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While Wronged Homeowners Got $300 Apiece in Foreclosure Settlement, Consultants Who Helped Protect Banks Got $2 Billion
Apr 26, 2013 | Rolling Stone | Matt Taibbi
The obscene greed-and-arrogance stories emanating from Wall Street
are piling up so fast, it's getting hard to keep up. This one is from
last week, but I missed it – it's about the foreclosure/robo-signing
settlement that was concluded earlier this year.
The upshot of this story is that in advance of that notorious
settlement, the government ordered banks to hire "independent"
consultants to examine their loan files to see just exactly how corrupt
they were.
Now it comes out that not only were these consultants not so
independent, not only did they very likely skew the numbers seriously in
favor of the banks, and not only were these few consultants paid over
$2 billion (over 20 percent of the entire settlement amount) while the
average homeowner only received $300 in the deal – in addition to all of
that, it appears that federal regulators will not turn over the
evidence of impropriety they discovered during these reviews to
homeowners who may want to sue the banks.
In other words, the government not only ordered the banks to hire
consultants who may have gamed the foreclosure settlement in favor of
the banks, but the regulators themselves are hiding the information from
the public in order to shield the banks from further lawsuits.
Secrets and Lies of the Bailout
To recap: in the foreclosure deal, 13 banks agreed to pay a total of
$9.3 billion to settle their liability in a number of areas, including
robo-signing, which is just a euphemism for mass-perjury – robo-signing
is the practice of having low-level bank employees sign documents
attesting to full knowledge of case files in court foreclosure actions,
when in fact they were signing hundreds of files per day, often having
no idea whether the paperwork was correct or not.
It was done across the industry and turned housing cases across
America into nightmares of jumbled and/or forged paperwork, in which
even people who did not deserve to be thrown out of their homes were
uprooted thanks to systematic errors by faceless bureaucrats who cut
legal corners purely to save money.
All the major banks were guilty on a mass scale, but they worked with
federal regulators like the Fed and the Office of the Comptroller of
the Currency to secure this wide-ranging, industry-saving settlement,
which not only covered the robosigning epidemic but a host of other bad
or illegal practices, like the wrongful denial of modifications and the
improper levying of (often hidden) fees.
Minus this crucial settlement, banks would have faced enormous
uncertainty about their legal liability going forward, and getting a
deal that not only gave these companies some legal closure but allowed
them to pay pennies on the dollar for their illegal activity was a
massive coup for the whole finance sector.
Only $3.6 billion was earmarked for cash payments to the nearly 4
million homeowners covered in the settlement. Most of the remainder of
the deal was in other forms of non-cash relief, i.e. modifications or
principal reductions.
Now, at the time of the deal, press releases by the Fed and the OCC
stated that part of the reason they'd fixed on that particular
settlement amount was that regulators had uncovered that banks had made
errors or committed illegal acts in about 6.5 percent of the mortgage
files reviewed. In other words, the error rate was an important
component of this calculation.
But it turned out that this error rate had been calculated with the
help of several consultant firms regulators had ordered the banks to
hire. Regulators had mandated the hiring of these "independent"
consultants back in 2011, and the list of companies included Promontory
Financial Group, PricewaterhouseCoopers, Ernst & Young, and Deloitte
& Touche. These private firms were hired to review the banks' loan
files in search of errors, and collectively were paid by the banks over
$2 billion, a staggering sum which ultimately worked out to over $20,000
per file.
With such highly-paid help, it would seem impossible that these
consultants could screw up so simple a task as figuring out how many of
these mortgage files were corrupt. Regulators came up with the 6.5
percent number this past January, then shortly afterward revised the
number downward, saying that only 4.2 percent of some 100,000 mortgage
files reviewed were compromised.
But that low number stank so badly that even the Wall Street Journal
was moved to check it out, and in late February, in a story called
"Foreclosure Files Detail Error Gap," the paper discovered that the
error numbers were almost certainly very much higher. From that piece:
A breakdown of the information provided to the regulator shows that
more than 11% of files examined for Wells Fargo WFC +0.39% & Co. and
9% of those for Bank of America Corp. had errors that would have
required compensation for homeowners, said people who have reviewed the
figures. A narrower sample of files – representing cases selected by
outside consultants – showed error ratios of 21% for Wells Fargo and 16%
for Bank of America, the people said.
