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David Dayen: Mortgage Settlement Monitor Lets Servicers Steal From Customers for Two Years Before Stepping In With Toothless Metrics

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By David Dayen, a lapsed blogger, now a freelance writer based in Los Angeles, CA. Follow him on Twitter @ddayen

Joseph Smith, the National Mortgage Settlement Oversight Monitor, created four additional servicing metrics on Wednesday, in what has to be seen as an admission of what we’ve known for a good while – that the servicers are violating the spirit, if not the specific terms, of the settlement.

In particular, servicers have been denying a prompt decision on a loan modification for borrowers, as well as the ban on dual tracking, by never completing any loan modification applications. Here’s the statement from Smith:

These four new metrics address a number of persistent issues involving the loan modification process, single points of contact and billing statement accuracy. They will better hold the banks accountable to the commitments they made in the Settlement to improve their operations in these areas. In particular, I have been extremely concerned about ongoing dual tracking issues. One of the metrics will address the issue of when a loan modification application is considered ‘complete,’ which has led to some of these problems.

First of all, in one paragraph, Smith names just about every important consumer protection put into the settlement as among the “persistent issues.” Being on the payroll and all, Smith isn’t going to come out and say it, but he’s acknowledging failure. If servicers aren’t offering a single point of contact (I know Yves questioned whether they ever can), aren’t ending dual tracking, aren’t posting accurate billing statements (!) and aren’t giving loan modifications in a timely and efficient manner, then they basically haven’t skipped a beat since the misconduct that was part of the impetus for the settlement in the first place.

The “completed” application issue is a classic example of getting around the rules. I wrote about this for The American Prospect three months ago, based on a report from the great Katherine Porter, UC-Irvine law professor and the California monitor of the settlement (Kamala Harris may have gone along to get along with the whole scheme, but she did right by getting her own state monitor and by hiring Porter):

This discrepancy between homeowner complaints and bank pleas of innocence can perhaps be explained by a gap in the settlement’s dual-tracking language, which mirrors other state and federal rules for servicers. The restrictions state that servicers cannot pursue foreclosure once a homeowner turns in a “completed” application for a loan modification. However, the rules do not meaningfully define “completed.” Does this mean the initial delivery of forms and financial documents? Do all documents have to be authorized by the bank? What if documents are lost? What if servicers are missing just one piece of information? It sounds wonky, but banks have exploited these ambiguities for financial gain, and it has led to people losing their homes [...]

A typical loan-modification application includes a standard form, authorization for the release of tax returns, and documents showing evidence of income, like recent pay stubs or a profit-loss statement. Banks require financial documents from homeowners to determine what would make an affordable modified mortgage payment. If a homeowner has a straightforward financial situation, with a single employer and relatively few outside sources of income, collecting financial documents is relatively easy. But lots of people have complex income situations—second jobs, income from renters on their properties, small businesses. The more multifaceted the income sources, the more information a bank will require.

Porter’s report tells the story of “Peggy B.,” who lost her home to foreclosure last November. Peggy was in the process of collecting documents when her home was sold. The bank told her that the sale would be postponed while she complied with requests for documents, but they sold the home anyway. Porter’s office contacted the bank, and “it informed us that Peggy’s application was missing documents at the time of the sale … because her application was not complete, the bank had not violated the dual-tracking protections in the settlement.”

It’s just a typical case of going around to the side door when the front door is locked.

The new metrics apply to all five servicers in the settlement, meaning that they’ve all been using tricks like this repeatedly. Here’s the draft of the Bank of America metrics. One strengthens the single point of contact language, and one confirms the accurately of monthly billing (and seriously, if this is a problem, you can give up and put this industry out of business now). Those go into effect in January.

The final two “will test the banks’ communications to borrowers of the requirements of a loan modification application, ensure that the banks do not reject a borrower’s loan modification application or proceed with a foreclosure for at least 30 days while the borrower is responding to requests for additional documents, and for those borrowers whose applications are denied, confirm that the banks properly communicate that denial and the loss mitigation alternatives available to the borrower.” But Porter was attuned to these issues about “completed” applications, and had a solution, at the beginning of July. Not only did it take Smith and the Monitoring Committee three months beyond this to come up with a metric, but it won’t even go into compliance testing until APRIL 2014! That’s over two years after the initial servicing standards went into effect. Keep in mind that the settlement is only effective for three years. So that means that Joseph Smith let the banks basically ignore their servicing standards, which were supposed to be a penalty for inappropriate behavior, for over 2/3 of the duration of the settlement. It’s abominable.

