It’s bad enough to see long suffering homeowners take it once again in the chin, thanks to the way the bank regulators prostrate themselves before their supposed charges. It adds insult to injury to see this type of ritualized sellout yet again presented as a boon for consumers.
The latest case study is the $8.5 billion foreclosure fraud settlement announced today. This agreement came out of a consent decrees among 14 servicers, the OCC, and the Fed entered into in April 2011. This was never a good faith effort to change bank behavior; the OCC was using this ruse to try to undermine the (then) 50 state AG-Federal regulator negotiations (which looked like they might be serious because Elizabeth Warren was informally advising the government side).
There were two major elements of the consent decrees, also known as cease & desist orders. One was a list of servicing standards, which were a partial recitation of what they were supposed to be doing already under current law. The second was a Potemkin review of foreclosures. The cover story was that this process was to identify wrongful foreclosures and compensate harmed borrowers. The real purpose was to whitewash servicer behavior.
And I can’t stress enough that the outcome was not only predictable, it was predicted as soon as the consent orders were published: that the OCC had deliberately devised a process that the servicers could exploit to claim that nothing bad had taken place. For instance, Georgetown professor Adam Levitin wrote:
By far the most interesting bit in the draft C&D order is the bit requiring the banks to engage independent foreclosure review consultants to review “certain” foreclosures that took place in 2009-2010. There is no specification as to which foreclosures are to be reviewed or precisely what the standards for review are. But that’s all kind of irrelevant. Who do you think the banks are going to engage to do these reviews? Someone like me? Not a chance. They’re going to find firms that signal loud and clear that if they get the job, they won’t find anything wrong. It’s just recreating the auditor selection problem, but without even the possibility of liability for a crony audit.
Frankly, this sort of regulatory outsourcing is pretty astounding–the OCC has resident examiner teams at the major servicer banks. Shouldn’t they be the ones auditing the internal controls and performance, not a third-party compensated by the bank? (Oh wait, I forgot that the OCC is paid by the banks–it’s budget comes from chartering fees and assessments on the banks is regulates. Indeed, I was struck in some places by the linguistic similarities between the proposed C&D order and the banks’ counterproposal to the AGs. It’s impossible to know who was cribbing from whom, but the similar language is revealing.)
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.
It turns out we were not cynical enough. We recounted in a post last week in gory detail that the information that leaked out as the reviews were underway showed not only that the review process was every bit as corrupt as we expected. It was also, peculiarly, turning out to be (per the banks) very costly. We couldn’t fathom the latter (we discussed how implausible the hours claimed to have been spent per borrower file were). The only explanations we can fathom are 1. that the banks were doing a lot more than OCC file review (as in they were bundling in “file remediation” as in cleanup/document fabrication) and 2. people were being paid to do nothing (we’ve gotten reports from insiders that some high-skill temps were kept “on the beach” at the start of the process).
Fast forward, and what happens? The banks bitch about the costs and use that to persuade the OCC and the Fed to shut the process down (they may also have become concerned that with so many people involved in file reviews, many of them temps and hence with no loyalty to the banks, that if they let the process continue to completion, they would have been exposed to enough leaks to get Congresscritters interested). Plus the banks were going to such lengths to suppress any unfavorable findings that the result, that pretty much no one was hurt, would be so ludicrous as to open the process up to unwanted scrutiny.
The excuse was that the money spend on performing the reviews would be at the expense of payouts to wronged homeowners. Huh? We are not talking about parties with strained budgets. The homeowners were supposed to be recompensed. That has squat to do with the expense of figuring out who was wronged.
Nevertheless, the banks and the Feds started negotiating in secret (homeowner advocates and Congressmen were not appraised), with the settlement total rumored at $10 billion for 14 servicers. It turned out to be $8.5 billion for 10. We get the party line and some commentary from Ben Hallman at Huffington Post:
Under the deal, announced by the Office of the Comptroller of the Currency and the Federal Reserve, the mortgage companies will make $3.3 billion in direct payments to “eligible borrowers” whose foreclosures were handled improperly, and will make $5.2 billion available in other assistance to struggling borrowers, such as loan modifications.
“The OCC and Federal Reserve accepted this agreement because it provides the greatest benefit to consumers subject to unsafe and unsound mortgage servicing and foreclosure practices during the relevant period in a more timely manner than would have occurred under the review process,” the regulators said in a joint statement….
