On Thursday, the housing subcommittee of the House Financial Services Committee held hearings on robo signing, documentation, and servicing issues. This session wasa companion to the Senate Banking Committee hearings on the same topic earlier in the week.
There were some notable differences between the two forums. The House group overall was less well prepared; I’m told that’s due to the fact that Representatives have far fewer policy staffers than Senators. There was also a higher proportion of participating members predisposed towards banks in the House hearings. Nevertheless, the sessions made a major dent in some key bank talking points, the biggest being their assertion that all of the foreclosures made are warranted, and therefore the foreclosure problems are mere paperwork issues.
Some exchanges were effective. Maxine Waters, who chaired the session, grilled the regulators on whether they had fined or imposed sanctions on any banks. She was forced to become prosecutorial when every single regulator present refused to provide simple a simple yes/no answer as requested. One of the less evasive interactions was with OCC acting chairman John Walsh:
Waters: Has OCC taken any enforcement action?
Walsh: We have certainly issued supervisory requirements on matters requiring….
Waters: Have you levied any fines?
Walsh: I do not believe that we have.
Waters: Have you issued any .. orders?
Walsh: I don’t believe there have been any public actions.
Waters: Have you threatened to revoke any charters?
Waters: Do you think the servicers really believe you mean business if they don’t fear consequences?
Walsh: I think the consequences are clear and ….
Waters: But you haven’t done that. You haven’t done any of that. Why should they take you seriously?
The banks did not comport themselves terribly well in either hearing. It’s remarkable to see how they all
tell the same lies hew to the same talking points: we do everything we can to avoid foreclosures, we don’t benefit from them (huh?), our second mortgage portfolios have no impact on our decisions (!?!), the only people we foreclose on are people who are delinquent. Chase adds some insulting-to-intelligence bromides about treating customers with respect. When told that there have been all sorts of people who have been foreclosed upon who don’t fit their tidy story (victims of compounding and often erroneous servicer junk fees, or told by the servicer not to pay so as to qualify for a mod), the next line of defense is to characterize them as errors, apologize, and profess that they fix mistakes as soon as they become aware of them.
Sadly, when Waters put up the notorious DocX document fabrication price list, all the bank representatives cheerfully piped up: “We don’t use DocX.” Of course they don’t now; DocX was shut down in early 2010. But she did score one when she asked banks to say which investors objected to mortgage modifications and the Bank of America witness ‘fessed up that it was very few.
It was also remarkable to how tightly the bank representatives had been scripted. They were utterly incapable of responding to unanticipated questions. Georgetown law professor Adam Levitin, who was extremely effective in both hearings, was stunned at how tongue-tied they were when Brad Miller asked about why big banks should be in the servicing business:
Rep. Brad Miller (D-NC) asked a panel with some 5 servicing executives on it why it makes sense for a servicer to be affiliated with either a loan originator, a loan securitizer, or a trustee. He might have been speaking Klingon to these executives. They stared blankly at him like he was asking them something that was far beyond their comprehension. None of them had a real answer for him.
This wasn’t a case of the servicers not wanting to speak an uncomfortable truth. There are perfectly legitimate reasons to bundle origination and servicing, for example–servicing is countercylical to origination (this is hardly news; banks’ 10-Ks state as much). Instead, this was a case of silence from ignorance.
As much as I respect Levitin (he was the standout of both hearings, as FireDogLake underscores), these business heads have clearly presented reams of PowerPoint presentations to senior executives that would from time to time discuss the strategic merits of the servicing operations. It’s more likely that they were put on a short leash by whoever prepped them for these meetings.
The problem with the industry defense that that delinquency = justified foreclosure is that they operate in a system where as far as the charges presented to homeowners are concerned, they are judge, jury, and executioner. Levitin debunked this stance in his written testimony (boldface ours):
A common response from banks about the problems in the securitization and foreclosure process is that it doesn’t matter as the borrower still owes on the loan and has defaulted. This “No Harm, No Foul” argument is that homeowners being foreclosed on are all a bunch of deadbeats, so who really cares about due process? As JPMorganChase’s CEO Jamie Dimon put it “for the most part by the time you get to the end of the process we’re not evicting people who deserve to stay in their house.”
Mr. Dimon’s logic condones vigilante foreclosures: so long as the debtor is delinquent, it does not matter who evicts him or how. (And it doesn’t matter if there are some innocents who lose their homes in wrongful foreclosures as long as “for the most part” the borrowers are in default.) But that is not how the legal system works. A homeowner who defaults on a mortgage doesn’t have a right to stay in the home if the proper mortgagee forecloses, but any old stranger cannot take the law into his own hands and kick a family out of its home. That right is reserved solely for the proven mortgagee….
Ultimately the “No Harm, No Foul,” argument is a claim that rule of law should yield to banks’ convenience. To argue that problems in the foreclosure process are irrelevant because the homeowner owes someone a debt is to declare that the banks are above the law.
Levitn and Julia Gordon of the Center for Responsible Lending both argued, forcefully, that many foreclosures were the result of servicer abuses. Gordon, who has handled many cases in her own practice pointed out what I have heard from borrower attorneys: that it is difficult for counsel to obtain the needed information from the servicer as to how it came up with the charges it claims the borrowers owes. And even then, it it not a trivial analytical task to unravel their accounts.
Other commentators find that the evidence supports the contention that defaults are often servicer generated. As Alan White notes at Credit Slips:
Erroneous foreclosures thus come in two flavors. Foreclosing someone who is not actually behind, or whose default was precipitated by junk fees, unnecessary or overpriced forced-place insurance, or payment application errors (common in bankruptcy cases) is obviously wrong. Equally wrong, however, are foreclosures of homeowners who have sufficient income to fund a modified loan that will produce significantly higher investor returns than a distressed foreclosure sale. Contrary to the pronouncements of servicers and Treasury officials, modification and workout consideration is not happening before foreclosure starts, it runs on a parallel track with foreclosure processes. Frequently, the foreclosure train wins the …
The clearest evidence of widespread errors and poor performance in mortgage servicing comes from data on HAMP and other modification programs…A February 2010 HAMP Call Center report of complaints lists more than 36,000 complaints of lost documents, inability to get a servicer response to an application, inappropriate requests for modification fees, and similar problems. An October 2010 ProPublica survey of HAMP applicants found that the average length of time homeowners had been seeking a HAMP modification was 14 months. Treasury guidelines call for a response within 30 days. Given those delays, it is highly likely there are affidavits of default being filed that allege default while the servicer is considering pending trial modification of mortgage terms. In cases where payments are being made on a temporary modification agreement, there are good contracts-based arguments that there is no default.
The banks apparently believe that their numerous abuses are no big deal, and that they can brazen their way through any real problems with a combination of delaying tactics, prevarication and appeals to authority. But it also appears that we still have enough of a semblance of rule of law in this country so as to throw a wrench in their strategy. The longer they dig in their heels, the more the public will come to recognize that nothing they say should be believed.