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OCC Defends Foreclosure Deal, Says It Drove 'Hard Bargain'

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The abrupt and embarrassing end of the independent foreclosure review raised many questions that policymakers didn't bother to answer.

Until now.

In an interview Tuesday, Morris Morgan, the federal government's point man for the painstaking review of 3.8 million mortgage loans, provided new details about the $8.5 billion deal regulators cut with 10 servicers last week.

Barbara A. Rehm

"The settlement idea was certainly initiated by the regulators," said Morgan, who joined the Office of the Comptroller of the Currency in 1985.

That runs counter to conventional wisdom, which says the servicers moved to shut the costly review process down. Mike Heid at Wells Fargo Home Mortgage is widely credited with spearheading the settlement.

But Morgan not only insisted government officials drove the deal, he said the negotiations were tough and nearly collapsed.

"I was more active in" the negotiations "than any other individual from the regulatory side," Morgan said. "Did we drive a hard bargain? I think yes."

Four servicers refused to join the settlement, which could bolster his point. But Morgan also notes, "The deal almost unraveled" at various points.

"Someone asked me, 'Don't you think there was another X dollars…an incremental amount of money that you could have gotten?' I replied to that by saying, 'I don't think so.'

"Once we got to the numbers we resulted in, I wasn't willing to risk throwing it all way and getting zero over getting some marginal incremental amount of money,'' he said. "I do think we were on the teetering point there of we could strike a deal at this level or we could end up with zero by overreaching by just a little bit."

The $8.5 billion settlement breaks down to $3.3 billion directly to borrowers and $5.2 billion in indirect relief like a loan modifications. To outsiders, the settlement figures seem arbitrary because the review process had yet to generate any estimates of harm to borrowers. Critics charged that the government couldn't know how much to ask for if it had no idea how much damage was done.

But Morgan insisted the regulators reached those figures via careful calculations.

"The amount that we negotiated is a number that we think was several times the likely payout to consumers had we continued down the existing path," Morgan said. "The cash payout that was really determined by us…by looking at the amount of likely harm under the IFR process, the remaining IC costs of completing the reviews and other costs and expenses associated with continuing the process we had in place."

[Acronym assistance: IFR is independent foreclosure review, the umbrella term applied to this program, and IC is independent consultant, the firms hired by servicers to comb through loan files on mortgages made between 2009 and 2010 to see which borrowers were hurt by the robo-signing fiasco. The consultants had racked up about $1.5 billion in costs and were only a third of the way through the job when the government pulled the plug.]

Morgan said the government came up with a "range of outcomes" for each of those three categories: borrower harm; consultants' costs; and other expenses. "The difference between the cash payout and the total was simply a negotiated number that includes, and was informed by, that range of outcomes," Morgan said.

To determine who gets how much of that $3.3 billion, servicers will slot borrowers in to one of 11 categories, depending on their experience. Each category has a dollar figure attached to it. For instance, a borrower whose loan modification application was wrongly denied is entitled to $5,000. [The OCC published this matrix last June.]

Regulators will then verify how the servicer reached its conclusions and then payments will be disbursed by the end of March, Morgan said.

This verification process was a sticking point in negotiations with servicers, he said.

"It would be in the servicers' interest to simply say, 'We'll slot them, take our word for it, no more work needs to be done.' But as a regulator, that is not a position I am comfortable with," Morgan said. "So we were insistent that there be verification by the regulators."

Morgan explained how that will work: "Our examiners, with oversight here at the D.C. level, will look to see and understand what the servicer did to do that slotting and does that make sense to us? Can it be verified and checked?"

In the interview, Morgan also tackled the sensitive question of how seriously the OCC has taken the foreclosure crisis. Critics claim the agency bought into the industry's position that the vast majority of foreclosures were justified, despite messy paperwork and lousy communication with borrowers.

"Do I think there were a significant number of people who were foreclosed on where the banks did not have a legal right to foreclose on them? At this point in time I don't think that was a significant number," he said. "But I would go further to say a very few number, and you could even argue one of those, is too many."

"Throughout this time period our banks made more errors than they should have made."

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Comments (6)
Morgan said: "Do I think there were a significant number of people who were foreclosed on where the banks did not have a legal right to foreclose on them? At this point in time I don't think that was a significant number," he said.

