National Mortgage Settlement – Attorneys General Mortgage Settlement Modifications

Background of State Attorneys General (AGs’)
Concern About Foreclosure Processes

For several years before 2010, most or all of the AGs for the 50 states had been looking at the nationwide foreclosure problem and became concerned about mortgage servicers’ use of fraudulent legal documents in the foreclosure process.  During mid-2010, private attorneys representing individual homeowners in defending against state court (“judicial”) foreclosures began deposing (questioning under oath and recording the session) staff from the servicers’ offices and the servicers’ attorneys’ offices, regarding their methods of preparing, signing, and notarizing the legal documents to present to the state court.  The processes were necessary for the servicers to get a court order allowing the foreclosure.

Some of these depositions were posted on the internet, and, as a result, they were read by attorneys and judges across the country, who were shocked by what the depositions contained.  These depositions revealed that, in many cases, servicer-related offices that processed foreclosures were creating documentation that blatantly violated state laws regarding basic notarization procedures, as well as the basic requirements for signing affidavits or declarations “under penalty of perjury.”

Fraudulent Bankruptcy Documents

Some of the depositions exposed the fact that similar fraudulent processes were used to create documents that were filed in bankruptcy courts to get permission to foreclose on bankruptcy debtors’ homes.

AGs’ Working Group

As this information was becoming publicly known, the state AGs decided that the problem was so damaging to the legal system that, in mid-2010, they established a special working group to study the problem and coordinate a legal challenge against the five big mortgage servicers (Ally Financial/GMAC/ResCap, Bank of America, Citibank, JPMorgan Chase, and Wells Fargo).  By March 2011, the AG’s draft settlement proposal with the servicers was (accidently) leaked and became public information.  Settlement negotiations between the servicers and the working group of state AGs also included several departments of the federal government which were represented by the Justice Department.  These negotiations dragged on for many months.

AGs’ Concerns About Servicers’ Loan Modification Processes

Since the state AGs were very concerned about the servicers’ poor record of processing and offering loan modifications through the federal government’s HAMP (Home Affordable Modification Program), the working group focused on developing a system of loan modifications including principal reductions, as one method of correcting the servicers’ misbehavior.  The idea was to compensate homeowners for the servicers’ violations of state foreclosure procedures and HAMP regulations by having the servicers offer the homeowners loan modifications, some of which would include principal reductions.  Determining how these loan modifications would be calculated, and how the servicers would receive credit for having offered them, was a lengthy and complicated process.

Federal Housing Finance Agency’s Participation in the National Mortgage Settlement (NMS)

During late 2011, one major unresolved issue was whether or not the Federal Housing Finance Agency (“FHFA”, the legal conservator of Fannie Mae and Freddie Mac) would agree to settle claims and allow Fannie Mae and Freddie Mac to participate in the anticipated NMS loan modification programs.

California’s Participation in the NMS

Another question was whether California Attorney General Kamala Harris would join in the Settlement, on behalf of California’s thousands of homeowners facing foreclosure.  After last-minute negotiations that stretched into February and March 2012, Attorney General Harris finally agreed to sign on to the Settlement, conditioned on the commitment by the servicers to offer more loan modifications – specifically in California.

Final NMS Parties

When the final Settlement was released in March 2012, Oklahoma was the only state that did not agree to the settlement.  Edward DeMarco, the acting Director of FHFA, also refused to agree to the Settlement, and he made any Fannie Mae or Freddie Mac loan ineligible for the loan modifications offered under the settlement.  Since Fannie Mae and Freddie Mac loans consist of about 50-60% of all outstanding home loans in the U.S., Mr. DeMarco’s refusal to participate in the settlement is hurting many homeowners in foreclosure.  Other parties to the settlement include the Departments of Housing & Urban Development, Treasury, Agriculture, and Justice; the Federal Reserve Board, and the Consumer Financial Protection Agency.

Federal Claims in Bankruptcy Cases Were Released in the NMS

The Executive Office of the United States Trustee (“EOUST”) Program, as a subdivision of the Justice Department, also released its claims against the servicers, which included claims regarding fraudulently prepared legal documents filed in bankruptcy courts across the country.


Basic Content of the NMS

The Settlement will be in effect until September 2015 (three and one-half years from its start), and consists of the following major elements:

1.    A little over $5 billion in cash, of which $1.489 billion nationwide will go to borrowers whose homes were already foreclosed.  The remainder of the $5 billion will go to the states and various agencies of the federal government.  This money was supposed to fund local foreclosure prevention programs, but in many states (including California) the state’s share is going toward reducing the state’s budget deficit.
2.    Based upon several different programs specified in the NMS, the servicers are supposed to grant loan modifications (most of which should include principal reductions) for borrowers in certain circumstances.  The servicers are entitled to “credits” of varying percentages of the modification amounts.  In order for the servicers to perform their duties under the NMS, each of them must offer modifications that produce “credits” that add up to a total (between all of the participating servicers) of a little more than $16 billion.
3.    As a part of the NMS, the servicers are also supposed to offer refinancing to certain types of borrowers.  The credits for refinancing must add up to a total (between all of the servicers) of $2.781 billion.  Most of the refinancing programs cannot be used by borrowers who are in, or were in a bankruptcy case within the last two years.
4.    In addition to the cash, the loan modifications, and the refinancing, the NMS also requires the servicers to change their methods of producing foreclosure and bankruptcy documents, and performing basic servicing duties.

Oversight of Settlement Implementation

The NMS does not provide for very effective oversight or compliance procedures.  The NMS relies virtually entirely on data provided by the servicers.  Initially, each servicer will provide aggregated (combined together) data regarding the modifications and refinancings they claim to have completed.  In addition, a small amount of loan level data can be requested by the National Monitor.

It is important to remember that these servicers set up systems for staff and contractors to sign off on the accuracy of documents that they were not even reading.  We wonder why the data provided by the servicers (whether it is aggregated data or loan level data) to determine if they are complying with the NMS should be believed by anyone.

The National Monitor of the NMS

Joseph A. Smith, Jr., the former North Carolina Commissioner of Banks, was appointed to serve as the National Monitor and oversee the implementation of the Settlement.  He has established the Office of Mortgage Settlement Oversight to perform those duties, along with staff and consultants.  His position was provided for in the Settlement, it was agreed to by the Settlement participants, and ordered by the federal judge in the case.  He has the ability to return to court to ask for sanctions against the servicers (if appropriate), or ask for other relief from the court.

The California Monitor of the NMS

When the Settlement was signed, California Attorney General Kamala Harris appointed Professor Katherine Porter (School of Law, University of California, Irvine) to serve in a similar role on behalf of the Attorney General and the California homeowners facing foreclosure.


Norma Hammes, NACBA, and the NMS

As NACBA’s designated representative on foreclosure-related housing issues, Norma Hammes led a panel regarding the NMS at the 2012 NACBA Convention in San Antonio, Texas, in April 2012.  Joining Norma on the panel were the National Monitor, Joseph A. Smith, Jr,, John Rao (National Consumer Law Center staff attorney), and Ike Shulman (friend of, and co-founder of NACBA with, Norma & Jim).  Below (for your information) are documents describing the NMS that were prepared by Norma and provided as conference materials (the attached files are updated as of 6-22-12).

•    National Mortgage Settlement Summary
•    Possible Relief for Chapter 13 Bankruptcy Debtors Under the NMS
•    Mortgage Relief Offered to Borrowers by the NMS
•    Summary of Side Agreements Between NMS Servicers and Selected States