Coakley Lawsuit Could Set Back Housing Recovery

Coakley Lawsuit Could Set Back Housing Recovery

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Martha Coakley is staging a one-woman crusade to squelch the housing recovery. Who’s Martha Coakley, you ask? She is the Massachusetts Attorney General who famously allowed Republican Scott Brown to abscond with Ted Kennedy’s senate seat in one of the most shocking election upsets of recent times. Coakley single-handedly brought the Tea Party to the nation’s attention in 2010 as that energized group helped turn Bay State politics on its head. A pointed Saturday Night Live skit at the time featured an impersonator of President Obama describing her as “the single most incompetent candidate ever to seek public office in this nation’s history.”

That was then. Today, in a new pitch for notoriety, Coakley is making headlines by gutting a nationwide effort to resolve the mortgage-foreclosure crisis. Specifically, she has sued the country’s top five mortgage lenders – JPMorgan Chase, Bank of America, Wells Fargo, GMAC Mortgage (now Ally) and Citigroup – accusing them of illegally foreclosing on properties and deceiving borrowers about loan modifications. She also names Mortgage Electronic Registration Systems (MERS) in the suit, claiming the computerized data bank “corrupted the public land recording system by not registering legal and proper transfers of ownership of property.” She says illegal foreclosures involving faulty titles could impact “hundreds, if not thousands, of properties” in the state.

Coakley’s suit torpedoes the negotiations underway between the banking industry, the Obama administration and all fifty states, headed by Iowa Attorney General Tom Miller. Though New York and California had stepped back from the talks, responding to concerns that the banks would be too let off too easily, Miller has steadily pushed the negotiations forward.

That was not adequate for Coakley. Known as a grandstander in her prior stint as a district attorney who championed the infamous (and ultimately overturned) Amirault sexual assault case, Coakley could bring chaos to the housing market. With banks potentially liable for vast sums of money, they may well be forced to fight Coakley’s suit, which could take years to resolve. In the process, the housing market will be put on hold. It is hard to conceive of anything more damaging to our fragile economic recovery.

One of the first responses to the lawsuit was from Ally Financial, which announced that it would stop buying home loans in Massachusetts. Saying that the suit has “led mortgage lending in Massachusetts to be no longer viable,” the fifth-largest mortgage company in the country shut down its purchase of loans from local originators. Ironically, taxpayers own 74 percent of Ally; the company stated that “it has an obligation to manage risks and deploy capital in an appropriate manner and in a way that protects the investment of the U.S. taxpayer.”

This, at a time when the housing industry may indeed be finding a bottom. Housing starts in October rose 16.5 percent from the year-earlier tally. October building permits, which allow a glimpse of the future, were nearly 18 percent ahead of a year ago while pending home sales rose 10 percent month-to-month in October and were 9 percent above the 2010 level.

To put this in context, starts of privately owned housing units (seasonally adjusted) totaled 628,000 in October, compared to the peak monthly total of 2.3 million in January 2006. Starts have been below 700,000 since November 2008. As a consequence, the stock of unsold houses has slowly declined. At the end of October there were 3.33 million  homes for sale, down from a peak of 4.58 million in July 2008. Analytics source CoreLogic puts combined shadow and visible inventory at 5.4 million units in July (latest available), down from 6.1 million in July 2010. There is no doubt that progress is being made. According to Lender Processing Services, there are currently 2.2 million homes in the foreclosure pipeline today.

The good news is that the number of borrowers behind on their loans is dropping. The bad news is that because of the robo-signing scandal and related lawsuits, processing the bad loans is taking too long, leaving homeowners and lenders in limbo. Those legal issues are also holding back lending for new sales, according to a recent update from NAR Chief Economist Lawrence Yun. Creating uncertainty about the legality of titles generated from MERS will only make matters worse.

Richard Bove, a long-time bank analyst with Rochdale Securities, says Coakley’s lawsuit could “throw us back to where we were two or three years ago.” Bove says the attorney general’s position jeopardizes all sales of homes in foreclosure in the state of Massachusetts. “In other words,” he says, “people who have bought homes, have been making their payments and paying their taxes could find themselves turned out by former owners who can now claim that the foreclosure was illegal.”

A source close to the fifty-state negotiations says that they have made considerable progress, with the banks agreeing to not only a hefty cash settlement, but also to (once unthinkable) principal reductions, numerous changes in how mortgages are serviced, and even an independent overseer – an unusual arrangement since the banks are state-chartered. Those pushing for an agreement think a settlement is better than stretching out litigation for several more years.

What happens next? Bove imagines that if a few Massachusetts homeowners are put out on the sidewalk because of title issues, Coakley will have to drop her suit. Failing that, Massachusetts could become the real estate market that is left behind. The Attorney General has struck back at Ally, whose abandonment of her state is clearly an embarrassment, asking legislators to investigate the firm’s “alleged improper foreclosure practices”.

Coakley says she wants “real and enforceable relief for homeowners.” She should put her own ambitions on hold and get on board the 50-state settlement.