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Investors and Protestors May Be Getting Foreclosure Settlement Wrong

The National People's Action Group calls for prosecuting the "corporate criminals" they say are responsible for the financial crisis, at the Conference of Attorney's General in Washington, D.C.
CNBC
The National People's Action Group calls for prosecuting the "corporate criminals" they say are responsible for the financial crisis, at the Conference of Attorney's General in Washington, D.C.

Investors bidding up bank stocks and protestors reaming state attorneys general over a proposed foreclosure settlement seem to agree on one thing: this would be a big win for banks.

Keep in mind that there is no official settlement proposal yet. Rather, there have been reports that a settlement is in the works. What appears to be a term sheet for the settlement leaked out this week.

But with bank stocks rallying, it seems investors are convinced that the settlement will be a positive for banks. And critics of banks from all around the blogosphere are likewise convinced that the settlement negotiations are giving away too much to the banks.

This kind of consensus has our contrarian spider-sense tingling. Could both sides be wrong?

That’s the argument that Georgetown law professor Adam Levtin has been making over on his Credit Slips blog. He describes the leaked terms of the settlement as “astonishingly strong.”

The term sheet, for instance, would give an attorney general the right to enforce loan modification requirements—something that right now only the Treasury Department really can do.

From Levtin:

The term sheet appears to repeat some existing HAMP requirements. What bloggers have missed is that the CFPB and AGs currently have no authority to enforce HAMP violations. The inclusion of these terms makes HAMP violations a violation of the settlement with the AGs/CFPB, which means that the AGs and CFPB can enforce these violations. Given Treasury's unwillingness to demand serious HAMP compliance, that too is an important step.

If a number of attorneys general take an activist role in enforcement home loan modification requirements, this could prove a major headache for the banks.

One sign that the settlement might not be such a win for the banks is that top banking executives are starting to criticize it.

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