Abigail C. Field has a very important post, looking at the mortgage settlement and how the deal and changes to mortgage servicing will be monitored by regulators and law enforcement. Field identifies a series of thresholds and tolerance levels the federal government and state law enforcement set for how the well the servicers have to perform. In short, banks can charge extra money, miscount payments homeowners make, and generally have their records remain in a mess, as long as it isn’t more than a certain percentage of their total amount of mortgages. As bad as it is for the people allegedly representing the public to have agreed to tolerate these abuses, it gets much worse. I’m going to quote Field at length, because this is an important analysis:
Even metrics that look tough superficially turn out to be cruelly weak. For example, take the very first metric in the table, page E-1-1, “Foreclosure sale in error”. If it happens, that means the B.O.Bs [Bailed Out Banks] sold your house when they weren’t supposed to. On first glance, things look good: no loan level error is tolerated (Column C is N/A). Column D looks tough, but only if you don’t think much about it: only a 1% error is tolerated.
When 1 million homes are foreclosed, that’s 10,000 sold wrongfully. In 2011 banks foreclosed on nearly 2 million homes according to BusinessWeek (stat on p. 2 of story), so if that metric were in place last year, nearly 20,000 homes could’ve been effectively stolen from people and the B.O.Bs wouldn’t get in trouble. But that 1% isn’t the really big flaw in this metric. The biggest problems with this metric are hidden in the “Test Questions,” which are Column F.
Focus on the parenthetical qualifications that start with question 2:
1. Did the foreclosing party have legal standing to foreclose?
2. Was the borrower in an active trial period plan (unless the servicer took appropriate steps to postpone sale)?
Surprise! It’s not reportable error if the B.O.Bs sold your house during an active trial mod, if they tried to stop the sale from happening.
3. Was the borrower offered a loan modification fewer than 14 days before the foreclosure sale date (unless the borrower declined the offer or the servicer took appropriate steps to postpone the sale)?
Again, it’s not reportable error if the B.O.Bs sold your house while you were evaluating or responding to their mod offer, if they tried to stop the sale.
4. Was the borrower not in default (unless the default is cured to the satisfaction of the Servicer or investor within 10 days before the foreclosure sale date and the Servicer took appropriate steps to postpone sale)?
Wow–it’s not reportable error to sell your house even though you weren’t in default, so long as you foolishly cured the default too close the sale date and the B.O.Bs tried to stop the sale of your home.
5. Was the borrower protected from foreclosure by Bankruptcy (unless Servicer had notice of such protection fewer than 10 days before the foreclosure sale date and Servicer took appropriate steps to postpone sale)?
Again, you can have the law on your side–you’re protected by the bankruptcy court–but the B.O.Bs can sell your house anyway if you dawdled in declaring bankruptcy and the bank tried to stop the sale. I wonder what a bankruptcy judge would make of that provision?
See, in four of the five questions the B.O.Bs have found a way to make yes mean no: Yes, we violated the bankruptcy stay; No, it doesn’t count toward the 1% error rate. As a result, 1% of the foreclosure sales checked by the monitor isn’t the real threshold for getting bankers in trouble. It’s 1% plus all the wrongful sales that this settlement says are ok anyway. [Bold emphasis added]
Let’s be clear: the settlement makes it allowable for banks to foreclose on people who were current on the mortgage, just so long as it’s not more than 1% of their total foreclosures. This is a big part of the bank behavior the settlement was supposed to stop and it is actually legalizing it.
At Naked Capitalism, Matt Stoller looks at other ways the settlement continues to reveal itself as a sweetheart deal for banks:
Beyond these reports (and the complaint by DOJ showing that Holder and the other attorneys general knew and understood what the banks were doing), the mortgage settlement is incoherent. The settlement will be challenged in court by investors. And the formula for settlement credits is bizarre and full of easter eggs for the banks. For instance, banks will now get credit for houses they were going to bulldoze anyway, essentially being allowed to unload low-value properties with clouded title on a dollar-for-dollar basis, which are actually worth pennies on the dollar (or perhaps value negative in areas where there are fines for not keeping up properties). Banks will also get credit for not going after deficiency judgments, which means they get credit when they choose not to sue foreclosed families who have no money. They aren’t suing for deficiency judgments anyway, by and large, because suing people who have nothing is, surprise, not profitable! But they’ll get billions in credit for this regardless.
Seeing how insanely pro-bank and anti-rule of law (let alone anti-homeowner) the settlement is turning out to be, I’m reminded of this passage from a post by Stoller at Salon shortly after the settlement was announced:
Rather than settling anything, this agreement is simply a continuation of the policy framework of both the Bush and the Obama administrations. So what, exactly, is that framework? It is, as Damon Silvers of the Congressional Oversight Panel, which monitored the bailouts, once put it, to preserve the capital structures of the largest banks. “We can either have a rational resolution to the foreclosure crisis or we can preserve the capital structure of the banks,” said Silvers in October, 2010. “We can’t do both.” Writing down debt that cannot be paid back — the approach Franklin Roosevelt took — is off the table, as it would jeopardize the equity keeping those banks afloat.
What we are seeing is a deal that seeks to preserve the capital structure of the banks. Having thresholds were the banks can continue to behave exactly as the have, even in the face of temporary new servicing standards, makes sense as long as we remember that this is about making sure the banks don’t go bust and we can move on past these inconvenient consequences of the housing bubble.