After too many years to count of regulatory failure and limp-wristed reforms, it’s hard to be surprised. Nevertheless, I hope to convince you that a yet another mortgage settlement, leaked on New Year’s Eve when hopefully no one would notice, achieves the difficult task of reaching a new level of dereliction of duty.
This latest bank gimmie comes in the retrading of consent orders that were entered into in April 2011. Readers who followed the mortgage beat closely may recall that the OCC broke with other banking regulators, the DoJ, and HUD in entering into its own consent decrees in the hope of undermining the mortgage negotiations. But this OCC settlement (which the Fed joined) was in some ways broader that the one entered into by 49 state attorneys general and various Federal agencies in early 2012, in that it involved the 14 major servicers, while the later state/Federal deal was limited to the biggest five. The banks piously promised to shape up, and were required to conduct reviews of foreclosures performed in a specified time frame if consumers asked for them, plus conduct a review of a sample of other foreclosures.
Now a number of observers, including yours truly, called out these settlements as patently ridiculous and rife for abuse Why? Rather than act like a proper regulator, and oversee the review process itself, the OCC outsourced it to consultants hired by the banks! Yes, the OCC would get to review them for conflicts of interest, but who are we kidding? And it was even worse than you can imagine, since the OCC accepted that conflicts would be the norm. As we wrote in July 2011:
If you’ve been following this sorry saga, you may recall that in April of this year, major servicers entered into servicing consent orders with the OCC and Fed. They were clearly all for show. Rather than observer the normal procedure, and have a regulator conduct the exams, the consent orders instead provide for the banks to hire soi-disant independent parties to conduct the reviews. As we and more recently Francine McKenna pointed out, there is pretty much no one with a brand name that is worth renting that doesn’t either have a relationship with the big banks or is keen to develop one. Since the reviews won’t be made public, there is every reason to expect that any problems reported will be strictly cosmetic.
And as we noted in May 2011:
One component of the OCC program was “independent” foreclosure reviews that would be offered to borrowers to determine if they had been harmed by a foreclosure and provide restitution. You have to understand that this was never a good faith effort, even though HUD secretary Donovan trumpeted these assessments as an important part of “social justice.” The purpose of every new bank review process implemented since the Obama administration took office has been to go through the motions of being thorough (typically not convincingly, as with the first stress test and the Foreclosure Task Force demonstrate ) and give a clean bill of health. Having the OCC look at a whole passel of foreclosures and say, “See, the overwhelming majority were OK” would be an important step in turning the clock back to before the robosigning scandal broke.
And as this farce went on, what little information that did come to light was even worse than our low expectations. For instance:
Low level, minimally skilled parties hired to do file reviews (advertised pay $23 an hour; a robosigner or call center employee with one year of experience would fit the job description)
And it indeed turned out the banks were doing all they could to stack the deck against homeowners seeking reviews. First, the GAO determined that the materials were drafted over the heads of most borrowers, at the second year college reading level, in clear violation of Federal “plain language” guidelines. And whistleblowers reported that Wells Fargo was designing the questionnaires to assure it would never find anything wrong. From a post by Abigail Field:
The full revelations of the temp hired, trained and supervised by Promontory Compliance Solutions, working on the Wells Fargo’s OCC independent foreclosure reviews project, are available as a Mandelman blog post and a Mandelman Podcast. But here’s a few highlights to show how rigged the process is:
“I have found errors that should be moved up through the ranks, but am told “quit digging so deep”…”put your shovel away”…Focus on the questions “in scope”… The review forms are set up so no harm could ever be found. It’s equivalent of an attorney presenting his case to a judge with just 20% of the evidence.”
“The foreclosed victims don’t realize if they do not provide specific dates on the intake forms… their complaints are considered “general comments” out of scope.
The kicker? The forms don’t tell people their information will be ignored if the complaints are not dated.
Mandelman reports that the insider
“also says that the questions on Promontory’s form are worded in such a way that it makes it very difficult to ever find fault. For example, by using compound questions, he is often told to answer “no,” when the first part of the question would be a “yes.””
