Last week, the Wall Street Journal publicized that the OCC cooked the books in its incredible claim that only 4.2% of the files examined in the recently shuttered foreclosure reviews showed harm. It looked like a case of lying with statistics, in that the Journal noticed that they had cited a higher error rate at the time of the settlement (6.5%), and then added a bunch of JP Morgan completed reviews to the sample. And why was that helpful? It looks like JP Morgan didn’t finish its review of all those drecky Bear Stearns loans, so only the prettier JP Morgan-originated ones got counted. How convenient.
And that’s before you get to the fact, as Dave Dayen stressed, “The numbers reported by the banks to OCC merely reflect how successful they were at controlling the review process and limiting the finding of borrower harm.” He contrasted the simply miraculous error rate claimed by JP Morgan of 0.6% when a small sample examined by the HUD inspector general found a 97.2% error rate.
The Journal today reports that a lot of Democratic congressmen are unhappy about the botched settlement process but are unlikely to do more than beef because the new Comptroller of the Currency, Tom Curry, was selected by Obama. Huh? This is his first major act in office and it’s a disaster. He was presented with a mess, but as we’ll discuss below, he played his hand badly.
But the more people poke at the settlement, the more creepy crawlies emerge. Tonight, the New York Times tells us that the banks ‘fessed up that they foreclosed improperly on 700 active duty servicemembers. The reason this is a big deal is that in 2011, the Veterans Affairs Committee got wind of these violations of laws dating back to World War I on prohibitions against foreclosures actions against active duty soldiers. This was a much bigger threat to the banks than being hauled up, say, before the Senate Banking Committee, since for the most part, they don’t make lavish campaign donations to these representatives. But it turns out the bank lied in a major way back then as to how many servicemembers they had foreclosed on illegally. And to add insult to injury, they entered into a settlement with the Department of Justice based on these misrepresentations. (This is the Department of Justice’s fault. One of the big rules of negotiating is never settle when you haven’t investigated the underlying conduct. Relying on the say-so of banks was a way to give them yet another slap on the wrist punishment).
From the New York Times:
Complaints that active military personnel and National Guard members were losing their homes while deployed in war zones set off national outrage and prompted Congressional hearings in 2011…
In 2011, JPMorgan settled claims that it inappropriately foreclosed on 18 military service members and overcharged 6,000. Bank of America and Morgan Stanley also struck a pact with the Justice Department to settle claims they foreclosed on 178 military members between 2006 and 2009…
When regulators forced them to take a close look at their loans, JPMorgan, Wells Fargo and Bank of America, the largest loan servicers, each discovered about 200 military members whose homes were wrongfully foreclosed on in 2009 and 2010, according to the people with direct knowledge of the findings. Citigroup had at least 100 such foreclosures.
First, the banks lied to Congress, and grossly understated the amount of servicemembers they’d abuses. JP Morgan told the whopper that it had foreclosed on less than 1/10 the number of military personnel that it is now willing to ‘fess up to. The number at Bank of America looks to have been understated by at least 50%. And why should we believe any of these new, improved figures? The OCC said when it shut the foreclosure reviews down that only 1/3 of them had been completed. It turns out it was less that 20%.* At JP Morgan, the cleaner files were the ones that got done faster and are thus disproportionately represented among the results. So logically, you’d expect higher defect rates in the ones that remain (the flip side is that the fear of the military industrial complex might have impelled the servicers to look carefully among the complaint letters that had not been processed and pull out the SCRA-realted ones and process them).
Now let’s look at the further proof of what a terrible job the OCC did in negotiating the settlement, which it repeatedly has touted as tough. Remember how we said to pay attention only to the cash portion of the settlement, $3.6 billion, an ignore the other goodies, which bring the total to a more impressive-sounding $9.2 billion? The New York Times confirms our reading:
When problems emerged and relief was delayed, the regulators halted the review in January, opting instead to strike a settlement with the banks. Under the terms of the deal, banks will have to provide $3.6 billion in cash and $5.7 billion worth of other assistance to 4.2 million homeowners.
At the time, regulators still did not have a full window into the flawed foreclosures.
Yves here. Let us stress that is unforgivably incompetent negotiating. Never settle when you don’t know the extent of the bad behavior. Back to the Times:
Under the settlement, banks receive credit for the size of the outstanding loan balance, rather than the amount of actual assistance provided. For example, if a bank cut a borrower’s $100,000 mortgage debt by $10,000, the lender could then reduce its commitment under the settlement by $100,000. In a previous foreclosure settlement, the banks received credit only for the $10,000.
The example, of the bank action delivering a benefit of only 10% of the headline number, is actually high. Banks are to be given credit for writing off deficiency judgments. If they still have them on 2009 and 2010 foreclosures, they are presumably worthless (they would have sold them by now, and even then they are only worth pennies on the dollar).
The OCC has provided the banks with another stealth gimmie, a “heads I win, tails you lose” review process that affects the borrowers who will likely be entitled to the biggest payouts**, SCRA violations and foreclosures when the borrower was not in default. I picked Bank of America’s updated consent order:
(4) With respect to reviews involving borrowers in the In-Scope Borrower Population who may have been entitled to protection under Sections 521 or 533 of the Servicemembers’ Civil Relief Act, (the “SCRA”), 50 U.S.C. App. §§ 521 or 533, and borrowers who may not have been in default during the foreclosure process, the Bank shall either: (a) place the borrower into the applicable category within the Borrower Waterfall, which will result in the borrower automatically receiving payments made from the Fund in accordance with the Distribution Plan for such category; or (b) instruct the Bank’s IC to complete file reviews for such borrowers to determine financial injury related to Sections 521 or 533 or to not being in default. For files reviewed under (b), the borrower will receive payments from the Fund in amounts specified in the June 21, 2012 Financial Remediation Framework where the IC makes a determination of “harm.” For files reviewed under (b) where the IC makes a determination of “no harm,” the Bank will place the borrower into the next highest Borrower Waterfall category for which such borrower is eligible, which will result in the borrower receiving payment from the Fund in accordance with the Distribution Plan for such category.