The new settlement Monday replaces a deal struck in April 2011 that established the Independent Foreclosure Review, a program that was supposed supposed to give homeowners an opportunity to have an unbiased third-party review their foreclosure and determine whether they might qualify for a cash payout of up to $125,000. Scrapping a previously agreed-to legal deal, especially one as high-profile and complex as the Independent Foreclosure Review, is highly unusual, and a tacit acknowledgement of the program’s failure.
“[It] has become clear that carrying the process through to its conclusion would divert money away from the impacted homeowners and also needlessly delay the dispensation of compensation to affected borrowers. Our new course of action will get more money to more people more quickly, and it will speed recovery in the nation’s housing markets,” said Comptroller of the Currency Thomas Curry in a statement.
If you think this deal was about helping borrowers, I have a bridge I’d like to sell you. The New York Times reported that servicers were eager to wrap the deal up so they could say in their soon-to-be-published 2012 financial reports that the matter was behind them. The Federal Reserve held up the deal briefly, wanting the banks to pony up an additional $300 million. The sense of urgency on behalf of the banks gave the regulators negotiating leverage. But the Fed inexplicably caved.
Now remember, we don’t know how the money will be divvied up, and the bank record on modifications in the deal struck in February of last year shows that they consistently gone for the cheapest route, which is modifying big ticket mortgages (bigger mortgages gets you to a dollar total with the minimum number of mortgages, and the costs are pretty much the same no matter how large the mortgage is). So the odds are high that mortgage mods will go to a comparatively small number of high income (but overleveraged) borrowers.
As for the part of the funds that goes to people who suffered wrongful foreclosures, how the hell are the servicers gonna do that now that the reviews have been aborted? Divide the funds among those that requested a review? Pro-rate it among them, adjusting for mortgage amount? Or divvy it among everyone they can find who was foreclosed on in 2009 and 2010 that they can locate (note they’ve had trouble finding the addresses of former customers who lost their homes) whether they think they were wronged or not? Gretchen Morgenson went through the math using the somewhat bigger numbers (starting with the rumored $10 billion) over the weekend:
Some back-of-the-envelope arithmetic on this deal is your first clue that it is another gift to the banks. It’s not clear which borrowers will receive what money, but divvying up $3.75 billion among millions of people doesn’t amount to much per person. If, say, half of the 4.4 million borrowers were subject to foreclosure abuses, they would each receive less than $2,000, on average. If 10 percent of the 4.4 million were harmed, each would get roughly $8,500.
This is a far cry from the possible penalties outlined last year by the federal regulators requiring these reviews. For instance, regulators said that if a bank had foreclosed while a borrower was making payments under a loan modification, it might have to pay $15,000 and rescind the foreclosure. And if it couldn’t be rescinded because the house had been sold, the bank could have had to pay the borrower $125,000 and any accrued equity.
Let’s look at the the paltry less than $2,000 to perhaps $8,500 compared to the harm some borrowers have suffered. Consider this example from a report posted here from one of the file reviewers:
For example, in one case I reviewed the borrower paid approximately 25K to reinstate his mortgage. Then he began to make his mortgage payments as agreed. Each time he made a payment the payment was sent back stating he had to be current for the bank to accept a payment. He made three payments and each time the response was the same. Each time he wrote and called stating he had sent in the $25K to reinstate the loan and had the canceled check to prove it. After several months the bank realized that they had put the 25K in the wrong account. At that time that notified him that they were crediting his account, but because of the delay in receiving the reinstatement funds into the proper account he owed them more interest on the monies, late fees for the payments that had been returned and not credited and he was again in default for failing to continue making his payment. The bank foreclosed when he refused to pay additional interest and late fees for the banks error. I was told that I shouldn’t show that as harm because he did quit making his payments. I refused to do that.
So the bank basically scammed the borrower out of an additional $25,000 before foreclosing as originally planned. Under the old formula, he’d be owed $15,000 plus his house back or $125,000 plus accrued equity. Instead, he’ll get an insultingly small amount. Oh, and he’ll almost certainly also be asked to release the bank from any liability as a condition of getting the dough.
This is what passes for justice in America: the authorities are all too happy to paper over what any sensible person would consider to be criminal conduct.