A last, flashing neon sign announcing the reviews will protect banks and do no justice is who has been hired to do the reviews. See, here’s the insider that’s willing to talk, and it’s probably why he’s willing to talk:
I have 15 years industry experience in all facets of the mortgage & title industry, and just needed a job at the moment.
But this is who he’s working with and for:
some of the people brought in with me do not know the difference between a truth in lending statement, and a note. It’s a shame, these are your reviewers!!! The supervisors don’t want any trouble…they are mostly temps too, just trying to get a promotion to full time.
Sounds like no bailed-out bank will be held accountable and no homeowner compensated. Nice product you’re selling there “U.S.” Housing Secretary Donovan.
Indeed, Wells Fargo’s Promontory process apparently found no wrong doing in 9,996 cases out of 10,000 examined. The other four were sent to Wells Fargo for further review but came back as no problem. At least, 0 problems out of 10,000 files is what the insider’s supervisors announced to everybody. I don’t know if the supervisors were telling the truth or just trying to message everyone to not find any problems in any files. Either way it tells you the same thing: the reviewers won’t find anything wrong with the files.
Now what would a competent regulator do when word of this egregious gaming of the process was taking place? Come down on the miscreant’s head like a ton of bricks. But nothing of the sort took place. And this was no surprise. Before the whistleblower report, Georgetown law professor Adam Levitin had concluded:
I think it demolishes even the thin fiction that the OCC/Fed servicing consent orders are anything more than Potemkin villages. Instead, what we have here is nothing less than a federally-blessed Robosigning 2.0.
Now fast forward to the “settlement” revelation of New Year’s Eve, courtesy the New York Times. The first nasty bit is that this deal has been under discussion with the 14 servicers in the consent decree for a month or so, with no inclusion of representatives of borrowers, which is already a big warning sign. Here are the key bits:
Banking regulators are close to a $10 billion settlement with 14 banks that would end the government’s efforts to hold lenders responsible for foreclosure abuses like faulty paperwork and excessive fees that may have led to evictions, according to people with knowledge of the discussions….
In recent weeks within the upper echelons of the comptroller’s office, pressure was mounting to negotiate a banner settlement with the banks, according to people with knowledge of the matter. The reason was that some within the agency had started to realize that a mandatory review of millions of bank loans was not yielding meaningful examples of the banks’ wrongfully evicting homeowners who were current on their payments or making partial payments, according to the people…
Under the terms of the order, the 14 banks had to hire independent consultants to pore through the loan records to determine whether the banks illegally charged fees, forced homeowners to take out costly insurance or miscalculated loan payment amounts. Consultants initially estimated that each loan would take about eight hours, at a cost of up to $250 an hour, to go through.
The costs of the reviews have ballooned, though, according to people with knowledge of the reviews, in part because each loan file is taking up to 20 hours to review. Since its inception, the reviews have cost the banks about $1.5 billion, according to those people.
Before we get any further, we need to stress how patently ridiculous these cost claims are. Notice that one of the things that this review process claims to be doing is reviewing whether borrowers were charged incorrectly. Reviewing the loan files is not going to get you there. You could either check a random sample of consumer records (which would be time consuming but give you insights you could not get any other way) or audit servicer software to see how payments were applied and processed. We’ve discussed for a long time that servicer-driven foreclosures (due to illegal application of charges to borrowers) are a big part of the problem; foreclosure defense lawyers say they represent 50% to 70% of the cases they handle. But this process was never set up properly to diagnose that.
Second is the absurdity of the “up to $250 an hour” and “up to 20 hours a loan file” claims. We’ve spoken at length to mortgage experts; it should take someone competent no more than an hour on average to review a file because there aren’t than many items to review if you are looking for frauds on borrowers as opposed to going on a treasure hunt for file errors, the overwhelming majority of which don’t have any implications as far as borrower harm is concerned.
