Gretchen Morgenson has a good piece up today which again proves that no matter how bad you think the mortgage settlement is, it’s worse.
Readers may recall that one of the dubious features of the settlement was that banks could accumulate credit for activities other than mortgage modifications of loans they owned, which meant that anything other than the actual hard dollars paid in the settlement, net of fines the officialdom chose to forgive, was the only believable number, since the rest could and likely would be gamed in various ways. The cash portion of the settlement was just shy of $6 billion, with fines owed to the Treasury and Fed clocking in at over $1 billion, making the only sure costs inflicted on the five biggest servicers for years of abuses of borrowers and making a mess of title an average of under $1 billion each.
One of the ways banks can earn credits toward the remainder of the balance is by extinguishing first and second liens. But the banks look to be taking debts that were uncollectable, from a legal perspective, and claiming credit nevertheless. The most egregious version is the one fingered by Morgenson, that of debts that were already erased in bankruptcy. Morgenson has unearthed multiple instances where the banks have sent out cheery letters saying they are wiping out consumers’ debts, when those debts in fact are long gone. And to add injury to insult, these servicers are also reporting these phony extinguishments of debt to the IRS as if they were actual debt forgiveness, so the consumers will have an uphill battle proving that the banks have done them a dirty by misreporting for fun and profit.
When Morgenson gave two servicers who had issued these letters the opportunity to explain themselves, Chase and Bank of America tried claiming that the banks still had liens against the properties in question, which was in essence contending the letters were valid, but written imprecisely. However, in the Bank of America case, two cases Morgenson discussed, the lien had in fact been discharged. Note that you can’t extinguish liens in a Chapter 7 bankruptcy, but you can in many jurisdictions in a Chapter 13. The response by the bank to Morgenson strongly suggests that BofA is treating all bankruptcies as the same when they most assuredly aren’t, and that may well be true of other servicers. And even if BofA is the only miscreant, it is required to provide far and away the largest amount of relief. Oh, and on top of that, the update provided by monitor Joseph Smith, meant to put a PR happy face on progress to date, revealed that through June, the bank was behind on meeting some targets.
What is troubling but predictable are the official responses, first that of Bank of America in claiming that there was no fundamental problem when there is, and then of Smith’s empty reassurance. Per Morgenson:
So I asked Joseph A. Smith Jr., a former banking regulator in North Carolina who is monitoring the settlement, how he planned to vet the banks’ claims of relief provided and credit earned. For example, how will he ensure that institutions do not receive credit for releasing liens that have been eliminated?
“We will review compliance with this requirement as we will with all of the consumer relief requirements,” Mr. Smith said, “through review of the corporate records relating to such transactions.”
I don’t know if readers appreciate why this approach assures this sort of error at best, chicanery at worst, won’t be unearthed. We’ve railed against past enforcement theater, starting with the whitewash an eight week multi-agency foreclosure review in November 2010. One of their common characteristics is they look only at bank records. There is no effort made to validate externally whether those records are correct. Yet as anyone who has had even remote contact with this topic knows full well, one of the underlying issues is that the servicer records are dreadful. And Smith has just admitted that his lame enforcement effort will not go to the trouble of even sampling borrowers who’ve gotten discharge related to past bankruptcies to see if the bank’s records comport with what is on file with the courts.
But as we’ve said in the past, Smith is a bank regulator from North Carolina, which is an oxymoron given how friendly that state is to financial services firms. So the settlement is just playing out according to script.