October 26, 2011; Source: Stateline  |  For the past year, all 50 state attorneys general have been joined in an effort to investigate how mortgage servicers have bollixed up foreclosures, but the real target are the big banks, who the AGs accuse of using the servicers “to cheat homeowners and accelerate the already torrid pace of foreclosures around the country.” Many banks have been involved in what the AGs say were illegal practices by the servicers (such as “robosigning”), but the bull’s-eye is really a small number of very big banks that the AGs hope will ante up a settlement of as much as $25 billion. The five particularly interesting banks under investigation are Bank of America, Citigroup, JP Morgan Chase, Wells Fargo, and Ally Financial (formerly GMAC)—though the AGs plan to go much deeper into the smaller banks and servicers too.

It appears that the AGs are close to an agreement with the banks. A “negotiating committee” comprising staff from Colorado, Florida, Illinois, Iowa, North Carolina, Texas, and Washington has been meeting with the five banks, with the subject matter focused on the contents of a settlement agreement. In many other class action–type settlements negotiated by attorneys generals, the funds are sometimes made available to nonprofits to carry out specific settlement functions. In this proposed settlement, the states obviously want a chunk of the money for state budgets, which would purportedly be used for “a variety of housing-related initiatives that states would determine, including foreclosure hotlines and counseling for distressed homeowners.” (Other parts of the fund would go for restitution to homeowners wronged by illegal foreclosures, and for such “soft money” support for homeowners as principal reductions and opportunities for favorable refinancing.) Counseling and hotlines are programs typically carried out by nonprofits through government grants and contracts, but many of these types of services have dwindled in the wake of federal and state budget cutbacks.

Nonprofits should be monitoring this dynamic carefully. There have already been splits within the AGs, with the New York and California AGs complaining about the narrow scope, slow pace, and relatively small potential settlement aimed at by their colleagues. There is always the possibility that the states will grab the “hard money” that would go into their deficit-ridden projects and divert the funds from their foreclosure-related ameliorative purposes. Pay attention, nonprofits!—Rick Cohen