Does The Foreclosure Fraud Settlement Actually Punish The Banks?
If you ask the blogosphere the above question, it appears that the answer is a resounding "No." Abigail Caplovitz Field has described the settlement as a means for the banks to " systematically overcharge borrowers and steal their homes." How did she arrive at this conclusion? She read the settlement documents, which were released this week. Her analysis focuses on the new servicing guidelines, which allow for certain margins of error. These margins of error correlate to so-called "reportable" error. The reportable errors are the ones that can put the banks in violation of the settlement agreement.
The big problem arises when you apply the margin of error to the actual numbers. For example:
"According to Column C, the loan level error tolerance for income errors is 5%. As a practical matter, here's what that means: Imagine your household income is $80,000. Imagine that at $80k the bank's formula says you get a modification and thus you can keep your house. But the bank doesn't use $80k in its math; it uses $77,000. So the computer rejects you, and you lose your home to foreclosure. Does law enforcement care about the bankers wrecking-your-life error? No, because the $3,000 error, while enough to deny you the mod, isn't 5% of your income. So the error was too small to count."
She also points out that, in order for a reportable error to trigger a breach, it must happen five times in every hundred files reviewed. This means that banks can dance right up to the line and never once be taken to task for doing so. This means that for every million loan modifications, lenders can wrongfully deny a loan modification 49,999 times before they are on the hook. Don't forget that those 49,999 errors are "reportable." Banks are still free to make as many unreportable errors as they please.
David Dayden at Firedoglake has also been posting his analysis. One of the more interesting tibits that he extracted from the settlement is that Ally (formerly GMAC) managed to negotiate a lower fine due to an apparent inability to pay. Instead of paying $250 million, Ally's cash penalty was cut to $110 million.
What makes this disturbing is that the actual cash payouts from the banks are the only real money coming out of this settlement. The remainder of the roughly $25 billion is to be paid in the form of credits -- for every dollar of principal reduced on an investor-held (securitized) loan, the servicer receives a credit of $0.45. If the participating banks reduce principal on loans that they hold on their books, the credit is $1 per dollar reduced.
It's also troubling that one of the "too big to fail" banks claims it cannot pay out $250 million in cash. In Ally's case, it is even more troubling in light of the HUD Inspector General's report about its investigation into Ally. Of the five major banks, Ally was the least responsive to the Inspector General's attempts to review its foreclosure files, going so far as to assert Fifth Amendment privilege for its officers and employees to avoid the Inspector General's subpoena powers.
And, as Dayden points out, Ally just paid out $134 million in dividends to TARP in mid-February.
Dayden's analysis covers several posts, and each one is worth reading. Another major problem with this settlement appears to be in the enforcement mechanism. I've already discussed the liability threshholds above. However, the initial reporting of errors will be done by internal employees of the participating banks. This means that the determination about which errors are reportable will be made by individuals with a rather vested interest in erring on the side of "unreportable." This sounds very similar to the OCC foreclosure review process which, by all accounts, has been largely unsuccessful thus far.
The enforcement mechanism does require reporting to an independent external review board. Even with that extra layer of review, my sense is that "garbage-in, garbage-out" will hold true. The HUD Inspector General reports resoundingly demonstrate that the foreclosure fraud issues were authorized from the highest levels in the subject banks.
For example, JP Morgan Chase shuttered its quality control division in 2008. This means that none of the legal documents prepared by or on behalf of Chase were reviewed for accuracy.
Bank of America also lacked a quality control department. Testimony elicited during the HUD investigation also indicated that document reviewers only checked for formatting and spelling errors. Document signers were expected to maintain a standard of 49 affidavits per hour, 51 assignments per hour, and document execution at 46 documents per hour. Notaries did not witness the signatures that they were notarizing. If anything, Bank of America's control structure was non-existent. Its fraudulent practices were systemic, not inadvertent error.
Wells Fargo also set metrics for its employees, requiring some to notarize up to 1,000 documents per day without witnessing the signatures. Wells Fargo also hired people woefully unqualified for their positions. From the report: "For example, immediately before Wells Fargo hired an individual to be vice president of loan documentation, the person worked at a pizza restaurant and as a bank teller. Another had been a department store cashier and daycare worker, while another had worked on the production line in a factory." Wells Fargo failed to train its employees, and routinely hired vice presidents whose only task was to sign affidavits. When document signers and their managers expressed concerns to upper management, the response was to shorten the turnaround time on document execution from 5 to 7 days to 24 to 48 hours.
CitiMortgage did not have any written policies and procedures for executing foreclosure documents prior to November 2009. It had no means of tracking foreclosure documents. Like the other banks, Citi's affiants did not review documents before signing them. It also employed the same high-volume signing practices of the other banks.
Given that the banks were utterly unable to manage the document signing process, it is difficult to believe that they will be able to manage the compliance and compliance review process. Allowing lenders to police themselves has not been effective thus far. Continuing the practice is eminently foolish.
One final note -- the servicing standards sunset in 2015. After that, it is anyone's guess as to what loan servicers will do. Mine is that they will follow the path of least resistance.
At the end of the day, the banks are paying out only a fraction of the $25 billion settlement from their own pockets. The remainder of the funds will be "paid" via credits for issuing loan modifications and principal writedowns. The settlement, all things considered, is a slap on the wrist at best.