There are so many borrowers. What does it matter if some are defrauded?


The end of reviews
In spite of all investments in banking reviews, they did not work out. Criticism and costs grew and the situation became untenable. So the reviews were ended, officially to save money for distressed homeowners. The reviews gave a lot of money to the reviewers; maybe the banks were ripped off but they didn't seem to mind very much. There was foreclosure fraud $8.5 billion settlement, imposed to put a limit to how much they had to pay; it also meant that those responsible did not have to fear any personal consequences.
No prison. Money? As we shall see, a big part was not paid or paid by others. The OCC could boast of the settlement they had achieved; if the homeowners were ripped off, who cares. The settlement was so poorly carried out, it is difficult to believe it was ever meant to succeed. With reports of the DoJ pressing state AGs to release the banks from many liabilities, the settlement looks more like cash for a broad release.

How to split the money
Of the $8.5 billion settlement, $3.3 billion were to be available to borrowers whose foreclosures had been handled improperly; $5.2 billion were to be available to other assistance like loan modifications.
With the reviews aborted, there was no way to decide how much the improperly foreclosed borrower had been harmed; if we assume that some foreclosures had been correct, it was impossible to say if the borrower had been harmed. So how should they split the money? If 10 percent of 4.4 million foreclosures were wrong, $3.3 billion would give on average $7,500; if 50 percent were wrong, they would get $1,500. This is far from what the regulators said the year before: if the foreclosed house could be rescinded they should get $15,000, else $125,000 plus any accrued equity. No wonder the banks were happy to accept.

Paid according to how far the review had proceeded
The Fed negotiated a settlement, with little or no knowledge about actual harm to the borrowers; neither how many they were nor how much they were harmed. When the reviews were stopped, a decision was made to find no harm; some types of abuse were not even seen as harm, like forcing borrowers to take insurances, like accumulating fees during foreclosure. So, when the reviews were aborted, the borrowers were placed in categories and paid, not according to how much harm they had suffered but according to how far the review had proceeded when it was stopped.

Messing up payments
The troubles were not over when those $3.6 billion had been split and allotted to foreclosed borrowers. To distribute the money, Rust Consulting was used. Bad choice. They did not always have enough money on their accounts; their checks bounced. They could send checks smaller than they were told to send. Many checks were sent to wrong address; if the recipients found out and told Rust the correct address, Rust wouldn't correct it no matter how many times they were asked.

Paying by not paying
An $8.5 billion settlement does not necessarily mean that mortgage abuse victims will get an extra $8.5 billion contribution. Part of the settlement can be used to cancel total or part of a borrower debt. This can be widely interpreted; banks can include uncollectable debts, even debts already erased in bankruptcy; money they have already lost or money they were going to lose anyhow. Banks have sent letters telling customers their debts are gone when the debts were gone long time ago; the money is deducted from the settlement although it does not leave the bank one dollar worse off.
Was that meant to be some sort of penalty? What kind of reasoning is this? Regulator: You defrauded your customers of 100 million so you'll have to pay 10 million restitution. Regulated: OK. I lost 10 million on some of my deals, can we call it quits? Regulator: That'll be fine. Now that's what I'd call a successful settlement! Regulated: Me too.
And almost as bad: if they make a small modification to a big loan, they can deduct the whole loan. If they write down a $500,000 loan by $15,000, they can count this as a settlement payment of $500,000.

BoA to pay with the money of others
As part of the $8.5 billion BoA mortgage settlement, BoA wants to modify securities they got when they acquired Countrywide. In other words, they want to pay part of the settlement with securities they don't own, with securities they are managing for others. That they do not have the permission of the investors (owners) as requested by law does not seem to matter.
If you work for Fannie Mae, you have a duty to the shareholders and to the state. In this case the investors apparently have other overriding duties and affinities. A group of investors, including Fannie Mae, made an investigation and found breaches in every single Countrywide security. This is a potential claim much bigger then BoA's $8.5 billion settlement, still the investors decided not to do anything.

Reportable and above "acceptable error rate"
The settlement makes demands on the banks; they should not err. Or at least they should not err too much and too often. If an error is but small, it is not reportable and it does not count. If the number of reportable errors is not big enough, the errors do not count; it's below the "acceptable error rate".
Amounts should be checked but as long as they keep within a certain tolerance it's not included in the metrics. This means a bank can deduct some dollars from a correct payment; an incomplete payment can trigger late fees. With fees pyramiding the end result can be foreclosure but it is still no wrong.
The "acceptable error rate" is 5%. With more than 50 million mortgages, more than 2.5 million errors are acceptable. And that is "reportable errors"; small but potentially fateful errors are not included. Suppose you found $10,000 missing from your checking account. When you complained to your bank, they answered "Oh, that's all right; we are permitted to do that as long as we don't do it to more than 5% of our customers".

We can afford some losses, right?
The Americans used to respect the individual. Unlike Communists, Nazis and extreme Islamists who expect you to sacrifice yourself for something bigger. These days, the courts are wonderfully selective when it comes to protecting the rights of the individual, instead expecting the individual to sacrifice itself to Wall Street. Reminds me of Mao Zedong talking about all those millions who died under his regime: "We got so many people, we can afford losses".

© Anders Floderus