We were far from alone in criticizing the servicer consent orders issued earlier this year. They were yet another whitewash masquerading as regulatory action, orchestrated by the banking industry toady, the OCC. As we wrote:
The current end run is apparently led by the Ministry of Bank Boosterism more generally known as the OCC and comes via consent decrees that were issued Wednesday (we’ve made that inference given the fact that John Walsh of the OCC presented the findings of the so-called Foreclosure Task Force, an 8 week son-of-stress-test exercise designed to give the banks a pretty clean bill of health, as well as media reports that the OCC was not participating in the joint state-Federal settlement effort).
This initiative is regulatory theater, a new variant of the ongoing coddle the banks strategy. It has become a bit more difficult for the officialdom to finesse that, given the extent and visibility of bank abuses. Accordingly, the final consent decrees are more sternly worded and more detailed than the drafts we saw last week, and also talk about imposing fines. But reading them reveals that there is much less here than meets the eye.
It is critical to understand that servicers are the perps in mortgage abuses. The list of malfeasance is long. This is only partial:
Rampant abuses of the HAMP program
Repeated “dog ate my homework” loss of borrower documents, often resulting in eligible homeowners being denied a mod
Widespread misrepresentation of the program’s terms, including consumers being told to default in order to qualify and failure to inform consumers that those who got trial mods but failed to get a permanent mod would be asked to make up the trial mod discounts late fees immediately
Abusive “dual track” strategies, in which borrowers were evaluated for a mod while the foreclosure process continued to move forward. Borrowers were almost universally told to ignore court documents related to their foreclosure when they had full legal force
Widespread forgeries and document fabrication
Servicer driven foreclosures (as in the foreclosure did not result from borrower failure to pay but from pyramiding and junk fees)
Force placed insurance
So there is a great deal of bad behavior that needs to be addressed and corrected, but the Obama Administration seems determined to do everything it can to pretend nothing is amiss.
Sheila Bair, departing head of the FDIC, pointed out the obvious flaw in the process mandated in the consent orders. Reviews of servicer compliance would NOT be conducted by regulators, but by consultants hired by the banks! Per the Wall Street Journal:
Under consent orders that 14 banks and thrifts reached with regulators in March, financial institutions are required to hire a consultant to review their foreclosures over the past two years to identify any borrowers who were harmed by foreclosure-processing problems.
Ms. Bair, however, questioned whether those reviews will truly be independent. Such consultants “may have other business with [banks] or future business they would like to do with them,” Ms. Bair said. “This is a huge issue.”
Georgetown law professor and securitization expert Adam Levitin was more pointed:
The C&D order basically tells banks to set up lots of internal procedures and controls within the next few months and then to tell their regulators what they have done…. The result, I suspect, is that in a few months the bank regulators will declare that everything is fine…
So here’s what’s going down. The bank regulators are going to provide cover for the banks by pretending to discipline them very hard, but not really doing anything. The public will see a stern C&D order, but there won’t be any action beyond that. It’s as if the regulators are saying so all the neighbors can hear, “Banky, you’ve been a bad boy! Come inside the house right now because I’m going to give you a spanking!” And then once the door to the house closes, the instead of a spanking, there’s a snuggle. But the neighbors are none the wiser. The result will be to make it look like the real cops (the AGs and CFPB) are engaged in an overzealous vendetta if they pursue further action.
So it should be no surprise to read Francine McKenna telling us that “.” This was a feature, not a bug:
Allowing the banks to choose their own judge, jury, and jailer presents almost untenable conflicts of interest. All of the consulting firms that were initially being considered to do the work serve the banks already. The banks, and their mortgage servicing operations, are existing or prospective clients.
PricewaterhouseCoopers, for example, is the auditor for Bank of America and JP Morgan Chase, two of the fourteen servicers under scrutiny. PwC’s retired Chairman, Sam DiPiazza, is an executive of, and on the board of, Citigroup, another bank with a servicer to be reviewed. Promontory Financial Group and Treliant Risk Advisors are professional services firms that serve the mortgage servicers directly on other consulting assignments.
Complicating matters, as a result of so many mergers and acquisitions, global banks are run by layers upon layers of automated systems – like SAP and Oracle – and legacy applications created from Cobol and other, older programming languages. All this software and hardware is held together by band aids, string, duct tape, manual processes, lots of unsecure spreadsheets, and crossed fingers.
The consulting firms hired under the consent order were also expected to address the bigger and more complicated management information systems issues. But it’s tough to find qualified firms that aren’t already working with the banks on these significant challenges and thus aren’t conflicted…
The banks have contracted with and will pay the vendors directly. Without bank-by-bank disclosure of the reports and the vendors that wrote them, we’ll never know if the process to right these wrongs was truly independent and objective.
McKenna is right: making the reports public would be a check on whether this effort was serious. And the publication of defects in servicing is not going to threaten the soundness of a bank or lead to bank runs. There is no justification for secrecy, save the reason we understand all too well, that it would expose the fact that this exercise was never intended to be serious.