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