resident needs to move for summary judgment that they own the house. A couple of months ago (I believe in NY, it was back East) the home title was transferred in that way because the so-called lender [who has appealed, of course] was found to lack standing without the note and the judge was not amused the lender had wasted the court’s time.

    Maybe that is part of the urgency to get something “done” here by B of A. The amount in controversy is high enough to require a jury trial per the Constitution, care to guess how often the banks would win those?

  16. Cregan says:


    No, I am saying you can’t solve a problem that began because people who should not have had a mortgage in the first place by again giving people who ought not to have one, or one so big, another one.

    It will end up the same way.

    And, if it does, it won’t prevent some corrupt politician blaming banks and wall street for their fuck up, and going happily down the road.

    As they always do.

  17. Rpm says:

    “if the Admin geuininely did implement a plan that brought about real modifications, it would have a tremendous effect on the economy.”

    What exactly is real modifications?

    1. does it extend to the unemployed
    2. does it have any strings attached
    3. could they turn around and resell the home for profit and keep the proceeds?
    4. does it extend to investor own property?
    5. would the modification be based on the current income of the mortgage holder?
    6. would anyone be eligible who is currently underwater on their mortgage?
    7. If prices continued to decline after the modifications would be government continue to remod?
    8. If the modification meant that the neighborhood would have lower values would home owners that already own the home outright any any financial recourse? or would
    their neighbors all get a modification down to the new price point?

    I have lots of other questions but will pause
    for now.

  18. P J Evans says:

    Those aren’t necessarily selling either. I have family members who sold a nice house in Malibu in June. It only took 30 months, and they lowered the price by quite a lot, too. It isn’t on the beach (which I consider an advantage: it’s out of reach of storm surge).

  19. P J Evans says:

    wrong solution, wrong problem.
    The foreclosures are due, many of them, to lack of income due to LOSS OF JOBS. Which has zero to do with whether they should have bought the house in the first place.

    FWIW, I know people in foreclosure who bought the house more than 20 years ago, got caught in Bush41’s recession, stomped flat in Bush43’s recession, refinanced in there to have money to try to start a business (that much-promoted-by-your-favorite-party ‘entrepreneurship’) and are now bankrupt due to LACK OF JOBS and no market for their skills.

  20. Rpm says:

    P J Evans: Yes its all about income and jobs which is in a significant 20 year downtrend!

    The recent hype to refin agency homeowners is not about helping mortgage holders but saving the mortgage industry which is reducing head count due to lagging sales. it also assumes that some folks will have a couple extra dollars to spend but most of this is just election year political talk that will have little meaningful impact.

  21. Cregan says:

    @P J Evans:

    You are talking about the “normal” type of foreclosure, if there is such a thing. People buy a house, things go off track, and they fall behind.

    They are then foreclosed on.

    Just as Steve Jobs said that death is a great aspect of life in that it sweeps out the old and brings in the new, foreclosure makes it possible to make the loans in the first place.

    If a bank was NOT able to foreclose, and do so fairly easily, the lending standard would be much higher. If you can’t get your money back when things go bad easily, you HAVE to be much more careful with who you lend to in the first place.

    Being able to foreclose without problem–WHEN THERE IS GOOD CAUSE BECAUSE THE PERSON FELL MORE THAN 4 MONTHS BEHIND–makes it so that a much wider field of people can get mortgages in the first place.

    Back to the point, the foreclosures now are not mostly of the type you mention. Some are but more are of the type where the person bought figuring they’d refi in a few years, the refi market collapsed, values collapsed and the rest of it.

    The real estate market is 90% predicated on the values going up. When they go down, the entire system collapses. It would not matter if there had been no recession, it would have still collapsed. The CDO’s made it a bit worse, but it still would have collapsed even with no CDO’s..

    The CDO’s f’d the banking and wall street industry; the collapse in values brought down main street.

    The minute the values started to turn down–long before any crisis in derivitives–was the minute the real estate market hit the skids.

    The sequence was NOT 1. derivitives go bad, 2. real estate market goes bad.

    It was 1. real estate market goes bad, 2. derivitives go bad.

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