The results are in. The award for the sorriest chapter of the great American foreclosure crisis goes to the Independent Foreclosure Review, a billion-dollar sinkhole that produced nothing but heartache for aggrieved homeowners, and a big black eye for regulators.
The foreclosure review was supposed to uncover abuses in how the mortgage industry coped with the epic wave of foreclosures that swept the U.S. in the aftermath of the housing crash. In a deal with the Office of the Comptroller of the Currency and the Federal Reserve, more than a dozen companies, including major banks, agreed to hire independent auditors to comb through loan files, identify errors and award just compensation to people who'd been abused in the foreclosure process.
But in January 2013, amid mounting evidence that the entire process was compromised by bank interference and government mismanagement, regulators abruptly shut the program down. They replaced it with a nearly $10 billion legal settlement that satisfied almost no one. Borrowers received paltry payouts, with sums determined by the very banks they accused of making their lives hell.
Now, new evidence shows that had the reviews continued, they may have uncovered far more mistakes than regulators said were present when they scuttled the deal. A new report by the Government Accountability Office released on Tuesday indicates that at one bank, the preliminary error rate was 24 percent, meaning that nearly 1 in 4 borrowers had suffered financial harm.
In a letter released last week, Rep. Elijah Cummings (D-Md.) said an inquiry by his office into documents related to the mortgage review found a report that revealed an error rate of 60 percent at Bank of America, and 21 percent at PNC Bank.
These rates are sharply higher than the figure the OCC cited when it shut down the reviews. The bank regulator said its analysis found that auditors were discovering mistakes in 6.5 percent of the loans they looked at, meaning that slightly more than 1 in 20 borrowers had suffered financial harm, such as improper fees or botched loan modifications.
Regulators have not discussed to what extent the projected error rate influenced negotiations with the mortgage industry over the size of the settlement. But the GAO report suggests that figure was important -- even as it severely undercuts the validity of the figure bank regulators used.
The biggest flaw with any calculation of harm is that the reviews were far from complete when the program was stopped. In the final weeks of 2012, before the program was shut down, more than 135,000 people applied to have their cases reviewed. Most of those loan files were never opened by auditors. All told, auditors had completed final reviews on just 14 percent of all files, making it difficult, the GAO said, "to reliably estimate the prevalence of harm."
Even as casting the data as insufficient, the GAO said its analysis indicated that the amount of the settlement earmarked for cash payouts to borrowers -- $3.9 billion -- was reasonable, even at the highest discovered error rate of 24 percent. This calculation, also, was based on incomplete and sometimes baffling results. A preliminary report from an auditor reviewing the loan files of one mortgage company turned up an error rate of less than 1 percent, which is hard to fathom given the scope of homeowner complaints.
In a statement, Rep. Maxine Waters (D-Calif.) said the GAO's findings indicate the settlement was reached "without adequate investigation into the harms committed by the servicers."
The GAO report and the Cummings letter together offer the latest evidence that the government badly fumbled its best opportunity to learn the full scope of mortgage abuses that inflicted additional harm on already battered neighborhoods and almost certainly deepened the recession that gripped the U.S. in the wake of the financial collapse of 2008.
Untold thousands of people have complained that their lender fouled up their mortgage -- assessing bogus fees, losing applications for loan modifications and even pushing them into an unnecessary foreclosure. Nearly all the evidence that has come to light indicates that these errors were commonplace, and even intentional.
At Bank of America, employees have testified that they lied to homeowners seeking loan modifications, denied their applications for invented reasons and were rewarded for pushing borrowers into foreclosure.
A 2012 study conducted by academics and regulators at both the Office of the Comptroller of the Currency and the Federal Reserve found that the mortgage industry had screwed up the modifications of more than 800,000 loans.
The foreclosure review was supposed to give these frustrated borrowers a chance for a fair hearing. Instead, by the fall of 2012, nine months after it began, the program was beset by complaints of bank interference. After the program was cancelled, contractors who worked on the reviews said the entire process was marred by shifting guidelines and poor oversight. Some said they were told by bank officers to ignore mistakes they were finding.
Despite the problems, dozens of borrowers who have shared their experience with The Huffington Post said they would have preferred that the reviews continue in some form, regardless of cost and time involved. That's because the math of the settlement did not work in the favor of people with a legitimate gripe.
Because the settlement divvied up that cash among so many people, instead of just the 250,000 or so who had applied for a review, it seems almost certain that many of those who suffered actual financial harm received less money than they would have had the reviews continued.
Payouts under the settlement were small. More than 99 percent of borrowers received less than $6,000, with many receiving checks of just $300. The settlement also included about $6 billion in foreclosure relief.
To add insult to injury, checks were delayed in going out, with some lost in the mail and others never delivered.
Officials at the Office of the Comptroller of the Currency and the Federal Reserve have declined to comment on the letter, or the GAO report.
One of the biggest homeowner complaints is lack of transparency: There is no process to learn how a payment decision was made. In response to questions from the GAO on this issue, regulators said borrowers could obtain information from other sources, such as the administrator hired to mail the checks, according to the report. But as the GAO notes, that information is not actually obtainable.
"In the absence of information on the processes, regulators face risks to public confidence in the mortgage market, the restoration of which was one of the goals of the file review process," the GAO concludes.
Incredibly, the GAO also found that regulators determined how many consumers should be slotted into each category of financial harm by extrapolating the results from just one company's initial review of this data. In other words, regulators determined that the same percentage of Citibank borrowers were improperly denied a permanent loan modification as borrowers at Bank of America and JPMorgan Chase. The report does not say which bank was used as the model.
The Cummings letter, which cites preliminary reports by Promontory Financial, one of the large auditing firms hired to review loan files, was sent to Darrell Issa (R-Calif.), the chairman of the House Committee on Oversight and Government Reform. It concludes with a call for a hearing to further investigate the review and the settlement. It is unclear, he wrote, how regulators arrived at the sums the mortgage companies would have to pay -- and whether the amounts were "in any way related to the actual or estimated harm suffered by borrowers."
Issa has not yet responded to the call for a hearing. Whatever he decides, it is hard to fathom an outcome to this mess that would satisfy foreclosure victims.
CORRECTION: This story incorrectly reported GAO projections about the size of possible homeowner payouts, had the reviews continued. The GAO did not conclude that those payouts could have been as high as $5.4 billion. That figure instead refers to the potential end cost of paying the auditing firms to conduct the reviews.