January 10, 2013

IT'S NOT exactly asking the fox to watch the henhouse. More like asking the fox to assign his favorite consultant to study how many chickens he killed.

This week, federal regulators announced that Bank of America and nine other big banks had agreed to pay $8.5 billion to end a review of foreclosure abuses, paperwork errors and botched loan modifications that robbed homeowners of their homes between 2009 and 2010.

According to the banks' deal with the Office of the Comptroller of the Currency (OCC), $3.3 billion will go to cash relief for homeowners who went through foreclosure in 2009 and 2010, and $5.2 billion will go to homeowners who are in danger of losing their homes after falling behind on their payments. The banks involved in the deal include some of biggest-name crooks of the foreclosure crisis, including Citibank, JPMorgan Chase, U.S. Bank and Wells Fargo.

This settlement is chump change, say fair lending advocates. But we'll probably never know just how good a deal it is for the banks, because the federal review of their lending practices at the height of the foreclosure crisis is over.

Bank of America corporate offices

"We think if the reviews were done right, the payouts would have been significantly higher than they appear to be under this settlement," Alys Cohen, staff attorney at the National Consumer Law Center, told the New York Times. "The regulators will have abdicated their responsibility if the banks end up getting off the hook easily and cheaply."

Originally, Federal Reserve officials asked that the banks come up with an additional sum to address their part in the 2008 financial crisis, which brought down the housing market and resulted in millions of people going into foreclosure. But government officials backed off that demand when the banks threatened to kill the deal entirely, sources close to negotiations told the Times. The agreement came just in time, before the bank's fourth-quarter earnings are scheduled to be released.

The review of the banks' loans was supposed to be much more thorough, but was cut short after the OCC argued that the it would take too long and be too costly to complete the process.

Top senior OCC officials, the Times reported, were concerned about the growing cost of the investigations, after each loan took more than 20 hours to review, at a cost of up to $250 an hour.

Their conclusion: stop the investigation while they were ahead.

WHY WAS the investigation so expensive and time-consuming? Maybe because the banks decided who conducted it.

In April 2011, the OCC and the Federal Reserve issued a consent order stipulating that 14 banks cited for foreclosure abuses would conduct investigations and hire independent consultants to examine the loans of some 4 million people who went through foreclosure during the 2009-10 crisis.

During this period, homeowners across the country went into foreclosure through no fault of their own, but because they fell victim to all-too-common bank practices, such as excessive and illegal fees or foreclosing when the borrower was undergoing a loan modification.

The OCC claims that the deal with the 10 banks--four additional banks included in the review opted out of the agreement--will save billions of dollars in fees that a complete review of the banks' malfeasance would have cost. Not to mention the billions that banks saved by never finding out what they owed people who were foreclosed on.

The banking industry's loyal mouthpieces applauded the decision to end the investigation. Forbes' Daniel Fisher, for example, called it a "snipe hunt," arguing that any investigation is a waste of time because banks just don't steal houses from innocent homeowners.

But fundamental flaws in the investigation process made it an almost foregone conclusion that there would be little to report.

Only an estimated 495,000 people went through the process of requesting a review, even after federal regulators extended the submission deadline three times. That's far too low, considering that some 4 million were eligible.

Fair lending advocates argue that the process was unnecessarily complicated and time-consuming. As Gretchen Morgenson pointed out in the New York Times:

[W]hat if victims of an improper foreclosure didn't receive a review because they didn't know about the program? Letters about the program sent to 5.3 percent of targeted borrowers were returned as undeliverable, regulators said. And many of those who did receive the mailings may not have understood them. In a study last June, the Government Accountability Office concluded that the initial letter, the request-for-review form and foreclosure review website were "written above the average reading level of the U.S. population." What's more, the study said, the materials did not include specifics about what borrowers might receive as a remedy, possibly affecting their motivation to respond.

Many of the banks' victims didn't even try to apply because they thought the system was rigged from the outset. Sounds like, after all they had been through, that was a reasonable conclusion.

The government let the banks lead up the investigation, and now they'll let them handle the allocation of money to their victims. According to the OCC, the cases will be assigned 11 different categories, and each will be assigned a proportion of the meager settlement. The largest of the puny settlements could be about $125,000, the smallest around $250.

And now the banks will decide who fits into each category, and what they will pay.

"How much do you pay the family of an elderly homeowner who died after they were forced to move from their home of 40 years?" Pat Pinto, manager of the foreclosure mitigation unit of the Legal Aid Society in Santa Ana, told the Orange County Register.