A rare public rebuke of a rogue attorney general by his colleagues has highlighted the dysfunction among the state AGs and raised doubts about their ability to strike a settlement deal with the nation's largest mortgage servicers.
Servicers are now operating under the assumption that New York Attorney General Eric Schneiderman will not sign on to a global settlement — and expect a handful of other state AGs to follow suit — after he was accused of trying to undermine the negotiations and removed from the coalition's executive committee early last week.
His removal was an attempt to get settlement talks back on track, but many said the damage has already been done.
"This confirms the AGs are fundamentally split," Andrew Sandler, a partner with BuckleySandler LLP, said. "With New York and perhaps other significant states not participating, any overall settlement has significantly less value to the banks."
The value is both literal and figurative.
If the settlement does not cover servicing problems in New York — a state particularly hard hit by foreclosures — the settlement amount would likely be much lower.
In turn, if settling is supposed to put the whole foreclosure mess behind the banks, several lawyers asked, what have they really gotten out of it if they still face years of potential litigation with other states?
There is also an increasing risk that the negotiations, which have dragged on for more than a year, are losing momentum, said David Dunn, a partner with the law firm Hogan Lovells.
"Things like Schneiderman pulling out make everyone reconsider their position," Dunn said. "Certainly from the banks' standpoint, a settlement without New York is something everyone is going to have to think twice about. And from the states' perspective, if New York is no longer willing to participate, am I willing to participate?"
The AGs are already exploring scenarios under which New York or others are not party to the settlement, although they won't know the impact of such decisions until an agreement is reached in principal.
For their part, state and federal officials insist that Schneiderman's exit has not derailed negotiations — he was not part of the smaller committee negotiating directly with the servicers — and are still confident that banks see the value in a deal with the majority of states.
"If one state, no matter how big the state is, pulls out of a deal, is that reason to discount the other 49 states?" said one person familiar with the negotiations. "If you do decide, 'Well, no deal,' you run the risk of a raft of litigation. And if you can settle with all but one or all but a small number of states, it may make a lot of sense."
Although they have yet to work out the details, sources on both sides said they are mostly in agreement over new mortgage servicing standards. But the talks have stalled on the issue of future lawsuits — specifically, whether the banks will be released from liability for past servicer-related misconduct.
Schneiderman has launched his own investigations into mortgage securitization, and warned that a narrow release could let the banks off too easily before the full extent of their conduct has been uncovered. AGs from Massachusetts, Delaware and Nevada, have raised similar concerns.
