The Financial Times discusses a curious development, namely, that the New York Fed is making an inquiry into allegations that Goldman’s mortgage servicing unit, Litton Loan Services, failed to comply with HAMP guidelines. Readers may recall that HAMP Is the half-baked Do Something About the Mortgage Crisis program designed to give homeowners “permanent” year payment reduction mods, which is a kick the can down the road strategy.
In HAMP, servicers routinely asked borrowers to send the same documentation multiple times and assured borrowers they were likely to get a mod, only to refuse them. The worst is that many homeowners wound up worse off since they were not told that when the reduced payment trial mod ended, they would be asked to fork over the foregone portion of the payments plus late fees, pronto. Servicers often encouraged borrowers to use the savings to pay down other debt, thus assuring the homeowner would be unable to catch up and would lose their home.
The reason the Fed inquiry is curious is not that there were abuses; they were rampant. But HAMP was a voluntary program, and to encourage banks to participate, my understanding is there were no penalties for failure to adhere to its requirements, save Treasury could claw back incentive payments. Last August, when there had been a good deal of unfavorable press about HAMP, Treasury officials acknowledged that banks had gamed the program, but then maintained they had no power to do anything.
In fact, there are ways to pursue bank misconduct under HAMP, but it falls under more conventional notions of consumer protection rather than HAMP program guidelines per se. For instance, when the banks provided statements to consumers about how HAMP worked and then failed to adhere to them, that can probably be characterized as a consumer fraud.
While it is good to see the normally somnambulant Fed rouse itself, this inquiry is….weird. Why is the Fed in charge, as opposed to Treasury or the OCC? Why doe the Fed suddenly think it has a basis for action on HAMP when the Treasury, which had been under pressure to look serious, said it was hamstrung?
The most curious bit is that the Fed seems to have been prompted to act by the Financial Times letting the central bank know it had found some dirt. While this response is likely to be regulatory theater, the Fed seemed to be a tad more responsive to the FT than to most American press. Maybe we should encourage whistleblowers to send their damning information to the pink paper.
The litany of “mistakes” made by Litton sounds typical for HAMP. However, the charge made against Litton is that the violations were deliberate. Litton is perceived in the industry to be better managed than most servicers, so it may be harder to pass HAMP program violations off as employee errors.
From the Financial Times:
The Federal Reserve Bank of New York is investigating allegations that the mortgage servicing arm of Goldman Sachs failed to conduct appropriate reviews before denying borrowers a chance to lower their payments through a government loan modification programme.
A person familiar with the Goldman unit concerned, Litton Loan of Houston, Texas, said loans were denied without the proper review under a “denial sweep” strategy devised to clear a backlog of applications.
The allegations were brought to the Fed’s attention by the Financial Times, which obtained a letter written by an anonymous Litton employee…
The person familiar with Litton said he had examined loans that met the criteria for a government modification, but were denied it, sometimes because Litton employees made mistakes in how they calculated the borrower’s income. Other loans were denied the modification on the grounds that documents were missing, even though Litton’s computer system reflected receipt of the necessary paperwork…
Lawyers and consumer watchdogs said they were seeing a growing number of complaints against servicers by borrowers who allege they were improperly denied a modification.
The Better Business Bureau in Houston has received 17 such complaints filed against Litton, which is more than for any other servicer…
The letter received by the Fed from the person familiar with Litton said that at the same time that the modifications under Hamp were being denied, Goldman was increasing non-government modifications for loans it retained on its books.