Why Banks Think Their Get-Out-of-Jail-Free Card Isn't Good Enough

Last Updated Sep 6, 2011 3:44 PM EDT

Attorneys general from 46 states have offered a settlement to major banks over improper mortgage practices -- even though those practices are still going on. Believe it or not, the banks rejected the Get Out Of Jail Free card because it wasn't generous enough.

It's not just finance they're bad at.

The proposed deal (aka The Great Bank Robbery) would let banks - including Bank of America (BAC), JPMorgan Chase (JPM), Wells Fargo (WFC), Citigroup (C) and Ally Financial (ALLY) - off the hook for seizing the homes of delinquent borrowers by employing so-called "robosigners," workers who signed off on foreclosure documents en masse without reviewing the paperwork.

According to the Financial Times, which broke the story:
The banks ... are pressing for immunity from a raft of alleged civil violations and have called the latest proposal a "non-starter". They say the proposals from state prosecutors will need to be expanded before striking a deal, which is expected to involve a total penalty of $10bn to $25bn.
Apparently business school doesn't teach you anything about the mouths of gift horses. They were being offered an impressively large and stupid gift horse, too. Stupid because many of the largest mortgage servicers are still fabricating documents that should have been signed years ago and then using them to foreclose on homeowners.

Documents reviewed by American Banker...
... show that as recently as August some of the largest U.S. banks, including Bank of America Corp., Wells Fargo & Co., Ally Financial Inc., and OneWest Financial Inc., were essentially backdating paperwork necessary to support their right to foreclose. Some of documents ... included signatures by current bank employees claiming to represent lenders that no longer exist.
Despite all this, the banks have balked on the offer. They want a free pass on liability related to other mortgage issues -- like their failures with loan modification. This last point is just one reason the AGs of Nevada, New York, Delaware, and Massachusetts have refused to agree to the proposal. (Kudos to all the aforementioned AGs and especially New York's Eric Schneiderman, who got kicked off the steering committee because he "actively worked to undermine" the agreement.)

The Obama administration is also pushing hard to give away this particular farm and has leaned on Schneiderman and others to go along. The feds clearly think getting rid of these cases will remove some of the financial uncertainty hobbling the economy. It wouldn't. The banks are already facing a tidal wave of lawsuits from private investors (as well as Fannie Mae and Freddie Mac).

If this effort were to be successful it would just mean the states are following the lead of the Justice Department, SEC and other federal agencies in essentially privatizing law enforcement.

Fortunately the public is overwhelmingly against this settlement -- a fact that may sway more than a few additional AGs.

Related: Ry Cooder performs his new anthem for the times, No Banker Left Behind

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    Constantine von Hoffman is a freelance writer and writing coach. His work has appeared in outlets such as Harvard Business Review, NPR, Sierra magazine, Brandweek, CIO, The Boston Herald, TheStreet.com, CSO, and Boston Magazine.

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