In the following, Attorney General, Ken Cuccinelli gives his take on The National Mortgage Settlement.

The National Mortgage Settlement.

March 1, 2012

Dear Fellow Virginians,

Many of you have asked about the national mortgage settlement I signed on to with other state attorneys general and the five largest mortgage servicers (banks) in America.  So, I thought it would be an appropriate Compass subject.

The criticism I’ve gotten from my own supporters has ranged from, “You let them off easy,” to, “How could you join such a bank-busting effort?” The folks who are satisfied with the settlement, as usual, have been much more muted in their comments, but the tenor of their remarks focuses on the fact that we can now move forward as a country and unclog our housing market (including foreclosures).

Let me say by way of summary: the settlement is not pretty.  However, I believe that the public record attests to my efforts to keep this settlement from doing harm to both the housing sector and the economy as a whole.  I also pushed steadily to get this chapter closed as quickly as possible, as foreclosures and an important portion of the country’s credit were tied up as the negotiations dragged on, slowing down our national recovery.

Some of my fellow AGs, along with federal participants, began the process looking hard at ways to simply wring money out of the banks – the more, the better, they thought.

My focus, however, was to tie consequences to the widespread wrong-doing by banks that did occur, and to avoid creating any moral hazard problems, i.e., setting up a system that encouraged people to stop making payments on their homes or otherwise fail to honor their contractual obligations.

The Wrong-doing by the Banks

Virginia joined the multi-state mortgage foreclosure investigation because the banks had engaged in wrong-doing both in Virginia and in ways that affected Virginians. Based on the investigations conducted here and in other states, it was clear that the banks frequently failed to follow Virginia law.  Specifically, the robo-signing you heard about included an enormous number of violations of our notary laws, and banks also engaged in what is called “dual tracking” and other deceptive mortgage servicing practices.

The banks had to answer for this conduct.

While some Virginians wanted criminal indictments, I as the Attorney General of Virginia, have no authority to criminally prosecute for the particular wrongdoing that was uncovered in the mortgage foreclosure investigation.  As AG, in this situation, I can only pursue civil remedies.  Also, I was hamstrung because civil prosecution was not available for mortgage servicing fraud that occurred before July 1, 2009 (Virginia changed its laws effective on that date).

Given the limitations of the law, this was the best course of action we could have taken when working with 49 other states and numerous federal agencies to attempt to resolve the mortgage fraud and abuse issues in our state.  Ultimately, in my judgment, the positives clearly outweighed the negatives. So,Virginia joined the settlement.

Some of the History

Nearly a year ago, I organized a small group of AGs to address several issues that cropped up as part of the early settlement negotiations, including allowing open-ended mortgage write-downs that could lead to the moral hazard of homeowners choosing to default on their mortgages just to get their principal reduced.  Avoiding this was a major priority for me, and the only way to fight it was from the inside, not the outside.

Part of the price for having an impact on the inside was a greater commitment to join in the final settlement.  It was part of why I stuck with the effort for more than a year.

Our small group of AGs pushed toward a settlement that was fair to borrowers but that avoided the moral hazard problem. I repeatedly argued that forcing lenders to automatically reduce mortgage balances and lose money in the process would have taken away market incentives to lend money, ultimately making access to a home mortgage more expensive for everyone.

By working behind the scenes on these issues, I was able to help stop several of these proposed elements and ameliorate others. Had I not participated in the settlement, I would not have had a seat at the negotiating table to try and improve the settlement.

The Wall Street Journal, Bloomberg, BusinessWeek, the New York Post, and others credited me and several of my colleagues by name for insisting on these improvements.

Non-Monetary Elements

The settlement also addresses breakdowns that occurred in the mortgage servicing industry and puts in place new protections for homeowners in the form of mortgage servicing standards.  [Note: a “mortgage servicer” is the bank that handles your home loan– the bank to which you write your monthly check.]

This was an area that was a substantial problem in Virginia.  For example, people were encouraged by some banks to intentionally get behind on their payments, because delinquency was a prerequisite for certain loan modification programs.  However, when some folks took this terrible advice from one bank employee and stopped paying their mortgages, they would get foreclosure notices from another employee of the  same bank.  This is the “dual track” problem.  I.e., they were on the loan modification “track” and then found themselves on the “foreclosure” track.

Part of the settlement was to fix the dual tracking problem and ensure that a borrower have a single point of contact with his bank for all purposes, including both foreclosure and loan modification.

I also worked with representatives of the military to make sure our service members are protected from foreclosure while they are deployed.  This meeting at the Pentagon with service members was the most efficiently run meeting I have ever participated in.

Rumors, etc.

There have been many incorrect statements made in the media about this settlement.  For instance, it has been reported that the penalties imposed on the five settling mortgage writers will be paid for by taxpayers. This is not correct. There are no taxpayer dollars going toward the bank’s settlement obligation.

