GAO Report on Foreclosure Reviews Misses How Regulators Conspired with Banks Against Homeowners

I suppose one has to be grateful for any official pushback against failed regulatory initiatives, such as the just-released GAO report criticizing the Independent Foreclosure Reviews. Of course, in this instance, I am charitably assuming that these reviews were a failure. They have certainly proven to be an embarrassment to the lead actor, the OCC, which has tried to maintain as low a profile as possible on this topic rather than offer any defenses.

But “failure” assumes that the OCC and the Fed did not achieve their real objective, which was to protect the banks. That hardly appears to be the case. The short story of the reviews is that to dampen down criticism of the many foreclosure horrors revealed in the media and in courtrooms all over the country, borrowers who were foreclosed on or had foreclosure actions underway in 2009 and 2010 were promised an independent review and compensation if they were found to have suffered financial harm. And even though the abrupt termination of the reviews has left the regulators with a lot of egg on their face, the result is that the banks paid a lot less than if the reviews had lived up to their billing.

Maxine Waters, to her credit, tried to put a little heat under the OCC and Fed by requesting that the GAO look into the matter. But as Dave Dayen stressed in his commentary on the GAO report, the overseer was blinkered in its approach:

Furthermore, its narrow scope – GAO only looked at the regulators’ design and ovesight of the foreclosure reviews, rather than what the independent reviewers did, and in fact they used the bank consultant reviewers as primary sources – tends to give a very circumscribed picture of the reviews. You could even say that this report will help get the bank consultants off the hook by putting the blame on OCC and the Fed.

The biggest problem, though, is the GAO was tasked only to do a very high level review of process, which meant it looked for how procedural weaknesses led to bad outcomes. It did not question the intent of the review, nor did it examine at how the reviews operated in practice, as opposed to theory (remember, the OCC relied on interviews of the consultants and questionnaires to them; there was no checking of the consultants’ processes or guides with independent experts, and the odds are very high that the only personnel that the GAO met from the consultants were individuals who would be attuned to and protective of their firms’ interest).

Some of the gaps in the report are simply stunning. For instance, the GAO points out at several junctures the intent of the exercise:

According to regulators, the goals of the foreclosure review were for consultants to identify as many harmed borrowers as possible, to treat similarly situated borrowers across all 14 servicers similarly, and to help restore public confidence in the mortgage market.

The GAO never considered that these goals are in conflict. If the reviews had indeed exposed the full extent of the rot in servicing, it would have undermined, not increased confidence in the mortgage market. It is obvious that the OCC either believed the bank PR that borrowers were deadbeats and complaints, for the most part, were simply the creation of clever foreclosure defense lawyers, or they had an inkling that there were serious failings, and so Potemkin reviews were necessary to shield the banks from liability. If they could claim to have made a meaningful investigation and found little amiss, that would undermine borrowers’ efforts to get a hearing in courts and to press for tougher curbs on servicers

Another conflict the GAO never considered was conflicts of interest; in fact, the word “conflict” does not appear once in the entire document. Yet as numerous independent parties pointed out from the very outset, the structure of having miscreant banks select and pay directly for “independent” reviews turned them into “bought” reviews. Sheila Bair described what happened when she was pressed for management changes at Citigroup in the wake of a bailout in the form of guarantees on $306 billion of toxic assets. A consultant was brought in to shield CEO Vikram Pandit:

When the “independent consultant” report came back in the fall, it compared Pandit to small European bank CEOs and gave him glowing marks. As for its review of the rest of Citi’s management, it gave high grades to Pandit loyalists while criticizing those who were not viewed as part of the Pandit team…

That was my first and last experience in asking bank consultants to assist regulators in reviewing bank operations. They are hopelessly conflicted, given their desire to secure future consulting work at those big banks. The consultants clearly considered their primary client to be Vikram Pandit. Indeed, they reported to him regularly on their review and sought his input until we found out about it and objected…..But Citi’s primary regulators, the OCC and NY Fed, didn’t seem to mind one bit.

While the GAO took its signals from the OCC and Fed and didn’t question the true interests of the consultants, Waters is not taking the matter lying down and is introducing legislation this week to curb this form of putting the foxes in charge of the henhouse.

