Instead of the much awaited justice and financial comfort, the Independent Foreclosure Review caused nothing but grievance, disappointment and a hole in the budget for those most affected by the great American foreclosure.
The intended purpose of the foreclosure review was to reveal the abuses made by lenders in their ineffective management of the foreclosure tsunami following the 2008 housing crisis. More than a dozen mortgage providers (companies and major U.S. banks) entered a deal with the Office of the Comptroller of the Currency and the Federal Reserve to compensate the victims of foreclosure abuse. This was to be achieved by hiring independent consultants to check loan files thoroughly to identify errors and establish the harm produced.
Unfortunately the program was shut down in January 2013 because of the compromising interference of banks and government mismanagement. Instead of the Review, Americans were given the Settlement. Nearly $10 billion were to be distributed to the foreclosure victims, but the payouts were to be established by the very banks that were being accused of ruining people’s lives.
Surfacing evidence shows that if the initial program had carried on, it may have exposed even more mistakes than reported by the federal government when they sunk the project. According to a report released by the Government Accountability Office, foreclosure victims could have received another $1.5 billion in cash, if the program had not been closed.
Under the deal, borrowers got $3.9 billion, whereas the reviews could have brought them $5.4 billion in cash payouts. This estimate itself could be much lower than the amount that banks and the other lenders should have paid to distressed homeowners. This error in estimation results from the 6.5% error rate calculated by the OCC. It means that a little more than 1 in 20 borrowers had suffered financial loss, according to regulator calculations.
According to the Government Accountability Office (GAO), the error rate had a “limited” value because the reviews remained incomplete. In the last weeks of 2012, more than 135,000 people filed applications to have their cases reviewed, and this happened right before the program was turned off. Most of those loan files never got on auditors’ table for reviewing. Only on 14% of the files had reviews been completed, which makes it difficult to determine the “prevalence of harm”, GAO said.
In April 2013, Sen. Elizabeth Warren (D-Mass.) accused regulators of making up that 6.5% rate. This means servicers did not perform adequate investigation into the harms produced before reaching the settlement.
The report of the Government Accountability Office was released after another Democratic Congressman’s letter denounced the invalidity of the error rate that the regulators used to determine the size of the settlement. “Widespread and systematic foreclosure abuses” were also uncovered by an inquiry into foreclosure review documentation performed by the office of Rep. Elijah Cummings (D-Md.). This information was brought to the attention of Darrell Issa (R-Calif.), the chairman of the House Committee on Oversight and Government Reform.
Cummings insists particularly on the high error rates present in the reports released by one of the auditing companies (i.e. Promontory Financial). In their May 2013 report, the Promontory auditors reported that even on a small sample from Bank of America loan files, the error rate was 60%. All of these were mistakes made by the bank in its management of the applications for mortgage modification submitted by borrowers who were trying to avoid default on their loans.
According to Cummings’ letter, the cited auditing company said in a separate report that “borrower financial injury” was identified in 21% of PNC Bank mortgages. These figures, 60% and 21% are vastly higher than the 6.5% cited by the regulators when deciding to shut down the program. The 6.5% was a dwarf rate for settling the amount lenders ought to pay for their abuses.
The documents issued by Promontory are not publicly available. Moreover, the officials from the Office of the Comptroller of the Currency and the Federal Reserve have refused to make any comments on the GAO report or the Cummings letter.
These documents represent the latest information on the government’s mismanagement of the mortgage abuses. Losing this chance to make justice inflicts additional harm to borrowers nationwide. The government has once more failed to determine the amplitude of the foreclosure crisis and its huge impact on the recession that crippled the U.S. in the 2008 financial crash.
Complaints abound about lenders losing applications for loan modifications, charging bogus fees and even opening unnecessary foreclosure files. And hundreds of thousands of Americans are in this situation. Unfortunately, all the evidence that surfaced so far shows that all these errors were common occurrence and even deliberate.
There were employees at Bank of America who testified revolting insider truths about the foreclosure crisis: they were rewarded for pushing borrowers into foreclosure, they used invented reasons for denying applications or lied to homeowners filing for loan modifications.
According to a 2012 study conducted by regulators and academics at the Federal Reserve and the Office of the Comptroller of the Currency, 800,000 loans had been fouled by the mortgage industry.
All the abused homeowners were supposed to get a chance to justice by means of the foreclosure review. However, nine months after it began, allegations of bank interferences had already marred the reliability of the program. After its cancellation, contractors involved in the reviewing process revealed that poor oversight and shifting guidelines had undermined the program. There are reports of auditors being instructed by bank officers to overlook the mistakes they came across.
Beyond these challenges, lots of the borrowers interviewed by the Huffington Post said they would have preferred the program to continue, no matter the costs and time involved. This is due to the fact that the settlement alternative was not in favor of the wronged party.
According to the settlement, $3.9 billion were to be divided to 4.4 million people who had received a foreclosure notice between 2009 and 2010. The major losers here were the 250,000 Americans who applied for a review. More than 99% of the compensated borrowers got checks of $6,000 or less, with some getting as little as $300.
And to make injustice worse, lots of checks were delivered very late, others got lost in the mail and an overwhelming number were sent to the wrong addresses.
The lack of transparency is the biggest complaint these days. People stand no chance at finding out how the bank made the payment decision. When GOA asked regulators about such issues, the answer guided borrowers towards other sources: the administrators in charge of check delivery by mail. Nevertheless, the information is not actually obtainable as GAO observes.
The conclusion that imposes itself is simple: without transparency, the public will lose confidence in the mortgage market. While building back this confidence was the primary goal of the review process, trust in the mortgage industry is very far from restoration.
The Government Accountability Office also revealed that regulators decided on the number of consumers in each category of financial harm by ‘guess’ work based on the results from just one lender’s initial review of these data. Puzzling enough, regulators decided that there be the same percentage for Citibank borrowers who were abusively denied a permanent loan modification as borrowers at JPMorgan Chase and Bank of America. There is no mention in the report of which bank served as a model for this extrapolation.
Maxine Waters (D-Calif.) called this decision “nonsensical.”
The end of Cummings’ letter launches a call for a hearing to further investigate the review and the settlement. How did regulators determine those sums that lenders should pay? This is the big question! There is pressing need to find out whether those amounts were “in any way related to the actual or estimated harm suffered by borrowers.”
At this point it is very difficult to imagine a positive solution out of this mess that would serve the interests of the foreclosure victims.