And in case you were wondering, yes there are “threshold error rates” with these new metrics! All four of them have an acceptable error rate of 5%, meaning that servicers can inaccurately bill their customers in 1 out of every 20 cases and face no sanction under these standards. And really it’s much worse than that, since (as I noted for Salon in May) the banks supply the initial compliance reports, the monitor merely services their work, and the services have the right after the fact to appeal any findings of non-compliance.

(If you want a straight news story on the metrics that includes none of these issues, the Wall Street Journal has you covered.)

I suppose Smith had to do something, with AGs across the country fielding all these complaints from homeowners that their servicers continue to screw them (Eric Schneiderman put together a show horse lawsuit against Wells Fargo while settling with Bank of America for really nothing). But this action sets a new standard for “the least you can do.” If there were a way for the government shutdown to stop Smith’s work, I don’t think anybody would even notice.

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19 comments

    1. as promised

      Wow. How you delight in misplaced finger-pointing. I think some of your venom-filled spittle landed over here.

      1. Francois T

        Sucks to be you because it turns out that kimsarah has a very valid point:

        Prosecutions against bad actors in the financial industry are at their lowest in four decades under Obama. Moreover, they’re down almost 40% compared to the period 2001-2008.

        Go ahead! Tell us it is pure coincidence that the same dude who called the big banksters “savvy businessmen” has suppressed more serious investigations than any other president since Nixon.

        1. Walter Map

          Obama has long since legalized financial fraud, and has even gone so far as to pay the criminals who crashed the economy. It’s all good, so long as the bribe payments are up to date.

          You Amerikans, you’re lucky Goldman Squid hasn’t cleaned out your checking accounts yet.

      2. Yves Smith

        Oh, come on, you are seriously trying to absolve Obama of responsibility for this “get banks out of liability almost free” card? As soon as state attorneys general saddled up to go after banks on foreclosure abuses, the Administration (HUD, Treasury, DoJ, the OCC, etc). joined their effort and sought to control/guide it. We chronicled this at considerable length from 2010 to 2012. Obama flipped the New York AG Schneiderman from being a leader of a group of dissident AGs that were working towards implementing their own settlement (ie, showing the other efforts to be a sham) to joining his effort. That enabled the Administration to push their bad deal, which looked like it was not going to get done, over the line.

        You really have to do better than that, especially here. My archives are full of posts with gory detail on how much Obama is in the can for banks generally, and even more so on mortgage abuses.

        1. DolleyMadison

          Thank you. I do not understand the willful blindness to the complicity of Obama in the failure not only to hold the banksters accountable for past misdeeds, but to stop them from continuing their reign of terror.

  1. skippy

    Amends for the copy and paste from earlier comment (before this post) but it seems apropos.

    Name an industry that doesn’t run this way now.

    Recently a lad that worked for me in the not so distant past, was in a board meeting, that ended with his head between his knees in hysterics. Topic was some work on a facility owned by a mob that has over 50% global market share, in their sector.

    Now his question was when a critical redundancy component could get some long over due refab, to bring it into compliance spec.

    Skippy… Answer is[!!!]… when the EPA inspector falls into a vat – machine or when they can be organized to be off site long enough.

    BTW compliance is a fig leaf, most officers understand they are the fall person if SHTF, its what your pay is all about…. too protect the BSDs. Nobody – made you – take the bloody job thingy~ FTW Freewill[!!!]

    1. carol jackson

      Make no mistake, Joseph Smith is an opportunist that is funding his retirement on the premise that he has the needs of consumers best interest. He was a banker, then Commissioner of a government entity that regulated banks. He was on the side of banks doing business in his state side and a typical liberal. Does that clue anyone in? He does not live with the general population, therefore, cares not.

      1. DolleyMadison

        Exactly – when he was head of the NCCOB he repeatedly looked the other way and his staff openly mocked and ridiculed North Carolina victims of the banks.

