Kamala Harris Has Key Role in Mortgage Settlement

By Andrew S. Ross, San Francisco Chronicle

12 February 12

here were two people without whom the $26 billion mortgage settlement would not have been done. One is the attorney general of California. The other is the president of Wells Fargo's home mortgage division.

Four months ago, Attorney General Kamala Harris walked away from a proposed settlement that the banks, the Obama administration and other state attorneys general thought was in the bag, for two reasons: The money wasn't enough, and immunizing the banks from further legal liability wasn't acceptable.

Because California, the most populous state in the nation, was also far and away the worst hit by the mortgage meltdown, Harris' signature, on terms closer to what she demanded, was essential for any deal to stand up.

"It was a tough, 13-month-long strategy," said a source in Harris' office. "In the last 10 days, it's been 24/7, round-the-clock negotiations."

California's $18 billion share of a pot that could reach $45 billion, depending on negotiations with other banks, is considerably more than the $4 billion originally on the table, especially given that a central issue of the settlement , the robo-signing of foreclosure affidavits, doesn't apply to California because such documents are not used in foreclosure proceedings here. (The final amount of the settlement will be arrived at by a complicated formula.)

And then there's the law. Under a separate "California commitment" in the settlement, banks failing to enact agreed-upon principal reductions face heavy fines in state court. Other "enforceable guarantees" call on the five banks involved in the settlement - Wells Fargo, Bank of America, JPMorgan Chase, Citigroup and Ally Financial - to focus early in the agreement's three-year period on mortgage relief for the state's hardest-hit areas, like Stockton.

That, said Harris in a news conference on Thursday, is to avoid a repetition of Countrywide Financial's $8.7 billion national settlement. While half the money was supposed to go toward principal reductions for California homeowners, many of them never saw a dime. "Countrywide got relief based on a promise. We made sure we won't be in the same situation," she said.

Many of the provisions are similar to ones in the national settlement. Harris and state attorneys general in New York and elsewhere succeeded in limiting the banks' traditional immunity from further legal action in such cases.

Exclusions from immunity include potential criminal cases, private and class-action suits, and the right of states to continue investigating mortgage and other financial fraud.

California can also continue pursuing cases under the state's False Claims Act, under which pension funds like the California Public Employees' Retirement System can sue for treble damages if mortgage-backed securities they have invested in were falsely packaged and dropped in value.

"We didn't get everything we wanted," said the source in Harris' office. "But we can continue our investigations and continue to use the False Claims Act. This is a big deal for us."

Finding common ground: On the other side of the table from Harris' staff sat Mike Heid, president of Wells Fargo Home Mortgage.

Heid, a 26-year mortgage banking veteran, became the point man for the other bankers in the room, said an industry source close to the negotiations. "He took on the role of the spokesperson for the industry."

As one can imagine, there was a fair degree of Sturm und Drang on the bankers' side of the room, but Heid, who was in the negotiations from the beginning, "is known to have a calming influence, to remove the emotions and find common ground," said the source. "One of his greatest strengths is to focus on the business aspects of the deal."

He managed to find common ground on a particularly noxious issue for the banks, including Wells Fargo: loan reductions. That's partly because Wells has had some experience in the area, having written down $4.1 billion in principal forgiveness for 128,000 homeowners since January 2009, according to the San Francisco bank.

Heid also was involved in the equally fraught issue of legal immunity, which ended up freeing the banks from state civil suits relating to issues in the settlement, such as loan origination and certain foreclosure practices.

A government negotiator was quoted elsewhere as saying Heid was a "real honest broker," without whom the deal would "never have gotten done."

Here's the $5.3 billion Heid got his employer to commit to:

- $3.4 billion in principal reduction for "qualified (Wells) borrowers with financial hardship."

- A $900 million refinancing program for little or no (i.e. underwater) equity in their homes.

- $1 billion for state and federal coffers to help foreclosed homeowners.

Wells and the other banks already have set aside the money they calculated it would take to cover the settlement. While taking some hits, Wells executives can be at least cautiously optimistic that the affair is behind them.

The "agreement represents a very important step toward restoring confidence in mortgage servicing and stability in the housing market," Heid said in a statement.

That, of course, remains to be seen, as will the banks' promptness in completing its part of the bargain. What it does to restore the confidence of the millions of troubled homeowners - 2.2 million underwater in California, which accounts for 11 percent of foreclosures nationwide - also remains to be seen.