If you ask the blogosphere the above question, it appears that the answer
is a resounding "No." Abigail Caplovitz Field has described
the settlement as a means for the banks to " systematically overcharge
borrowers and steal their homes." How did she arrive at this conclusion?
She read the settlement documents, which were released this week. Her
analysis focuses on the new servicing guidelines, which allow for certain
margins of error. These margins of error correlate to so-called "reportable"
error. The reportable errors are the ones that can put the banks in violation
of the settlement agreement.
The big problem arises when you apply the margin of error to the actual
numbers. For example:
"According to Column C, the loan level error tolerance for income
errors is 5%. As a practical matter, here's what that means: Imagine
your household income is $80,000. Imagine that at $80k the bank's
formula says you get a modification and thus you can keep your house.
But the bank doesn't use $80k in its math; it uses $77,000. So the
computer rejects you, and you lose your home to foreclosure. Does law
enforcement care about the bankers wrecking-your-life error? No, because
the $3,000 error, while enough to deny you the mod, isn't 5% of your
income. So the error was too small to count."
She also points out that, in order for a reportable error to trigger a
breach, it must happen five times in every hundred files reviewed. This
means that banks can dance right up to the line and never once be taken
to task for doing so. This means that for every million
loan modifications, lenders can wrongfully deny a loan modification 49,999 times before they
are on the hook. Don't forget that those 49,999 errors are "reportable."
Banks are still free to make as many unreportable errors as they please.
David Dayden at Firedoglake has also been posting his analysis. One of the
more interesting tibits that he extracted from the settlement is that Ally (formerly GMAC) managed
to negotiate a lower fine due to an apparent inability to pay. Instead
of paying $250 million, Ally's cash penalty was cut to $110 million.
What makes this disturbing is that the actual cash payouts from the banks
are the only real money coming out of this settlement. The remainder of
the roughly $25 billion is to be paid in the form of credits -- for every
dollar of principal reduced on an investor-held (securitized) loan, the
servicer receives a credit of $0.45. If the participating banks reduce
principal on loans that they hold on their books, the credit is $1 per
It's also troubling that one of the "too big to fail" banks
claims it cannot pay out $250 million in cash. In Ally's case, it
is even more troubling in light of the HUD Inspector General's report
about its investigation into Ally. Of the five major banks, Ally was the
least responsive to the Inspector General's attempts to review its
foreclosure files, going so far as to assert Fifth Amendment privilege
for its officers and employees to avoid the Inspector General's subpoena powers.
And, as Dayden points out, Ally just paid out $134 million in dividends
to TARP in mid-February.
Dayden's analysis covers several posts, and each one is worth reading.
Another major problem with this settlement appears to be in the enforcement
mechanism. I've already discussed the liability threshholds above.
However, the initial reporting of errors will be done by internal employees
of the participating banks. This means that the determination about which
errors are reportable will be made by individuals with a rather vested
interest in erring on the side of "unreportable." This sounds
very similar to the OCC foreclosure review process which, by all accounts,
has been largely unsuccessful thus far.
The enforcement mechanism does require reporting to an independent external
review board. Even with that extra layer of review, my sense is that "garbage-in,
garbage-out" will hold true. The HUD Inspector General reports resoundingly
demonstrate that the foreclosure fraud issues were authorized from the
highest levels in the subject banks.
For example, JP Morgan Chase shuttered its quality control division in
2008. This means that none of the legal documents prepared by or on behalf
of Chase were reviewed for accuracy.
Bank of America also lacked a quality control department. Testimony elicited
during the HUD investigation also indicated that document reviewers only
checked for formatting and spelling errors. Document signers were expected
to maintain a standard of 49 affidavits per hour, 51 assignments per hour,
and document execution at 46 documents per hour. Notaries did not witness
the signatures that they were notarizing. If anything, Bank of America's
control structure was non-existent. Its fraudulent practices were systemic,
not inadvertent error.
Wells Fargo also set metrics for its employees, requiring some to notarize
up to 1,000 documents per day without witnessing the signatures. Wells
Fargo also hired people woefully unqualified for their positions. From
the report: "For example, immediately before Wells Fargo hired an
individual to be vice president of loan documentation, the person worked
at a pizza restaurant and as a bank teller. Another had been a department
store cashier and daycare worker, while another had worked on the production
line in a factory." Wells Fargo failed to train its employees, and
routinely hired vice presidents whose only task was to sign affidavits.
When document signers and their managers expressed concerns to upper management,
the response was to shorten the turnaround time on document execution
from 5 to 7 days to 24 to 48 hours.
CitiMortgage did not have any written policies and procedures for executing
foreclosure documents prior to November 2009. It had no means of tracking
foreclosure documents. Like the other banks, Citi's affiants did not
review documents before signing them. It also employed the same high-volume
signing practices of the other banks.
Given that the banks were utterly unable to manage the document signing
process, it is difficult to believe that they will be able to manage the
compliance and compliance review process. Allowing lenders to police themselves
has not been effective thus far. Continuing the practice is eminently foolish.
One final note -- the servicing standards sunset in 2015. After that, it
is anyone's guess as to what loan servicers will do. Mine is that
they will follow the path of least resistance.
At the end of the day, the banks are paying out only a fraction of the
$25 billion settlement from their own pockets. The remainder of the funds
will be "paid" via credits for issuing loan modifications and
principal writedowns. The settlement, all things considered, is a slap
on the wrist at best.