The Foreclosure Fiasco
By JOE NOCERA
Published: January 14, 2013
It’s been five days since Jessica Silver-Greenberg’s article on the latest bank settlement was posted on The New York Times’s Web site. I’m still shaking my head. Her “story behind the story” of the $8.5 billion settlement between federal bank regulators and 10 banks over their foreclosure misdeeds illustrates just about everything that is wrong with the way the government has handled the Great Foreclosure Crisis.
Shall we count the ways?
1. It is more about public relations than problem-solving. Pick a program — any program — that the Obama administration unveiled to help troubled homeowners over the past four years. Not one has amounted to a hill of beans.
This settlement is no different. The country’s primary bank regulator, the Office of the Comptroller of the Currency — which, along with the Federal Reserve, engineered the settlement — is trying to make it look like a victory. Of the $8.5 billion, $3.3 billion will go directly to foreclosed-upon borrowers, making it “the largest cash payout to date,” according to Bryan Hubbard, the O.C.C.’s chief spinmeister. (The rest of the money will consist of reduced interest payments and loan modifications.)
In truth, the O.C.C. needed to save face after a foreclosure review process it had mandated had become an expensive fiasco. As amply demonstrated by Silver-Greenberg and American Banker, the government insisted that the banks hire expensive consultants to do a review of every foreclosure that took place in 2009 and 2010. The consultants racked up more than $1 billion in fees, while proceeding at such a molasseslike pace that the feds and the banks finally threw up their hands. The settlement made the whole thing go away.
2. Accountability? What’s that? We have known for a long time that overwhelmed bank servicers took shortcuts, like robo-signing, that violated many state laws. They also put people through hell who were trying to get a modified mortgage. “I’ve seen marriages break up because of what banks put families through,” says Elizabeth Lynch of MFY Legal Services. All this settlement does is push those misdeeds under an $8.5 billion rug.
3. It won’t actually help anybody. The settlement will cover some 3.8 million foreclosures. The government is going to distribute $3.3 billion dollars. It comes to around $868 per lost home.
Of course, the O.C.C. says that is the wrong way to look at it: Some people — military personnel, for instance — could get as much as $125,000 while others won’t get much at all. People denied a modification will be eligible for up to $40,000 or $50,000, said Hubbard. I have no doubt that money will be welcome. But for those who lost their homes because of bank misconduct, it doesn’t come close to making them whole.
4. The money is being distributed with no regard to whether a borrower suffered harm. In some ways, this is the sorriest part of the whole episode. The foreclosure review never answered the key question: which borrowers had legitimate claims against their bank and which didn’t. Thus, the settlement doesn’t make that distinction. If you lost your house in 2009 and 2010, you are going to get money — whether the bank was culpable or not. “The notion of error is not involved in this settlement,” conceded Hubbard.
As a result, those who really were truly harmed by bank behavior will be shortchanged. As Karen Petrou, the well-known banking consultant, puts it, the government has “come up with something that gives every borrower — maybe — a pittance and leaves the truly hurt — and there were many — as much in the lurch as before.”
This is hardly the only time in recent months that a settlement that is publicized as righting a wrong instead hands money to people who were never victimized. Think back to the $4.3 billion fund established by Congress to compensate people who became sick because of their exposure to toxic dust created by the 9/11 attacks. Even though there is no scientific evidence that the dust caused cancer, the government added cancer to the list of diseases that would be compensated. The result will be less money for those who truly did become sick because of their exposure to the 9/11 aftermath.
Or take Toyota, which recently paid $1 billion to settle a lawsuit claiming that an electrical flaw caused some accelerators to stick — even though there turned out to be no evidence to support that claim.
People who do these kinds of settlements regularly say that the world has become so complicated that, more often than not, it is simply too expensive to figure out who was harmed and who was not. So best just to throw a little money at everybody and make the problem go away.
That is what the federal government did last week in its settlement with the banks. It’s nothing to be proud of.
This article has been revised to reflect the following correction:
Correction: January 15, 2013
An earlier version of this column miscalculated the amount each home lost to foreclosure would receive under the settlement between federal bank regulators and 10 banks. It is $868 per home, not $1,150.