The Promise Of The Big Mortgage Deal

Posted on 13 February 2012

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By Peter Schrag
California Attorney General Kamala Harris deserves at least some of the self-congratulation she heaped on herself when the big national mortgage foreclosure deal was announced last week.

Despite the cheering, by itself this settlement, with the nation’s five big private mortgage service companies, is not likely to make much difference to the overall California economy or to most of the 2.2 million families directly hit by the mortgage crisis of the past five years.

“It’s a drop in the bucket,” said Christopher Thornberg, the respected analyst who heads Beacon Economics. In terms of its impact on the state’s economy, “It’s not going to cure anything.”

But if it pushes Fanny Mae and Freddy Mac, the nation’s huge public- private home lenders, into agreeing to similar terms it really could make a difference. Fanny and Freddy, which hold 60 percent of all mortgages, have so far refused to budge.

The $26 billion settlement with the five banks, Bank of America, Citygroup, JPMorgan Chase, Ally Financial and Wells Fargo, -- $18 billion for California -- wouldn’t have been even this big or as secure if Harris and New York State Attorney Eric Schneiderman hadn’t resisted a lot of pressure, much of it from the White House, to settle on the cheap. Ultimately, the total may grow to $45 billion.

In holding out for five months, Harris not only drove up the total amount of the settlement  -- the initial terms, she said, would have given California $4 billion.  She also preserved California’s right to sue banks in state courts and to pursue its own on-going investigations into their malfeasance in bundling shaky mortgages into bonds later sold – and oversold – to both private and public investors.  Among them, the largest was CalPERS, the California Public Employees Retirement System. It wasn’t just the little guys who got scammed.

Last week Harris also reiterated her intention to go after those she calls the “predators”, fast-buck operators who extracted fat fees from homeowners with underwater mortgages by promising services to reduce payments or principal they never delivered. 

Under the terms of the deal negotiated by the nation’s attorneys general and the Justice Department with the five big mortgagors, about a fourth of those two million-plus California homeowners whose homes are worth less than they owe on their mortgages, or have already lost their homes through foreclosure, will get some relief.

Much of it, $12 billion of California’s $18 billion share, will go to write-downs of the principal or for short sales – essentially the willingness of the mortgagor to accept less repayment in the sale of a home than what’s still owed on the loan. 

Some people who’ve already lost their homes will get token sums – typically about $2000 each – in “restitution” for irregularities in the foreclosure process, typically the use of the mechanized lenders’ robo-signatures on legal documents. 

About $1.1 billion of California’s share will go to the hardest-hit communities for anti-blight and other neighborhood restoration efforts; $850 million will go to some 28,000 struggling homeowners to help them refinance their homes. For more details and

Spread over the more than two million homeowners who are in trouble with their mortgages, California’s $18 billion share comes to less than $9000 per family, the “drop-in-the bucket” as Thornberg describes it. And when the total U.S. mortgage deficit runs to more than $700 billion, $26 billion, or even $45 billion, doesn’t cover much. And that’s of course assuming a lot doesn’t get stuck in bureaucracy, or worse.

But the deal will almost certainly add to the pressure on the two big holdouts, Fanny Mae and Freddy Mac, to come to the table. Both are run by Edward DeMarco, the acting director of the federal Housing Finance Agency who, Harris said last week, simply doesn’t get it. Both she and Gov. Jerry Brown have called on DeMarco to quit. She’s also suing Fanny and Freddy.

What makes the whole affair more complicated, financially, politically and morally, is that while it’s easy to cast the banks and Fanny and Freddy as the prime villains in this drama, a lot of others share part of the blame.

It’s a long list:  the buyers, many of them working class people of color, who, in Harris words, “believed in the California dream” so much that they were ready to be convinced that it could produce financial miracles; the real estate brokers and bankers who exploited those dreams even though they knew they were mirages; home owners who took every cent in equity out of their homes to support lifestyles beyond their means; the big Wall Street credit rating organizations that sucked up to the banking houses and brokerages they pretended to be impartially rating; the federal regulatory agencies that didn’t regulate and the string of Congresses and administrations that defanged them. 

