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Foreclosure Review Program's Regulators Take Pounding From Elizabeth Warren, Sherrod Brown
Posted: 04/11/2013 1:32 pm EDT Huffington Post

Elizabeth Warren, The Fed, Foreclosure Crisis, Independent Foreclosure Review, Senate Banking Committee, Sherrod Brown, Foreclosure Review, Foreclosure Review Program, Office Of The Comptroller Of The Currency, Business News Two prominent Democratic senators levied a withering attack on federal bank regulators on Thursday, accusing them at a Senate hearing of putting the interests of banks ahead of consumers in refusing to disclose what they know about the failed foreclosure review program that ended abruptly earlier this year.

Most aggressive was Sen. Elizabeth Warren, a Massachusetts Democrat and longtime consumer advocate who is quickly developing a reputation as perhaps the Senate's most effective crossexaminer. Following a series of probing questions that would not have been out of place in a court room, Warren excoriated the regulators for not immediately turning over case records of borrowers who may be considering private legal action against their bank. "You have made a decision to protect the banks but not to help the families who were illegally foreclosed on," Warren said. "Families get pennies on the dollar for being the victims of illegal activities." She continued: "You know of cases where the banks broke the laws, but you are not going to tell the homeowners. People want to know that their regulators are watching out for the American public, not the banks. Without transparency, [we] cannot have any confidence in your oversight or that markets are functioning correctly." Over the past few months Warren and other legislators have repeatedly asked bank regulators at the Office of the Comptroller of the Currency and the Federal Reserve for more information about the case-by-case review of homeowner loans that was dropped in January in favor of a blanket $9.3 billion settlement. At the hearing before the Senate Banking Committee, Warren and Sen. Sherrod Brown (D-Ohio) made clear that they were not happy with the answers lawmakers have received thus far about the program, which is widely considered an expensive and lengthy debacle. Last week, the Government Accountability Office issued a scathing report of the reviews, finding that regulators did not provide proper oversight and that some errors likely went undetected. On Tuesday, regulators released new information suggesting that banks may have made errors in as many as 30 percent of all loans that qualified for a review, a figure far higher than previously reported. Thursday's hearing was framed by the Senate committee as an opportunity to understand better the relationship between the financial institutions that agreed to the loan reviews nearly two years ago, and the independent consultants -- companies like Promontory Financial and Deloitte -- hired by the banks to conduct the reviews. As HuffPost and others have reported, those reviews were compromised by inconsistent oversight of the often-poorly trained contract employees and by improperly close relationships with the banks themselves. Under questioning from Sen. Jack Reed, a Rhode Island Democrat, regulators came the closest to acknowledging that the reviews, which resulted more than $2 billion in payments by the banks to consultants, were poorly conceived and supervised. "The OCC and the Fed greatly underestimated the complexity of the task," said Daniel Stipano, a top lawyer at the OCC. He cited the number of financial institutions, consultants and homeowners involved and the difficulty in negotiating state law as among the challenges that reviewers and regulators had to negotiate.

Asked if he thought the structure of the reviews was appropriate in hindsight, Stipano responded "no." "We would take a different approach" if the process were done again, he said. He declined to say what changes regulators might make in the future. Brown led off the committee by asking officials to reveal the name of an independent consultant that regulators had admonished for shoddy work. The officials declined, citing the confidential bank-regulator relationship. They did not rule out the possibility of disclosing the name of the consultant in the future. Brown seemed to find this response unsatisfactory. "How does disclosing the identity of an underperforming third-party entity damage the relationship with banks?" he asked. Warren focused many of her questions on the January settlement into which most of the banks conducting the foreclosure reviews entered. That deal requires they distribute $3.6 billion in cash payments to 4.4 million homeowners who received a foreclosure notice in 2009 or 2010 -- a number far greater than the half-million or so who applied for a foreclosure review with a specific complaint. Most borrowers will receive less than $1,000 each. Warren noted that regulators have given conflicting answers as to the number of loans that reviewers found to contain bank errors. Regulators have said roughly 100,000 reviews were completed, or nearly so, when the program ended. The Federal Reserve, for example, initially said that errors were detected in 6.5 percent of those loans, but subsequent estimates have put the percentage both higher and lower than that figure, Warren said. "If you had believed that the banks had broken the law in 90 percent of cases, would you have settled for more money?" she asked Daniel Ashton, a top lawyer at the Federal Reserve. "Doesn't it matter how many homeowners were victims of illegal activities by their bank?" "Our priority was to get cash to borrowers," Ashton responded. "[It is a] question of getting the right amount of cash to the right people, isnt that right?" Warren said. After a few more minutes of back and forth, Warren said, "The number is critical. It tells us how much illegal activity there was ... but 6.5 percent is a made-up number." She continued: "What is the right number? If you cant correctly tell how many people were the victims of illegal bank actions, how can you possibly decide what is the appropriate amount for a bank settlement?" "An estimate would have required additional delay," Ashton answered. The largest mortgage settlement in U.S. history was pitched by its creators as a deal that would offer quick aid to 1 million people in...

COULD THE MORTGAGE CRISIS REAR ITS UGLY HEAD? YOU BETCHA!!
Op-Ed Contributor

The Second-Mortgage Shell Game

By ELIZABETH M. LYNCH Published: February 17, 2013

IN January, federal regulators announced an $8.5 billion agreement with 10 mortgage servicers to settle claims of foreclosure abuses, including bungled loan modifications and the wrongful evictions of borrowers who were either current on their payments or making reduced monthly payments.

