Realty Check

New Financial Crimes Unit Could Throw Wrench in ‘Robo’ Settlement

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Barely a few days ago, word was that a settlement among state attorneys general and the big banks over faulty foreclosure practice, i.e. “robo-signing”,was imminent.

In fact, there was a big meeting on Monday in Chicago to try to seal the deal. It included Secretary of Housing and Urban Development, Shaun Donovan, Associate U.S. Attorney General. Thomas Perelli, and several Democratic AG’s, including the lead negotiator, Iowa Attorney General Tom Miller.

Now some say that could all be for naught.

During his State of the Union address, President Obama announced he was ordering the U.S. Attorney General to create a “Financial Crimes Unit,” its number one task being to go after the banks for faulty mortgage originations and securitizations.

“I am asking my Attorney General to create a special unit of federal prosecutors and leading state attorneys general to expand our investigations into the abusive lending and packaging of risky mortgages that led to the housing crisis. This new unit will hold accountable those who broke the law, speed assistance to homeowners, and help turn the page on an era of recklessness that hurt so many Americans,” the President said.

The morning after has many analysts claiming that this new unit will scuttle that nearly-settled settlement over “robo-signing,” because it will tell banks that even though they are agreeing to pay states a multi-billion dollar penalty for bad foreclosure practices, the Federal government is still coming after them for securitization issues.

“We believe industry is worried that this new task force will go after the banks for the origination of many of the mortgages that have defaulted or are now underwater,” writes Jaret Seiberg at Guggenheim Partners. “Either way, this further adds to the litigation mess that is hurting the housing market by forcing banks to keep underwriting standards tighter than warranted.”

He admits we need to hear more details about the task force, not to mention full details of the AG/bank settlement, which is still in process.

“I don't think this will impact our negotiations,” said Geoff Greenwood, spokesman for Iowa’s Miller. “While we would release servicing claims and origination claims against these five companies [the nation’s five largest banks], we are not releasing other aspects of the mortgage mess, including securitization. We are not granting criminal immunity. And this case doesn't involve other companies that originated fraudulent loans. So there are many other pieces of the puzzle, and this announcement will enable states and our federal partners to continue to work together to address those other pieces.”

Some even say the announcement of the task force could actually help the AG/bank settlement.

“We believe this will reignite concerns related to the securitization of private-label securities,” wrote Ed Mills of FBR. “Creating this unit could give political cover to AGs who have been concerned that a robo-signing settlement would hinder further investigations into securitization.”

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