Big Banks Say $5 Billion Should Be Punishment Enough

After seven months of trying to work out a settlement for their “robo-signing” foreclosure scandals, the nation’s big banks are now offering $5 billion to the state attorneys general to close the matter.

Last fall it was discovered that many banks were trying to fast-track the foreclosure process by skipping some of the necessary legal protocol and paperwork. This has led in some cases to wrongful evictions and all 50 states banded together to go after these banks, including Bank of American, JPMorgan Chase, Wells Fargo, and Citigroup.

The states joined up with several government oversight agencies, among whom are the Federal Trade Commission and the Department of Housing and Urban Development, and gave the banks a term sheet calling for drastic changes to their foreclosure processes. The banks received revised term sheets last Friday, and it appears that many of the original demands have been softened. Originally, the government coalition called for $20 billion or more in penalties, of which a good portion would be used to put toward loan modifications for struggling homeowners, with a particular emphasis on principal write-downs.

That has been a major point of dispute for the banks. As Bloomberg reported yesterday,

During a recent call between states officials and the banks, some lenders said they opposed any settlement term that would reduce loan balances, according to one of the people familiar with the talks. The banks argued a principal write-down plan would encourage homeowners to default, a notion some attorneys general on the call disputed, the person said.

And

At today’s meeting in Atlanta, Bob Davis, an executive vice president with the American Bankers Association, said in an interview that he told the group that principal reductions don’t work. Loan balances must be reduced so much for borrowers struggling to make payments that it is a better deal for lenders to foreclose instead, he said.

“Principal reductions don’t substantially improve the cash flow problem,” Davis said. “You can’t lower principal enough to make it an attractive tool.”

So now the banks have made their own offer: $5 billion to be used to compensate borrowers who were wrongfully foreclosed upon in exchange for the end to claims against the banks for their robo-signing messes.

The proffered deal is much less than what many in the coalition have hoped for, but with such a large and motley group, it may be difficult to reach a settlement that will appease everyone involved.