It's been four months since banks and state attorneys general reached the landmark $25 billion national mortgage settlement and attorney Robert Maddox is still fulminating against it.
Maddox, who represents Ally Financial, says he told each of the 49 state attorneys general and officials from the Justice Department and the Department of Housing and Urban Development, those allegations of improper foreclosure practices was nothing more than a ruse by regulators to extract money for defaulted borrowers and impose more requirements on the five largest mortgage servicers.
"I've said it to every attorney general, DOJ and HUD official that it was a Trojan horse for the government to fix perceived problems in mortgage servicing," says Maddox, a partner at Bradley Arrant Bolt Cummings LLP, a 400-lawyer firm in Birmingham, Ala.
The settlement essentially boiled down to two demands from regulators, he says.
"State attorneys general wanted to fix mortgage servicing practices that constituents were complaining about and the Obama administration wanted to get principal reductions on a large scale," Maddox says of the national settlement that was reached in February and signed in April.
For the next three years, the top five mortgage servicers, Ally, Bank of America (BAC), Wells Fargo (WFC), JPMorgan Chase (JPM) and Citigroup (NYE: C), will be working directly with the settlement's monitor, Joseph A. Smith Jr., the former North Carolina banking commissioner, to ensure compliance with the agreement.
Regulators identified significant weaknesses in banks' foreclosure processing. The five banks charged improper fees, misapplied mortgage payments, wrongfully denied modifications to borrowers, abused the bankruptcy process, improperly foreclosed on members of the military and tried to rip off the Federal Housing Administration, according to the Treasury department's inspector general.
Yet Maddox still maintains that few, if any, borrowers were wrongly foreclosed upon.
"The most frustrating part of all of it was that there was no acknowledgment of borrower responsibility," he says. "Were there inaccuracies? Yes. But those inaccuracies didn't do damage to the borrower who was already in default. The penalty has to meet the harm."
Maddox argues that regulatory uncertainty caused servicers to halt foreclosures, hindering a housing recovery. State laws that extended the timelines on foreclosures led to millions of seriously delinquently loans being stuck in limbo.
"It takes five years now to foreclose on someone in New York, and two to three years in Florida," says Maddox. "The process shouldn't be lengthened and continue to grow and grow if there is a scenario where the borrower can't be helped. All they're doing is cratering the real estate market."
Bruce Marks, the chief executive of Neighborhood Assistance Corporation of America, a nonprofit consumer advocacy group, disputes the view that the punishment was too severe.
The responsibility in the foreclosure process is on the servicers and clearly what they did in forging names and notarizing documents in the foreclosure process was illegal, Marks says.
He also thinks servicers got off cheap since they agreed to pay a combined $5 billion in cash payments to individual states and the federal government. Another $20 billion is made up largely of credits the servicers receive for offering principal reductions, refinancing and forbearance plans to borrowers.
"They get credit for principal reductions on bank-owned mortgages that help them with the loans they already own," Marks says. "We would call that highway robbery, but in today's standards it's a bank bailout with government support as usual. It's another inside job at the homeowners' expense."
A particular pet peeve for both borrowers and servicers has been the issue of dual-tracking. Though Federal consent orders imposed on the 14 largest banks last year banned the practice of initiating foreclosure proceedings while borrowers were pursuing loan modifications, Maddox says the practice was useful in discouraging defaulted borrowers from living in their homes rent-free for years.
Ultimately, Maddox says the requirements imposed by the settlement may have the opposite effect of what attorneys general wanted, Maddox says.
Middle-tier servicers are exiting the mortgage servicing business in droves, leaving large banks that control 70% of the market to handle performing loans and a small group of specialty servicers that now only work on defaulted loans.
"In order to comply with the 300-plus servicing standards, there are only two business models that make sense because it takes a lot of money and technology," says Maddox. "The middle ground will get out because there is too much political risk and it is way too expensive."
Maddox has some advice for the other 20 servicers that were not party to the agreement: climb aboard. While some servicers may already be complying with 50% to 60% of the settlement's servicing requirements, they should make as many changes as possible to proactively fix problems before regulators come knocking, he says.