We interviewed a partner at SolomonEdwards, a firm that has mortgage file reviews and remediation as a line of business and had 600 people deployed on OCC reviews. We deemed the process to be overkil. Even so, they were spending 3 hours on average, vastly less than the level the Times implied:
I called SolomonEdwards to discuss its press release about “scrubbing” loan files and had two conversations totaling over 50 minutes with a partner in this business. What was disconcerting about this discussion what that despite his emphasis on how thorough SolomonEdwards is in inspecting loan files (its software allows it to flag hundreds of items on a file review) and how strict it is in managing conflicts….he seemed remarkably unaware of the differences between how you can handle a loan that a bank owns versus one that was supposed to be transferred to a trust pursuant to a PSA. When I asked specifically about whether their process was different for securitized loans versus bank owned loans, he said that there was not a great deal of differences…
In fact, these reviews sound like documentation theater. The partner stressed how through SolomonEdwards was and how they had software that allowed them to record up data items and capture whether a item was material or not material and then risk rate an entire loan file. They can look at up to 12000 variants (no typo) for the OCC reviews (how many they actually look at depends on the scope of the client engagement; the difference between the number of steps, as he called them, in the OCC reviews versus the typical bank engagement is because the OCC reviews include state law requirements. Needless to say, it’s a bit curious that routine forensic investigations do not include state law matters). He also stressed that they have senior teams working on these projects, 5 years average experience for the OCC work, more than that on bank work, and that on a normal engagement, they would typically spend 3 hours per file, but if a bank had serious documentation problems, it might take as long as 12 hours.
He said that a typical bank engagement would require looking at 100 to 150 items. For a 3 hour process, that’s less than two minutes an item (and remember, that includes the time to log their findings). But the reality is that there are really only 5-10 things you need to look at: Do you have an original note? Does it have all the endorsements that the PSA says it should have? Do the mortgage assignments correspond to the endorsements? Were they all completed on time?
These multi-hour investigations are fee-padding form over substance. But this sort of thing is perfect for the bank-defending OCC, since it would take someone pretty expert to penetrate the fiction that this exercise in counting trees was designed to miss the forest.
I suggest you read the entire post to get a clearer picture of how bad this is. First, it makes clear that this firm, which prides itself on its expertise, really did not get many basic legal issues. It seemed to be working back from what servicers considered to be important in foreclosures, when the problem has been servicers have been running roughshod over the law (I’ve spoken at conferences with servicer employees among the participants, and I get reactions ranging from stunned to outraged when I tell them what the chain of title issues are). Second, this firm, and I suspect its competitors, offers not just “review” services, but “remediation” services as well, which include such dubious practices as document fabrication (creating allonges) and making back-dated mortgage assignments. Thus it isn’t hare to imagine that the reason that the costs have ballooned is not that the reviews are costing this much, but that the reviews are being used as cover to tidy up bad mortgage files.
Look, it is simply not plausible that these reviews have found nothing. The US Trustee found widespread abuses in bankruptcy courts, particularly improper default servicing fees (inflated harges for legal work, property inspections, insurance and appraisals). From the New York Times account:
But after sifting through the data produced by this investigation, Mr.[Clifford] White [director of the Trustee's executive office] disagreed that problems are rare. “In Senate testimony, an executive from Countrywide said its error rate was 1 percent,” Mr. White recalled. “The mortgage servicer industry error rate might be 10 times higher, based on the number of cases we are looking at.”
“There are continued flaws in the process, and they are not merely technical,” Mr. White continued. “Those flaws undermine the integrity of the bankruptcy system. Many homeowners have been harmed, including where the lender has come in and said ‘we want to lift the stay and go back into foreclosure proceedings,’ even though they lacked a sufficient basis to do it.”
He went on: “There are enough examples of this to know that we are not dealing with small numbers.”
In an April 2008 ruling, Elizabeth Magner, a U.S. bankruptcy judge in New Orleans, rejected the two charges [for broker price opinions charged when the parish in which the home was located was evacuated thanks to Hurricane Katrina] as invalid. She also disallowed 43 home inspections, 39 late charges, and thousands of dollars in legal fees charged to the Stewarts’ account.
