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.]
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."
Morgan said the OCC is determined to "fix what was broken and we think to date that many things have already been fixed. Others things are in the process of being fixed and we will complete that part of our objective, ensuring that things that were broken will be fixed."
The settlement means no one will ever know how many borrowers were harmed by robo-signing.
"We recognize that this change of direction will result in us not having a finite count on errors made or errors made with harm. Is that unfortunate? Perhaps, but the trade-off we made there was to go to an alternate process that would get compensation to consumers in a quicker manner yet allow us the ability to fulfill our other objective, which is to make sure that what was broken gets fixed."
This was not the column I set out to write this week. When Morgan called I had just finished a piece outlining the lessons policymakers should learn from the independent foreclosure review.
When the interview started, I told him the project wasn't credible from the start. It relied on consultants with a conflict of interest because the servicers are their clients. It was based on the very loan files that were the cause of the crisis. The OCC's management of the project was shaky as it let questions linger and never narrowed the project to focus on the worst problems.
Morgan put up no defense, saying simply, "All those items are fair game and should be assessed."
He promised the OCC would conduct its own "lessons learned" exercise and use the findings to improve its performance.