Finding Little Evidence Of Foreclosure Fraud, Feds Give Up
With a pair of terse notices yesterday, the Office of the Comptroller of the Currency basically admitted that its elaborate process for turning up evidence of fraud in hundreds of thousands of loan files was a waste of money.
With the $8.5 billion settlement with Bank of America, Citi and other lenders, the government abandoned the Independent Foreclosure Review and switched to a system of direct grants to foreclosed borrowers, details to come. In a statement, Comptroller of the Currency Thomas J. Curry said “it has become clear that carrying the process through to its conclusion would divert money away from the impacted homeowners and also needlessly delay the dispensation of compensation to affected borrowers.”
The New York Times reported today concerns grew “in the upper echelons of the comptroller’s office” at the cost of the loan reviews, which consumed up to 20 hours per file at $250 an hour. Banks spent $1.5 billion on this snipe hunt without turning up meaningful examples of fraud, the Times reports. That money could have been handed out to borrowers in the form of a $5,000 check for each file.
The outcome shouldn’t come as a surprise. After I wrote a piece critical of the parallel mortgage settlement with state attorneys general last year, comparing it to the deeply flawed tobacco settlement, I was barraged with comments from critics accusing me of downplaying foreclosure fraud. I responded with one simple question: Has there been a single case in the past five years of a homeowner who was current on his mortgage being foreclosed through fraud?
Silence. I did get a lot of legal gobbledygook from marginally competent lawyers who, as it turns out, were the real crooks in the foreclosure crisis. For excessive fees, they offered underwater borrowers the false hope they could somehow keep their homes without paying for them, either by challenging the foreclosure paperwork or convincing a judge that the national registry system known as MERS was not the legitimate party to foreclose. Those tactics mostly failed. The Federal Trade Commission has a website devoted to protecting borrowers from the real scammers in the foreclosure crisis, and prosecutors have found plenty of fraud. Last September North Carolina AG Roy Cooper, for example, sued three foreclosure assistance firms for charging upfront fees and delivering nothing in return.
The reality is robosigning couldn’t have been the cause of foreclosure fraud because robots can’t engage in the self-interested behavior that underlies fraud. Robosigning was just an acknowledgement that in a large, modern lending institution only the central computer registry of mortgages contains all the information about loans, and no lawyer at the periphery can possibly possess additional information beyond what is in that registry. It may be nice to conjure up the image of a kindly loan officer, familiar with the circumstances of every person behind every home mortgage, but that’s not how the system works in big banks.
The OCC released an interim report on the Independent Foreclosure Review program last June, detailing the agency’s ambitious plans for getting to the bottom of foreclosure fraud. It sent out letters to 4.4 million borrowers, ran ads in 1,400 publications including Parade, People magazine, and USA Weekend, as well as Hispanic and African-American publications, and racked up an estimated 341 million impressions. Nearly 200,000 people submitted their files for review and regulators selected another 142,817 files for “look-back” reviews.
About the same time, the GAO released a report critical of the foreclosure review program, which involved servicers handling two-thirds of U.S. mortgages, because it didn’t provide clear enough information for borrowers.
But by retreating to a class-action style payout system, where borrowers simply receive lump sums, the feds seem to be acknowledging that there wasn’t much outright fraud — as in banks stealing houses from innocent borrowers — to find.
Fraud is a flexible term, of course, and many lawyers think it includes lending money to people who have no hope of paying it back. This so-called “predatory lending” doesn’t make any economic sense, unless you’re willing to buy the theory that the fees flowing from an ultimately unprofitable loan were enough to induce bankers to destroy their own institutions in search of a year-end bonus. That’s possible, but it downplays the responsibility of the borrowers who signed detailed loan documents, filled with caveats and cooling-off periods mandated by federal regulators.
As for robosigning computers stealing homes, still not much evidence for that. If you know of a case, do let me know.