Still, the biggest exploiters and profiteers – and those that got the biggest federal bailouts – were the lenders. The biggest losers, not just financially but in terms of embarrassment and shattered pride, as Harris said last week, were those modest first-time homebuyers.
If Fanny and Freddy can be pushed into accepting some version of the deal with the five big banks, it might not only restore some pride and keep many of those families in their homes but, in freeing billions of dollars in written-down loans and other unfrozen real estate, put a little more vitality into the larger economy. The mortgage crisis has probably been the biggest job killer of all. Why don’t we hear more about that in this election?  


Peter Schrag, whose exclusive weekly column appears every Monday in the California Progress Report, is the former editorial page editor and columnist of the Sacramento Bee. He is the author of Paradise Lost: California’s Experience, America’s Future and California: America’s High Stakes Experiment. His newest book, Not Fit for Our Society: Nativism, Eugenics, Immigration is now on sale.  

What is the crime that Fannie and Freddie did? Is it their fault that California home prices went down? They don't guarantee house prices.

And, Fannie and freedie are creatures of the federal government. So, if Fannie and freddie cough up money aren't they just robbing the federal taxpayer to benefit California? I mean, this might be cool to California, but how would the other states look at it? Just another Obama bail out to a blue state? And, really, isn't that all it would be?

Bankers and their friends in Congress by-passed state laws to create their mortgage monsters that crashed the world economy. California Mortgage Brokers who saw the opportunity to write "straw man" loans and contracts are sometimes going to jail under CA law, but those who funded these fraudulent loans are still doing business. It is comforting to blame someone for the massive social and legal chaos, but more important is restoring the rule of law. Harris has been outstanding in not cooperating with the usual "chump change" agreement in exchange for banker protection from prosecution.

I am not doubting you but your description is vague. What EXACTLY did they do and how did they do it? Again, I am not disagreeing, I just want to know the exact details because all I have seen is statements and inuendo.

I can only respond with my personal experience. As a Real Estate Broker for 35 years, I received 14 "straw man" offers on a property. I called a friend who assured me that while they seemed to be fake offers and no one with any sense would fund them, they would be funded. Fortunately I received an honest offer and was able to close the deal. Some others in my community have gone to jail for writing "straw man" offers and perhaps had I accepted the offer, I would also have been in trouble. The experience was enough to make me get out of real estate until I could do it "legally". As a Broker under California law I have a fiduciary duty to my client. For further information about how Wall Street funded these offers, there are many books and articles. One is "Chain of Blame" by Muolo and Padilla. Wall Street didn't care what they funded because they would immediately bundle the loans, sell them to investors who had to buy blind, keep the commissions in their personal accounts, but use bank money to buy the loans. They kept few records and can not provide proof of ownership of notes. Now they are waiting for the Statute of Limitations to expire. It is a "too big to fail" crime with massive proportions.

so, these "straw man" offers were eventually packaged for Freddie and Fannie? That is what I was told. so, if Frannie and Freddie would take them than what was illegal about them? Granted, it was stupid for Fannie and Freddie to take them, but was it illegal?

"Straw Man" means there never was a buyer. The agent was getting the money (about $20-30,000 commissions and offer kick-backs) with people pretending to be a buyer. Clearly when a legal document is faked, it is illegal. Fannie and Freddie bought mortgages generated by Wall Street. The scam originated in "investment banks". It was very easy to not read mortgages, fake the underwriting and rating of tranches, sell them as AAA paper around the world, take their commissions for their personal bank accounts and disappear before the system collapsed. The Germans call it the "biggest heist in history". If the courts refuse to prosecute, the government refuses to regulate and investigate, we can become a country with laws that do not exist except to enrich a wealthy few.

so why doesn't Freddie and Fannie file a complaint? this would require a prosecution.

Freddie and Fannie are part of the problem. The best on that issue is Gretchen Morgensen at the New York Times. She wrote a book about the problems at Freddie and Fannie. For Wall Street and systemic problems go to This morning at nakedcapitalism they are hysterical because the new mortgage deal announced by the Attorney Generals is not in writing and seems to mean little beyond giving banks a free ride. I believe the mortgage problems are like the "too big to fail". It is massive, illegal under our previous system and no one seems able to think of a correction that means much. I wonder what the title companies in CA are doing with this issue because the banks did not record their actions. Do they issue insurance with a big disclaimer that without recordings they have no idea what happened or who actually owns the note to the mortgage? The pension funds may be at great risk because they bought so much of this toxic trash.