California Attorney General Kamala Harris objects to giving banks broad releases of liability forpredatory lending. At the same time, she may be locked into herpredecessor?s 2008 settlement with the largest lender in thestate during the mortgage boom that does exactly that.
Facing a Feb. 6 deadline to join a proposed multistateagreement over foreclosure practices said to be worth as much as$25 billion if California joins, Harris has said she won?t signonto a deal blocking her from investigating whether the fivelargest U.S. mortgage servicers misled homeowners about theterms of their loans, among other issues.
One of the five lenders involved in the talks, Bank ofAmerica Corp ., reached an agreement in 2008 with Harris?spredecessor, Jerry Brown , who is now governor, that bars itsCountrywide Financial unit?s mortgage holders from pursuingclaims of the type that Harris wants to investigate.
Based on the ?broad release? contained in the agreement,?it is unclear on what grounds Kamala Harris would pursuelending violations by Countrywide,? said Guy Cecala , publisherof Inside Mortgage Finance, an industry publication.
Harris, 47, whose state is the most populous and leads thenation in foreclosure filings for housing units, has describedas ?inadequate? the proposed settlement state and federalofficials have been negotiating for more than a year with Charlotte , North Carolina-based Bank of America, JPMorgan Chase Co. (JPM) , Citigroup Inc. (C) , Wells Fargo Co . and Ally Financial Inc (ALLY) .
The foreclosure probe, which had involved attorneys generalfrom all 50 states, began in October 2010 following disclosuresthat banks were using faulty documents to seize homes.
The proposed accord would set requirements for how lendersconduct home foreclosures and mandate that the banks fund loanprincipal writedowns for homeowners and provide refinancings,said a person familiar with the matter who didn?t want to beidentified because the terms aren?t public.
With California?s share of the settlement said to be atleast $6 billion, a decision by Harris to opt out would putpressure on her to extract more favorable terms from the banks,Ken Scott, a Stanford University law professor, said in a phoneinterview.
For Harris, ?the rationale has to be, ?We?re going to getso much more it will have been worthwhile, and that?s agamble?? Scott said. While the attorney general may ?get theglory,? he said, ?the risk and the possibility that isn?t theoutcome is being born by the borrowers.?
Countrywide, which was based in Calabasas, California, andwas acquired by Bank of America in 2008, was ?by far thelargest mortgage lender in the state? before the credit crisis,Cecala said. In 2006, Countrywide reported that whileresidential loans in the U.S. had tripled since 2000, from$1 trillion to $2.9 trillion, Countrywide?s origination businessgrew about three times faster, from $62 billion in 2000 to $463billion in 2006, according to a court filing.
Based on the liability release in the 2008 settlement, inwhich Bank of America resolved fraud complaints in 11 states byagreeing to pledge $8.7 billion in assistance to Countrywideborrowers, ?BofA wouldn?t seem to have much reason to pay stillmore for the benefit of anyone already covered by it,? Scottsaid.
Harris, through spokesman Shum Preston, declined to commenton the Countrywide settlement or the multistate negotiations.
Gil Duran , a spokesman for Brown, had no immediate comment.
The 2008 accord required Countrywide to reduce amounts owedby borrowers, cut their interest rates , and provide relocationassistance for homeowners who lost or almost lost their homes toforeclosure. In exchange, borrowers who received payments fromthe deal were required to release Countrywide from liability,preventing them from pursuing ?remedies of whatever kind?arising under ?any source whatsoever,? meaning any statute,regulation, rule or common law.
The releases covered ?without limitation, the originationof that loan and any representations or omissions made duringthat origination process,? according to the agreement.
The release went further, requiring borrowers to waive anypotential liability concerning the ?servicing or administrationof that loan following its origination.?
Another person familiar with negotiations in the multistatedeal said that while the 2008 agreement may present an obstacleto an investigation of origination claims by Harris, her lawyershave identified ways in which Countrywide may be violating theaccord. The compliance failures may be grounds to terminate thesettlement, said the person, who didn?t want to be identifiedbecause the negotiations aren?t public.
The agreement requires the bank to meet a quota of loanmodifications, the person said. Bank of America may beoverstating its compliance by taking credit for modifications onloans even though it later sought foreclosure against thosehomeowners when they fell behind on payments, the person said.The person also said that while the settlement may barinvestigation of any predatory lending by Bank of America before2008, such behavior after the date of the agreement is fairgame.
Bank of America has ?adhered to the letter and spirit ofour agreements with the attorneys general since 2008,? RichardSimon, a spokesman for the bank, said in an e-mail.
Since 2010, 46 U.S. states have signed onto the settlement,he said, and are partaking in the National HomeownershipRetention Program providing loan modification, foreclosurerelief and relocation assistance, Simon said.
Bank of America is ?performing at or above the programexpectations,? Simon said. The company expected it would offeras much as $3.4 billion in principal and interest savings toCalifornia homeowners, and through the third quarter of lastyear the offers have exceeded $5.3 billion, he said in the e-mail.
At least one state, Nevada, already has sought to undo anagreement over home-loan modifications tied to Countrywide,claiming the lender failed to meet its obligations. Nevada Attorney General Catherine Cortez Masto sued Bank of America inDecember 2010. The two sides are now in a dispute over pretrialevidence gathering, or discovery, in federal court in Reno,Nevada. The bank seeks to dismiss the case, according to courtfilings.
In a Jan. 30 status report on the case, Masto?s lawyersaccused the bank of stalling tactics that they said?underscores the gamesmanship? the state faces.
?Given the critical, time-sensitive issues in this case ?whether Nevada consumers will continue to lose their homes whilethey wait for or are denied help promised by the defendants ?the state urges that the solution is not simply to extenddiscovery deadlines,? attorneys for Masto wrote in the courtfiling.
Jennifer Lopez , a spokesman for Masto?s office, declined tocomment on the case.
Bank of America , in its court filing, has said it hasengaged in an ?aggressive, systematic, and unprecedented?collection and production of documents. Bank of America has been?exceedingly open? with Masto?s lawyers, according to thefiling.
In December, Harris and Masto, who has also criticized theproposed nationwide settlement as inadequate, announced theywould jointly investigate wrongdoing in mortgage loanorigination, servicing and securitization, and will sharelitigation strategies, information and evidence.
Cecala, of Inside Mortgage Finance, said the peril ofmounting such an investigation ?probably is a good argument forCalifornia to get on board? with the multistate agreement.
?Does the state have the wherewithal to launch a majorinvestigation of all foreclosures of all lenders in the state,or even the five that are a party to the attorneys generalsettlement currently pending?? he said. ?We?re talking aboutmillions of loans.?
To contact the reporter on this story:Joel Rosenblatt in San Francisco at jrosenblatt@bloomberg.net
To contact the editor responsible for this story:Michael Hytha at mhytha@bloomberg.net
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