The last few days have had more and more ugly revelations emerge about the botched OCC and Fed Independent Foreclosure Review settlement, with some particularly important ones coming out of the hearings in Robert Menendez’s Senate Banking subcommittee today. We’ll turn to that soon, but first wanted to cover some issues that have correctly stirred ire among the NC commentariat.
First was the embarrassing confirmation of complaints all over the web that paying agent Rust Consulting did not have sufficient funds in its account to cover the first batch of settlement checks sent out Friday. And this isn’t the first time that Rust has sent out checks that bounced in a settlement. And in some jurisdictions, passing bum checks is a crime. What gives?
Second is the fact that the envelopes themselves look like numerous scam letters, in particular debt collection letters and offers. Lisa Epstein kindly provided this example:
People who sent in letters to the IFR are waiting for payments and will presumably be on the lookout for the settlement letters. But what about the everyone else?
Third is that the check itself has stern “Valid for only 90 days” language (huh? why was that deemed necessary?) and the accompanying letter indicates that recipients will be liable for any taxes owed:
The “if required” is unnecessarily ambiguous. Rust has said it will issue 1099s if the amount is $600 or higher. Why not say that in the letter proper?
Of course, taxes could be an issue for the folks who do get a check. Despite Rust Consulting’s protest that it was trying really really hard to find borrowers, we’ve gotten reports that contradict that already. One attorney sent a scan of an IFR letter and a check on behalf of JP Morgan Chase with this message:
Our office has never heard of this individual and never represented her (we focus on business litigation estate planning and patent prosecution). It is an absolute mystery as to how we received or got named on this check. It was a mystery to Rust Consulting (“Rust”) as well. When I asked them about this they stated they simply received the address from the Servicer and did not know why our firm was associated with the file.
Also, it was next to impossible to find out how to get the check to the individual. After 30 minutes of being bounced around to different representatives, I was told to just write void on the check and return it to them at the address listed on the check. When I asked who to attention the return letter to they stated that they did not know who to attention the letter to and would figure out what to do with the check arrived (I wonder if the individual will ever receive this payment). Pursuant to Rust’s instructions, we voided the check and sent it back to them.
As we’ve indicated, another wee problem is that servicer records are hopelessly unreliable. One has to wonder why Chase is having Rust send checks to attorneys that are not in the foreclosure business, particularly when, in Senate hearings, the process they described where they were having trouble finding borrowers would not lead to a check being sent to a law firm, but to a residential address.
And we have this:
Now this might not be so aggravating if the amount paid were remotely adequate and weren’t doled out in an arbitrary manner. But as numerous critics indicated, this outcome was baked in from the get go. The OCC and Fed settled blindly, eager to shut down the reviews as more and more damaging leaks filtered out. And their objectives were the same as the banks, which was to find only the bare minimum amount of harm necessary to make the reviews seem credible. Problem was that any credible amount would have turned out to be more than the banks could stomach.
The Senate hearings Wednesday had fewer fireworks than the Consumer Protection subcommittee’s did, when Elizabeth Warren, Jack Reed, and Sherrod Brown all causing the OCC and Fed some badly deserved discomfort. Nevertheless, with a different set of Senators (Menendez and Jeff Merkley) and panelists (representatives of the GAO, Rust, the National Fair Housing Alliance , and Joseph Smith, the monitor of the other settlement, the state attorney general/Federal one reached in early 2012), there were still some important revelations. Deborah Goldberg, from the National Fair Housing Alliance, made many damning observations, but because they were made in a matter-of-fact, professional manner, they may not get the attention they warrant.
To me, this one describing how the arbitrary payments were arrived at, was critical. From a transcript prepared by our faithful anonymous transcriber:
Ms. Goldberg, NFHA: I’d like to correct one thing, Senator Merkley, which is that when the independent reviews were stopped, the decision was made not to find harm, not to worry about finding harm. So the categories, as I understand it, the categories that borrowers were placed in for purposes of payments was based on how far along they had gotten in the loss mitigation process, or the foreclosure process, with their servicer. So the fact that a particular borrower was in a particular category wasn’t a reflection of whether they were actually harmed, but just kind of what stage of the process they had gotten to.
