THE DREAM FORECLOSED

Foreclosure Fraud Fallout

Late last year, several of the nation's largest banks were forced to implement foreclosure moratoriums after it came to light that they were short-circuiting the foreclosure process through, among other abuses, the use of "robo-signers." These bank officials were approving thousands of foreclosures per day, without verifying basic information and documentation. "I had no idea what I was signing," said one employee from Bank of America. "We had no knowledge of whether the foreclosure could proceed or couldn't, but regardless, we signed the documents to get these foreclosures out of the way." The bank's circumventing of due process resulted in improper foreclosures (and even led to instances of homeowners who didn't have mortgages  receiving foreclosure notices). As a result of the foreclosure fraud scandal, a bipartisan group of Attorneys General, alongside  the Department of Justice, the Treasury Department, and federal bank regulators, launched an investigation into the banks' mortgage practices. For several months now, the AGs have been working on a settlement, under which the banks would pay a penalty for their mortgage misdeeds, with the money being used to provide relief to troubled homeowners. However, the settlement talks have bogged down, with some conservative AGs siding with the banks and regulators breaking off to forge their own settlements with the banks, even as new information comes forward showing that abuses in the mortgage servicing arena are significant and ongoing.

THE SETTLEMENT:

 As the New York Times' Gretchen Morgenson wrote, "evidence of extensive and abusive servicing practices does in fact exist. It is piling up at the offices of the United States Trustee Program, the arm of the Justice Department that monitors the bankruptcy system. ... The findings should dispel any notion that toxic servicing practices were atypical or have done no harm." For instance, one bank claimed that a borrower owed $52,043, but documentation showed that the borrower   actually owed the bank just $3,156. Furthermore, a report from the Department of Housing and Urban Development's inspector general alleges that banks have been "defrauding taxpayers in their handling of foreclosures on homes purchased with government-backed loans." The AGs have suggested that the banks pay $20 billion in a settlement for their mortgage abuses, while the banks have counter-offered by saying that they will pay $5 billion. However, a report from the Consumer Financial Protection Bureau shows that the nation's five largest mortgage servicers have saved more than $20 billion "by taking shortcuts in processing troubled borrowers' home loans," making even the AGs' figure seem conservative. The goal of the AGs and the Obama administration is to put the money towards relief for troubled homeowners, including reducing loan principal for underwater homeowners (homeowners who owe more on their mortgage than their house is worth). Currently,  nearly 30 percent of homeowners are underwater. As Center for American Progress Housing Policy Adviser Alon Cohen notes, some of the funds should also go towards mortgage mediation, which as he points out, "is working to help thousands of homeowners keep their homes while returning greater value to investors and communities than they would see in foreclosure."

THE GOP DEFECTORS:

 Initially, all 50 Attorneys General joined the investigation into the banks' foreclosure practices. However, several Republican AGs  have since defected, voicing their opposition to monetary penalties in general and, more specifically, using that money to reduce loan amounts. Radical Virginia Attorney General Ken Cuccinnelli (R) derided loan modifications as "welfare," while Georgia Attorney General Sam Olens (R) said, "I'm a little concerned that this process disengages the normal market forces." Several Republican AGs joined Cuccinnelli in a letter stating that reducing loan principal "rewards those who simply   choose not to pay their mortgage." These AGs have also met with representatives of the banking industry to discuss reasons to oppose helping underwater homeowners (and they've all  received large donations from the banking industry). Of course, many homeowners are underwater through no fault of their own: Wall Street malfeasance and a lack of prudent regulation caused a housing bubble to grow and burst, plunging home prices steeply downward. Also, as Nobel Prize-winning economist Paul Krugman noted, the proposed settlement only calls for modifications that  benefit bank and homeowners alike. Not content to sit on the sidelines and let the AGs do their work, some congressional Republicans have also criticized the settlement , with Sen. Richard Shelby (AL) calling it "nothing less than a regulatory shakedown."

THE SIDE DEAL: Another hurdle in the way of the AGs trying to reach a settlement is that two federal bank regulators -- the Office of the Comptroller of the Currency and the Federal Reserve --  brokered their own settlement with the banks, undermining the AG's work. As Cohen noted, the regulators' settlement is a weak one, as "There is no mention of penalties, and the servicers’ repeated focus on 'processes' is replaced by the terms 'policies and procedures' and 'internal controls,' nearly all of which presumably should already be in place." The Fed and the OCC (which is notoriously cozy with the banks) only reviewed 100 mortgages before settling with the banks. FDIC Chair Sheila Bair questioned the thoroughness of the deal the OCC and the Fed struck, saying, "We do not yet really know the full extent of the problem." "Flawed mortgage-banking processes have potentially infected millions of foreclosures , and the damages to be assessed against these operations could be significant and take years to materialize," she said. Adding insult to injury, under the terms of the settlement, the banks are required to undergo a review of their mortgage operations, but they are  allowed to hire their own reviewers  and the results of those reviews are   not going to be made public. As Bair pointed out, there is significant potential for conflict-of-interest, as these reviewers "may have other business with [banks] or future business they would like to do with them." "This is a huge issue," she said.