The settling banks can get federal incentive payments for loan modifications if they meet the requirements of the Home Affordable Modification Program (unrelated to the settlement), but those incentive payments are deducted from the credits they earn under the settlement. Also, this setup only relates to the federal component of the settlement, which goes into effect whether I or any other attorney general signed on or not. [There are separate parts of the settlement: state and federal; however, the settlement was negotiated as a package that included both parts.]

Additionally, some have complained that the banks lose nothing by this deal.  That is simply not accurate. The settlement requirements apply both to loans the banks originated and to loans that they serviced. Furthermore, second mortgages owned by banks are NOT exempted; they are part of the mix as well.

As far as the projected $1,500 to $2,000 that goes to foreclosed borrowers, to obtain it, eligible borrowers will have to indicate that they suffered some sort of servicing abuse, e.g. documents were robo-signed, they were foreclosed upon while pursuing a loan modification (dual tracked), their mortgage servicers lost their modification application documents, or they were otherwise aggrieved. Individuals do not have to sign a release to obtain the payment and remain free to pursue their own claims against the settling banks. But having this uniform payment avoids having much costlier mini-trials to figure out who is eligible for this form of relief.

As far as the Commonwealth of Virginia’s $69 million share of the settlement, the multi-state agreement essentially allowed me to direct how the money was spent. But as I told our state legislators recently, I gave up my role as an appropriator when I left the Senate. I believe strongly in the separation of powers, and the Constitution of Virginia provides that the General Assembly, not me, appropriates the commonwealth’s funds. Therefore, I will turn Virginia’s share of the settlement over to the General Assembly to do with as our elected representatives see fit.

Ultimately, more than half ($294 million) of the $480 million that is projected to come to Virginia will come from the federal side of the deal, which would come to Virginia regardless of whether or not we signed on to the agreement. By actively participating in the settlement negotiations, I gained the ability to help move the terms of the settlement in a direction that would help clear the housing market and avoid a moral hazard that could do long-term damage to the mortgage market and make it harder for the average Virginian to access a home loan for years to come.

Some of the Media Coverage

While the settlement discussions were going on for more than a year, periodically the media commented on the dissension that was cropping up due to the insistence of many on the left that the settlement move much more toward large mortgage writedowns and more money for state coffers, and our insistence that penalties be tied to actual wrongdoing.  Below are some excerpts from those media stories:

Wall Street Journal (3/31/11)

Wednesday’s meeting comes as federal and state officials struggle among themselves to forge consensus on a single proposal, particularly over the size and use of any monetary penalties. Justice has spent the past month trying to coerce an unwieldy mix of state attorneys general and federal agencies to agree on the broad outlines of a deal.

Most of the seven-hour meeting centered on a discussion of servicing standards, but a clear division emerged once a participant raised the subject of reducing loan balances for troubled borrowers, said people familiar with the situation. Others in the room, including Virginia Attorney General Kenneth Cuccinelli, pushed back.

Banks have united in opposition to any calls for broad-based write-downs of loan balances, and they have joined with Republican lawmakers and some Republican attorneys general in protesting any settlement that uses financial penalties to fund housing-relief programs.

Bloomberg (4/14/2011)

Miller’s 50-state coalition began to fracture last month when a 27-page list of proposed settlement terms leaked and at least seven Republicans attorneys general, including Florida’s Pam Bondi and Virginia’s Kenneth Cuccinelli, came out against it.

BusinessWeek (4/20/11)

Virginia Attorney General Kenneth Cuccinelli and six other Republican attorneys general assailed the proposal as overreaching, with four calling principal reduction a moral hazard.

… In his March 22 letter to Miller, Cuccinelli said the settlement proposal, or term sheet, given the five lenders appears to reach well beyond the scope of our enforcement role, and, in some instances, far exceeds the scope of the misconduct which was the subject of our original investigation.

New York Post (8/11/11)

A multibillion-dollar deal with big banks to clean up the foreclosure fiasco is falling apart as a handful of holdouts balk at key terms of the proposed settlement put together by state attorneys general and federal regulators, The Post has learned.

… State attorneys general Pam Bondi of Florida, Kenneth Cuccinelli of Virginia, Greg Abbott of Texas and Alan Wilson of South Carolina are among those who take a dim view of so-called principal reductions.

Bearing Drift (2/28/12)

Had Cuccinelli refused to participate in the settlement, Virginia would not have seen a dime of that money….

But it wasn’t just the state portion of the deal that got Cuccinelli involved. He told me a big reason was to “influence the parts of the settlement over which we had little control” — meaning, the federal portion of the deal.


A lot of time and effort went into these negotiations by many people, and with 50 AGs plus the federal agencies, plus the five biggest banks in America participating, it was hard, complicated negotiating and cat herding.  I’m glad we’re done, that people who were harmed have some degree of recompense, that new servicing standards have been put in place to improve the process for consumers, that these banks can get back to lending, and that one more cloud of uncertainty is removed from the economy.

This ain’t pretty, but now we can press ahead.  The settlement was on a track to be much worse.  My main contribution was to keep it from being worse.  I didn’t have control – I had influence.  To exercise that influence, I had to participate, and so I did.


Ken Cuccinelli, II
Attorney General of Virginia

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