After uncovering significant problems in the foreclosure process, the 50 state attorneys general and several federal agencies delivered a 27-page list of demands to the five largest mortgage servicers, requiring upgrades and changes throughout their systems.
But many have begun to suggest the government went overboard by setting unrealistic goals, a move that could backfire and give the banks involved more leverage to fight some of the most onerous requirements. Bankers note that the term sheet makes no mention of what they did wrong — leaving it unclear what problems some suggested remedies are meant to correct — and that it treats all the servicers exactly alike.
Banks are almost certain ultimately to sign a settlement, but observers doubt it will resemble this opening offer.
"It probably goes too far," said Brian Gardner, a political analyst at KBW Inc. "We now know there were a ton of problems with the robo-signing issue, and those need to be addressed, but it seems they are trying to kitchen-sink everything and shove it all in one, and I don't think that's the right approach."
The term sheet covers virtually every aspect of the servicing business, detailing requirements for mortgage documentation, interaction with borrowers, relationships with active military personnel, loan modifications, principal reductions, bankruptcy proceedings, short sales and technology systems. It even specifies that servicers should start relationships with retailers like Wal-Mart Stores Inc., to provide a way for troubled borrowers to fax in their documents for free.
While the term sheet is undoubtedly a powerful opening salvo in negotiations with the banks, many observers said the government undercut itself.
"It went to a point where I think some provisions would be unconstitutional and certainly subject to a court fight," said Stephen Ornstein, a partner at SNR Denton. "It seems a compendium to a wish list of consumer activists and people in the Obama administration. I just don't think it's realistic."
State AGs and consumer advocates disagree, arguing that they are mostly enforcing existing law. Some even suggested the banks were getting off easy.
"This settlement is more than the banks could hope for given the evidence of both illegal and negligence practices," said Julia Gordon, senior policy counsel for the Center for Responsible Lending. "These investigations have revealed that there are huge problems throughout the servicing system, and as a result millions of foreclosures may have happened. Where you stand depends on where you sit. I don't see [the term sheet] as that aggressive."
Iowa Attorney General Tom Miller, who is leading the investigation for the attorneys general, insisted last week that the term sheet was workable. The settlement is on behalf of the attorneys general, the Justice Department, the Department of Housing and Urban Development and the Consumer Financial Protection Bureau.
"It's fair, in my opinion," he said at a news conference. "While a lot of it is comprehensive, a lot of these are things servicers should have been doing years ago. So it's not a new system."
