Failsafe failure



Aforeclosure review system that failed to compensate mistreated borrowers has been mostly scrapped in an $8.5 billion agreement with the largest US mortgage servicers. US regulators' deal with 10 mortgage servicers replaces an almost two-year, case-by-case review of flawed foreclosures. The Independent Foreclosure Review (IFR) process — agreed to by 14 servicers in a 2011 settlement — has so far cost the servicers more than $1.5 billion in fees to the consultants reviewing cases.

Companies including JPMorgan Chase, Bank of America and Citigroup must now provide $5.2 billion in mortgage assistance and $3.3 billion in direct payments to wronged borrowers, the Office of the Comptroller of the Currency (OCC) and the Federal Reserve said in a statement. This largest cash payout to those harmed by bad foreclosures during the subprime mortgage crisis is also meant to help people with current home- loan struggles.

"The IFR process was poorly designed and executed," said Representative Maxine Waters of California, the senior Democrat on the House Financial Services Committee, in a statement. She said she was concerned about "the independence of the consultants selected to review homeowner files for potential harm, the complexity of the materials sent to borrowers, and a lack of outreach by servicers to impacted households."

When the regulators ordered the review process for 2009 and 2010 foreclosures, they "pledged to fix what was broken, identify who was harmed, and compensate them for that injury," said Comptroller of the Currency Thomas Curry, adding that this "significant change in direction" will meet the original objective faster.

 'Needlessly delay'
"It has become clear that carrying the process through to its conclusion would divert money away from the impacted homeowners and also needlessly delay the dispensation of compensation to affected borrowers," Curry said.

JPMorgan, the biggest US bank by assets, will pay $700 million for the cash portion of the deal in addition to other settlement costs, according to a person briefed on the matter who declined to be identified because a bank-by-bank breakdown hasn't been announced.
Executives of New York-based JPMorgan "are pleased to have it now behind us," said Amy Bonitatibus, a spokeswoman for the bank.

"We have helped nearly one million homeowners avoid foreclosure over the last four years and will continue to help others who may be struggling," she said.

 BofA settlement
Charlotte, North Carolina-based Bank of America also agreed to pay $11.7 billion to resolve mortgage disputes with US-owned Fannie Mae. It said in a statement that it was profitable in the fourth quarter after accounting for that cost and an additional $2.5 billion for expenses including litigation and a regulatory settlement.

"We support the new approach because it expands the number of borrowers who will receive payment, speeds the delivery of those payments, and will provide support for homeowners still struggling to make payments," Dan Frahm, a Bank of America spokesman, said in an e-mail.

Citigroup, the third-biggest US bank by assets, will show a $305 million pretax charge for the cash payment when it reports fourth-quarter results on January 17, the company said in a statement.

The New York-based lender's $500 million share of the mortgage assistance will be absorbed by existing loan-loss reserves, according to the statement.

 Other lenders
The settlement with the Fed and OCC also covers Aurora Bank FSB, MetLife, PNC, Sovereign Bank, SunTrust Banks, US Bancorp and Wells Fargo, the biggest US home lender, which said in a statement that it will pay $766 million in cash and $1.2 billion in mortgage help.

Four banks continue under the original settlement, including HSBC Holdings, which "remains in discussions," according to Neil Brazil, a spokesman.

The third-party consultants, including Promontory Financial Group, PricewaterhouseCoopers and Ernst & Young, will lose their jobs reviewing the files for the 10 servicers.

Promontory, the Washington-based firm that reviewed files for Bank of America, Wells Fargo and PNC Financial Services Group, said in a statement that it "is ceasing essentially all review work immediately.

We will, of course, cooperate with regulators and servicers to ensure a smooth transition to the new remediation approach."

The agreement drew criticism from Representative Elijah Cummings of Maryland, the top Democrat of the House Oversight and Government Reform Committee.

 'Serious concerns'
"I have serious concerns that this settlement may allow banks to skirt what they owe and sweep past abuses under the rug without determining the full harm borrowers have suffered," Cummings said. The accord is meant to speed up payments to borrowers who otherwise would have continued to wait under the case-by-case review. Eligible borrowers are expected to get payments of as much as $125,000, depending on how badly their foreclosure was handled, the regulators said, similar to compensation levels the agencies outlined last year. A payment agent will act as go-between for the loan servicers and borrowers eligible for the $3.3 billion in direct compensation under the agreement. Those borrowers should expect to be contacted by the end of March, according to the regulators. The remaining $5.2 billion will go toward modifying loans and forgiveness of deficiency judgments, according to the settlement. The regulators said they will keep trying to secure settlements with mortgage servicers outside of deal.

 'Vilifies' banks
"I think it's important to look beyond the dollars in these settlements to see how much harm they do to the nation's largest banks," said Karen Shaw Petrou, managing partner of Washington-based Federal Financial Analytics. "Billion by billion in enforcement action after action, the industry is seen as sloppy at best and unscrupulous at worst," Petrou said in an e-mail. "The array of new rules set for 2013 redefining not just mortgage finance, but also banking more generally, will not go easy on big banks because public opinion increasingly vilifies the industry."

In the previous foreclosure reviews, about 6.5 per cent of borrowers were harmed to a degree that deserved compensation, according to Bryan Hubbard, an OCC spokesman. The servicers are now responsible for checking out their own missteps and ranking borrowers by how egregiously they may have been wronged, with regulators looking over their shoulders and testing their methods, Hubbard said.( Jesse Hamilton/ Bloomberg News)


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