As Regulators and Banks Review Foreclosures, We’ll Be Watching

The country's bank regulators are launching an unprecedented plan to undo some of the damage done by mortgage servicers, compensating victims of shoddy or illegal foreclosure practices. Part of the plan involves a massive outreach effort to contact the potentially millions of borrowers affected.

Exactly how this will unfold is, for now, unclear; if regulators hold true to form, the process figures not to be transparent. Homeowner advocates applaud the idea of the banks righting their wrongs but are skeptical the process will be thorough and fair. The regulators don't “have a good track record at identifying or fixing servicer misbehavior,” said Diane Thompson of the National Consumer Law Center.

ProPublica will be watching closely. We'd like to hear from current and former homeowners who wrongfully faced foreclosure in the last couple of years. Much as we've tracked the administration's mortgage modification program, we'll be tracking what happens with these cases.

Last week, regulators released “consent orders” that laid out problems at many of the country's biggest servicers (see sidebar for the list), which collectively handle almost 70 percent of the country's mortgages. The orders followed an investigation prompted by widespread revelations last fall that servicers were regularly filing false affidavits signed by so-called “robo-signers.” According to the orders, regulators found that servicers weren't properly evaluating homeowners for loan modifications, had wrongly foreclosed on some homeowners, and in addition to doing a generally poor job, had broken the law. (None of this should surprise those who've been reading our coverage.)

You can see the regulators' report on their investigation and all of the orders here.

To fix the ongoing problems, the orders lay out broad principles that servicers should follow — basics such as having sufficient staff, training them adequately, not losing documents, etc. But because the orders are so general, borrower advocates have been vocal in saying they won't be enough to fundamentally change the industry's cost-cutting ways or to ensure that homeowners are properly evaluated for a modification.

The orders include a requirement for the banks to do foreclosure reviews to address problems that have cropped up during recent years. The process will start immediately but won't culminate until early 2012.

Each bank is required to hire an outside firm to review all of its foreclosure actions in 2009 and 2010. The firm will be tasked with looking for certain violations (see our list below), ranging from robo-signed affidavits and forged documents to foreclosure sales that occurred without a proper review for a modification. Based on those findings, banks will compensate the victims, or as the orders put it, “remediate all financial injury to borrowers caused by any errors, misrepresentations, or other deficiencies.”

So, how exactly will this work? Many of the details remain unclear, but we spoke to regulatory sources who provided some additional information.

Over the next couple months, the banks will hire the outside firms to conduct the reviews. The actual reviews are expected to begin this summer. They are supposed to cover all mortgages that were in the foreclosure process at any point in 2009 or 2010, but because that involves more than 3 million loans, the firms will use sampling to do their analysis.

The process won't be strictly internal, however. Regulators also will require some form of outreach. It's likely, for instance, that all the banks will be sending letters to every homeowner who was in foreclosure in 2009 or 2010.

Of course, some of these people are likely to be former homeowners who may well no longer reside at the same address. There might also be a kind of ad campaign, but regulators acknowledge these people will be tough to reach.

However it's done, there will be some way for homeowners to submit their complaints to banks. Those who think they might be eligible for reimbursement or remediation should “get their documents together,” said one regulatory source. When the reviews launch in the summer, it should become clear exactly where those complaints should go. (You can be sure we'll post that information when it's available.)

It's still anyone's guess what will happen after complaints are submitted. Among the important unanswered questions: whether the review will involve homeowner interviews; how the outside firms will investigate claims of violations; whether those who complain will receive some sort of explanation if they're denied; and how banks and regulators will calculate what victims are owed.

Thompson, of the National Consumer Law Center, said she worries the reviews will “shift the burden onto homeowners” to prove they were wronged. Homeowners won't necessarily have kept the documents that demonstrate harm, she said. Even those who do have documentation may not know they were wronged, she added. They wouldn't know, for instance, whether the fees they were charged were improper or whether they were considered for a modification.

If the reviewers do no investigation of their own and simply reply on homeowners to submit proof of wrongdoing, she said, it will miss most of the problems: “The process and remediation will serve as a whitewash for servicer misbehavior without actually either remediating past errors or preventing future ones.”

The reviews are expected to culminate late this year or early next year, when checks are scheduled to go out to victims. Regulatory sources told us that the total amount sent to eligible homeowners would likely be disclosed. Even before this phase, observers may get a hint of what's happening if, as expected, regulators levy financial penalties against the banks. The findings of the reviews will determine the size of those penalties, regulatory officials said.

Regulators have done similar reviews in the past to compensate victims of bank wrongdoing, but not on this scale. In 2008, the Office of the Comptroller of the Currency (one of several regulatory agencies for the biggest banks and servicers, such as Bank of America, Wells Fargo, JPMorgan Chase, and Citibank), oversaw a process that resulted in Wachovia Bank issuing $150 million in checks to more than 740,000 consumers for the bank's role in a telemarketing scam. Regulators acknowledge, however, that the foreclosure reviews, which will involve 14 banks, millions of consumers, and billions of dollars in claims, is in a class of its own.

If you think you're a borrower who should be compensated through this process, we want to hear from you. We also want to hear from homeowners who have mortgage servicers not covered by this process (there are some large ones), because they might be covered by efforts from other regulators down the line.

Here’s the language from the Consent Orders that describes the scope of the foreclosure review:

The purpose of the Foreclosure Review shall be to determine, at a minimum:

(a) whether at the time the foreclosure action was initiated or the pleading or affidavit filed (including in bankruptcy proceedings and in defending suits brought by borrowers), the foreclosing party or agent of the party had properly documented ownership of the promissory note and mortgage (or deed of trust) under relevant state law, or was otherwise a proper party to the action as a result of agency or similar status;

(b) whether the foreclosure was in accordance with applicable state and federal law, including but not limited to the SCRA and the US Bankruptcy Code;

(c) whether a foreclosure sale occurred when an application for a loan modification or other Loss Mitigation was under consideration; when the loan was performing in accordance with a trial or permanent loan modification; or when the loan had not been in default for a sufficient period of time to authorize foreclosure pursuant to the terms of the mortgage loan documents and related agreements;

(d) whether, with respect to non-judicial foreclosures, the procedures followed with respect to the foreclosure sale (including the calculation of the default period, the amounts due, and compliance with notice periods) and post-sale confirmations were in accordance with the terms of the mortgage loan and state law requirements;

(e) whether a delinquent borrower's account was only charged fees and/or penalties that were permissible under the terms of the borrower's loan documents, applicable state and federal law, and were reasonable and customary;

(f) whether the frequency that fees were assessed to any delinquent borrower's account (including broker price opinions) was excessive under the terms of the borrower's loan documents, and applicable state and federal law;

(g) whether Loss Mitigation Activities with respect to foreclosed loans were handled in accordance with the requirements of the HAMP, and consistent with the policies and procedures applicable to the Bank's proprietary loan modifications or other loss mitigation programs, such that each borrower had an adequate opportunity to apply for a Loss Mitigation option or program, any such application was handled properly, a final decision was made on a reasonable basis, and was communicated to the borrower before the foreclosure sale; and

(h) whether any errors, misrepresentations, or other deficiencies identified in the Foreclosure Review resulted in financial injury to the borrower or the mortgagee.