So step back and think about what went down. The OCC negotiated a settlement number that was arbitrary. The Fed (speaking on behalf of both agencies) effectively admitted that last week, that they had negotiated the outcome with no idea what the actual damage to borrowers was. Since they didn’t know enough to make any allocation related to harm (they had reviewed only 100,000 files, many and likely most related to the statistical review, which was separate from the review of 510,000 borrower letters submitted) they had a bucket of money per servicer and they had to whack it up in some manner they could sorta-kinda justify. But the problem is the numbers in the table they’ve released on how many people got what amount of money aren’t remotely credible. For instance, “Servicer initiated foreclosure on borrower who was not in default” is a mere 589. There were at least 20 cases reported of people being foreclosed on who didn’t have a mortgage. I have very limited personal contact with borrowers, and I can name an additional five cases where the bank refused to take regular borrower payments or insurance settlement payments after a fire and initiated a foreclosure. If I can name 25 (and a lit search would probably turn up well more than the roughly 20 I recall), it’s clear this number is way too low. Foreclosure attorneys are even more derisive of the totals shown.
But the Goldberg “the decision was made not to find harm” is an important reminder. The table and the methodology is a mere ruse. With no idea of who was hurt and how badly, the giving out of money was a dart-throwing exercise that needed to be made to look legitimate. So the way to dress that up was to find an arbitrary metric from within the servicer, since the testimony last week revealed the independent consultants, who were the ones who allegedly did whatever investigation was done, weren’t involved in the process. And they just did a time cutoff as Goldberg indicates. If you were far enough along (oh and military, the banks are really afraid of being hauled before the Veterans Affairs Committee, so those borrowers were much more likely to get a decent payout), you might win the lotto of being slotted in a higher-payout category.
In case you think I’m exaggerating how completely bogus the payout numbers are, consider this testimony from the GAO:
Mr. Evans, GAO: It is. And I think that’s a good place for me to assert that any information based on the IFR at this point should be deemed incomplete, and the data does not allow us to render any conclusions about error rates at a particular servicer or make comparisons across servicers, despite what’s been reported in the press. They were at different degrees of completion, across the servicers, variations in the type of files that were reviewed varied, and also even if it were complete, depending on the sampling methods used, it’s possible that this information would still have limits. So it’s impossible to draw any inferences about the data, because they’re not representative.
And that’s before you get to the fact that the reviews also failed to consider some types of borrower harm. We found that in our whistleblower reports from Bank of America, that there were certain types of systematic abuses, such as hitting borrowers with fees accumulated during a bankruptcy (impermissible under Federal law) and forced place insurance that were omitted. And it appears that the folks doing the statistical track of the review didn’t look at servicer notes, which would make it impossible for them to understand how homeowners were jerked around:
Ms. Goldberg, NFHA: I would add one thing, which is that one concern we had all along with the methodology was the potential problem that the files themselves would not be enough to understand the problems that borrowers experienced. So, for example, one of the most common problems that borrowers encountered was servicers losing their documents and having to resubmit them over and over and over again. Or borrowers being told the wrong information. “You have to stop making payments before we can consider you for a loan modification.” You know, things along those lines. And it’s not clear that anybody examining just the files would be able to tease out that kind of information and understand those kinds of errors, and in order to do that what’s really necessary is for whoever’s doing the review to be talking, at least in selected cases, to homeowners themselves or to the advisers who work with them, housing counselors or attorneys.
Menendez and Merkley probed other issues as well. One was that the non-cash portion of the settlement was structured so that servicers would get the same credit for short sales and deed in lieus of foreclosure as they would for principal reductions. Yet principal reductions are more work for the servicer but produce better outcomes, both for the investor as well as the borrower, since he’d keep his home that way. But why should the bank-friendly OCC and Fed try to make banks work for their settlement credits?
Another way the banks are certain to game the settlement is (as they’ve been doing in the national settlement) is to focus their non-$ relief efforts on bigger mortgages, since it will take them fewer loans to meet their goal (the work is the same regardless of the mortgage size). That means the soft credits will go to better-off borrowers and communities, when it was lower-income communities and minority borrowers who suffered the most systematic mortgage abuses. Deborah Goldberg pressed for getting granular information as to exactly what kind of relief was going where, say by Census sub-tract.
