naked capitalism

We’ve heard numerous bank executives swear piously before Congressional hearings that those “paperwork problems” that led major servicers to halt or slow foreclosures on a widespread basis last year were “mistakes”. That was already a really big lies, since “mistake” means the practice was not deliberate and was presumably isolated, when in fact robosigning was a widespread, institutionalized practice.

14 major servicers then swore in consent orders earlier this year that they’d stop doing all that bad stuff. But with compliance weak (the banks get to hire the overseers!), they appear to have decided they don’t need to change their ways all that much. Indeed, the record of consent orders is underwhelming; for instance, both Nevada and Arizona are suing Countrywide for violations of past agreements.

Two stories were published yesterday, one a long form Reuters investigation (hat tip April Charney), the other a shorter report by AP (hat tip Lisa Epstein and Daniel Pennell). First from Reuters:

Reuters has found that some of the biggest U.S. banks and other “loan servicers” continue to file questionable foreclosure documents with courts and county clerks. They are using tactics that late last year triggered an outcry, multiple investigations and temporary moratoriums on foreclosures.

In recent months, servicers have filed thousands of documents that appear to have been fabricated or improperly altered, or have sworn to false facts.

Reuters also identified at least six “robosigners,” individuals who in recent months have each signed thousands of mortgage assignments — legal documents which pinpoint ownership of a property. These same individuals have been identified — in depositions, court testimony or court rulings — as previously having signed vast numbers of foreclosure documents that they never read or checked.

So…the banks have perjured themselves, made commitment to regulators that they are brazenly violating. The Reuters investigation determined that at least 5 of the 14 servicers that signed consent decrees in April are not complying with their requirements: OneWest, Bank of America, HSBC, Bank USA, Wells Fargo and GMAC Mortgage. Note that three of them (Bank of America, Wells, and GMAC, now Ally) are among the five biggest servicers, so the impact is greater than the number of derelicts suggests. And one is the annoyingly pious Wells, which keeps maintaining, contrary to all evidence, that it is better than the other servicers. In addition, another six servicers that did not sign the consent orders were also found by the Reuters exam to have engaged in abusive practices.

The AP report found that servicers were continuing to generate documents signed by well-known robosigners, including the notorious Linda Greene. This seems to be asking to be caught out.

And this isn’t just robosigning; notice that the Reuters article mentions document fabrication. The prevalence of continuing inability (or unwillingness) to comply also calls one of the provisions of the so-called Bank of America mortgage settlement into question (the one in which the Charlotte bank hopes to buy a big “get out of liability” card for a mere $8.5 billion). One of the key provisions is to move delinquent borrowers over to subservicers. Given the continuing level of misconduct in the servicing industry, it remains an open question as to whether BofA could find enough servicing capacity in clean operators to handle its volume (of course, I am foolishly assuming that the purpose of this exercise is to improve performance, as opposed to merely con investors into believing that Something Has Been Done).

Remarkably, the head of the industry lobbying group admits this is happening and offers a weak defense:

One of the industry ’s top representatives admits that the federal settlements haven’t put a stop to questionable practices.

Some loan servicers “continue to cut corners,” said David Stevens, president of the Mortgage Bankers Association. Nearly all borrowers facing foreclosure are delinquent, he said, but “the real question is whether the servicer complied with all legal requirements.” The loss of a home is “the most critical time in a family’s life,” and if foreclosure paperwork is faulty homeowners should contest it. “Families should be using every opportunity they can to protect their rights.”

This commentary is an interesting shift in stance. The MBA chief still tries to justify the abuse of legal procedures and contractual requirements as “cutting corners” against people who are really undeserving (they were delinquent anyhow, right?). The problem, which does not get the press it deserves, is that many foreclosures are servicer driven. One or two late payments (and they may not even have been late; servicers have been found to hold checks to make them late or simply be dilatory about processing payments) can quickly compound into a foreclosure due to impermissible but nevertheless common misapplication of payments and junk fees. Borrower attorneys as of last year estimated that 50% to 70% of the parties that fought foreclosures were victims of servicer fee abuses (the problem is it is very costly to contest foreclosures on that basis; it’s generally easier to go after standing). Yet for the MBA to concede that borrowers should fight foreclosures if the mortgage transfers were botched is a major change in posture.

The Reuters report begs an additional question: why has no Federal regulator done the sort of review the journalists undertook? As they describe it:

Reuters reviewed records of individual county clerk offices in five states -– Florida, Massachusetts, New York, and North and South Carolina -– with searchable online databases. Reuters also examined hundreds of documents from court case files, some obtained online and others provided by attorneys.

The searches found more than 1,000mortgage assignments that for multiple reasons appear questionable: promissory notes missing required endorsements or bearing faulty ones; and “complaints” (the legal documents that launch foreclosure suits) that appear to contain multiple incorrect facts.

By contrast, 11 Federal agencies, which have vastly greater access to bank records, were satisfied to look at a mere 2800 loan files, only roughy 100 of which were foreclosures. Predictably the review found pretty much no foreclosures to be unwarranted. This wasn’t merely a dereliction of duty; it was a cover-up.

The more serious point here is the banks actually probably do want to clean up the documents. So why haven’t they done so? Clearly the costs for some, potentially most, cases are too high relative what they deem reasonable to pay. Tom Adams has estimated that the additional costs per foreclosure are probably in the $20,000 to $40,000 range. While those numbers may seem incredible, they make the banks’ failure to comply make sense. While those charges in theory should come from the investors (!) the banks may either be having trouble procedurally making the changes (as in they may need to find completely new attorneys, a major undertaking) or may worry about wakening the heretofore sleeping giant of investors, since if they chose to go after chain of title issues, they could blow up the entire mortgage industrial complex.

But why should we expect anything different? The regulators are clearing willing at most to inconvenience the banks at the margin. Given how deep seated mortgage problems are, that means they will try to do anything but deal with the problem squarely for as long as they possibly can.