The mortgage settlement looks to be every bit as bad as cynics predicted. The most exacting and detailed reporting on the settlement terms came from attorney Abigail Field, who undertook the painful process of reading the entire agreement and making sense of what the detailed terms meant. And the latest word from the settlement monitor Joseph Smith is yet another confirmation of the settlement process as enforcement theater.
One of her important finds was that the servicing standards, touted as one of the key victories in the deal, were worse than a joke. They didn’t simply call on servicers to obey existing law; they put in place supposedly new standards which in the fine print allowed for such large error rates as to weaken rather than strengthen regulators’ hands. For instance, if you believe in the rule of law, a wrongful foreclosure should be absolutely impermissible. But the regulators have now decided that banks can screw up 1% of the time and they’ll let it slide, the poor wronged homeowner will have to fight that uphill battle all on his own. To put that in practical terms, that means the authorities deem 33,000 wrongful foreclosures since 2008 to be a perfectly acceptable level of theft. Read her post “The Mortgage Settlement Lets Banks Systematically Overcharge You and Wrongly Take Your Home. for more ugly details”
The settlement also does squat to stop document fraud. Her bottom line:
The mortgage settlement signed by 49 states and every Federal law enforcer allows the rampant foreclosure fraud currently choking our courts to continue unabated.
But the kabuki must continue, and Field sent along a cheery bit of propaganda from the mortgage settlement monitor, Joseph Smith. Recall Smith was the banking regulator from North Carolina, the state that contained the two super aggressive regional bank acquirers, NCNB (later NationsBank) and First Union. NationsBank acquired Bank of America and kept its name. So it isn’t hard to imagine that a North Carolina bank regulator would have to be a bank booster to get the job.
Smith gave an update of sorts via an interview in National Mortgage News, which Field was kind enough to circulate. NMN is not type of magazine that asks tough questions. Here are the key bits:
That’s the deadline for the five companies—Ally, Bank of America, Citigroup, JPMorgan Chase and Wells Fargo—to certify that they are complying with 304 servicing standards, everything from loss-mitigation practices to adequate training to proper communication with customers.
“Every indication I have from all five servicers is they will be ready to perform each and every one of the servicing standards on Oct. 2,” says Joe Smith, the former bank regulator hired to oversee implementation of the settlement’s terms. “Each of the firms, to a varying level of severity, is going through a really extensive quality control process with regard to each of the standards.”
Ooh, this is really exciting! Down to the wire but they are all gonna make it! We’ve reported at length (as has Field) on other aspects of how dubious the oversight process it. The servicers have hired the monitors. Smith is not running any auditing or reviews; it’s all been subcontracted, and there are numerous examples of firms conducting the oversight having troubling conflicts of interest. This blog and others also criticized an early (and not required) preliminary report released by Smith as looking like an Administration PR gambit.
Field flagged this disturbing section at the close of the story:
Smith endorses the move to wring bad actors and bad practices out of the mortgage business, but says the price may be less credit at a higher cost.
“The thing the policymakers need to be discussing is the cost of compliance with a necessarily more rigorous mortgage regulatory system,” he says. “I am not saying it’s wrong to have those costs. But I think the banks are going to reduce the number of loans that they are making and reduce the number of counterparties from whom they buy loans. The level of competition in the marketplace overall” will decrease.
“There is a chance,” Smith says, “that the cost of this will reduce competition in the marketplace, and we don’t know how that will affect the availability and cost of credit in the future.”
Smith figures the standards will be loosened, eventually.
“I think the standards we’ve got are effective to address the abuses we’ve had in the past,” he says. “I am not entirely convinced all of them will be needed going forward and can’t be streamlined over time. But it’s not the time to streamline yet. Let’s get them in place and see what works and what doesn’t.”
This is utter garbage. Higher “costs” as in margin to servicers to do it right, will encourage more new entrants and allow them to invest in software platforms to do it right. For Smith to contend that high servicing costs might be a problem, when it was undercharging for servicing that has wrecked records and led to widespread borrower abuses, isn’t just perverse, it’s 180 degrees wrong. The record of servicing is that the industry’s fee structures allow only for servicing portfolios with extremely low delinquency rates. Servicing a delinquent loan costs vastly more than a performing loans; the owners of high touch servicers that focus on distressed portfolios tell me their staffing levels are five times the level of ordinary servicers.
If banks and their boosters like Smith want to keep lending rates high, as in lend to riskier borrowers, they need higher margins in servicing, or else you’ll again see the sort of predatory servicing and courtroom abuses we’ve seen since Fairbanks, a servicer that got the bright idea in the early 2000s of focusing on portfolios with high concentrations of bad loans and entered into a FTC consent decree in 2003. And since 2003, the authorities keep promulgating the same servicing standards, and the industry keeps failing to meet them. Earth to base, you can’t have decent standards and current fee levels, but the solution is always the same: let the industry keep its lousy fee model, and borrowers and rule of law be damned.
Anyone who is touting servicing costs concern based on tired bank bromides (“oh if you make us do anything different it will hurt lending”) doesn’t deserve to be a regulator. Well, except for the state of North Carolina, and except for the Obama Administration, it seems.