It used to be that a $10 billion settlement would be a legal wonder, an amount so huge that everyone was certain justice had been done and that finality had come to a given issue.
But that's turning out not to be the case with “independent foreclosure review” agreements recently worked out between the government and more than a dozen mortgage servicers.
The reviews have now stopped and in their place we have settlements concerning “foreclosure actions” that currently total $9.3 billion, an amount that includes $3.6 billion in cash payments to nearly 4.2 million eligible borrowers, plus $5.7 billion in “additional assistance.”
But instead of finality, look for more claims, more foreclosure headlines and more money, at least until someone can explain what is being settled, whether the settlements are sufficient, who gets paid and how much. Here's why.
This whole process began when government regulators did a survey of 14 mortgage servicers and the way they handled foreclosures. As the Government Accountability Office (GAO) explains, “the examinations revealed severe deficiencies” including shortcomings in the preparation of foreclosure documents; inadequate policies; staffing; processing and the use of foreclosure attorneys.
In other words, everything.
In response, the Federal Reserve and the Office of the Comptroller of the Currency (OCC), two leading bank regulators, issued consent orders against 14 major servicers. According to the GAO, as part of the consent agreements the servicers were obligated to “retain an independent firm to conduct a review of foreclosure actions on primary residences from January 1, 2009, to December 31, 2010, to identify borrowers who suffered financial injury as
a result of errors, misrepresentations, or other deficiencies in foreclosure actions, and to recommend remediation for borrowers, as appropriate.”
Thus came into being the idea of “independent foreclosure reviews” and news that “outreach letters” had been sent to 4.3 million foreclosed borrowers explaining that they might receive awards ranging from $500 to $125,000 plus equity if they had improperly lost their homes. To determine who would get what, the servicers hired outside consultants to review vast numbers of individual case files.
Unfortunately, several problems arose.
First, the letters sent to borrowers were essentially incomprehensible. “Readability tests,” said the GOA, “found the initial outreach letter, request-for-review form, and website to be written above the average reading level of the U.S. population, indicating that they may be too
complex to be widely understood.”
When recipients did read the letters some may have gotten the wrong impression.
“Borrowers,” according to the GAO, “may have ignored communication materials because they did not understand who provided the information and believed the materials were fraudulent.”
Second, the reviews were not independent. The reviewers were selected by lenders and the review guidelines were established by, well, lenders. ProPublica alleged that an “examination of contracts that outline what work the banks would do on the review shows that America's four largest banks all planned to participate heavily in evaluating whether homeowners were harmed. Three of the four banks would even help set how much compensation victimized homeowners would receive.”
Third, huge numbers of borrowers were not covered by the settlement, including those foreclosed before 2009 and after 2010, and those foreclosure actions not involving the servicers involved in the original consent orders or in the recent proposed settlement. RealtyTrac data shows that from 2006 through 2012 there were more than 10 million U.S. properties that started the foreclosure process.
The Cost of Reviews
A major issue with the review process has been the matter of cost, more than $1.5 billion according to the Huffington Post.
“Designed to compensate wronged homeowners,” said American Banker, “the review programs are almost certain to deliver several times more cash to the consultants overseeing them. Bankruptcy filings by ResCap, the former GMAC mortgage servicer slated to be acquired by Ocwen, state that the company will pay consultant PricewaterhouseCoopers $12,500 to review each of 20,000 loans for a total cost of a quarter-billion dollars. Yet ResCap expects to pay only $35 million to $60 million to harmed homeowners.”
Given hundreds of thousands of potential claims, the servicers and government regulators instead elected to end the review process and pay out $9.3 billion and counting. Under the new agreements borrowers can receive awards “ranging from hundreds of dollars up to $125,000.”
And this, of course, brings us back to square one.
- Why should Smith get $125,000 while Jones receives $500? Should a borrower who defaulted on a loan get anything if neither the lender nor the servicer did anything wrong?
- If the folks across the street were wrongly foreclosed and the value of your house went down as a result do you get anything?
- If you were wrongly foreclosed in 2008 how much will you collect?
- Does “hundreds of dollars” mean less than $500?
- What happened to awards “plus equity” for borrowers who were wrongfully foreclosed? Now, apparently, awards are limited to $125,000 and no equity regardless of how egregious the abuse, except if a borrower goes to court and wins more. Which homeowners negotiated this deal?
You can see what's next. To figure out who should get what we'll need an individualized assessment system to examine the potential claims of each borrower. It's just a guess, but I suspect the cost will be in the billions of dollars and whatever happens we will surely not call such evaluations independent foreclosure reviews.