Even worse, the computation of the credits are easily abused:
Sen. Merkley: Thank you very much, Mr. Chairman. I wanted to continue on this same issue. In your testimony, Miss Goldberg, on page 10, you note that on a loan with an unpaid balance of $500,000, a loan modification that provides any amount of principal reduction, be that $1,000 or $10,000 or $100,000, yields $500,000 worth of credit for the servicers. It’s hard for anyone apart from this process to truly believe that if you do a $1,000 reduction you get $500,000 of credit, yet are you saying absolutely that’s the way it works?
Ms. Goldberg, NFHA: That’s what it says in the settlement. I have to say, Senator, that when I first read the settlement I didn’t pick that up because it was so hard for me to believe it could be structured that way as well, but in fact that is the wording of the settlement…
Sen. Merkley: Okay. Well, I’d just to point out that the roughly 6 billion of small, in soft money that’s in the settlement, at that 500 to 1 rate, that is reduced down to 12 million dollars. Six billion goes to 12 million dollars. That’s a vast difference. Now you’ve pointed out, Miss Goldberg, that this creates a pure incentive to do reductions on large loans. Now, I live in a working-class neighborhood, three-bedroom ranch houses. There are no $500,000 mortgages where I live because there’s no $500,000 houses. So your point in your testimony is that working-class communities, and certainly communities of color, are essentially – there’s an incentive to kind of bypass them. Why would the Fed and the OCC agree to a structure that allows a 500 to 1 or more – for that matter, it could have been $1 under the argument you’re making rather than $1000. Why would they agree to such a fictitious form of accounting and a structure that incentivizes the bypassing of working Americans in this whole process?
Ms. Goldberg, NFHA: I think that’s an excellent question, Senator Merkley. I’m afraid I can’t answer it. It would be a good question to ask them to explain.
Sen. Merkley: Has anyone at the OCC or Fed explained, given a rational explanation, of what they were possibly thinking?
Ms. Goldberg, NFHA: At one point I heard one person say that they believed that this structure accurately reflected the value of the assistance that the borrower received. That’s the only explanation that I’ve heard, and it’s not one that I find credible.
Recall that the settlement does not require that the soft dollar relief go to the 4.3 million people that were in the target universe for the settlement. It can go to anyone. Do you think the servicers among them would find it hard to dredge up 12,000 borrowers with mortgages of $500,000 or more to give them a $1,000 break? This is why it is critical to get a breakout of the amount of relief, not just in terms of credit but actual action taken and how that was translated into credit, and where the recipients of particular types of credit are located. I’ve always regarded the non-hard dollar portion of settlements as a joke, since they reward things that the bank either would have done anyhow or can do for virtually no cost. This 500 to 1 example makes clear what a fiction these provisions are.
While it is better to have the widespread criticism of the IFR confirmed in an official setting, this exposure will not do anything for wronged borrowers. And one of the frustrations of these hearings is watching the major actors, the OCC and Promontory in particular, being treated as if they acted in good faith. The IFR was intended from the outset to be another stealth rescue operation, this one to legitimate bank PR that nothing bad had happened to borrowers aside from occasional, inconsequential mistakes.
Sadly, these hearings look like the regulatory analogue to the Rodney Dangerfield joke: Steal $1000 from the convenience store and you go to jail for ten years. Steal $100 million and you appear before Congress and get called bad names for ten minutes.
The only way for these hearings to have some impact is for the responsible parties to suffer meaningful consequences for their bad actions. Legislation like the bill proposed by Maxine Waters to put more curbs on the consultants performing regulatory work is critically important. But far more essential is to shut down the OCC. It has demonstrated that it is a hopelessly bank-cronyistic organization. The incoming Comptroller of the Currency, Tom Curry, has performed badly in the settlement negotiations, which took place on his watch. It is time to recognize that the OCC is beyond redemption. Even though a first go at shutting down the OCC is likely to fail, this sort of effort would put the agency on notice that future misconduct puts its survival at risk. If we can’t take on too big to fail banks, maybe the alternative is to take out their most important enablers, starting with a not too big to fail regulator like the OCC.