NEW YORK -- In abruptly ending a case-by-case review of hundreds of thousands of foreclosed home loans early this year, federal regulators said the process had become simply too costly to be worthwhile. But an audit of the program by an independent government agency suggests another likely reason for abandoning the program: the reviews were simply too flawed to be reliable.
The draft report by the Government Accounting Office, an independent arm of Congress, obtained Wednesday by The Huffington Post, describes "ambiguous" guidance by bank regulators to the consultants reviewing the loans. It also cites a failure of "key oversight mechanisms" installed by regulators, led by the Office of the Comptroller of the Currency. As a result, the report concludes, "regulators risked not achieving the intended goals of identifying as many harmed borrowers as possible."
Even if the reviews had continued to conclusion, there is no guarantee that wronged homeowners would have received any compensation, the report says.
"The report confirms that the Independent Foreclosure Review process was poorly designed and executed," Rep. Maxine Waters (D-Calif.) said in a statement Wednesday evening. The "report confirms what I had long suspected -– that the OCC’s oversight of the supposedly independent consultants hired by the servicers was severely deficient. The report should serve as a wake-up call.”
Waters is one of a handful of legislators, including Sen. Elizabeth Warren (D-Mass.), who has called on the OCC and the Federal Reserve to disclose more details about the reviews.
Warren and another legislator, Rep. Elijah Cummings (D-Maryland), sent those regulators a letter with questions about how the process had broken down. The regulators have not answered those questions, a Cummings spokeswoman said Wednesday.
The OCC did not immediately respond to a request for comment Wednesday evening. In a brief response letter included with the audit, the agency said it would take the report’s recommendations into account when designing programs in the future.
In a more detailed response letter, the Board of Governors of the Federal Reserve, the other regulator involved in the foreclosure review, defended its actions to correct deficiencies. The Fed said it “significantly expanded its planning and monitoring efforts" while the reviews were underway and has taken pained efforts to improve communication since the settlement was announced.
The Independent Foreclosure Review grew out of a legal deal struck in 2011 between bank regulators and 14 mortgage companies, known as servicers, to resolve widespread allegations of foreclosure abuse. The reviews required the companies, which included Wells Fargo and Bank of America, to hire independent consultants to look over the case files of individual home loans and then decide whether a mistake was made that would require the homeowner to be compensated.
The program was troubled from the start. Though any homeowner who received a foreclosure notice in 2009 or 2010 was eligible to apply, few did, and the application deadline was extended repeatedly. Homeowner advocates blamed poor efforts by regulators and banks to effectively communicate with potentially eligible borrowers.
Although the OCC focused on improving its communication strategy after a previous GAO report criticized its lack of outreach to minority communities, in the end, the communication was still poor.
“The absence of timely and useful communications at certain stages of the process -- for individual borrowers as well as the general public -- hindered transparency and undermined public confidence in the processes and results,” the report noted.
Eventually, about 450,000 borrowers applied. But those who did had little faith in a process that a ProPublica report suggested was neither as independent nor fair as promised. In January, HuffPost reported that contractors hired to review loans were poorly or inconsistently trained and it wasn't always clear whether they were sufficiently independent from bank influence. Many of these former contract employees said that the process was so compromised by mistakes and misconduct that the results of the reviews were not reliable.
In January, the reviews were scrapped in favor of a blanket $9.3 billion settlement between regulators and 11 of the mortgage companies. At the time, the OCC cited the mounting cost, blaming the independent consultants for billing much more than had originally been planned.
“The consultants provided original engagement letters with estimations that were far off” the eventual scope and cost of the project, Bryan Hubbard, the OCC spokesman, said in January. By the time the reviews were stopped, consultants had charged nearly $2 billion -- or roughly $20,000 per loan, according to Warren and Cummings.
Hubbard also contended the settlement was a better deal for borrowers than the foreclosure review and would mean higher payouts. “I can guarantee that the amount paid out would have been much less than the amount of the [current] settlement,” he said.
As part of the settlement, the mortgage companies said they will make $3.6 billion in direct payments to foreclosed borrowers. All of the 4.4 million homeowners in the qualifying period will receive some payout, ranging from $250 to $125,000. Instead of an outside consultant, the banks themselves will determine who gets what -- a process that bank regulators say they will oversee.
The foreclosure reviews were meant to identify specific errors made by the banks, which following the housing crash were swamped with millions of defaulting mortgages they were not equipped to handle. The most common mistakes include failure to process an application for a government-sponsored mortgage modification, which often turned into a nightmare of lost paperwork and unexplained rejections that sometimes led to unnecessary foreclosures.
Mary Diab, a consultant in Mission, Kansas, claimed JPMorgan Chase illegally foreclosed on her in May 2010. After a car accident in 2009 left her temporarily disabled, she said, the bank approved an agreement that forgave her mortgage payments for a few months. But then, Diab said, Chase repeatedly tried to foreclose on her during the "forbearance" period and “never let up.”
Even before the independent foreclosure review process began, Diab said she logged a complaint with the OCC. When the review process was announced, Diab said the federal regulator rolled her case into her review application.
“I was really excited. I thought, 'Oh good, at least someone’s doing something about it.' I’m thinking maybe I’m going to get a little bit of justice with this independent foreclosure review.”
Now, Diab said, “I just view this as one more opportunity to get kicked in the teeth.”
“Do I have any hopes at this point of getting anything out of it? Not really. Mostly I just want it to be over before it kills me,” she added.