By Pam Martens: April 18, 2013

The past week has delivered revelation after revelation suggesting that the foreclosure frauds perpetrated against the American homeowner by the too-big-to-fail (or prosecute) banks, have been deviously matched with a corrupted settlement that has members of Senate hearings shaking their heads in astonishment. Yesterday brought the latest example of Federal bank regulators serving as lapdogs of their charges.

The Senate Banking Committee’s Subcommittee on Housing, Transportation and Community Development held a hearing titled: “Helping Homeowners Harmed by Foreclosures: Ensuring Accountability and Transparency in Foreclosure Reviews, Part II.” Senator Merkley delivered the fireworks of the session.

Early this year, when the Office of the Comptroller of the Currency (OCC) and Federal Reserve Board (Fed) announced that they were abruptly halting the Independent Foreclosure Reviews they had ordered 13 banks and mortgage servicers to have conducted by independent consultants, the party line was that it was to bring more rapid restitution funds into the hands of potential victims of foreclosure abuse.

The settlement was to consist of $3.6 billion in cash being paid directly to more than 4 million aggrieved borrowers with another $5.7 billion in soft dollar assistance such as loan modifications, principal reduction and forgiveness of deficiency judgments. Yesterday’s bombshell, that the $5.7 billion may only amount to a paltry $12 million, was captured in this exchange at the hearing between Senator Jeff Merkley and Deborah Goldberg, Special Project Director of the National Fair Housing Alliance:

Senator Merkley: “In your testimony Ms. Goldberg, on page 10, you note that ‘on a loan with an unpaid balance of $500,000, a loan modification that provides any amount of principal reduction – be that $1,000, $10,000, or $100,000 – will yield $500,000 worth of credit for the servicer.’ It’s hard for anyone apart from this process to truly believe that if you do a $1,000 reduction you get $500,000 credit. Yet, are you saying absolutely that’s the way it works?”

Ms. Goldberg: “That’s what it says in the settlement…”

Senator Merkley: “Well, I’d just like to point out that the roughly $6 billion in soft money that’s in the settlement, at that 500 to 1 rate, that is reduced down to $12 million. Six billion goes to $12 million. That’s a vast difference. Now you’ve pointed out Ms. Goldberg that this creates a pure incentive to do reductions on large loans. Now I live in a working class neighborhood, 3-bedroom ranch houses. There are no $500,000 mortgages where I live ‘cause there’s no $500,000 houses. So your point in your testimony is that working class communities, certainly communities of color, there’s an incentive to kind of bypass them. Why would the Fed and the OCC agree to a structure that allows a 500 to 1 or more, for that matter…why would they agree to such a fictitious form of accounting and a structure that incentivizes the bypassing of working Americans in this whole process.”

Ms. Goldberg: “I think that’s an excellent question Senator Merkley. I’m afraid I can’t answer it. It would be a good question to ask them to explain.”

There are multiple reasons to believe that the banks, with the sycophantic regulators in tow, have gamed the system with this settlement. As we reported last week, Senator Elizabeth Warren delivered the bombshell in last week’s Senate hearing that the banks themselves were allowed to determine the potential number of harmed borrowers and classify them into categories of harm – thus effectively determining the monetary payments.

There is also the fact that mortgage servicers are paid fees based on the balance of the mortgage. A $500,000 loan reduced by just $1,000 would deliver more ongoing fees to the banks than a reduction of $50,000.

In an April 19, 2012 speech on reviving homeownership before a conference in Los Angeles, the current Comptroller of the Currency, Thomas Curry promised the following:

“These enforcement actions are intended not only to fix the parts of the process that were broken, but also to compensate borrowers harmed financially by the deficient practices identified in the OCC’s orders. This will be a long and expensive process for the banks and thrifts involved, and it will require a great deal of work on the part of the agencies to ensure that it is done correctly. But the steps we are taking are absolutely necessary to restore faith in the system.”

Many of the first checks issued under this corrupted process have bounced. Faith in the system is also bouncing toward zero. It’s time for the U.S. Senate to stop looking astonished and start issuing subpoenas.

Banks covered under this agreement include: Aurora, Bank of America, Citibank, Goldman Sachs, HSBC, JPMorgan Chase, MetLife Bank, Morgan Stanley, PNC, Sovereign, SunTrust, U.S. Bank, and Wells Fargo.

Four mortgage servicers did not settle and the foreclosure reviews are continuing. Those institutions are: GMAC, Financial Freedom, Everbank/EverHome Mortgage Company and OneWest Bank/IndyMac Mortgage Services.