In a perfect world, state attorneys general and the U.S. Department of Justice would have worked hand in hand with bank regulators to fix foreclosure wrongs. But that's not how the world works.
I've heard there's a multistate settlement between five large mortgage servicers and state attorneys general, but there's no signed agreement or even a term sheet.
An ideal joint agreement would have not only compensated borrowers for past abuses, but also required servicing standards to prevent those crimes in the future.
It would have been great, too, if neither good-faith investors in mortgage-backed securities nor taxpayers had to provide a backdoor bailout for banks by paying for principal reductions and modifications that should be coming out of the pockets of mortgage servicers.
Joseph Smith, the former banking commissioner for North Carolina who was appointed monitor for the AG settlement, has to deal with reality, however. He should start coordinating with the OCC and Fed on their foreclosure abuse agreements now.
The Comptroller of the Currency and the Fed took urgent action last April by signing consent orders that require independent reviews and a significant overhaul of foreclosure process with 14 mortgage servicers. This dramatic action was a response to egregious errors found during reviews conducted only a few months before. The OCC had found, "critical weaknesses in servicers' foreclosure governance processes, foreclosure document preparation processes, and oversight and monitoring of third-party vendors, including foreclosure attorneys." These weaknesses resulted in "unsafe and unsound practices and violations of applicable federal and state law and requirements."
But it wasn't long before the Department of Justice, state attorneys general and Congress got in on the act and asked the OCC and Fed to put the brakes on the train. The Department of Justice asked the OCC in June to give servicers more time to file the action plans required by the consent orders outlining the steps for conducting retrospective foreclosure reviews and for implementing process improvements.
A dozen U.S. Senators sent a letter to the OCC supporting the delay, ostensibly to allow for coordination with other agencies at both the state and federal level. The legislators also reminded regulators that their states reserved the right to also hold servicers accountable for any foreclosure crimes.
The Department of Justice, the Department of Housing and Urban Development, and several state attorneys general finally announced their own settlement with five mortgage servicers on February 11. All of those servicers — Ally Financial, Bank of America, Citibank, JPMorgan Chase and Wells Fargo — are also covered under the OCC and Fed agreements in place since last April. Given the banks' history of non-compliance with previous consent orders and settlements, it's critical that progress — and the ways and means the banks use to make progress — be monitored closely.
The AG settlement is widely perceived to be more forward looking while the OCC consent decrees focus more on compensating for past harms. Payments made under the consent decrees are for borrowers who have already lost their homes. The settlement supposedly includes principal reductions combined with modifications — under the existing HAMP program — that will meet the needs of those still struggling to hang on.
The foreclosure reviews mandated by the consent decrees utilize outside consultants and lawyers, appointed by the banks and monitored by the regulators, who will assess the damages to borrowers and eventually implement recommendations for process and control improvements. Congressional critics and consumer advocates have questioned the independence and objectivity of these consultants and legal advisors.
The New York Times' Gretchen Morgenson reported that an administration official, speaking on condition of anonymity, said multistate settlement monitor Joseph Smith, who is responsible for ensuring penalties are meted out and changes are made — particularly to servicing standards, will hire more accountants and consulting firms to audit the banks' compliance with the multistate agreement.
But where will he find more "independent" accountants, consultants, and attorneys? It was difficult enough to find the ones who are working with the servicers under the OCC consent orders and I questioned the "independence" of many of them. There are even more assigned to Ally Financial and SunTrust, the servicers regulated by the Fed, but we don't know yet who they are. The Fed has still not released those engagement letters.
The requests from borrowers for a foreclosure review under the consent decrees must be coming in slowly. The OCC and the Fed have extended the deadline for borrowers to submit requests for review by three months to July 31, 2012.
Members of the House Financial Services Committee sent another letter to regulators last week asking for, "substantial improvements to the outreach process, including expanded language accessibility, an improved Independent Foreclosure Review website, and further print, radio and third party outreach by servicers." Barney Frank, Maxine Waters and Brad Miller, and several other members of the House Financial Services Committee also asked the OCC and the Fed to reassure them that affected borrowers would be entitled to relief under both the settlement and consent orders and that possible compensation would not be limited under either action.
Finally, the legislators asked regulators to tell them how the consent orders relate to the recent federal-state settlement. In other words, can everyone start working together to insure borrowers — and investors — don't wait too long for the intended benefits?
I hope so.
Francine McKenna writes the blog re: The Auditors, about the Big Four accounting firms. She worked in consulting, professional services, accounting and financial management for more than 25 years.