$8.5B settlement with loan servicers opens a big can of worms

Commentary: Foreclosure reviews were flawed, but settlement only raises more questions

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By DAREN BLOMQUIST

In a surprise announcement, 10 big mortgage loan servicers that were facing enforcement actions for allegedly deficient practices in loan servicing and foreclosure processing have agreed to pay $8.5 billion in cash and “other assistance” to more than 3.8 million borrowers whose homes were in foreclosure in 2009 and 2010.

The servicers were operating under enforcement actions issued in April 2011 by federal bank regulators that required them to retain independent consultants to conduct independent foreclosure reviews for borrowers who requested them.

In announcing the agreement, the Federal Reserve said it’s a better solution than the case-by-case reviews that were under way. The agreement ensures that more than 3.8 million borrowers whose homes were in foreclosure in 2009 and 2010 will receive compensation “in a more timely manner,” regardless of whether or not they filed a request for a review, the Fed said.

The agreement calls for $3.3 billion in direct payments to eligible borrowers and $5.2 billion in other assistance, such as loan modifications and forgiveness of deficiency judgments. Awards are expected to range from several hundred dollars to as much as $125,000.

Banking regulators and loan servicers may think they’re putting these issue behind them. But a more likely outcome is that the world’s largest can of worms has now been opened. Here’s why:

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In a few weeks the Government Accountability Office is expected to issue an assessment of the Independent Foreclosure Review (IFR) program. The GAO is famous for fact-based reports that set off congressional investigations and media frenzies.

Servicers selected ‘independent’ reviewers
The just-announced settlement is an agreement between 10 servicers and three federal regulators. That sounds fairly impressive until you look at the FAQ page explaining the consent order that the loan servicers had been operating under. The FAQ lists 27 participating servicers.

“The Independent Foreclosure Review,” says the FAQ, “provided homeowners the opportunity to request an independent review of their foreclosure process between November 2011 and December 2012.”

Actually, the program provided no such thing. To have an “independent” intermediary both parties must have an opportunity to pick a neutral third party. There was none. The reviewers were selected by the servicers.

According to ProPublica.com, “federal regulators designed the program to work like this: Each of the banks would hire an ‘independent consultant’ (approved by the regulator) to conduct reviews of the bank’s foreclosure cases. The bank was supposed to foot the bill, but the consultant, not the bank, was supposed to decide which of the bank’s customers deserved compensation and how much.”

Even if the consultants could be seen as impartial, any awards would have to be made on the basis of rules outlined in the agreement between the servicers and the regulators. Borrowers — who might have some interest in this matter — were not allowed at the table. This is like a football game where the league and one team get to pick the referees, the field and then decide what’s a touchdown and what’s not.

The best example of one-sided rule making comes with a quick look at the eligibility standards: Only those in foreclosure during 2009 and 2010 qualify for consideration. If you faced foreclosure before or after the qualifying period then the review program was not even open to your claims. It’s worth mentioning that RealtyTrac recorded more than 10 million foreclosure starts from 2006 through November 2012.

No appeal process
No less important, the independent review process was not subject to appeal.

“The decision of the review is considered final and there is no further recourse within the Independent Foreclosure Review process,” according to the program FAQ page. “The Independent Foreclosure Review will not have an impact on any other options homeowners may pursue related to the foreclosure process of their mortgage loan.”

The Neighborhood Assistance Corporation of America, the nation’s largest HUD-certified counseling agency, said it submitted 65,000 cases for review under the program along with 10 million pages of documentation.

It said the review program was “uncovering large numbers of borrowers who were foreclosed on when a modification was available. The agreement is not sufficient in providing compensation for the homeowners who should not have been foreclosed on. In addition, the $5.2 billion in other assistance will do little in assisting homeowners stay in their homes since it is not dedicated to principal reduction.”

In the end the Office of the Comptroller of the Currency and the servicers are left with more problems than before the review process started: Who will be entitled to a piece of the $8.5 billion settlement? Why $8.5 billion and not some other figure? How will borrowers be able to file claims? What about wrongfully foreclosed borrowers not covered by the agreement? How can claim decisions be appealed? Why was the Consumer Financial Protection Bureau not allowed to participate in the program? Will any borrowers be involved in setting the new rules?

And look for more questions shortly. As Rep. Maxine Waters, the ranking Democrat on the House Financial Services Committee has said, federal regulators “must explain why the IFR process was abandoned.”

Daren Blomquist is vice president of Renwood RealtyTrac LLC, an online marketplace for foreclosure properties, and the managing editor of the company’s monthly newsletter, the Foreclosure News Report.

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