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Ultimate Statistics Senator Takes on U.S. Regulators’ $9.3bn Foreclosure Agreement

ftalphaville.ft.comApril 15, 2013

By Lisa Pollack

FT Alphaville does like a good Senate Banking Hearing. Especially when they feature a political body slam on proper statistical methods. And so we are proud to announce this month’s Ultimate Statistics Fighter… [dramatic pause]… is Senator Elizabeth Warren!

Warren demonstrated her moves on Thursday during a hearing on Outsourcing Accountability? Examining the Role of Independent Consultants. (Don’t let the incredibly dull title of the hearing deter you. That would be a mistake. Don’t be that person.)

In the red corner, witnesses included Daniel Stipano, Deputy Chief Counsel of the Office of the Comptroller of the Currency, and Richard Ashton, Deputy General Counsel of Board of Governors of the Federal Reserve System!

In the blue corner, Senators Warren, Sherrod Brown, and Jack Reed!


Mortal Kombat!

The hearing ended up having a delightful ringside match, inclusive of the Warren body slam. To understand the context around it, we first turn our attention to the the main match. This concerned the role of consultants in the Independent Foreclosure Review whereby the foreclosure practices of US mortgage servicers were assessed for “errors, misrepresentations, and other deficiencies in the foreclosure process”, aka “getting stuff badly wrong”, during 2009 and 2010.

For example, if a bank initiated foreclosure proceedings on a serving, or recently serving, member of the military (they are protected under the Servicemembers Civil Relief Act — something about having to not worry about things back home while risking their lives) or on a homeowner who wasn’t actually in default, that’s bad. Big no-no.

The Foreclosure Review process itself was initiated by regulators in 2011. It involves banks hiring “independent” consultants to examine bad practices like the above. However, this was taking ages and concerns were raised about how conflicted the consultants were, due to having pre-existing relationships with the banks they were meant to independently assess. (For more reading on that and this topic generally, see Naked Capitalism, as they’ve been all over this for some time. We’ve included a selection of links from them below.)


Peanuts, getcha peanuts!

In January 2013, the Fed and OCC pulled the plug on the review for the majority of the servicers, by agreeing a $9.3bn settlement with them. This headline figure comprises $3.6bn of cash payments and the rest is to support loan modifications.

The most spectacular failures by banks, such as those which affected servicemen and women, will result in compensation of some $125,000 per affected family. However, the vast, vast majority will receive compensation in the region of $300-1,000 each. The compensation level is determined by the category a given case falls in, and the decision about the category is decided by…(drumroll)… the mortgage servicers. The regulators ostensibly let them do this because the total compensation each servicer has to pay is fixed. It’s only a question of how the money is doled out, but doled out it shall be.

Looking at the numbers from a Fed disclosure dated April 9th, if the “Servicer did not engage with borrower in a loan modification or other loss mitigation action”, the person affected will receive $600 if they requested a review under the programme and $300 if they didn’t. Note how that category has 568,476 homes that were foreclosed upon. In the framework published by the OCC and Fed jointly last June, we think this falls under the “Servicer never solicited borrower loan modification option as required under HAMP or other program designated by regulator” error.

Homeowners get a whopping $100 more if they fall under “Modification request received but no underwriting decision made” category. A mere 149,631 lost their home in that one.


Let’s get ready to rumble!

Now that we have some colour on the settlement, let’s go back to last week’s Senate hearing. The WSJ notes why legislators were foaming at the mouth even before the event:

Among lawmakers’ concern is that regulators won’t disclose details about a consulting firm that was officially reprimanded for poor performance. In a letter to Fed Chairman Ben Bernanke and Comptroller Thomas Curry, the lawmakers wrote that Fed and OCC staff “stated that the performance of one of the independent consultants conducting foreclosure reviews was so poor that you issued a letter faulting the company and directing it to cure its deficiencies” but that staffers “would not elaborate” on the identity of the consulting firm or mortgage-servicing company.

Enter, Senator Warren.

Her staff clearly think that the most interesting part of her questioning of the Fed and OCC counsel was when she put on her best indignant look in response to the regulators saying that they aren’t sure yet if they are going to disclose information to individual homeowners — information that would help the person in a lawsuit against the relevant bank in cases where the Foreclosure Review found an error (or errors). The regulators consider said information to be “confidential supervisory information”.

It does make good watching, the video uploaded to YouTube by Warren’s staffers, especially in light of the paltry amounts some of those foreclosed upon will receive:


Statistical insignificance

FT Alphaville is, however, drawn to Warren’s attack on the 6.5 per cent error rate that the Foreclosure Review turned up before it ended — for the servicers who signed up to the $9.3bn settlement, that is. The “errors” being things like the above examples: foreclosing on military personnel, or where the loan modifications weren’t offered as per regulations or actioned, etc.