The OCC findings appear skewed by the outsize contribution of one
bank, J.P. Morgan Chase JPM -0.39% & Co., which reported an error
rate far below rivals that oversaw a much larger universe of loans.
J.P Morgan was responsible for more than half of the completed files
counted in the OCC review and reported compensation-worthy errors in
just 0.6% of cases, according to people familiar with the figures.
So you have numbers from all of these other banks coming in at 9
percent, 11 percent, even 21 percent, and yet somehow J.P. Morgan Chase
came in at 0.6 percent. The OCC just took the Chase numbers and averaged
them together with the rest and ultimately came up with the 4.2 percent
number.
So how did Chase come out so squeaky clean? Well, it seems they
developed quite a rapport with the government-mandated consultants who
were hired to review their loan files. This is from that WSJ report:
Two Deloitte employees who performed the review for J.P. Morgan in a
Brooklyn office building said workers were encouraged by supervisors to
examine pools of loans they knew would be less time-consuming or
error-prone as they tried to hit loan quotas.
One of these employees said that at an event last year known in the
Brooklyn office as "March Madness," Deloitte officials encouraged
reviewers to avoid problematic loans originated by EMC Mortgage, a
troubled mortgage lender J.P. Morgan acquired in 2008.
So basically Chase allegedly warned the consultants off their problem
loans and incentivized the consultants to examine the less-fucked-up
loans. Employees of another of Chase's auditors, Promontory, were
reportedly given gift cards of up to $500 for "completing a certain
number of files quickly."
The whole thing was a joke. Government orders banks to hire auditors
to investigate robosigning, then banks induce said auditors to robosign
the investigation! Because that's exactly what that would mean, if there
were financial incentives to finish masses of files quickly. It's
horrible, obviously, but on another level, it's so ingeniously corrupt,
one almost has to tip a cap to whoever thought of it.
Incidentally, what were Chase's real numbers? I mean, if it hadn't
been a consulting firm hired by Chase for buttloads of cash to do the
study, what might an auditor have concluded? Well, as reported by (among
others) David Dayen at Naked Capitalism, we got a glimpse into one
possible truth when the HUD Inspector General released a report that
included an ad-hoc survey of Chase loans:
For Chase, we also reviewed 36 affidavits for foreclosures in
judicial States to determine whether the amounts of borrowers'
indebtedness were supported. Chase was unable to provide documentation
to support the amounts of borrowers' indebtedness listed on the
affidavits for all except four. When we reviewed the four affidavits,
three were inaccurate. Specifically, the amounts of the borrowers' late
charges and accumulated interest did not reconcile with the information
in Chase's mortgage servicing system.
As Dayen jokingly pointed out, that means the gap in the stats was
relatively small – Chase's loans were either 97.2 percent fucked (as HUD
found), or 0.6 percent (as Chase/OCC found). Somewhere in between
there.
Anyway: In March, a Washington law firm called Williams and Connolly
sued the OCC for failing to properly ensure that the auditors would be
truly "independent." The firm declined to say on whose behalf it was
suing. Around the same time, members of congress like the House's Elijah
Cummings and new Massachusetts Senator Elizabeth Warren started to
become interested in these consulting arrangements, expressing concern
that perhaps the settlement number had been reached in error.
Fast forward a few weeks. It's April 11th, and Warren, along with
Sherrod Brown and Jack Reed, held hearings on this whole issue, bringing
in officials from the OCC along with some of these consultants to get
to the bottom of a number of issues, including, most importantly, how
the settlement was calculated, and who decided who would receive how
much compensation.
There were two major revelations from these hearings, in addition to
the ongoing revelation that the suits who people the country's financial
regulators are sniveling, obfuscatory weasels who clearly view the
banks they're supposed to be regulating as a bunch of stand-up dudes
while the taxpayers who are always demanding this or that (and the
politicians who represent them) are humorless pains in the ass.