(5) With respect to the borrowers in the In-Scope Borrower Population who may have been subject to interest rate protections under Section 527 of the SCRA, 50 U.S.C. App. § 527, as part of the Borrower Waterfall placement, the Bank shall either: (a) place the borrower into the highest category within the Borrower Waterfall for which the borrower is eligible, which will result in the borrower automatically receiving payments made from the Fund in accordance with the Distribution Plan for such category; or (b) instruct the IC to complete file reviews for such borrowers to determine financial injury related Section 527. For files reviewed under (b), the borrower will receive payments from the Fund, as calculated pursuant to the methodology outlined in Department of Justice (“DOJ”)/Department of Housing and Urban Development (“HUD”) National Mortgage Settlement (“NMS”) Exhibit H (Consent Judgment entered April 4, 2012), where the IC makes a determination of “harm.” For files reviewed under (b) where the IC makes a determination of “no harm,” the Bank will place the borrower into the next highest Borrower Waterfall category for which such borrower is eligible, which will result in the borrower receiving payment from the Fund in accordance with the Distribution Plan for such category.
When you parse this language, it says that for SCRA violations and when the borrower was not in default but was foreclosed on anyhow, the bank can ask for his pet independent consultant to review the file. If the consultant finds no harm, the borrower is bumped to a lower compensation category, but the borrower cannot appeal to have his case moved to a higher category (the word “appeal” does not appear in the BofA consent order). Now this might seem not so terrible After, all, if the independent consultant finds no harm and the borrower gets a payment anyhow, isn’t this a freebie? Not until you look at the lengths our whistleblowers told us Promontory went to to find no harm. For instance:
….this was one specific that the borrower had a trial mod that was granted. The trial mod was signed by both the bank and the borrower, and a copy of it was in the system. The borrower continued to make payments every month on the trial mod and the lender kept returning the payment.
So the actual reviewer, the level 3 reviewer that reviewed the loan, said that there was harm because the bank returned the agreed payment for the trial mod. So the QA reviewer [quality assurance, Bank of America staffers who would push back against reviewer finding of harm, more on that in later posts] found no harm. They disputed it and said that no harm was found because the borrower was not making the contractual payments according to the original loan mods. So that person didn’t, wasn’t even smart enough to realize that there was a whole new contract in place that amended the original one and this was the new payment.
When it made it to Promontory, and Promontory’s response was the lender was returning the payment because the borrower was not making any.
This is simply a regulatory version of Catch-22.
But the banks are busy trying to persuade the public of the reverse, that all sorts of undeserving parties are about to get payouts. Adam Levitin shellacks that claim:
Apparently part of the bank flaks’ talking points regarding the foreclosure reviews is that to the extent homeowners harmed by wrongful foreclosures, they were actually drug dealers. The message: we didn’t foreclose on anyone who didn’t deserve it….
Running a meth lab in your basement may be an event of default on a mortgage–but if that’s going to be the default that triggers a foreclosure, the bank is going to have to prove that you’ve been running a meth lab on the property. The lender’s relationship with the borrower is contractual, not moral. If the borrower does something morally objectionable, it only matters if there is a breach of the contract. If sanctity of contract matters as a social principle, then even meth lab owners rights’ must be respected. We have criminal forfeitures to the government, but that doesn’t result in civil forfeitures to private lenders other than pursuant to contract. We’ve seen this vigilante foreclosure line before.
And Levitin tells us why this process is corrupt:
….what the OCC and Fed gave consumers was a jury-rigged, improvised kangaroo system. The avoidance of formal legal process is a hallmark of how bank regulators operate–no prosecutions, just consent decrees, informal supervisory feedback, etc….the independent foreclosure reviews were almost doomed to failure (although not necessarily as egregiously as we have seen) because their design lacked any legitimacy.
Levitin thinks the foreclosure reviews failed because a consumer matter was put in the hands of a produential regulator, meaning its priority was to protect the banks. But it is even worse than that. The OCC is a prudential regulator that should no longer exist. It has terrible incentives. It does not suffer any consequences when it is too generous to banks; it’s the FDIC and Fed that ride to the rescue. The Comptroller of the Currency wasn’t falling over from exhaustion doing serial bailouts during 2008. And precisely because it is set up to be the biggest pushover among the bank regulators, it is also the favorite target for the revolving door, as proven by how heavily OCC alumni are represented at the shadow bank regulator, Promontory Financial Group.
One post crisis reform plan that was scuttled was to fold various financial regulators into the Fed. That was scuttled, but it is time we revive it as far as the OCC is concerned. There’s no reason for it to exist, particularly given the damage it has done. It is time its duties are handed over to regulators who do have skin in the game, namely the FDIC and the Fed.
* The New York Times reports the reviews were completed on 104,000 files 495,000 borrowers asked for reviews, plus each bank was separately required to examine a large sample of additional loans (at Bank of America, for instance, an additional 35,000). Our source indicate at Bank of America, only 4,800 reviews out of a total of 140,000 to 150,000 borrower requests had been completed.
** These were in the highest payout categories in the original remediation framework.