Senator Warren insists that the 6.5 per cent must have been a significant factor in coming to the amount involved in the settlement, i.e. the $9.3bn, and therefore it’s very important.

Ashton, the Deputy General Counsel for the Fed’s Board of Governors, kept saying in response to Warren’s questioning that the 6.5 percent was, in fact, just one of the factors considered in getting to the $9.3bn figure. He rather places his emphasis on the settlement getting compensation to those affected by bad foreclosure practices much quicker than might have otherwise been the case given how long the review was taking.

Warren’s take on the 6.5 per cent, after effectively giving up on Ashton:

What I take it to mean, since you used it in your press release and since it’s relevant to how much money the people who’ve been injured are going to get that the number is critical. It tells us how much illegal activity there was and how much the banks should pay.

The problem is that the 6.5 per cent is not accurate. Your staff admitted to us in a meeting earlier this week that the number is not based on a random sample, not on a review of these cases, it was determined based on whatever files had been reviewed by the time you shut down this process.

And then it gets worse on the numbers. A week after announcing… a few weeks after announcing the settlement, your agency revised the 6.5 per cent number down to 4.2 per cent. The Wall Street Journal reported that the error rate — that is, the rate of breaking the law — was uhh, or making mistakes, was 11 per cent at Wells Fargo, 9 per cent at Bank of America, and there are reports that the error rate at JPMorgan Chase was only six tenths of one per cent.

In other words, the 6.5 per cent number was just a made up number.

So Congressman Cummings and I have asked for information about how you came up with the number. We still don’t have enough facts to check it, but the question I have is: what is the right number? Is it six tenths of one per cent? Is it 6.5 per cent? 9 per cent? 11 per cent? 20 per cent? 50 per cent? 90 per cent? If you can’t correctly tell how many people were the victims of illegal bank actions, how can you possibly decide how much money is an appropriate amount for settlement?


She is NOT done either! Turning to Stipano, Deputy Chief Counsel at the OCC:

Warren: I’m sorry [interrupting Stipano saying that a substantial number of cases were reviewed], Mr Stipano, we met with your staff and your staff has made clear, you did not review a random sample.

Stipano: No it wasn’t a random sample.

Warren: And without a random sample, can you then generalise to the accurate number, even an estimate, of how many banks broke the law?

Stipano: Um, not in my, my understanding is not in a statistically valid way. [Warren: OK, that's a no.] Ca-can I finish though — I do think that the review of a hundred thousand files plus is not valueless. I mean it does inform your decision to some extent.

Warren: So you’re telling me it’s not a random sample, but you think you know something?

Stipano: It has some value.

Warren: And what is it that you know since we’ve seen different numbers reported here?

Stipano: I’m assuming that that’s where the error rate came from, but I’m only assuming, Senator, I was not involved in it.

Warren: So if we are to draw an inference from those hundred thousand files, it seems to me we need more information about the hundred thousand files. That is, how they were drawn and how much illegal activity was found in them in those files. Is that accurate?

Stipano: I think that’s accurate.

Warren: So far you have not given us that information.

And then we’re back to the same old line that there are processes to share confidential supervisory information to Congress in its oversight capacity. The OCC intends to provide some additional information on this to the public, but we’re not holding our breath that it will be meaningful.

Considering how much was spent on the Foreclosure Review, how badly it went, how long it took, and how little useful information it ultimately produced, maybe the focus for next time shouldn’t be to find less conflicted consultants. Perhaps it should instead involve employing a single consultant, just one person, to run a random number generator to produce any of the statistics that need to factor into the settlement. At least that would be less misleading.

Back to April 2013 Archive

CFLA was founded by the Nation's Leading Foreclosure Defense Attorneys back in 2007 to serve the Foreclosure Defense Industry and fight pervasive Bank Fraud. Since opening our virtual doors, CFLA has rapidly expanded to become the premier online legal destination for small businesses and consumers. But as the company continues to grow, we're careful to hold true to our original vision. For us, putting the law within reach of millions of people is more than just a novel idea—it's the founding principle, just ask Andrew P. Lehman, J.D.. With convenient locations in Houston and Los Angeles, you can contact Our National Account Specialist and General Manager / Member Damion W. Emholtz at 888-758-2352 for a free Mortgage Fraud Analysis or to obtain samples of work product, including cutting edge Bloomberg Securitization Audits, Litigation Support, Quiet Title Packages, and for more information about our Nationally Accredited and U.S. Department of Education Approved "Mortgage Securitization Analyst Training Certification" Classes (3 days) 24 hours for approved CLE & MCLE Credit (Now Available Online).

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