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Quelle Surprise! Servicer Consent Orders Producing Expected Whitewash

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We were far from alone in criticizing the servicer consent orders issued earlier this year. They were yet another whitewash masquerading as regulatory action, orchestrated by the banking industry toady, the OCC. As we wrote:

The current end run is apparently led by the Ministry of Bank Boosterism more generally known as the OCC and comes via consent decrees that were issued Wednesday (we’ve made that inference given the fact that John Walsh of the OCC presented the findings of the so-called Foreclosure Task Force, an 8 week son-of-stress-test exercise designed to give the banks a pretty clean bill of health, as well as media reports that the OCC was not participating in the joint state-Federal settlement effort).

This initiative is regulatory theater, a new variant of the ongoing coddle the banks strategy. It has become a bit more difficult for the officialdom to finesse that, given the extent and visibility of bank abuses. Accordingly, the final consent decrees are more sternly worded and more detailed than the drafts we saw last week, and also talk about imposing fines. But reading them reveals that there is much less here than meets the eye.

It is critical to understand that servicers are the perps in mortgage abuses. The list of malfeasance is long. This is only partial:

Rampant abuses of the HAMP program

Repeated “dog ate my homework” loss of borrower documents, often resulting in eligible homeowners being denied a mod

Widespread misrepresentation of the program’s terms, including consumers being told to default in order to qualify and failure to inform consumers that those who got trial mods but failed to get a permanent mod would be asked to make up the trial mod discounts plus late fees immediately

Abusive “dual track” strategies, in which borrowers were evaluated for a mod while the foreclosure process continued to move forward. Borrowers were almost universally told to ignore court documents related to their foreclosure when they had full legal force

Widespread forgeries and document fabrication

Wrongful foreclosures

Servicer driven foreclosures (as in the foreclosure did not result from borrower failure to pay but from pyramiding and junk fees)

Force placed insurance

So there is a great deal of bad behavior that needs to be addressed and corrected, but the Obama Administration seems determined to do everything it can to pretend nothing is amiss.

Sheila Bair, departing head of the FDIC, pointed out the obvious flaw in the process mandated in the consent orders. Reviews of servicer compliance would NOT be conducted by regulators, but by consultants hired by the banks! Per the Wall Street Journal:

Under consent orders that 14 banks and thrifts reached with regulators in March, financial institutions are required to hire a consultant to review their foreclosures over the past two years to identify any borrowers who were harmed by foreclosure-processing problems.

Ms. Bair, however, questioned whether those reviews will truly be independent. Such consultants “may have other business with [banks] or future business they would like to do with them,” Ms. Bair said. “This is a huge issue.”

Georgetown law professor and securitization expert Adam Levitin was more pointed:

The C&D order basically tells banks to set up lots of internal procedures and controls within the next few months and then to tell their regulators what they have done…. The result, I suspect, is that in a few months the bank regulators will declare that everything is fine…

So here’s what’s going down. The bank regulators are going to provide cover for the banks by pretending to discipline them very hard, but not really doing anything. The public will see a stern C&D order, but there won’t be any action beyond that. It’s as if the regulators are saying so all the neighbors can hear, “Banky, you’ve been a bad boy! Come inside the house right now because I’m going to give you a spanking!” And then once the door to the house closes, the instead of a spanking, there’s a snuggle. But the neighbors are none the wiser. The result will be to make it look like the real cops (the AGs and CFPB) are engaged in an overzealous vendetta if they pursue further action.

So it should be no surprise to read Francine McKenna telling us that “Banks Hire Friendlies for ‘Independent’ Foreclosure Reviews.” This was a feature, not a bug:

Allowing the banks to choose their own judge, jury, and jailer presents almost untenable conflicts of interest. All of the consulting firms that were initially being considered to do the work serve the banks already. The banks, and their mortgage servicing operations, are existing or prospective clients.

PricewaterhouseCoopers, for example, is the auditor for Bank of America and JP Morgan Chase, two of the fourteen servicers under scrutiny. PwC’s retired Chairman, Sam DiPiazza, is an executive of, and on the board of, Citigroup, another bank with a servicer to be reviewed. Promontory Financial Group and Treliant Risk Advisors are professional services firms that serve the mortgage servicers directly on other consulting assignments.

Complicating matters, as a result of so many mergers and acquisitions, global banks are run by layers upon layers of automated systems – like SAP and Oracle – and legacy applications created from Cobol and other, older programming languages. All this software and hardware is held together by band aids, string, duct tape, manual processes, lots of unsecure spreadsheets, and crossed fingers.

The consulting firms hired under the consent order were also expected to address the bigger and more complicated management information systems issues. But it’s tough to find qualified firms that aren’t already working with the banks on these significant challenges and thus aren’t conflicted…

The banks have contracted with and will pay the vendors directly. Without bank-by-bank disclosure of the reports and the vendors that wrote them, we’ll never know if the process to right these wrongs was truly independent and objective.

McKenna is right: making the reports public would be a check on whether this effort was serious. And the publication of defects in servicing is not going to threaten the soundness of a bank or lead to bank runs. There is no justification for secrecy, save the reason we understand all too well, that it would expose the fact that this exercise was never intended to be serious.

