The state attorneys general have a secret weapon in their negotiations with the largest mortgage servicers: the results of a HUD investigation into the banks' robo-signing practices.
The Department of Housing and Urban Development has completed an investigation begun last year of foreclosure robo-signing and given state officials the results, a spokesman for Iowa Attorney General Tom Miller says.
Miller is leading the fractured negotiations between states and the large mortgage servicers related to last year's robo-signing scandal, when banks were found to be cutting corners in the processing of thousands of foreclosure documents.
A full government investigation would fill in a major gap in state officials' information as they negotiate with the servicers: the attorneys general have not known the full scope of the banks' robo-signing practices, or how many homeowners have been affected by their paperwork lapses.
Neither HUD nor the attorneys general would discuss the report's findings.
"One of our federal partners, HUD, has conducted a thorough investigation of robo-signing," says Geoff Greenwood, a spokesman for Miller. "HUD has shared that investigation with our executive committee."
The states and their "federal partners," including HUD, "have the information we need concerning the banks' robo-signing activities, and this is key to the strength of our understanding and our negotiating position," he says.
A HUD spokesman would not discuss any investigation, except to say its probes into robo-signing are ongoing.
As American Banker reported Wednesday, some of the largest mortgage servicers are continuing to fabricate mortgage documents that should have been signed years ago and submitting them as evidence to foreclose on homeowners.
This is continuing a year after the same banks were caught having employees sign hundreds of foreclosure affidavits a day without checking whether the information was accurate.
HUD briefly acknowledged this summer that it was looking into the extent of robo-signing. The agency's Office of Inspector General said in a June 15 report that it had initiated a review last October into the foreclosure practices of the five largest Federal Housing Administration lenders "to determine whether the selected FHA servicers complied with applicable foreclosure procedures for signing and notarizing judgment affidavits when processing foreclosures on FHA insured loans."
The Office of Inspector General said that the results of its "reviews have been provided to the Department of Justice for possible civil action," and it plans to increase audits of servicers by HUD and by the companies themselves.
The big servicers have maintained that documentation errors amount to legal "technicalities" that can easily be fixed by refiling documents to prove they have the standing to foreclose against defaulted borrowers. The servicers say such paperwork failures did not cause them to foreclose upon borrowers who were not in default, and have balked at the $20 billion to $25 billion potential price tag for a settlement.
"No borrower was improperly foreclosed upon," Michael R. Zarro, a servicing executive at JPMorgan Chase & Co., wrote in documents submitted to the New Jersey Supreme Court April 7 this year. "Chase has not identified or become aware of any deficiencies in its processes that caused it to pursue foreclosure actions without merit." Zarro recently left JPMorgan Chase and joined a competitor, according to Tom Kelly, a bank spokesman.
The top six mortgage servicers were required to submit documents to New Jersey's Supreme Court describing their procedures so they could resume foreclosures in that state. The court also required servicing executives to "certify" that their practices are legal by describing in detail their foreclosure processes, including how affidavits are signed and checked, the integrity of their data and information on borrowers, and oversight of third-party vendors.
The New Jersey requirements are part of a patchwork effort by federal and state regulators to review the mortgage servicers' practices.
In regulatory consent orders, the Office of the Comptroller of the Currency has instructed the 14 largest bank servicers to conduct a self-assessment of their own processes.
The banks have been operating under those orders since April 13 for failures stemming from the robo-signing scandal. Their reviews are due by the end of the third quarter.
Michael Brauneis, managing director of regulatory risk in the Chicago office of consulting firm Protiviti Inc., says regulators are extending their self-assessment directives to midsized servicers and to large thrifts.
The Federal Reserve and Federal Desposit Insurance Corp. "are similarly pressing their regulated banks in this area," Brauneis says. "I would be surprised if we didn't see additional enforcement actions against smaller servicers within the next six months or so."
States also have conducted what Greenwood, the spokesman for Iowa's attorney general, calls "a comprehensive examination" of state-licensed servicers. Such exams are "more thorough" than a comparable federal exam, he says.
The state AGs "have amassed large volumes of case files and investigated cases involving consumers who have lodged foreclosure and servicing complaints," says Greenwood. That includes court files and interviews with servicer employees, he said.
The vast majority of complaints "pertain to troubling and simply unacceptable servicing practices," Greenwood says.