The nation's 14 largest mortgage firms must compensate wronged homeowners after federal bank regulators determined the companies broke federal and state laws by improperly foreclosing on an incalculable number of distressed borrowers. The agencies announced such penalties Wednesday, the first in what is likely to be a series of enforcement actions targeting the country's biggest banks and costing them billions.
Lenders like Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial systematically broke rules and took shortcuts when foreclosing on homeowners last year, the regulators said. Their three-month review launched after documents and videos of so-called robo-signers -- people who signed thousands of foreclosure documents a day without reading them or knowing what was in them -- surfaced, leading the biggest banks to halt home seizures.
Bank examiners found the firms employed practices that "failed to conform to state legal requirements." In other words, they broke the law.
The banks must stop such practices and fix the way they process home loans, according to agreements they signed Wednesday with the Federal Reserve, Office of the Comptroller of the Currency and the Office of Thrift Supervision.
The Fed said the review uncovered a "pattern of misconduct and negligence" in the way mortgage servicers processed home repossessions, which represent "significant and pervasive compliance failures." All three agencies deemed the practices to be "unsafe and unsound," an industry label that essentially means the actions threaten the viability of the institutions and the banking system.
But the agencies don't even know the full scope of the problem, they admitted in a joint report outlining their findings. They did not fully review whether borrowers were assessed improper fees, as critics have widely alleged, nor did they investigate mortgage servicing issues outside of the foreclosure process.
Last November, Fed Governor Sarah Bloom Raskin said servicing flaws were "part of a deeper, systemic problem."
Additionally, the agencies only examined a "relatively small number of files from among the volumes of foreclosures processed by the servicers," the regulators said in their report.
By comparison, more than 2.8 million homes received a foreclosure filing in 2009, and nearly 2.9 million residences got one last year, according to RealtyTrac, a California-based data provider.
"Therefore, the reviews could not provide a reliable estimate of the number of foreclosures that should not have proceeded," the agencies said in their report.
The banks were forced to hire independent auditors to review "certain residential mortgage loan foreclosure actions." In other words, regulators did not demand they review every foreclosure.
"There is evidence that some level of wrongful foreclosures has occurred," the Federal Deposit Insurance Corporation said in a statement, adding that Wednesday's agreements with the banks "do not purport to fully identify and remedy past errors in mortgage-servicing operations of large institutions" and that "much work remains."
Fines are "appropriate" and will be assessed, the Fed said in a statement. The OCC chief also told reporters that fines are coming. An amount was not announced.
Yet while the agencies outlined goals for the firms, it's up to the banks to determine what specific actions they need to take, and how to implement the new procedures. With the exception of a few items -- like forcing the lenders to establish a single point of contact for each borrower -- the regulators essentially asked the banks to follow existing rules and laws.
Meanwhile, attorneys general from all 50 states, state bank supervisors, and other federal agencies continue to pursue their own probe of the biggest mortgage companies.
Attorneys General Beau Biden of Delaware and Tom Miller of Iowa both said in statements that the OCC's actions would not impact the state probe.
Representatives from 10 state attorneys general offices, along with officials from the Justice Department and the Department of Housing and Urban Development, met with banks again on Wednesday, part of a two-day meeting that marks the second time they've discussed the ongoing investigation with bank representatives, Associate U.S. Attorney General Tom Perrelli said on a conference call with reporters.
"We have substantial ability to assess fines and penalties, as do the state AGs," said Helen Kanovsky, HUD's general counsel and top legal adviser to HUD Secretary Shaun Donovan. HUD and the state officials have abilities to set fines that go "well beyond what the federal banking regulators can do" or what the "banking regulators ever set out to do," she added.
At this point, state officials are only focusing on the top five firms -- Bank of America, JPMorgan, Wells, Citi and Ally. The states' audit of Ally, the fifth-largest mortgage handler in the country, was the "most in-depth analysis and investigation of any of the servicers that has been done or will be done," Miller said in an interview.
State regulators will use their findings from Ally as part of the settlement negotiations with the other large mortgage firms, Miller said, as practices were likely the same across the biggest firms -- a point underscored by Wednesday's announcement.
Federal regulators publicly praised the three banking agencies for their work, yet were quick to note that the consent orders with the targeted firms mark simply the first step of a process designed to fix the "pervasive" problems that plague the industry, punish the banks for wrongdoing and compensate homeowners for their losses.
Privately, officials described the action as confirmation of a strategy long pursued by the OCC, a light-touch approach the agency hopes will force the hand of other regulators to quickly settle, rather than pursue in-depth investigations or levy costly penalties on the banks.
Officials are pursuing as much as $30 billion in penalties against the five biggest mortgage firms. Some attorneys general want a thorough review of borrowers' loan files in order to be able to confidently survey the damage wreaked by faulty bank practices.
The nation's five largest mortgage firms have saved more than $20 billion since the housing crisis began in 2007 by taking shortcuts in processing troubled borrowers' home loans, according to a confidential presentation prepared for state attorneys general by the nascent consumer bureau inside the Treasury Department and obtained by The Huffington Post.
The report, prepared by the Bureau of Consumer Financial Protection, suggests that amount should be used as a starting point in settlement discussions with the targeted firms. Many more billions would likely have to be levied as penalties in order to discourage the firms from taking a similar approach in the future and to compensate homeowners for bank abuses, including reducing distressed borrowers' loan balances.
The OCC rejects that approach. Republicans in Congress say such a penalty could hurt banks' capital levels and stifle their ability to lend.
But a Wednesday report by the International Monetary Fund dismisses such concerns.
If Bank of America, JPMorgan, Citi and Wells reduced housing debt on first mortgages by 15 percent for borrowers expected to be at risk of foreclosure over the next year and a half and then lowered loan balances by 30 percent for seriously-delinquent borrowers and those in foreclosure through 2015, they'd face little consequence, the IMF said.
"Our stress tests highlight the capital strength of U.S. banks," it said in its report, noting the lenders' ability to manage "even under a severe shock."
The IMF's estimates are based on a widespread principal reduction program that would impact millions of homeowners, far beyond what's currently under discussion in the foreclosure abuse probe.
State regulators and some federal agencies similarly believe that a principal reduction program would not impede banks' ability to lend or maintain a healthy balance sheet.
Of the public statements issued by the nation's four banking regulators, those of the OCC and OTS were the tamest, according to a review. The OCC said the enforcement actions are "comprehensive" and will "fix the problems" it found.
The Fed said they found a "pattern of misconduct and negligence." The FDIC said the review was "limited" and discussed the need for a "thorough regulatory review" so agencies could identify the extent of the problem.
Neither termed the enforcement actions "comprehensive," nor did they claim the consent orders would fix what's broken in an industry with "structural problems," which is how Raskin described mortgage servicing.
Both the Fed and the FDIC mentioned the state regulators and federal agencies working with them. The FDIC specifically said the consent orders should not impede or preempt the state action.
The OCC and OTS, which are merging as part of last year's financial reform law, did not make any such statements.