With all the talk in 2013 about the recovery of the housing market, many questions remain about the practices of large financial institutions leading up to and following the explosion of the sub-prime lending bubble that played such a central role in the economic meltdown of 2008.
Over a year ago, the U.S.’s five largest mortgage servicers, Bank of America (BAC), JPMorgan Chase (JPM), CitiMortgage (C), former GMAC-owned ResCap, and Wells Fargo (WFC) settled litigation with no less than 49 state attorneys as well as the U.S. Department of Housing and Development over scandalous, if not outright criminal, foreclosure practices at a cost of $26 billion.
On Wednesday, however, Joseph A. Smith, a monitor with the National Mortgage Settlement, said that while the situation has improved, much more work needs to be done.
The $26 billion was a form of restitution to borrowers who had lost their homes as a result of a practice that has come to be known as robo-signing, whereby foreclosure documents where approved in the most expedient manner possible, regardless of the fact that the bank employees putting their names on those documents were shown in a disturbingly large number of cases to have little to no knowledge about the actual cases they were signing off on.
While the banks have gone to great lengths to create the impression that the robo-signing fiasco resulted from an error of oversight, there have been other controversies regarding home loans that have received less attention. Wells Fargo, for example, while not admitting to wrongdoing, settled civil charges back in 2011 to the tune of $85 billion over accusations that some 10,000 borrowers were unnecessarily manipulated into costly sub-prime mortgages, or had loan documents falsified by bank employees.
Worse still, back in 2009 the Wall Street Journal reported that as early as 1999, civil society organizations from the Chicago area met with regulators from the Federal Reserve to complain about home-loan practices at banks like Wells Fargo and Citigroup. At issue was the contention that the banks had created entire divisions whose sole purpose was to target the city’s ethnic neighborhoods for the high interest-rate loans. Former Wells Fargo employees have subsequently emerged to at least partially verify these allegations, detailing how homeowners with otherwise excellent credit were strong-armed into dubious loans. Furthermore, at least in the case of Wells Fargo, the bank sought the assistance of churches and community groups, specifically in poor and ethnic areas of Maryland and elsewhere, to push shoddy financial services, many of which would eventuate in needless and illegal foreclosures.
That said, last year’s $26 billion settlement also required the five banks to abide by 304 servicing standards when dealing in home loans. Banks have been required to use employees from divisions other than their loan-servicing units to work with monitors who assess their work in accordance with 29 different guidelines dealing with anything from foreclosure errors, to denials of modification requests, to proper adherence to deadlines.
In the subsequent testing results, 4 of the 5 banks have been found in violation of the settlements terms, with ResCap being the only exception. But Joseph Smith claims to have received an additional 59,600 consumer complaints, along with another 800 from mortgage professionals between last October and March of this year.
The main frustration on the part of homeowners has been the lack of a single servicing agent aware of the conditions of each individual loan. This has led to a situation that has been described as dual-tracking, whereby one division of the bank works with a given customer on the modification of his/her loan, at the same time as a separate division moves to foreclose on that same home.
Smith put a hopeful spin on the findings, saying "The banks take this very seriously. They were not elated at having failures. I know they've spent a lot of money and a lot of time trying to correct their processes in a way that will serve the public better, but we're not there yet,". But this is in contrast to New York State Attorney General Eric Schneiderman, who announced a lawsuit against Bank of America and Wells Fargo in early May, citing 339 violations of the National Mortgage Settlement in New York State alone.
Schneiderman accused the banks of “flagrantly” violating their obligations and putting homeowners at greater needless risk of foreclosure.
Just last week, former Bank of America employees involved in a Massachusetts lawsuit against the institution claimed, among other things, that they were paid bonuses to prevent loan modifications and push foreclosures. Some of the employees claimed they were paid a $500 monthly bonus by the bank for every ten homes that were foreclosed.
DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer