It is really annoying when people, particularly those in positions of power, can’t even be bothered to take the trouble to lie well.
As we noted back in November, in a post titled, “Foreclosure Task Force: Worse Than Stress Tests?“, the officialdom was embarking on yet another hollow exercise in oversight:
Felix Salmon reports on a conversation with departing assistant Treasury Secretary Michael Barr on newly-commenced reviews of the practices of bank servicers.
Barr’s patter might sound convincing to the uninformed. An “11-agency, 8-week review of servicer practices, with hundreds of investigators crawling all over the banks”! Promises to hold miscreants accountable! Banks required to fix what’s broken!
Felix was skeptical, noting that the reviews were effectively a “physician, heal thyself” approach to a part of the banking business that has proven to be unable to change behavior…
In addition, as Felix pointed out, if the exams were to uncover issues that might pose systems risk, the Treasury is certain to reason to minimize them…
This “review” is clearly a Potemkin exercise, yet another stress test-type charade, in which the facade of a serious investigation is used to sell the message that all is well in the banking industry.
We had a longer discussion of the process, as outlined in Barr’s testimony before the Financial Servicer Oversight Council and set forth five reservations, which we discussed at length:
Insufficient staffing and inadequate time
The regulators appear not know what they are doing.
The regulators are not talking to people who know where the dead bodies might lie.
These regulators have history of siding with financial services industry interests.
The process is not transparent
One illustrative tidbit: Barr made much of how much time the task force was going to spend on loan files. Not only are loan files not that informative for many borrowers (a low doc or no doc file will be thin; we were further told in the days of Tanta that the files were often incomplete), but the time allotted to examine each file was so preposterously high as to suggest incompetence or a concerted effort at benchwarming.
Things are playing out even worse than our cynical forecast. It turns out not Treasury, but the most bank friendly regulator, the Office of the Comptroller of the Currency, led this exercise. In Senate Banking Committee hearings today, Walsh did say that the exam found a small number of improper foreclosures and specifically cited those involving military personnel. Funny how the only concrete cases he’s willing to acknowledge are ones that have been the subject of hearings by Congressional committees that have nothing to do with the mortgage industrial complex.
To give you an idea how insulting-to-the-intellgence this is, Walsh in his live testimony said that servicers has standing to foreclose. Really? That sounds like a big whopper, given the large number of decisions to the contrary. And more counter-evidence came via a Bloomberg story today, which reported that a Bank of America unit in Utah that carries out roughy 4000 foreclosures a year is, according to the state attorney general, violating state law. Although this case is still in play, it illustrate the type of obstacles servicers are encountering in various states.
It is also clear that the review missed or chose to ignore critical issues plaguing foreclosures, such as the widespread failure to convey notes to securitization trusts as stipulated in the documents governing securitizations, the pooling & servicing agreement. From Walsh’s written submission:
….the OCC, together with the FRB, the FDIC, and the OTS, undertook an unprecedented project of coordinated horizontal examinations of foreclosure processing at the 149 largest federally regulated mortgage servicers during fourth quarter 2010. In addition, the agencies conducted interagency examinations of MERSCORP and its wholly owned subsidiary, Mortgage Electronic Registration Systems, Inc. (MERS), and Lender Processing Servicers (LPS), which provide significant services to support mortgage servicing and foreclosure processing across the industry.
The primary objective of the examinations was to evaluate the adequacy of controls and
governance over bank foreclosure processes, including compliance with applicable federal and state law. Examiners also evaluated bank self assessments and remedial actions as part of this process, assessed foreclosure operating procedures and controls, interviewed bank staff involved in the preparation of foreclosure documents, and reviewed approximately 2,800 borrower foreclosure cases11 in various stages of foreclosure. Examiners focused on foreclosure policies and procedures, organizational structure and staffing, vendor management including use of third parties, including foreclosure attorneys, quality control and audits, accuracy and appropriateness of foreclosure filings, and loan document control, endorsement, and assignment. When reviewing individual foreclosure files, examiners checked for evidence that servicers were in contact with borrowers and had considered alternate loss mitigation efforts, including loan modifications, in addition to foreclosure.
To ensure consistency in the examinations, the agencies used standardized work programs to guide the assessment and document findings of each institution’s corporate governance process and the individual case review. Specifically, work programs were categorized into the following areas:
Policies and Procedures—Examiners determined if the policies and procedures in place ensured adequate controls over the foreclosure process and that affidavits, assignments, and other legal documents were properly executed and notarized in accordance with applicable laws, regulations, and contractual requirements.
Organizational Structure and Staffing—Examiners reviewed the functional unit(s) responsible for foreclosure processes, including staffing levels, qualifications, and training programs.
Management of Third-Party Service Providers—Examiners reviewed the financial institutions’ governance of key third parties used throughout the foreclosure process.
Quality Control and Internal Audits—Examiners assessed foreclosure quality control processes. Examiners also reviewed internal and external audit reports, including government-sponsored enterprise (GSE) and investor audits and reviews of foreclosure activities, and institutions’ self-assessments to determine the adequacy of these compliance and risk management functions.
Compliance with Applicable Laws—Examiners checked compliance with applicable state and local requirements as well as internal controls intended to ensure compliance.
Loss Mitigation—Examiners determined if servicers were in direct communication with borrowers and whether loss mitigation actions, including loan modifications, were considered as alternatives to foreclosure.
Critical Documents—Examiners determined whether servicers had control over the critical documents in the foreclosure process, including appropriately endorsed notes, assigned mortgages, and safeguarding of original loan documentation.
Risk Management—Examiners determined whether institutions appropriately identified financial, reputation, and legal risks, and whether these communicated to the board of directors and senior management.
Can you see what a garbage in, garbage out exercise this was? This is all a limited review of the servicers’ internal records, with no external validation. This process is inherently incapable of capturing numerous abuses flagged in the media and in this and other blogs, including document forgeries (production of allonges to cover for the failure to convey notes correctly), loss or deliberate late application of payments; the application of “junk fees” and impermissible fee pyramiding; notes held at the originator rather than the trust (notice the failure to audit trustees), lack of cross checking of servicer claims re servicing with borrower experiences. The HAMP fiascoes alone, with repeated servicer false claims of document losses, should lead to serious skepticism about servicer claims about the integrity of their internal processes.
And it is also impossible for Walsh’s statement about standing to have any solid foundation without a 50 state review of foreclosure actions as well as a legal analysis of the New York trust theory discussed in Congressional hearings, Congressional Oversight Panel reports and on this blog. There is not evidence that any such review took place in either the original Treasury project description, the Walsh retrospective comments, or the staffing (which would require the involvement of considerable outside resources to even take a stab at the task in a mere eight weeks).
The banking regulators are so obviously corrupt or at best deeply captured that they no longer even do a remotely credible job of covering for their abdication of their role. And until the media starts to call them out on it, it is certain to continue.