A third major gap in the report is its failure to look at the borrower-requested reviews in any meaningful way. The report focuses mainly on failings that made the reviews overly labor-intensive and inconsistent. For instance, it criticizes the regulators for failing to talk to community groups, housing counselors, or other stakeholders. It also spends a great deal of time on problems with the sampling methodology for the loans that were to be examined in addition to the ones where a review was requested. It also discusses how the reviewers reinvented the wheel in terms of the state law elements of the reviews, where different servicers came up with different approaches and answers. For instance, at least one didn’t look at state law rules on fees at all but merely relied on “investor guidelines” meaning Fannie/Freddie/FHA/VA requirements. But the OCC consent orders specifically required that the consultants examine compliance with state law. It’s astonishing that the GAO blandly reports this “investor only” review as an inconsistency, rather than a blatant failure to adhere to the consent order requirements.

The GAO similarly mentions that the reviewers expected from 0 errors on certain types of loans and the highest level of errors anticipated was 10%. Huh? These are astonishingly low assumptions. The GAO does discuss how overly low assumptions can affect sampling. But it failed to consider how these assumptions served as “anchoring,” a well known cognitive bias. An assumption of low error rates would lead the consultants, even if they really had been independent, to have trouble with results that depart significantly from your assumptions. If you expect a 0 error rate and you find 15% of the sample to have problems, you’ll assume the problem is your sample or your error definition.

But what I found most striking was the way the GAO managed not to talk at all about how the borrower reviews were conducted. Yes, they did talk about the problems with borrower outreach, and also discussed in some detail how the regulators haven’t said much about how borrowers who asked for a review will be compensated, and they don’t look to have come up with a way to assure that similarly-situated borrowers at different servicers will be treated the same. But there was absolutely no consideration of the issues exposed by our whistleblowers: that the consultants and the servicers were working hard to suppress any findings of harm, when the evidence of harm was widespread.

And this gets back to a basic question: why was the sampling being done at all? Remember, in the engagement letters, the effort devoted to the sampling was roughly the same as that expended on the borrower letters. Why did that make any sense? If you had adequate borrower outreach and education as to what types of harm would be eligible for compensation, why would you need the sampling, or at least sampling of that scale? Absent any explanation, it’s hard not to imagine the sampling was intended to come up with low error rates (as in confirm the low expected error rates) which would then be used to justify low findings of harm in the borrower letters.

But we are past that point, so the GAO pulls the veil and focuses on the mess that is left in the wake of the abruptly-shuttered reviews, which is also pretty ugly. Consider this section of that discussion:

In most cases, servicers, with regulators’ approval, have engaged the third-party consultants to review borrowers’ files in two categories (SCRA and foreclosed borrowers who were not in default) to determine whether borrowers experienced those specific types of harm. According to one third-party consultant, at the time of the agreements that led to the amended consent orders, consultants were waiting on additional guidance from regulators to complete aspects of these reviews.

Now you probably missed the “gotcha” in that section” “borrowers who were not in default”. Shouldn’t that include borrowers who had gotten modifications and were complying with the terms of the mod, yet were foreclosed upon? There are tons of cases like that, where payments were misapplied or where the bank simply started refusing to accept payment even though a mod had been executed. There are also instances of banks refusing payments from borrowers who were current and proceeding to foreclosure (I’ve just heard of a new case like that and I may be writing it up). Yet at Bank of America, Promontory deemed borrower who were having their checks returned by the bank not to be making payments! So with this sort of Catch 22 going on (presumably “if you were foreclosed on, you must have been in default”) you can rest assured that “borrowers who were not in default and were foreclosed upon” will be as scarce as unicorns.

The OCC’s excuse is that this new approach will be less inconsistent than the one that had been in place:

As discussed earlier, regulators had limited and unsystematic centralized control mechanisms to monitor consistency among the foreclosure review processes and did not have the information to assess the implications of any differences. According to regulators, achieving consistent results for borrowers, so that similarly situated borrowers receive similar payment amounts, is a goal of the amended consent orders, as it was of the foreclosure review process. OCC staff stated that the direct payments provided under the amended consent orders will likely be more consistent than what would have occurred under the foreclosure review because servicers are using a standard framework and objective criteria to categorize borrowers and all borrowers in a particular category will receive the same payment amount.

