Is this going to be it? Servicers Said to Agree to Revamped Foreclosures:
The nation’s top mortgage servicers are expected to sign legal agreements by the end of this week compelling them to change their foreclosure procedures, regulatory officials said Tuesday.
The servicers, which violated state and local laws and regulations governing foreclosures, are agreeing to improve their methods in numerous ways. They will be required to have more layers of oversight and proper training of their foreclosure staff. The oversight will extend to third party groups, including the law firms that do much of the actual work of eviction ...
One of the most significant measures in the consent agreement will require servicers to hire an independent consultant to review foreclosures done over the last two years. If owners were improperly foreclosed on or paid excessive fees, they will be compensated.
This builds off an American Banker article by Cheyenne Hopkins. Adam Levitin wisely called this "Potemkin Regulation" and noted:
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 reporting on these internal controls to the regulators will be non-public (like all safety-and-soundness review issues), so it will be impossible to judge whether the controls are adequate and whether the regulators are being sufficiently demanding. The result, I suspect, is that in a few months the bank regulators will declare that everything is fine.
(Even if the regulators think the internal controls are inadequate, it’s not clear what the consequence would be. My guess is that it just results in the bank regulator telling the bank to revise and resubmit.)
By far the most interesting bit in the draft C&D order is the bit requiring the banks to engage independent foreclosure review consultants to review "certain" foreclosures that took place in 2009-2010. There is no specification as to which foreclosures are to be reviewed or precisely what the standards for review are. But that’s all kind of irrelevant. Who do you think the banks are going to engage to do these reviews? Someone like me? Not a chance ... Frankly, this sort of regulatory outsourcing is pretty astounding – the OCC has resident examiner teams at the major servicer banks. Shouldn’t they be the ones auditing the internal controls and performance, not a third-party compensated by the bank?
We are going to outsource the regulation of the banks to firms the banks hire. The OCC has people who can do this work. They can hire additional people and charge the banks for it if it is a necessary part of a settlement. Instead they are telling the banks to hire their own regulators on the market. This is like recreating the ratings agencies model. The government has a responsibility to enforce the law here. Outsourcing this by letting the banks purchase their regulators discredits the whole process.
The second part is that there’s a reason why there’s conflicts and abuse that needs a government regulator here. Reasonable investors asked themselves whether or not this servicing model, the new way we bundle and handle mortgage debt in this country, would work in a housing bust. Countrywide, who helped create the model that the industry is now trying to deal with, made it very clear that bilking people with dubious fees and putting extra pressure on struggling homeowners from renegotiating bad debt with lenders was going to balance out the losses form a housing bust – it was a "countercylical strategy." Katie Porter, in an essential post:
David Sambol, president of Countrywide (CFC), said in an earnings call for 2007 that when "asked what the impact on our servicing costs and earnings will be from increased delinquencies and lost mitigation efforts, and what happens to costs . . . we point out that increased operating expenses in times like this tend to be fully offset by increases in ancillary income in our servicing operation, greater fee income from items like late charges, and importantly from in-sourced vendor functions that represent part of our diversification strategy, a counter-cyclical diversification strategy such as our businesses involved in foreclosure trustee and default title services and property inspection services."
Mr. Sambol is saying that, for the 75-88% of loans that Countrywide services but does not hold any loss position, the servicer’s additional expenses when a loan defaults are paid by the borrower. Defaults do not cut into a servicer’s profits. Indeed, the reference to ancillary income tending to "fully offset" increased operating expenses suggests that in at least some cases, a servicer will make money when a loan is non-performing, particularly if that loan is repeatedly non-performing but ultimately the borrower pays (Gee, that sounds a lot like the situation before bankruptcy, doesn’t it?)
I think the most damning part of this statement is the reference to "in-sourced vendor functions." Allegations are swirling around that servicers, and their agents such as MERS, bloat their actual costs of collection or default and build in a profit margin. This is illegal, in part, because most mortgages only permit the recovery of "costs," which most courts read to mean actual costs incurred, not some amount chosen to "offset" the costs of servicing delinquent loans. Judge Elizabeth Magner has a recent opinion that addresses the propriety of this practice. She writes in the Memorandum Opinion in In re Stewart (07-11113, Bankr. E.D. La. April 10, 2008) that "Wells Fargo’s national counsel has represented to this Court that only $50.00 of each invoice represents the actual cost incurred by Wells Fargo fro a BPO. The remaining amounts, approximately $880.00 in total, were added to the actual costs by Wells Fargo. The Court concludes that these additional charges are an undisclosed fee, disguised as a third party vendor cost, and illegally imposed by Wells Fargo." Her opinion, combined with the statement in Countrywide’s earnings statement, suggest that Senator Schumer may be too generous in calling servicers’ practices "piling on." If this practice is widespread, the more apt term may be "ripping off" struggling homeowners.
The whole model doesn’t work unless it is imposing massive transaction costs, throwing sand on the gears of trying to get bad debt renegotiated. Porter wrote that entry in May 2008, and here we are, three years laters, still having the same fight. And regulators look to be kicking the ball even further down the road.