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7 comments

    1. Yves Smith Post author

      Please see Barry Ritholtz’s comments policy, item 5C, which I generally hew to as web standard:

      http://bigpicture.typepad.com/comments/the_big_picture_disclosur.html

      I know you said “please” but the general principle still applies.

      And I do not do book reviews. I only read a very few of the new books coming out, since doing this blog takes too much time. I know too many authors personally and if I were to review any books, I’d get requests from friends and good contacts that I’d have to turn down and they’d be miffed.

      1. Thorstein

        I apologize. I regretted my OT post immediately after hitting send. Please remove it & this comment after reading.

        Btw, I seek not your review of Morgenson’s book but your response to Madrick & Portnoy’s essay, in which they assert:

        “The increased risk-taking of the GSEs during the 1990s . . . had no bearing on the financial crisis of 2007 and 2008″ and “it was Wall Street, not the GSEs, that fundamentally caused the 2007–2008 crisis”

        which does not jive with my reading of The Levin Report (pp. 136-42) account of the GSE’s relationship with WaMu, to wit: “Twice during {the period from 2004 to 2008}, WaMu successfully played one GSE off the other to sell more high risk Option ARM loans under better terms to Freddie Mac” (Levin Report, p. 142).

        http://levin.senate.gov/imo/media/doc/supporting/2011/PSI_WallStreetCrisis_041311.pdf

        At any rate I’m dying to read your take on Madrick & Portnoy’s essay.

  1. Mark P.

    Eh. It’s not just the servicers or the White House.

    “Freddie and Fannie Reject Debt Relief”

    http://www.nytimes.com/2011/10/06/business/opposition-from-freddie-and-fannie-stalls-debt-reduction.html

    ‘Home values have fallen so much in Arizona that almost half the people with mortgages there owe more than their homes are worth…(Nevertheless)only three homeowners have been approved for debt reduction since the program began in September 2010… the two largest mortgage guarantors, Fannie Mae and Freddie Mac, will not participate — in Arizona or elsewhere. No loans are eligible for the state’s program if they were bought and held or securitized by the two companies, which are now under government control and guarantee more than 70 percent of the country’s home loans…

    ‘The companies’ policy against… principal reduction, has blocked widespread use of … an indispensable tool for fixing the housing problem. The state attorneys general have been insisting that debt forgiveness be a part of the multibillion-dollar settlement they are negotiating with big banks over faulty mortgage practices.

    ‘Smaller investors and companies that service home loans have stepped up debt forgiveness as well… Not so Edward J. DeMarco, who as acting director of the Federal Housing Finance Agency oversees Fannie and Freddie…

    ‘White House officials say that although taxpayers essentially own Fannie and Freddie, the administration lacks authority to require Mr. DeMarco to comply with its policies, which encourage principal reduction through a handful of programs. The Federal Housing Administration and the Veterans Administration do not allow principal reduction on their loans either. …’

    More via the link.

    1. Mark P.

      I mean, what are they thinking?

      Sans real estate credit ponzi, home prices must inevitably return to a reasonable relationship to US citizens’ actual incomes — the incomes of those who still have jobs, anyway. This has historically meant that a property costs about three times a buyer’s annual income.

      More than three years into this bust, the denial of this simple fact by the likes of DeMarco, Wall Street and Washington — if they’re rationalizing this at all — is presumably based on hopes that, if this process is stalled and extended over time, their institutions will sustain less damage thanks to the Fed’s dollar devaluation and to a perhaps hypothetical reluctance that enough American homeowners will have to walking away, taking a credit hit or whatever it is that TPTB imagine will keep those homeowners from doing the rational thing. Which is defaulting.

      Perhaps DeMarco etc. at Freddie and Fannie also figure that while the GSEs could take the hit, principle reductions would create ‘moral hazard’ across all US homeowners. Thence, this would be catastrophic for the whole system — and for the balance sheets of the banks, which unlike the GSEs, cannot take the hit.

      Are figures like DeMarco and the administration seeking of what in their own words they’d call the ‘soft landing’? Is that their rationale?

      Because if it is, it’s not working.

  2. Charles Reed

    I have had a loan review appeal at the OCC since Jan, and in Apr a confession by lender of the criminal action but for some reason I been put off for 6 months, while the criminal has the flat screen TV in his living room that he stole from me, yet I have not received my TV or restitution for my TV, the kicked in door and the invasion.

    I find it hard reading ever other day another aspect of this crime being exposed, yet the White House (that does not receive the Washington Post or New York times)like yesterday, acts like he has no say so in who the US Attorney General prosecute when he appoint the dude for the job.

    Obama’s “that my story and I am sticking to it” does not pass the smell test. Obama is now wanting to campaign against the rich using the Buffet rule, when Buffett picture is in the dictionary next to MAJOR bank shareholder of the same freaking bank committing the crimes, and just within the last month he doubles down with buying some Bank of America, who is the lead bank in this mortgage scandal and is just a photo finish in front of Well Fargo as lead crook! Give me a break with I pay less than my secretary in taxes when it was Buffett’s teams of accountant that are paid to find the loopholes that allows the clown to pay less than the cheap billionaire pays his people!

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