September 5, 2011

IT’S BEEN months since the nation learned that some of America’s biggest banks engaged in dubious practices regarding loan modifications and foreclosures, including the now notorious “robo-signing” of what were supposed to be individually vetted documents. Yet in all that time, no one has produced evidence that large numbers of homeowners who were current on their mortgages were cast out of their homes because of bank misconduct. This looks like a case of spectacular wrongdoing with hardly any victims.

How do you handle a situation like that? For the 50 state attorneys general, the answer was: Use the specter of legal liability, however vague, to extract concessions from the banks. The banks, meanwhile, would prefer to make the whole embarrassing mess go away if they can do so for less than it would cost to litigate the principle of “no harm, no foul.”

And so the attorneys general — backed by the Obama administration — have been working on a settlement that would grant the banks legal immunity in return for reforms in their mortgage business and a large amount of cash to bail out underwater homeowners. The number under discussion reportedly is $20 billion from 14 large banks.

But the deal may fall apart because of a squabble among the attorneys general over how much legal immunity to give the banks, which say they need guaranteed legal “peace.” New York attorney general Eric Schneiderman has been warning that he won’t go along with any deal that keeps him from pursuing the banks for alleged securities fraud related to rotten mortgages they packaged and sold to investors. The majority of the other attorneys general, led by Tom Miller of Iowa, have kicked Mr. Schneiderman out of the negotiations, accusing him of making excessive demands. Mr. Schneiderman protests that the banks are to blame, for trying to use the robo-signing case to get immunity they could use on the securities front. Mr. Miller and his colleagues respond that they have no intention of letting the banks off that particular hook.

And so it goes. We’re tempted to declare a pox on everyone’s house — or at least say that the banks are getting what they deserve for being sloppy, and that the attorneys general are getting what they deserve for exploiting an overblown scandal to shake down the banks.

After all, the banks will have to come up with that $20 billion somehow — perhaps through reduced lending and higher fees. That wouldn’t be a problem if the money were going to compensate victims. But it won’t, because there don’t seem to be many victims. In fact, the people who end up getting principal reductions and other relief through this settlement will be a completely different group from those who got foreclosed on during the age of robo-signing.

Still, there are benefits to a potential deal. One is reform of foreclosure processes. This is not trivial or cheap; J.P. Morgan Chase, for example, has written down the value of its mortgage servicing by $1 billion to reflect the expense.

The second is restoring stability to the banking system and housing market. Ironically, housing can’t get back on its feet unless lenders can proceed normally with unavoidable foreclosures, but that hasn’t been possible because of the legal struggle over past misconduct. Mr. Schneiderman’s objections notwithstanding, it’s time to remove this legal cloud over the banks, and the sooner the better.