Almost every disallowed fee was imposed while the Stewarts were making regular monthly payments on their home…
Magner determined that Wells Fargo had been “duplicitous and misleading” and ordered the bank to pay $27,000 in damages and attorneys’ fees. She also took the unusual step of requiring the servicer to audit about 400 home loan files in cases in the Eastern District of Louisiana.
Wells fought successfully to keep the results of the audit under seal, and last summer a federal appeals court overturned the part of Magner’s ruling that required the audit. But two people familiar with the results told iWatch News that Wells Fargo’s audit had turned up accounting errors in nearly every loan file it reviewed.
Or how about the fact that the Michigan Supreme Court just ruled that $3.75 billion of JP Morgan mortgages in that state are voidable? Or how about the guilty plea of Lorraine Brown of the DocX unit of Lender Processing Services, who admitted to preparing and filing over 1 million fraudulently signed and notarized documents? Any foreclosure that relied on them would be subject to question.
Let’s be clear on what happened here. The OCC created a process that was giving the banks a license to cheat. Not only di they cheat, but it’s almost certain they did so on aggressively, on every possible axis, then had the temerity to complain to the authorities that they were running up big consultant bills, when it’s certain these bills were massively inflated (whether due to letting the consultants rape them, or the more likely that they loaded every possible servicer-related bit of activity is moot, the bottom line is the charges bear no relationship to the work that actually needed to get done). This is a variant of a common bank scam, tantamount to killing their parents and then asking for sympathy for being an orphan. And the regulators are too craven, corrupt, or just plain incompetent to bring the banks to heel. They don’t examine the twattle they are served; at best, they are too deeply invested in the fiction of the settlement to admit that this colossal screw-up was completely predictable and undeniably their fault. There is no way to excuse this sort of gross misconduct.
Reader Hugh wrote this about the fiscal cliff yesterday, and it applies here as well:
The two parties, our whole political class, are not stupid or incompetent. They are not good people making mistakes. Nor are they psychopaths making bad decisions. Each of these rationales in some way contains the idea that they are not wholly and completely responsible for their acts. While each of these explanations holds a certain attraction, none of them are true. The truth is a lot simpler. They are criminals acting as criminals. It doesn’t matter what they think. It doesn’t matter what they believe.
Who cares if they equate their good with the general good, and believe the more they take for themselves, the more the general good is served? Would we accept this argument from a car thief, a burglar, or a bank robber? No. So why should we accept it from our political class?
We need to be as serious and hard assed about this as they are. Everytime you see Obama, Boehner, Reid, McConnell, or Blankfein and Dimon, everytime you see any of our political classes remember that they murder more Americans in a year than a dozen bin Ladens did in a lifetime. They steal more in a year than a million Dillingers. They create more destruction than a hundred natural disasters. More pain and suffering than a major epidemic. They are the banality of evil made manifest. We must stop being distracted by that banality and look at them up close and in the face in all their evil and ugliness.
They mean with every atom of their being to loot us to the last drop and beyond if they can. To resist them, we must be as clear eyed and steadfast as they are to destroy us. We must put aside comforting but false stereotypes. We should keep ever present in our mind the evil that they are and the evil that they do. We can not afford to let that image slip an instant from our view, because when we do, they win. They succeed in making their evil appear less, or even no evil at all, and so easier to sell and continue.
We do need to keep this sort of thought foremost in our minds. The feckless conduct of what passes for leadership in America is too well established to pretend that the results are the result of good intentions stymied or gone awry. You can see the gory details above, that the outcome here was no mistake. It was not merely predictable, it was predicted as soon as the settlements were announced.
The political classes have a vested interest in giving “cost of doing business” punishments because no punishment at all undermines their role and what little confidence there is left in the system. But the sooner we understand that their interests are not merely divorced from those of ordinary citizens, but actually opposed to them, the closer we are to coming up with realistic courses of action.