In terms of new revelations, the first was this one, a real shocker:
that apparently, it was not even the obscenely overpaid, lapdog
consultants who made the final decisions about which homeowners fell
into which boxes in terms of settlement compensation. Incredibly, it
appears that the banks themselves were allowed to do that sorting
process!
This came out when Warren was interviewing private consultants from PriceWaterhouseCoopers, Promontory, and Deloitte and Touche:
Senator Warren: I just want to take a look at the Independent
Foreclosure Review Payment Agreement details. I think you've probably
all seen this one page agreement that lists all of the things that the
banks did wrong and then boxes for how many people fall into each
category and how much money they're going to be paid. Is that right?
You've all seen this? [Panel indicates they have seen it.] And this was
put out – who put this out? I think this is put out by the OCC and
Federal Reserve. Is that right? As part of the settlement details.
In the settlement there is a one-page document that lists all the
various misdeeds the banks engaged in during the foreclosure process,
then goes on to list how many homeowners were victimized by each
activity. Warren is showing this document to these consultants and she's
asking them, did you prepare these statistics? She goes on – listen to
the answers from the auditors:
Senator Warren: So I just want to ask you about this. It has some
pretty amazing categories here. The first category is about service
members who were protected by Federal law whose homes were unlawfully
foreclosed. It's got people who were current on their payments whose
homes were foreclosed. It's got people who were performing all of the
requirements under a modification who lost their homes to foreclosure.
And it tells how many people fall into each category and how much money
the people in that category will receive. And, it ultimately resolves
what will happen to 3,949,896 families. So the question I have is having
resolved this for nearly 4 million families, who put the people, the
families, into each of these boxes. Is that what your firms did, Mr.
Ryan?
Owen Ryan, Partner, Deloitte & Touche LLP: No, Senator, we did not.
Senator Warren: So who put them in?
Ryan: I'm not sure how that schedule is prepared. I saw it for the first time yesterday.
Senator Warren: Mr. Flanagan?
James Flanagan, Leader, U.S. Financial Services Practice,
Pricewaterhouse Coopers LLP: Same response. We were not involved in the
accumulation of that information.
Senator Warren: Mr. Alt?
Konrad Alt, Managing Director, Promontory Financial Group: Senator,
I've seen the schedule but I'm not familiar with the basis for its
preparation.
Having established that the consulting firms did not do this sorting, Warren presses toward the obvious conclusion:
Senator Warren: So that leaves us with the banks that broke the law,
were then the banks that decided how many people lost their homes
because of their lawbreaking. And, as a result, how many people would
collect money in each of these categories. Is that right,Mr. Alt?
Alt: Senator, I'm not familiar with the basis for the scheduling.
Senator Warren: So far as you know, there's no independent review of
the banks' analysis . . . You looked at 100,000 cases, and the banks
have now put 4 million people into categories and resolved finally how
much they will get from this review by the OCC and the Federal Reserve.
So that's bombshell Number One – it wasn't the auditors who decided
which homeowners fell into which categories, it appears to have been the
banks themselves. Bombshell Number Two? The representatives of the OCC
and the Fed – remember, federal regulators whose job it is supposedly to
protect ordinary people – flatly refused to give any information about
the real results of their surveys, i.e. their inquiries into what the
real error rates were.
Even worse, when pressed on the question of whether they would
deliver any evidence of wrongdoing they uncovered to private parties who
might want to sue, they hedged.
In these exchanges, Warren questions Daniel Stipano, deputy chief
counsel from the OCC, and Richard Ashton, Associate General Counsel for
the Board of Governors at the Fed. There are two key sequences.
In the first, Warren asks both men if they will make public what they
know about the extent of the illegality and errors – whether the real
error rate was, as she put it, 1 percent or 90 percent. But the two
officials respond in gibberish legalese (if you watch the video, Ashton
in particular seems to take pleasure in dicking the Senate around with
his verbose non-answers), repeatedly forcing Warren to pin him down to
their actual concrete position, which turns out to be, "Fuck you." For
example:
Senator Warren. So let me just make sure I understand this
completely. I want to know on a bank-by-bank basis the number of
families that were illegally foreclosed on. Will you give me that
information?
