The foreclosure fraud settlement has been filed in federal court in Washington. The Justice Department has provided the relevant documents, over a month after the settlement was announced. So now we can finally begin to assess the settlement and what it will mean for housing policy.
It’s going to take a while. The documents are long and the rules dense. I don’t expect to get a handle on it for the next several days. But we can make some quick points.
First of all, as we’ve been documenting, these are larger releases from liability than at first contemplated. It’s not just a “robo-signing” settlement. Among the elements released in the settlement include foreclosure fraud, numerous instances of varied servicer abuse, violations of the Servicemembers Civil Relief Act, whistleblower claims of fraud in HAMP, origination errors, false documentation in court, violations of the False Claims Act, appraisal fraud at Countrywide, fair lending violations, underwriting inaccuracies on FHA loans, and more. Here’s just one list from the complaint of servicing abuses found by the government:
a. failing to timely and accurately apply payments made by borrowers and failing to maintain accurate account statements;
b. charging excessive or improper fees for default-related services;
c. failing to properly oversee third party vendors involved in servicing activities on behalf of the Banks;
d. imposing force-placed insurance without properly notifying the borrowers and when borrowers already had adequate coverage;
e. providing borrowers false or misleading information in response to borrower complaints; and
f. failing to maintain appropriate staffing, training, and quality control systems.
This is one portion of what is being released in the settlement. And here’s another list on loan modification noncompliance (which in the case of FHA and other loans, is mandatory):
a. failing to perform proper loan modification underwriting;
b. failing to gather or losing loan modification application documentation and other paper work;
c. failing to provide adequate staffing to implement programs;
d. failing to adequately train staff responsible for loan modifications;
e. failing to establish adequate processes for loan modifications;
f. allowing borrowers to stay in trial modifications for excessive time periods;
g. wrongfully denying modification applications;
h. failing to respond to borrower inquiries;
i. providing false or misleading information to consumers while referring loans to foreclosure during the loan modification application process;
j. providing false or misleading information to consumers while initiating foreclosures where the borrower was in good faith actively pursuing a loss mitigation alternative offered by the Bank;
k. providing false or misleading information to consumers while scheduling and conducting foreclosure sales during the loan application process and during trial loan modification periods;
l. misrepresenting to borrowers that loss mitigation programs would provide relief from the initiation of foreclosure or further foreclosure efforts;
m. failing to provide accurate and timely information to borrowers who are in need of, and eligible for, loss mitigation services, including loan modifications;
n. falsely advising borrowers that they must be at least 60 days delinquent in loan payments to qualify for a loan modification;
o. miscalculating borrowers’ eligibility for loan modification programs and improperly denying loan modification relief to eligible borrowers;
p. misleading borrowers by representing that loan modification applications will be handled promptly when Banks regularly fail to act on loan modifications in a timely manner;
q. failing to properly process borrowers’ applications for loan modifications, including failing to account for documents submitted by borrowers and failing to respond to borrowers’ reasonable requests for information and assistance;
r. failing to assign adequate staff resources with sufficient training to handle the demand from distressed borrowers; and
s. misleading borrowers by providing false or deceptive reasons for denial of loan modifications.
You might ask why any industry with this kind of performance record would be allowed to stay in business. It would be a good question.
The broad outlines of the settlement are familiar. It will cost five major banks – Bank of America, Wells Fargo, Citi, JPMorgan Chase and Ally Financial (previously GMAC Mortgage) – $25 billion to resolve claims. Only it will not actually cost that much. Only $5 billion comes in hard dollars to the federal government and the states ($1.5 billion of that will go toward those $2,000 checks for foreclosure victims). The other $20 billion is divvied up, with $3 billion for refinancings, and $17 billion for a variety of other measures, including principal reduction. But we have learned that $1.7 billion of that, or 10%, could go toward waiving deficiency judgments that banks were unlikely to pursue anyway. Another 5% could go toward moving assistance for foreclosure victims. And Bank of America could wriggle out of as much as $850 million by engaging in deeper principal reductions for a smaller universe of borrowers. Plus, servicers get a 25% credit for principal reductions in the first year, to push near-term relief. But of course, this reduces the total cost to the banks even further.
Similar sleight of hand can be seen throughout the document. The press release claims that “The court documents filed today also provide detailed new servicing standards that the mortgage servicers will be required to implement. These standards will prevent foreclosure abuses of the past, such as robo-signing, improper documentation and lost paperwork, and create new consumer protections.” This neglects the fact that the servicing standards will only stay in place for the 3 1/2 years of the settlement, and that the Consumer Financial Protection Bureau has authority to enact servicing standards themselves, without the need for the settlement to do so.
Further, there’s this nugget from the opening page on the “consumer relief requirements”:
Servicer shall not, in the ordinary course, require a borrower to waive or release legal claims and defenses as a condition of approval for loss mitigation activities under these Consumer Relief Requirements. However, nothing herein shall preclude Servicer from requiring a waiver or release of legal claims and defenses with respect to a Consumer Relief activity offered in connection with the resolution of a contested claim, when the borrower would not otherwise have received as favorable terms or when the borrower receives additional consideration.
Wow. In other words, servicers can force borrowers to sign away their due process rights for accepting principal reductions associated with the settlement.
As expected, the monitoring elements of the settlement include a quarterly self-report by the banks, after which an independent monitor can scrutinize the reports. So the banks are essentially policing themselves here, while the monitor has to wait several months to review their work and see if they are not according themselves properly. This is an invitation to abuse.
I will definitely have more when I find time to dig into the documents further.