For more than a year, housing advocates and their allies worried that a review of foreclosed loans managed by banking regulators was vulnerable to mortgage industry interference.
On Monday, the Office of the Comptroller of the Currency and the Federal Reserve Board -- the two regulatory bodies that had taken the lead in making the nation’s largest banks accountable for rampant foreclosure fraud -- announced that homeowners no longer need worry about the independence of the reviews. The regulators, essentially admitting that the reviews were too difficult to conduct, and that assigning appropriate compensation to those most harmed by the banks was no longer a priority, said the mortgage companies themselves will determine how to distribute $3.3 billion to more than 4 million homeowners forced into foreclosure in 2009 or 2010.
Housing advocates, while acknowledging that the foreclosure reviews were flawed, said they don't understand how turning the process over to mortgage companies improves a system already insufficiently independent.
"The regulators have decided to replace the fox in the henhouse with the wolf," said John Taylor, president of the National Community Reinvestment Coalition, a Washington-based housing nonprofit. "It is just incomprehensible to me that they could not find a third party that has the wherewithal and independence to fairly determine what the damage is to homeowners."
Regulators said the review process, which sought to determine if specific loans were unfairly foreclosed upon, was too costly and time-consuming. Under the new deal, 10 mortgage companies, including Bank of America, Wells Fargo and JPMorgan Chase, will pay $8.5 billion. Of that, $3.3 billion is earmarked for direct payments to "eligible borrowers" whose foreclosures were handled improperly. The remaining $5.2 billion will help struggling borrowers with programs such as loan modifications.
This new deal is separate from the $25 billion mortgage settlement involving five large banks and the state attorneys general earlier this year, though many allegations of misconduct are the same. Homeowners have complained for more than five years that mortgage companies made widespread errors in the management of home loans, and that in some cases those errors pushed them into foreclosure.
Scrapping the reviews means dismissing the consultants who had already spent hundreds of thousands of man-hours (and more than $1.5 billion) poring through loan files. Regulators will still oversee the new framework by reviewing a sample of the decisions made by the banks, OCC officials said, but will not actively evaluate every case. Instead, the companies -- known as mortgage servicers -- will make broad determinations about who is compensated for lenders' own malfeasance.
Ernie Dobson is one of the 495,000 homeowners who applied for a review. Dobson lost his San Diego home in 2009 to foreclosure while in the midst of a mortgage modification by JPMorgan Chase. He estimated he spent at least 10 hours applying to the foreclosure review. When reached by phone with the news, he said was afraid to tell his wife what he had learned. "I feel fear," he said. "Fear that the person who committed the injustice is now going to be the judge and jury about that injustice."
Many other homeowners -- an additional 3.9 million, according to regulators -- were eligible to apply for the foreclosure review, but never bothered. Some did not know about it, and others may have trashed the confusing application forms by mistake. Still others simply lacked faith that it would be worth their while to apply.
"Most of my clients did not apply because they thought the process was rigged," said Roy Oppenheim, a housing lawyer in Ft. Lauderdale, Fla.
On Capitol Hill, congressional leaders who had asked federal regulators for a briefing on the settlement when rumors started swirling last week, reacted negatively to the announcement.
Rep. Elijah E. Cummings (D-Md.), ranking member of the House Committee on Oversight and Government, said in a statement he was “deeply disappointed” the regulators decided to proceed “before providing Congress answers to serious questions about how this settlement amount was determined, who these funds will go to, and what will happen to other families who were abused by these mortgage servicing companies.”
“I believe that borrowers deserve more answers and transparency than the Federal Reserve and the OCC are currently willing to provide,” Cummings said.
The lack of disclosure -- unusual for such a high-profile agreement shepherded by a bank regulator -- extended to members of the media. OCC officials said they would not provide more than a sketch of the deal Monday, telling reporters the specifics of the settlement may take at least 15 days to be revealed.
Under the new process, OCC officials explained, banks would take the 4.4 million foreclosed mortgages involved in the original review and broadly classify them into 11 “buckets” corresponding to the level of fraud during the foreclosure process. Borrowers with foreclosed loans that fall into the highest-priority bucket, such as foreclosures illegally conducted on U.S. troops while they were fighting overseas, will qualify for a payout of as much as $125,000. Those in the lowest-level group, such as loans with a clerical error, will qualify for at least $250.
Banks will be making all the “slotting” decisions, something OCC officials said was needed to speed the process. Payouts to some borrowers could begin as early as March, OCC officials said. All the aggrieved borrowers will likely get something, if only at the expense of specific determinations of harm being made for those exposed to egregious fraud.
In spite of admitting the new process will not determine “whether or not there was harm” in specific cases, OCC officials contended the latest settlement keeps the Obama administration's promise to discover and correct the wrongs of foreclosure fraud.
“When we began the Independent Foreclosure Review, the OCC pledged to fix what was broken, identify who was harmed, and compensate them for that injury," Comptroller of the Currency Thomas Curry said in a statement. "While today’s announcement represents a significant change in direction, it meets those original objectives by ensuring that consumers are the ones who will benefit.”
The settlement replaces a review criticized as insufficiently independent from the start. ProPublica, an investigative news nonprofit, found that supposedly independent third-party reviewers looking over Bank of America loan files were given the "correct" answers in advance by the bank. These reviewers could override the answers, but they weren't starting from a blank slate.
It was also expensive. Reviews were taking more than 20 hours a loan to file at a cost of up to $250 an hour, according to The New York Times. All told, the banks spent an estimated $1.5 billion on the reviews.
As HuffPost reported last week, the settlement came as the Government Accountability Office, a nonpartisan investigative arm of Congress, was preparing a report critical of the program.
The settlement agreement ncludes Aurora, Bank of America, Citibank, JPMorgan Chase, MetLife Bank, PNC, Sovereign, SunTrust, U.S. Bank, and Wells Fargo.
The original deal included four additional mortgage companies: Ally Financial, EverBank, HSBC and OneWest Bank. The reviews on those loans will continue and are not affected by the settlement.