| March 6, 2012

Mortgage Settlement Provides a Lesson in Federalism

Many Oklahomans have been paying close attention to the recent announcement of the settlement reached with five major mortgage companies. The settlement comes after an 18-month investigation by attorneys general in all 50 states and by the U.S. Department of Justice into mortgage servicing practices that contributed to the nation’s mortgage and foreclosure crisis.

Oklahoma is the only state in the Union that entered into a separate agreement, and many citizens want to know if we made the right call.

The agreement requires Bank of America, Citigroup, JPMorgan Chase, Wells Fargo, and GMAC to pay Oklahoma a total of $18.6 million in compensatory damages to resolve claims of unfair and unlawful practices. The amount was determined by the multistate executive committee, but the decision for Oklahoma to go it alone came from Oklahoma Attorney General Scott Pruitt. In so doing, he reminds us of the importance of our nation’s founding principles and why we must be watchful regarding the roles of our federal and state governments.

The proper role of our justice system in this country is to carry out its constitutional responsibilities related to the cases and controversies before the courts, and not to actively look for ways to create new law from judicial rulings or massive settlements that have policy implications.

There are many reasons to applaud Attorney General Pruitt’s decision and the results of the separate negotiations.

  • The federal settlement does little to help those who were wronged by unfair practices. The most they will receive, if eligible, is $2,000; it is up to the banks to contact the homeowners; and any payment will take about three years to disperse. The Oklahoma settlement is focused on those homeowners who were wronged, so they can be compensated for their harm. Oklahomans are still eligible for the refinancing and write-down portions of the federal settlement, but Oklahoma created its own mortgage relief application form and will handle the financial distribution in a much faster and more efficient manner.
  • It is true that larger states like New York, California, and Texas will get more money under the federal settlement than the $18.6 million Oklahoma negotiated, but our state will fare much better than states similar in size. This is because the $18.6 million Oklahoma will receive is actual dollars, while a large portion of the money the other states are claiming is soft money that is based on speculation related to bank write-downs and credits.
  • The federal settlement “relief” for those affected comes in the form of the government forcing companies toward loan modifications that reduce people’s mortgages if they are behind. The settlement actually does not help anyone who has struggled and sacrificed to stay current on their mortgage. Rewarding homeowners who have fallen behind may encourage some homeowners to simply go into default in order to qualify for a reduced mortgage.

But the main reason to applaud Oklahoma’s effort is that it represents the kind of courage and commitment needed to keep our Republic, as Benjamin Franklin warned us would be necessary. After the Constitutional Convention, Franklin was asked whether we had formed a republic or a monarchy, and his response was “A republic, if you can keep it.” The distinction was important to the founders because their intent was to establish a system that recognized the inalienable rights of individuals and administered justice in line with fixed principles, the rule of law, and the power remaining where it belonged—with the people.

Of primary concern to Attorney General Pruitt was his belief that the Department of Justice was influencing the discussions in such a way that could set a dangerous precedent. “We had concerns that what started as an effort to correct specific practices harmful to consumers, morphed into an attempt by President Obama to establish an overarching regulatory scheme, which Congress had previously rejected, to fundamentally restructure the mortgage industry in the United States,” Pruitt said.

As power-hungry federal agencies can sometimes do, the Justice Department began to use the process for political gain rather than focusing on the least-intrusive means of accomplishing the task at hand. For example, the settlement proposal incorporated a mechanism known as “principal write-downs,” a policy change President Obama had tried unsuccessfully to push through Congress. A principal write-down involves reducing the book value of an asset if it is overstated compared to current market values, and the federal settlement requires the lenders involved to reduce the amount of principal owed on the mortgages they service. Congress disliked the idea because it could seriously harm home values in some of the hardest-hit areas, but this concept and other political power plays found their way into the federal settlement that Oklahoma refused to join.

In a press release regarding the structure of the Oklahoma agreement and his reasons for not joining the federal settlement with the other states, Attorney General Pruitt said he doesn’t believe the role of the state attorneys general is to make policy changes and restructure the mortgage industry. This is sound constitutional thinking. The role of state attorneys general is to provide legal counsel and representation for state agencies and employees, and in certain cases to represent the interests of consumers, natural resources, and crime victims. So when the settlement expands beyond investigating fraud and unlawful practices and begins to look more like a restructuring of the mortgage industry and government-mandated modifications to loans, someone has to stand up and say enough is enough. Once again, that someone is Oklahoma.

Brian Bush (J.D., University of Oklahoma) is vice president of OCPA.

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