Baloney! San Francisco County did a recent audit on a sampling of 400 foreclosures, and found that 84% of them were done illegally:

http://www.nytimes.com/2012/02/16/business/california-audit-finds-broad-irregularities-in-foreclosures.html?_r=0

The Essex County (MA) Registrar of Deeds has found at least 10,000 fraudulent documents in his county alone:

http://stopforeclosurefraud.com/2013/01/16/register-john-obrien-calls-on-court-for-restitution-on-behalf-of-the-homeowners-of-essex-county-offers-national-solution-to-public-land-records-crisis/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:+ForeclosureFraudByDinsfla+(FORECLOSURE+FRAUD+|+by+DinSFLA)&utm_content=Google+Reader

In tens of thousands of cases, borrowers who were current on their payments were FORCED into default by the servicers. I.e., servicers told borrowers they could not apply or qualify for a loan mod until they had missed three payments...which the borrowers then did. Then the banks foreclosed on those borrowers anyway, even if they were in the middle of a trial modification period and making all their payments. That's just one way it happened - there were a multitude of other ways that banks forced borrowers into foreclosure.

Morgan also calls these "errors". No, they were not "errors" - they were FRAUD, and they were intentional.

Regardless of whether a borrower has defaulted or not, the banks still need to follow the law just like the rest of us. I have first hand proof that they continue to break the law even to this day. These consent orders and settlements have done absolutely NOTHING to stop the fraud - it's just business as usual, for the simple fact that no senior banker has been prosecuted or gone to jail for this massive crime spree.

If any of us little people submitted fraudulent, forged, or perjured documents to a court of law, we would go to jail. The banks should be treated no differently. This "settlement" is yet another complete sham, just like the AG/DOJ settlement.

Morgan is either completely clueless, or a shill for the banking industry, or both.

Other than that, great article. I appreciate the author's well-warranted skepticism!
Posted by JL1965 | Wednesday, January 16 2013 at 6:22PM ET
Something smell funny from a group for 5 years as the US Treasury report said that the OCC could not find water while swimming in the ocean. But now the OCC and Fed have some algorithm that tell them how many people were harm but it was not that many but one is to many? Right!

So this would not have to do with getting ahead of Docx Lorraine Brown who in her plead deal admitted to having the Docx staff forged 1 million assignment. What about the independent audit of the FHA and $70 billion in loan losses?

So now were up to 1.7 million loans that the servicers needed 1 million fraudulent assignment and how do you actual foreclose on a government insured loan that Ginnie Mae is in possession of the blank Notes that they have not purchase, meaning you don't have the power to foreclose.

But we got another 50,000 military families with loans like FHA that the loans are in Ginnie Mae pools.

Since 2007 thee OCC been receiving complaint and HAMP started in 2009 and through 2010 the OCC did not take action and had shipped any complaint to the Independent(wink wink)Foreclosure Review Board, so what harm in a servicer not having an assignment and needing a forgery to be able to trick local land recording office to allow administrative foreclosures.

I believe the reason for a speedy payout is that the outside world is catching up with the crimes the Federal Law Enforcement so far have failed to investigate.

Now after months of commenting on the legal alleged parties of the Mortgage Backed Securities, this is catching up to the agencies, and show a complete lack of knowledge of the regulator of the banks. Treasury said that the OCC had a lack of knowledge regarding state law in foreclosures.
Posted by charleswreed | Wednesday, January 16 2013 at 7:15PM ET
From what I've seen in any type of negotiation, the one who said they "Drove a Hard Bargain" is usually the one who got taken for the proverbial ride. How can the comments from someone who hasn't worked in the business sector in almost 30 years, clearly lacks any true understanding of effective negotiations and works for an agency that has consistently demonstrated an inability to accurately and effectively make any types of financial assessments or valuations with lending products, carry any weight to those of us that are impacted by these arbitrary and capricious practices and advancing the rise of TBTF.

Another example of our wonderful and talented regulators saying that things are the way they ought to be, and it's because they will it.
Posted by akimbo24 | Wednesday, January 16 2013 at 8:02PM ET
Hard to believe that the "friendliest" bank regulator since the OTS was closed down could drive a hard bargain with anyone. Note the absence of push-back from any of the banks involved. If the OCC was really a strong regulator, there would be no need for this settlement. It would have forced the Too Big To Behave Banks to comply with the original servicer settlement.
Posted by jim_wells | Thursday, January 17 2013 at 7:42AM ET
The OCC's idea of a hard bargain is nothing more than the cat scratching litter over its waste.
Posted by masaccio | Thursday, January 17 2013 at 5:51PM ET
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