Mr. Stipano. Eventually, we are going to issue a statement to the
public where we provide additional information, but if we go through the
processes that I described previously, we can share it to Congress in
its oversight capacity.
Huh? I have no idea what that means, but it sounds positive – it did to Warren, too:
Senator Warren. So you are saying you will make that information publicly available?
Mr. Stipano. I did not say that. I said that we are planning on
issuing a public statement that wraps up the IFR that provides
additional information . . .
Ultimately, both the Fed and the OCC turned out to be united on the
issue. They'll release something, but it won't be the real numbers.
Frustrated, Warren asked them where the public is supposed to get the
numbers, if not from them. Their answer is, well, they can maybe pull it
out of their butts, if they get lucky – not our problem:
Mr. Stipano. Well, sometimes you get information through third
parties, through outside sources. But in this case, that is not the
case.
Senator Warren. So unless someone throws a rock through the window
with this information tied to it, you will not release it, is that what
you are saying?
Stipano here replies with more gibberish:
Mr. Stipano. To the extent that the information is confidential
supervisory information derived from the exam process, it is subject to
privilege.
From there, Warren asks a more specific question. What if someone
wants to sue a bank for illegally tossing them out of their home? And
what if you have evidence in such a case? Wouldn't such evidence be, you
know, helpful to those people? Stipano helpfully agrees, yes, it would
be helpful:
Senator Warren. All right. So let me ask it from the other point of
view. You now have evidence in your files of illegal activity, I take
it, for some of these banks. I get that from the evidence you have
released about the charts, who is going to get paid what. So if
someone believes that they have been illegally foreclosed against, will
they still have a right under this settlement to bring a lawsuit against
the bank?
Mr. Stipano. Yes.
Senator Warren. All right. Now, if a family wants to bring a
lawsuit--you are both lawyers--would it be helpful, if you are going
against one of these big banks, would it be helpful for these families
to have the information about their case that is in your files? Mr.
Ashton?
Mr. Ashton. It would be helpful, obviously, to have information related to the injury. Yes, it would.
Which leads to the next question – having acknowledged that it would be helpful, will you help?
This seems like it should be an easy answer, but it isn't:
Senator Warren. Okay. So do you plan to give the families this
information? That is, those families that have been victims of illegal
foreclosures, will you be giving them the information that is in your
possession about how the banks illegally foreclosed against them? Mr.
Ashton?
Mr. Ashton. I think that is a decision that we are still considering. We have not made a final decision yet.
Senator Warren. So you have made a decision to protect the banks but
not a decision to tell the families who were illegally foreclosed
against?
Mr. Ashton. We have not made a decision about what information we would provide to individuals, that is true. Yes.
Senator Warren. Mr. Stipano?
Mr. Stipano. We are in the same position.
Obviously these guys can't come out and say, "We're not giving
anybody anything. Blow us." That would cause too much of an uproar. So
they just say they haven't decided, and we all know what that means.
Warren tries to frame the issue in the most embarrassing way possible,
but the witnesses prove immune to such embarrassment:
Senator Warren. So I want to just make sure I get this straight.
Families get pennies on the dollar in this settlement for having been
the victims of illegal activities or mistakes in the banks' activities.
You let the banks, and you now know individual cases where the banks
violated the law and you are not going to tell the homeowners, or at
least it is not clear yet whether or not you are going to do that?
Mr. Stipano. We have not made a decision on what we are going to tell the homeowners.
All of this just confirms what we already suspected about the
foreclosure settlement. This whole enterprise was conceived by the
government solely as a means of dealing with the explosive problem of
containing the private liability of these "systemically important"
companies. Not only are we not prosecuting these firms anymore, we're
also actively in the business of protecting them from litigation.
No other conclusion is possible from this testimony, which shows that
our two primary regulators not only withheld information about bank
illegality and errors prior to the settlement, but plan on continuing to
do so going forward. There can be only one reason for concealing that
information from the people affected by those "errors."
Will The New Housing Bubble That Bernanke Is Creating End As Badly As The Last One Did?
