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Cuccinelli raises ‘moral hazard’ issue in mortgage settlement case
He said a settlement in a national bank fraud case might reward delinquent homeowners.
By Laurence Hammack
After joining a nationwide investigation into fraud by banks that serviced thousands of troubled home loans, Virginia’s attorney general is balking at a proposed settlement that offers relief to some struggling borrowers.
Ken Cuccinelli, along with his counterparts in three other states, said reducing the principal owed on certain mortgages raises the “moral hazard” of bailing out delinquent homeowners.
The proposal, to be discussed today at settlement talks with the banks, “may actually foster an unintended ‘moral hazard’ that rewards those who simply choose not to pay their mortgage—because they can simply take advantage of lenders’ obligation to honor virtually automatic principal write-downs,” Cuccinelli wrote in a March 22 letter to Iowa Attorney General Tom Miller, who is leading the investigation.
Also signing the letter were Attorneys General Greg Abbott of Texas, Pam Bondi of Florida and Alan Wilson of South Carolina. All 50 attorneys general are participating in the probe.
The objections come at a crucial time in the investigation, which began in October following revelations that several large mortgage servicers falsified documents and cut corners in other ways as they rushed to foreclose on homes in almost assembly-line fashion.
Officials from Bank of America, J.P. Morgan Chase & Co., Wells Fargo, Citigroup and Ally Financial’s GMAC unit have been summoned to Washington to meet today with leaders of the investigation, The Wall Street Journal reported this week.
Using portions of a multimillion-dollar fine against the banks to reduce the principal owed on some loans is just one of many parts of the proposed settlement.
Jay Speer, executive director of the Virginia Poverty Law Center, said he is troubled that the opponents’ talk of “moral hazards” seems prefaced on the assumption that the homeowners—not the banks—are the ones prone to wrongdoing.
“They [the banks] seem to be getting the benefit of the doubt—despite the fact that they have been caught falsifying documents and abusing the legal system,” Speer said.
It’s too soon to tell what effects the concerns raised by Cuccinelli and others might have on the negotiations.
“You would think this is exactly what the mortgage servicers were hoping for,” Speer said. “Dissension within the ranks on the other side is just going to help them.”
A spokesman for Cuccinelli said the attorney general supports many parts of the proposed settlement.
However, the vague standards for principal reductions “encourage homeowners to default and seek a reduction in their loan amounts,” Brian Gottstein said. “Forcing lenders to reduce mortgage balances and lose money would take away all incentive to lend money, ultimately denying the average person access to a home mortgage.”
It was unclear what type of borrowers might qualify for reduced principal under the proposed settlement. A spokesman for Miller did not return a call Tuesday.
Cuccinelli’s letter made a second argument against the principal reductions: Such a move would go beyond the law enforcement authority held by attorneys general, it stated, and put them in the position of becoming “deeply involved in the review and monitoring of the servicers’ everyday business practices.”
The letter stressed that Cuccinelli and his like-minded counterparts are not attempting to derail the process.
“Please know that our purpose in raising—and in some cases, reiterating—our objections is to forge consensus within our fifty-state group so we can work collaboratively to redress the unlawful conduct that prompted our investigation in the first place,” the letter stated.
Although the negotiations are private, some details of a deal in the works have leaked out.
There has been talk of a $20 billion fine, which according to the Center for Responsible Lending, “represents only a fraction of the damage caused by the banks.”
In a statement released this month, the center said the investigation will address “widespread evidence of improper accounting, unwarranted fees, false documentation and arbitrary foreclosure decisions.”
One practice, in which bank officials admitted they signed off on large numbers of foreclosure documents despite having no knowledge of the facts asserted, has been dubbed “robo-signing.”
Banks have argued that any mistakes were technical, and that they didn’t change the fact that the homeowner being foreclosed on was in fact delinquent.
Speer, who serves on the Virginia Foreclosure Task Force, said he’s dismayed to hear the banks’ arguments repeated by some of the attorney generals who agreed to investigate them.
“It’s amazing to me that people always seem to take the position that the homeowner is going to do the wrong thing, and the banks are going to do the right thing,” he said.
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