But even then, the GAO isn’t convinced:

Without using mechanisms to centrally monitor the consistency of servicers’ activities to categorize borrowers, regulators may risk delays in providing direct payments to borrowers and inconsistent results.

So even where the GAO does look, what it finds is pretty ugly, but you have to read through bureaucrat-speak to discern the implications. I hope Sherrod Brown is in the mood in his hearings later this week to put the consultants and regulators on the spot. It will take some determined probing. The obfuscation is almost always thicker when there is more to hide.

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  1. RKS

    Considering the total white wash of this review, wouldn’t affected parties have a basis for a class action suit? It seems obvious that the “review” was a billion dollar sham and has done little if nothing (by design and application) to remedy the issues pointed out in this article. And so the borrowers/ homeowners are no better off than before the review.

    1. Mr. Jack M. Hoff

      Sure, the whitewash would be grounds for a class action, but so whould a million other things our govt does to you every day. Troube is, try finding a lawyer who has the balls to take it on. There are none anymore. Back in 08 I asked a damned good lawyer why bankers werent being tried for obvious crimes. His answer was the big banks and by extension their officers were way too financially powerful for anyone to take on in the US court system. So, as you can see, money buys justice.

    2. LucyLulu

      A class action suit be tied up in the courts for several years and cost millions to prosecute. Even if attorneys could be found to try the suit and ultimately prevail, the awards to individual borrowers would be small, as they always are in class action suits. A large portion of the settlement, anywhere from 20% to as much 50% could be collected by the attorneys as their contingency fee, leaving the remainder to be split among potentially millions of borrowers.

  2. Wake Up America!

    “borrowers who were not in default and were foreclosed upon” will be as scarce as unicorns.”

    Actually – not. I am a daily visitor to NC (thanks to the foreclosure “crisis”) and have shared a brief recap of my foreclosure horror story with NC readers via the comments section on several occasions.

    I “lost” my home of almost two decades in a classic servicer-driven foreclosure. I had never missed a payment and continued to make my payments after foreclosure proceedings started.

    The servicer (BAC) used an erroneous vacany report after a BPO (broker price opinion) “drive by” to slam me with forced placed insurance. BAC notified my carrier of the vacancy and they immediately canceled my policy (although I had been with them the entire time I occupied my house with nary a claim). They used the vacancy as a “trigger” to start the foreclosure. My previous insurance company would not reactivate my policy and no other carrier would touch me. By the time I left my home, the forced placed policy through Balboa (BAC had an ownership stake in them at the time) was 4X the cost of my previous policy. They raised their premium 3 times in 10 months.

    I sent my payment certified/return receipt for 10 consecutive months. And for 10 consecutive months, BAC returned my payment. Keep in mind that I was current at the time foreclosure proceedings started.

    I was a squeaky wheel from the moment this nightmare started. Complaints were filed with my state AG (who ignored all of my calls and written correspondence), the OCC (worthless), BAC, etc. I had regular contact with BAC’s “Offie of The President.” Promise after promise from BAC to fix the mess were broken. I also had legal representation for almost the entire length of my ordeal.

    Returning payments is not only a BAC trick. All of the banks and servicers use it. I would imagine it is very convenient to tell a judge in a judicial hearing “We haven’t received a payment in X number of months” (I lived in a non-judicial state).

    Thanks, Yves for continuing to stick with this story when almost everyone else has abandoned it. Reading NC and realizing I am not alone has helped me get through this.

    I wonder how much the IFR will be paying out to unicorns?

    1. Yves Smith Post author

      Please reread that section. I’m saying that the official finding, that banks pretty much never foreclosed on people who were making payments on time, is bollocks.

      1. dolleymadison

        Happened to me if you need doco I have prodigious amounts..

        The M.O. in my case was to divert all payments into suspense to trigger a default which allowed fees – then foreclose for unpaid fees.

