February 23, 2012

Barofsky Says Mortgage Settlement More of a Subsidy than Punishment

Earlier this month, the Justice Department reached a $25 billion settlement with the nation’s five largest mortgage servicers – Bank of America Corporation, JPMorgan Chase & Co., Wells Fargo & Company, Citigroup Inc. and Ally Financial Inc. (formerly GMAC).

The agreement was supposed to punish the banks for hundreds of thousands of forged affidavits.

But Neil Barofsky says that it’s more of a subsidy than punishment.

Barofsky is the former Inspector General for the Troubled Assets Relief Program and former Assistant U.S. Attorney in Manhattan.

He’s currently at NYU Law School’s Center on the Administration of Criminal Law.

Barofsky told the Financial Times last week that the settlement was “scandalous” and that “it turns the notion that this is about justice and accountability on its head,”

In an interview with Bloomberg Television yesterday, Barofsky said that the settlement will be $3 billion to $5 billion in cash up front.

“The rest will be in credit – the mortgage servicers are going to earn credit by reducing principal in loans that either they own or that they service for private investors,” Barofsky said.

What will they get credit for?

“They are actually going to get credit for mortgages that are modified by the government’s HAMP (Home Affordable Modification Program),” Barofsky said. “In essence, that means the banks are going to get credit for mortgages that they modify – which the taxpayers are paying them to do.”

“They are going to modify a mortgage – it will reduce the principal on a mortgage – and during the course of that modification, they are going to receive taxpayer dollars. Money out of your pocket and my pocket will go to the servicers – and they will get credit on a settlement that is supposed to punish them. And they will have a chance to make money off of it because of taxpayer subsidies.”

“This was supposed to punish the banks for this massive fraud where there were hundreds of thousands, maybe millions of forged affidavits that hit the court system around this country over the last couple of years, and this thing that is supposed to be a deterrent and supposed to bring accountability? It’s not doing any of that.”

“One estimate is that the banks saved $25 billion by cutting corners, by doing this. And now the punishment is – we are going to subsidize your meeting your obligations under this agreement. It’s crazy.”

Barofsky says that the alleged wrongdoing saved the banks up to $25 billion.

When asked why the deal was cut now – Barofsky said – “election year politics that’s what this is all about.”

“The administration, the state attorneys general, more than a year ago decided this was how they were going to attack the problem,” Barofsky said. “Not by doing in depth investigations but by entering into high profile negotiations conducted in large part by press release and in the press. And over time, the balance of power shifted away from the government and toward the banks. The banks gained ever more leverage. And by the time we got out to here in the early months of 2012, there was a desperation, a need to have a settlement for political purposes. And that is what you are seeing.”

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