The story of the inflation and subsequent popping of the housing bubble is correctly seen as a failure of regulation, particularly by the Federal Reserve, which at the time held oversight for consumer protection. They ignored the violations of mortgage origination standards that essentially led to handing out loans to anyone with a pulse. And the rating agencies blessed these bad loans with a triple-A rating. But lax regulation also plays a role in the foreclosure fraud crisis. Regulators have stayed almost completely off the playing field in looking at the operations of the banks they are supposed to monitor.
As foreclosures began to mount across the country three years ago, a group of state bank regulators suspected that some borrowers might be losing their homes unnecessarily. So the state officials asked the biggest national banks for details about their foreclosure operations.
When two banks – J.P. Morgan Chase and Wells Fargo – declined to cooperate, the state officials asked the banks’ federal regulator for help, according to a letter they sent. But the Office of the Comptroller of the Currency, which oversees national banks, denied the states’ request, saying the firms should answer only to inquiries from federal officials. In a response to state officials, John Dugan, comptroller at the time, wrote that his agency was already planning to collect foreclosure information and that any additional monitoring risked “confusing matters.”
But even as it closed the door on state oversight, the OCC chose itself not to scrutinize the foreclosure operations of the largest national banks, forgoing any examination of their procedures and paperwork. Instead, the agency relied on the banks’ in-house assessments. These provided no hint of the problems to come until they had tripped the nation’s housing market, agency officials later acknowledged.
OCC has yet to do any reviews of the activities of the banks they regulate, seeking instead “internal reviews” by those banks. The regulatory agency just started sending officials in to interview bank employees two weeks ago.
The evidence that banks gouged their own customers in multiple ways was obvious then and remains obvious now. Servicers have ignored their statutory duty, in many cases, to engage in loan modifications prior to foreclosure, and often their modification process would lead to foreclosures even if the borrower seeking the mod was current on the loan previously. The servicers clearly tacked on extra fees, violating the terms of the mortgage agreement. They abused the HAMP program and sometimes didn’t live up to their promise of modifying the loans, foreclosing on the borrowers anyway, even if they made all the payments. And they clearly ran afoul of private property laws and the laws of due process by illegally submitting false documents to courts to speed up foreclosures. Much of this was known by 2007, when law professor Katherine Porter at the University of Iowa wrote a study on the subject, and even earlier. But OCC did nothing.
This alibi is actually in the article.
While acknowledging they did not police foreclosure practices, OCC officials defended their oversight of banks’ mortgage operations. They cite multiple cases brought against loan servicers in recent years. In an instance where the agency caught a manager allowing legal documents to be improperly signed, the OCC fined her $5,000 and told her not to do it again.
Emphasis, and disbelief, mine.
The state regulators have gotten bolder in going after the banks on this front. Today in Ohio, lame-duck Attorney General Richard Cordray will get a preliminary ruling in his lawsuit against GMAC Mortgage for defrauding courts with phony documents. GMAC wants to simply replace the bad documents with new ones and keep the foreclosure cases rolling. Cordray is asking a common please court judge, Nancy Russo, to disallow that.
The precedent set by the case might hasten a settlement between home lenders and the attorneys general of the 50 U.S. states, who are investigating allegations of fraud in foreclosure filings. Those being probed include San-Francisco- based Wells Fargo, which has said it will re-file foreclosure affidavits involving statements that “did not strictly adhere to the required procedures.”
In potentially thousands of cases across the U.S., judges have the power to impose “sanctions, penalties, fines and even default,” as the banks try to submit substitute paperwork to proceed with flawed foreclosures, Cordray said.
“The banks want to wish this away and pretend like it doesn’t exist,” he said.
The judge sounds like she understands the problem, particularly with the underlying title. “If courts around the country do not handle this on an individual case basis and there are later problems with the title, the courts will have participated with the clouding of the title,” said Judge Russo. “The potential for harm is so immense at so many levels.”
With delinquencies rising in the last quarter, this problem, and the potential for harm, is only increasing. Regulators at the state and federal levels have an obligation to act.