        (don’t worry, I won :) )

  3. Susan the other

    If the banks and regulators screw around long enough and say well it was very complex and we did out best to reach out directly to foreclosed borrowers, people will get weary of the whole farce and let them off the hook. Even tho’ the reviews were ‘Potemkin Reviews’ they still served to push the process forward whereby the banksters will get off the hook. All Janet Yellen said was they closed down the reviews because they were too complex and the Fed wants to pay money directly to harmed borrowers; to get them their compensation quickly. She didn’t say how. She insinuated this new approach involved some 4 million foreclosures. I think that’s every single one. The only way to fix that many documents is with a one-size-fits-all bribe. Going thru the files again will not be done. Clearly there will never be a discussion about lost notes, forged notes, forged forged notes, scraped allonges, multiple rehypothecations, and failed securitizations. I think if Janet Yellen had to hold a press conference to discuss the real facts she might have a heart attack.

    1. LucyLulu

      So, there are close to 4 million affected borrowers, and they shut down the reviews long before completion, with no plans to ever reopen them. Given that, how is it possible to put all 4 million borrowers into the different compensation categories? How you can classify a borrower whose loan was never reviewed, or reviewed using error-laden methodology? Will it be any more fair than using a lottery to determine compensation?

  4. Jack

    Quote: “There are also instances of banks refusing payments from borrowers who were current and proceeding to foreclosure Yet at Bank of America, Promontory deemed borrower who were having their checks returned by the bank not to be making payments!”

    Bank of America et al have been using this ruse since at least 1996-1997. It is an incredibly simple sure-fire way to force any borrower into default. The borrower is responsible to make timely payments; the borrower has no control over what happens on the servicer’s end.

    Then the bank goes into court with their manipulated records and allege the borrower missed payments.

    The defense to this is (UCC 3-603 (b),(c)): Tender of payment:
    (b) If tender of payment of an obligation to pay an instrument is made to a person entitled to enforce the instrument and the tender is refused, there is discharge, to the extent of the amount of the tender, of the obligation of an indorser or accommodation party having a right of recourse with respect to the obligation to which the tender relates.

    (c) If tender of payment of an amount due on an instrument is made to a person entitled to enforce the instrument, the obligation of the obligor to pay interest after the due date on [[the amount tendered is discharged]]. If presentment is required with respect to an instrument and the obligor is able and ready to pay on the due date at every place of payment stated in the instrument, the obligor is deemed to have made tender of payment on the due date to the person entitled to enforce the instrument.

    In 2002, I argued that all the way up to the Supreme Court of the United States, and nobody was listening.

    1. sd

      Back in the 1980’s, not accepting payments was a ploy was used by NYC landlords to force out tenants from rent control apartments. The landlords just stopped depositing checks.

      1. Yves Smith Post author

        Yes, and now if you send your payment in certified mail, the landlord can’t say you didn’t pay. Housing court will take the fact of sending the check as evidence of payment.

        1. dolleymadison

          Well – I paid via online banking and – lo and behold – after foreclosure was filed Bank of America DELETED my entire online payment history for the last 7 years – but only for one payee – Ocwen.

  5. LucyLulu

    I can’t help but wonder if the GAO is another agency whose integrity has become compromised.

    Counterpunch recently published an article on the GAO report on the F-35 jet fighter project at DoD. Despite citing evidence in support of shutting down development due to lack of progress on a major issue with no solution on the horizon, the report concluded that orders for the jets should proceed. Counterpunch also discovered that GAO had been eliciting feedback on its report from Lockheed-Martin prior to releasing the report.

    If the damn things can’t fly, maybe those without homes can live in them.

    1. belinda crawford

      well well the time has come to give out the checks i just got info sent to myemail that checks go out april 12,2013 you can go to ane also and see the info they have a table set up that catergorizes each person ‘s situation as to how much they will get it’s very interesting.i don’t think it’s going to be fair seeing that they have already botched up the reviews with all the cover ups and banks trying to hide what they did to homeowners, i wouldn’t be surprised if they go back to court and have to pay out a lot more for the secrets and the botched up mess they have created.

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