Mark Allen Miller

Related

A.C.L.U. Sues Morgan Stanley Over Mortgage Loans (October 15, 2012) Wells Fargo Will Settle Mortgage Bias Charges (July 13, 2012) States Negotiate $26 Billion Agreement for Homeowners (February 9, 2012)

Connect With Us on Twitter For Op-Ed, follow @nytopinion and to hear from the editorial page editor, Andrew Rosenthal, follow @andyrNYT. Under the deal, announced by the Federal Reserve and the Office of the Comptroller of the Currency, the mortgage servicers will pay $3.3 billion to borrowers who went through foreclosure in 2009 and 2010 and an additional $5.2 billion to reduce the principal or the monthly payments of borrowers in danger of losing their homes. Those numbers might look impressive, but the deal is far too modest to be a credible deterrent to reckless foreclosure practices. Consider the last big mortgage settlement. Last February, the federal government and 49 state attorneys general reached a $25 billion deal with the countrys five largest mortgage servicers Bank of America, JPMorgan Chase, Wells Fargo, Citibank and Ally Financial (formerly GMAC). They promised to help save homeowners from unnecessary foreclosure. A year later, its clear that the settlement hasnt worked as planned. Banks have dragged their feet in modifying first mortgages, much less agreeing to forgive part of the principal on homes that are underwater. In fact, the deal contained a few flaws. It has allowed banks to push homeowners into short sales, an alternative to foreclosure whereby the distressed homeowner sells the property for less than the debt that is owed. Not all short sales are bad some homeowners are happy to walk away with the debt cleared but as a matter of social policy, the program has failed to keep people in their homes. A lesser-known but equally grave problem is that banks have been given a backdoor mechanism to continue foreclosures at the same pace as before. The problem involves second mortgages, which millions of homeowners took out during the housing bubble. Its estimated that as much as a quarter of all mortgage debt in the United States is in the form of second mortgages. Some of these loans were taken out to finance home improvements; others were part of a subprime product known as an 80/20 mortgage, in which 80 percent of the purchase price was covered by a first, adjustable-rate mortgage, and the remainder by a second mortgage, often with a much higher interest rate. The second mortgages have given the banks a loophole: each dollar a bank forgives goes toward fulfilling its obligation under last years settlement. But many lenders have made it a point to almost exclusively modify secondary loans while all but ignoring the troubled, larger primary mortgages.

Its a real problem: when it comes to keeping your home, its the first mortgage that counts. Take Tiberio Toro, a Queens resident who took out an 80/20 mortgage in 2006 when he purchased his home, and who now owes far more to the bank than his house is currently worth. Recently, Wells Fargo told him that it completely forgave his second loan. But at the same time, it declined to modify his first mortgage an adjustment Mr. Toro needs to get his monthly payment to a level he can afford. Why would a bank forgive a second mortgage completely but move forward with foreclosure on the first mortgage? Surprisingly, such a tactic often makes sense for banks. When a lender forecloses on a first mortgage, the house in question is typically sold at auction. If the house is worth less than the loan amount, the bank gets only part of its money back. But after the sale, of course, theres no asset left to pay off any of the second loan. The holder of that second loan which has lower priority than the holder of the first gets nothing. So a lender can forgive a second mortgage which in the event of foreclosure would be worthless anyway and under the settlement claim credits for modifying the mortgage, while at the same time it or another bank forecloses on the first loan. The upshot, of course, is that the people the settlement was designed to protect keep losing their homes. The five banks covered under last years settlement are wiping out second mortgages in record numbers. In New York State, for example, during the first six months of the settlement period, three times as many homeowners received second-mortgage forgiveness (2,933) as received permanent modifications on first mortgages (967). In New York State, 36.2 percent of the banks credits under the settlement have been related to second loans, compared with only 18.2 percent for first mortgages. In 2011, the five banks that are subject to last years settlement sent 230,678 pre-foreclosure notices to New York State homeowners, according to data I obtained from the Finance Department through the Freedom of Information Law. As is well known, many of those at greatest risk of losing their homes are African-American or Latino. Under the settlement, banks get more credit for forgiving mortgages that they own (portfolio loans) than those they sold to Wall Street and currently only service. These portfolio loans are largely conventional loans; those sold to Wall Street were subprime. It was these notorious subprime loans that were marketed, often through predatory lending practices, to black and Latino borrowers during the housing bubble. There is a lesson to be learned from the deficiencies of the National Mortgage Settlement. And the new deal reached by the Fed and the comptroller of the currency provides an opportunity to get right what the 49 attorneys general got wrong. At a Senate Banking Committee hearing on Thursday, Senator Elizabeth Warren, Democrat of Massachusetts, called on regulators to take tough enforcement actions and not settle for negotiated agreements with banks.

To do that, the government must clearly require that relief be given in the form of first-mortgage modifications. In addition, the settlement should direct the banks to provide relief in the ZIP codes hardest hit by predatory lending. Finally, we need real transparency to monitor the new settlement. That means that the public should easily be able to determine who is getting relief, and how. Until thats done, as weve seen, banks are likely to keep playing the same old shell game. Elizabeth M. Lynch is a lawyer at MFY Legal Services, a New York City organization that provides free civil legal aid.