Forum Post: the banks are getting parking tickets for felony offenses.

AMY GOODMAN: Joining us now is one of the most prominent critics of the settlement. Yves Smith is a longtime financial analyst, who runs the popular finance website Naked Capitalism. On Thursday, she published an article called "The Top Twelve Reasons [Why] You Should Hate the Mortgage Settlement." Yves Smith is author of the book ECONned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism.

Yves, welcome to Democracy Now!

YVES SMITH: Amy, great to be here.

AMY GOODMAN: Explain what this settlement is about.

YVES SMITH: The settlement, on the surface, does look like it’s helping homeowners, but, in fact, the bigger part that most people don’t recognize is the way it actually helps the banks with mortgages on their own books. What changed in the practice of how people do mortgages, and one of the reasons why we had so much trouble, is that most mortgages are now securitized. That means, instead of going to your bank like you did in the old days and having the bank make the loan and keep the loan, they’re then packaged with a lot of other loans, and the cash flows from them are distributed to investors. And the procedures for getting the loan from the bank to the trust on behalf of investors are very complicated, and the fact the banks didn’t behave those procedures then is what led to robo—is a big factor of what led to robo-signing. That’s why they had to sort of fix the paperwork for what they hadn’t done right in the first place.

Now, in many cases, borrowers don’t just have a first mortgage, they have a second mortgage. Unlike the mortgages that were sold, the banks mainly kept those second mortgages on their own balance sheets. The way this—and normally, if a borrower is in trouble, or in any—not just borrowers. You know, if a corporation has a bunch of different loans, you always reduce the weakest one first. You wipe it out, before you even touch the stronger mortgage. Ten billion of this deal is in the mortgage modifications, where the bulk of that is expected to come from investors, not from the banks. So even though this is billed as a $25 billion-plus deal, in fact, $10 billion of that is actually going to come substantially from investors.

And then, the other piece, they’ve got another $7 billion, which they are—is other forms of relief. Some of that’s a bit dubious, too. For example, they’ve got up to—they’ve got $3 billion of that in forgiveness. If somebody’s been foreclosed upon, but the value of the house doesn’t pay, doesn’t cover the amount of the debt, that’s what they call a deficiency judgment. That means that, in theory, the bank could still pursue you for the money that they didn’t recover. In practice, banks hardly ever do that. So they’re basically going to get credit, you know, for people they weren’t probably going to go after anyhow.

JUAN GONZALEZ: And what is the impact of the decision that those mortgages covered by Fannie Mae or Freddie Mac or by FHA would not be subject to this settlement?

YVES SMITH: Well, that’s more than half the mortgages outstanding. So, more than half the borrowers aren’t even in consideration for any kind of relief. And then, of the ones that remain, you know, the number that the administration is using is around a million. It’s going to depend on how much the banks actually do and whether the enforcement is tough. And in fact, some of the provisions of the enforcement are very troubling. But even so, you’re talking that versus—you know, the numbers vary by who’s running the numbers, but roughly 10 or 11 million borrowers who are underwater. I mean, even if you accept this deal is going to work as it is on face value, only a very small proportion of borrowers who are suffering are going to get any help.

AMY GOODMAN: Can you tell us how this deal was made? Because, for quite a time, Eric Schneiderman, the attorney general of New York, and Kamala Harris, the attorney general of California, among others, like Beau Biden of Delaware, were opposing this.

YVES SMITH: Right. There was a big change in the last month. You know, initially, Schneiderman was one of the first to be critics, and he was one of the first to file subpoenas. And then other states, as you pointed out, you know, like Beau Biden, like Martha Coakley of Massachusetts, were critics and started filing suits. It really looked as if the deal wasn’t going to get over the line. And then, when Schneiderman agreed to form a federal task—join a federal task force that would do mortgage investigations, he went quiet on his opposition. And that appeared to have a very destabilizing effect on the other attorneys general who had been opponents of the deal. You know, Schneiderman kept talking as if this investigation will be very serious. Quite frankly, the record of—track record of these investigations has been very poor. He may sincerely believe this is going to be serious, but that very much remains to be proven.

JUAN GONZALEZ: The other aspect of this that hasn’t got much attention—and I was listening to Schneiderman being interviewed defending the settlement last night—is that a lot of these attorneys general will be getting cash payments directly from the banks to their offices, right, which they will then be able to decide how to use that money. In some cases, it’s $100 million or more going to some of these offices.

YVES SMITH: Well, that’s correct. And that actually always was part of the plan, and that’s why so many state attorney generals actually had been on board initially. The administration really knew that it already had at least 35 in its pocket. You know, there was—there were five that had been public in terms of being out, and then another 10 that had met—so it was 15 in total, that had met to discuss their, you know, possible opposition to the settlement. So we were fighting about these state attorney generals, but California was the big one that they were very concerned about getting in. And, of course, then there was also just New York because of its visibility and because New York has the Martin Act, which is much tougher in terms of—they can basically use it to file, effectively, securities lawsuits against banks. It’s the only state that has that power.

AMY GOODMAN: I wanted to turn to California Attorney General Kamala Harris, who ended up signing on to the deal after months of criticizing a settlement, as you said. On Thursday, she commented the settlement will not help the millions of homeowners whose mortgage is held by Fannie Mae and Freddie Mac.

ATTORNEY GENERAL KAMALA HARRIS: While this is a tremendous victory—$18 billion for those who are in their circumstance as a result of the conduct by the five biggest banks—the reality is, 62 percent of the mortgages in California are owned by Fannie and Freddie. And that is why, months ago, we sued Fannie and Freddie in California, because this is about making sure that we bring relief to all Californians. And our focus then cannot afford to be myopic and look only at the banks, because the reality is that Fannie and Freddie are right now being run by a fellow named DeMarco, who—I’ve said before, and I say again—should step aside, because the guy can clearly not figure out what his job requires. And in particular, it requires that in California we see principal reductions on those Freddie and Fannie loans. So, part of our focus is also on Freddie and Fannie.

AMY GOODMAN: And this is Attorney General Eric Holder at the news conference Thursday.

ATTORNEY GENERAL ERIC HOLDER: Our investigations revealed disturbing practices. For instance, we saw that, far too often, services pushed borrowers into foreclosure, even though federal regulations require the servicers to try other alternatives first. These failures didn’t just hurt borrowers who might have been able to afford modified mortgages, they fueled the downward spiral of our economy and of communities nationwide. They eroded faith in our financial system. And they punished American taxpayers, who have had to foot the bill for foreclosures that could have been avoided. With this settlement, we are recovering precious taxpayer resources.

AMY GOODMAN: That was Attorney General Eric Holder. Your response to Harris and Holder, and then, exactly how much the banks are having to really pay out?

YVES SMITH: Well, the fact is that even though Fannie and Freddie have not—are not part of this deal, Fannie and Freddie actually have done, so far, more in the way of mortgage modifications than other—than the banks have so far. And as much as DeMarco—you know, you can argue whether Fannie and Freddie have done more—should have done more, the fact is that they’re kind of under conflicted guidelines. You know, as a conservatorship, DeMarco is actually supposed to recover for taxpayers, so his guidance, in terms of what he’s doing, is a bit conflicted.

But the real problem is that this deal is just not going to give that much relief. The mortgages are underwater—in the U.S., $700 billion. Even the most generous estimate of how much relief that this deal will provide is $35 billion to $40 billion. I mean, that just isn’t that much. And the notion that homeowners who were foreclosed on are going to get a $1,500 to $2,000 check, I mean, we’ve just basically said the price of fraud is $1,500 to $2,000.