  2. Susan the other

    How do you wipe the slate clean while avoiding jail? First you reimburse the investors. Almost done that already thanks to the Fed. Then you admit you have no valid chain of title, no proof you own anything, but it was an oversight and you are really sorry. But to make up for all those years of illegal mortgage premiums you are going to just give everybody their house. And in addition you are going to give a new house of equal value to all those people who were foreclosed on by your unfortunate steam roller. And to make it all equitable, you, along with government help, will give people who were debt free for the whole fiasco a nice compensation of some average cost of a new house which they can invest but they must invest it in green tech projects and socially beneficial industries. And you promise never to do this sort of securitization fraud again. Etc.

    1. Yves Smith

      No, RMBS are prices are a function of interest rate risk and credit risk.

      The Fed bought ONLY government guaranteed RMBS. QE does nothing to alleviate losses due to lousy credit quality. There has been a lot of wrong-headed commentary, that the Fed was buying junk. It isn’t and didn’t.

      The prices of the bonds exposed to credit losses did rise due to QE and ZIRP, but that was true of all bonds. So the investors in non-GSE bonds did benefit, but not to the degree you suggest.

      The big way the Administration helped the banks has been letting them get away with keeping their second mortgages (mainly HELOCs) which are what they have on their balances sheets and not marking them down much. The banks have been saying they are current, so no need to mark them down for losses. The dirty secret is the banks can put HELOCs on negative amortization (as in take less than the interest due and add to principal, making the loan look current when the borrower is in fact unable to make the stipulated payments). There is a lot of anecdotal evidence that banks were calling borrowers, telling them to send any small amount of money in so as to avoid having the loan default, and calling that current.

  3. just me

    David, is this just more wheel of distraction, extend and pretend, foam for the fraud runway? Do the servicers have any legal rights if the title is screwed? They act on behalf of owners, banks, investors and have no authority beyond what those entities have, is that right? Because all this continuing futz just sounds like what was discussed in the KQED forum on Richmond eminent domain — that when homeowners actually try to get to a negotiation, there’s no there there.

    http://www.correntewire.com/kqed_forum_richmond_california_looks_to_eminent_domain_me_but_is_there_a_who_there

    “Who do you turn to when you want to talk about something other than foreclosing the property? People who do not seem to be available or accountable to the government.” – Rachael Myrow, KQED

    The middleman company that’s behind the city of Richmond’s foray into eminent domain wanted to find out who the city should send letters to; in other words, who had the rights? No one stood up:

    Steven Gluckstern, chairman, Mortgage Resolution Partners: I think Jeff gave a very good explanation that there are trustees and servicers who actually can make decisions about these loans. You’ll find ironic, as part of our advice to Richmond, we reached out to the servicers and trustees just to find out where to send the letters in terms of the request for purchase, and the trustees in general told us they had no power to make this decision, that we should send them to the servicers, and the servicers sent us a letter saying they have no power to make this decision; you should send them to the trustees. So the city of Richmond sent them to both, because between them they must have that power.

    Continuing, from above link:

    Except maybe not?

    Richmond is in California’s First District Court of Appeals; in the recent (published!) Fifth District decision, Glaski v. Bank of America, a homeowner successfully argued that the bank did not have standing to foreclose because the securitization and thus chain of title were faulty. (Hello, hello, hello! I think that would be covered by David Dayen’s prior story, “Your mortgage documents are fake!”)

    If they can’t foreclose, then how can there be any legitimate delegation of servicing rights, and how can servicers legitimately modify or apply fees or anything? Is Glaski making a difference? Is Kamala Harris unwinding this? Are my questions.

    1. just me

      P.S. I mean the mortgage settlement was an admission of wrongdoing like robosigning in 49 states. So they get to stay out of jail, but it didn’t fix the title problems. Is that right?

      1. Yves Smith

        The title problems are much worse than robosigning, but the answer to your question is yes.

        Only exceptions are proving to be some states where cases are going against MERS. Oregon is the big example here, they have a state-wide title recording statute that required filings and fee payments on every transfer, no doing transfers only in the MERS system.

        1. just me

          If the states don’t care and don’t pursue broken titles (California?), does Glaski make a difference? Will investors fighting Richmond make Glaski make a difference?

        2. Matt

          When I sold a mortgaged property in 2009 the release filed with the county came with MERS “signatures”. Haven’t the servicers stopped using MERS?

  4. Wake Up America!

    Thanks, Yves for being one of the few to continue to write about the biggest heist in history.

    It looks to me like the banks and servicers have pulled it off. The American people, even the ones who suffered at the hands of the banks, don’t seem to care about justice.

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