Foreclosure Settlement Awaits California's Next Move

As state attorneys general continue to pursue a national settlement with mortgage companies to resolve claims of improper handling of foreclosure processes, they appear likely to be operating without the biggest jurisdiction: California. The state removed itself from talks last month, citing concerns that the deal currently emerging would provide too much forgiveness for wrongdoing in exchange for too little in restitution to homeowners.

The state has yet to confirm whether it intends to pursue its own prosecutions against mortgage companies or potentially rejoin the settlement, according to sources familiar with the situation. What is clear is that California remains a key player in resolving the foreclosure mess.

The prospect of a deal without California has become a growing source of worry among those pressing for a national settlement -- something they say can't be attained without the nation's most populous state. Though California is not the only state to raise concerns about the settlement terms -- New York, Nevada, Delaware and Massachusetts have either left or are considering leaving the negotiations -- California is unique for its status as ground zero during the foreclosure crisis. In April 2010, a full 25 percent of the nation's foreclosures occurred in the Golden State, according to RealtyTrac.

"Sure, the [attorneys general] could get a settlement [without California or New York], but it's essential that they get a good, tough one. Without the bigger players in the deal, I worry that the settlement won't go far enough," said Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities. 

Kevin Stein, associate director of the California Reinvestment Coalition, echoed, "If California's not in it, it feels like it's hard to say it's a national settlement."

For 14 months, federal officials and states' attorneys general have been negotiating with Ally Financial Inc., Bank of America Corp., Citigroup Inc., J.P. Morgan Chase & Co. and Wells Fargo & Co, the country's five largest mortgage servicers, which send out the mortgage bills, collect mortgage payments and help homeowners who fall behind on their payments.

Though the settlement talks began in response to the "robosigning" debacle in which servicers neglected to appropriately review files and falsified signatures, it has grown to include other questionable foreclosure practices, including losing or mishandling borrowers' paperwork, leaving a struggling borrower on hold on a phone call for an unnecessarily long period of time, or disconnecting from the call altogether, said sources familiar with the negotiations. 

California, represented by state attorney general Kamala D. Harris, was heavily involved in the negotiations until last month. She exited the talks in October due to her concern that the settlement will ultimately let the servicers off the hook for their shady practices by extinguishing some of the mortgage companies' legal liabilities.

"The fact is that a large number of state attorneys general -- many of whom are keenly aware of the facts of the case and the proposed settlement terms -- have expressed support for our efforts," said Geoff Greenwood, a spokesman for Iowa Attorney General Tom Miller, who is leading the talks on behalf of the states. "We anticipate that unless something unforeseen occurs, the number of states that sign will be well into the forties, and I think that speaks for itself."

Though no deal has been finalized, the proposed terms include some mix of cash payments directly to borrowers, and principal write-downs and refinances for so-called underwater borrowers whose home is worth less than they owe on their mortage. The agreement -- valued at roughly $25 billion -- would establish targets that the lenders would be required to meet, and would be monitored by an independent third party who has yet to be selected but who will be pivotal to the success of enforcing the agreement.

Dean Baker, co-director of the Center for Economic and Policy Research, asserts that California's absence is less an issue for the state attorneys general and more a concern for the five mortgage servicers. He explained, "A lot of states are onboard [with the national settlement], but for the most part those weren't the ones where the worst servicing practices were, they aren't the ones that were hardest hit, so the servicers can get released from the liability [in these states], but that doesn't offer them much. California is huge, and the banks are still going to be losing sleep if California isn't on board and they have liability there."

While California continues to weigh its options, other states are pushing forward. "We're certainly hopeful that California will be a part of the proposed settlement we're currently negotiating," said Greenwood. "But instead of putting negotiations and substantive relief to homeowners on hold, we just feel it's important to explore an alternative settlement path without California, if absolutely necessary."