Enough Punishment for Banks in AG Deal? Maybe Not

Even as the banks and their conservative allies mount a fierce attack on the effort by state attorney generals to punish banks for their abusive foreclosure and modification practices, an entirely different critique of the proposed deal has emerged: It's not tough enough on the banks.

The critique that banks are being let off the hook has a few threads. One is that the terms -- which you can read below -- would give banks more ability to write off failed second mortgages or home equity loans as tax losses, saving themselves billions.

As David Wallechinsky explains:

Normally, holders of first mortgages can write down—or reduce the stated value—of failed loans in order to reduce their taxable income. When this happens, the second mortgage may become a total loss. The proposed settlement would allow the holders of second mortgages to also write down their losses.

This change would be a boon to the biggest banks because they are the ones most likely to hold second mortgages or home equity lines of credit. The top four banks—Bank of America, JPMorgan Chase, Citigroup and Wells Fargo—currently hold about $408 billion worth of second mortgages. First mortgages, on the other hand, are often held by small banks, life insurance companies and even pension funds.

The second complaint about the deal is that it would probably protect the banks and mortgage servicers against future litigation, limiting their liability in ways that guarantee that they will never be held responsible for the full scope of their criminal or negligent actions. Some more liberal attorney generals, like Eric Schneiderman of New York, have reportedly raised concerns to Tom Miller -- the Iowa AG negotiating the deal -- about releasing banks from future litigation. As Gretchen Morgenson reported in the New York Times:

According to a person briefed on the discussions, Mr. Schneiderman has told Mr. Miller that he will not participate in a deal that would preclude his office from pursuing claims against the banks relating to their mortgage origination, securitization and marketing practices. . . .

It is also unclear whether the settlement would prevent borrowers or investors from bringing their own lawsuits against loan servicers — a terrible result. And the list of terms has only the briefest mention of restitution for borrowers who have been hurt by questionable loan servicing.

A final complaint about the deal is that the amount of cash that it extracts from the banks to help homeowners with modifcations -- $20 billion -- is small change given the number of households that are underwater and need a shot at modifying their loans.

The core strength of the deal is that it forces banks and servicers to halt abusive foreclosure practices and follow the law in giving homeowners a chance to modify their loans. But everything else, it appears, is now being questioned by critics who want a tougher stance against the banks. The good news is that the deal is still being negotiated.

50 State Attorney General 27 Page Settlement on Fraud Closures