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Why thousands of homeowners are getting money for mortgage abuses they never suffered

May 5, 2014
In The News

Thousands of homeowners will get a pleasant surprise in the mail this summer: checks to (wait for it) compensate them for foreclosure problems they never suffered.

EverBank Financial is prepared to write $1,050 checks to 25,389 of its customers, even though no errors were found in reviews of their foreclosure files, according to a report issued Wednesday by the Office of the Comptroller of the Currency.

The mind-boggling situation is an outgrowth of the foreclosure settlement that the Jacksonville, Fla.-based bank inked with the OCC and the Federal Reserve in August. And the payments tell us a lot about the byzantine nature of the mortgage settlement world.

EverBank's deal was part of a $10 billion agreement that regulators struck last year with some of the nation's biggest banks because they made it harder for millions of struggling Americans to hang on to their homes.

Sound familiar? There are at least a dozen other housing crisis settlements rooted in some version of that story. There were banks that steered borrowers into unsustainable mortgages that were then bundled into toxic securities and sold to investors. And when people could no longer afford to pay their mortgages once the economy tanked, some banks allegedly used forged or sloppy paperwork to rapidly foreclose, a practice known as "robo-signing."

As these misdeeds came to light, the government scrambled to hold firms accountable and brokered dozens of settlements. But lawmakers and consumer advocates criticized the paltry sums that many victims received. Millions of borrowers in the $10 billion settlement, for instance, got checks for $300.

EverBank was one of the last mortgage servicers — the folks that process home loan payments — to sign on to an amended government order born out of the rob0-signing scandal. The original 2011 order instructed 16 mortgage servicers to hire independent consultants to review their files of homeowners in any stage of foreclosure. But regulators shut down the process a year later because no homeowners were receiving financial help and the banks were barely halfway through the review. Regulators negotiated a new deal, and most banks, including JPMorgan Chase and Wells Fargo, got on board.

Bucking convention, EverBank continued reviewing thousands of mortgage files on its own. But the results were no different: Its investigation went on for almost two years and produced no payouts to homeowners. The consultant the bank hired did complete the initial reviews and found errors in 22 percent of the files. A majority of those errors related to excessive fees charged to consumers. But EverBank still needed to dig a little deeper into the fee problems.

At this point, regulators encouraged the bank to abandon the process, so at least some struggling homeowners could get help. Both sides agreed that continuing the fee review would have "significantly" delayed any sort of remediation, according to the report.

And here is where it gets tricky. The new agreement that EverBank struck with regulators required the servicer to shell out about $40 million to all 32,574 borrowers whose homes were in any stage of foreclosure from 2009 to 2010, regardless of whether the bank mismanaged the process.

Neither EverBank or the OCC would explain how they arrived at these terms.

It makes sense that people who lost their homes while they were in bankruptcy, forbearance or still paying their mortgage received up to $125,000 — though that figure is arguably low, at least to lawmakers and consumer groups. But it's a bit of a head-scratcher that thousands of people whose foreclosures were not mismanaged will receive $1,050 simply because EverBank wanted to be done with its entire review.

It's also spit in the eyes of the millions of borrowers who received $300 from the 13 mortgage servicers that immediately signed the amended order. To make matters worse, some of the first checks bounced, while a later batch had the wrong amounts.

The seemingly haphazard way that the foreclosure settlement came together has been a sore point in Washington. Lawmakers, including Sen. Elizabeth Warren (D-Mass.) and Rep. Maxine Waters (D-Calif.), have questioned whether regulators cheated struggling homeowners out of compensation by nixing the original review.

Waters, the ranking Democrat on the House Financial Services Committee, said Wednesday's progress report from the OCC "further underscores the flawed methodology underlying the settlement. It clearly confirms that the error rates across banks varied widely, and that the process would have benefited from the completion" of the Independent Foreclosure Review.

Last week, Rep. Elijah E. Cummings (D-Md.) requested a hearing over the decision to end the review, after he received records from regulators that showed high rates of banks charging excessive fees, failing to process requests for lower mortgage payments and illegally kicking homeowners in bankruptcy out on the street.

A report issued Tuesday by the Government Accountability Office raised doubts about whether consultants would have found more errors if they had been allowed to complete the review for all of the mortgage servicers.

"This new information should be analyzed carefully and responsibly by Congress to determine whether homeowners were fully and properly compensated for the harms they suffered," Cummins said in an e-mail.

There were some glaring problems in the original review, like the $1.9 billion that banks paid the eight consultants managing the process. Or the fact that not a single homeowner received a dime in the 12 months that the review was underway.

Regulators have said that the slow-going process and whopping amounts spent on operations made them shut down the system and forge a new $10 billion deal. The revised agreement handed $3.9 billion in cash to 4.4 million borrowers, while $6.1 billion was set aside for foreclosure prevention.

Investigators at the GAO were none too please that the OCC and the Fed failed to attach specific prevention measures to that $6.1 billion, but regulators say they are monitoring what banks have been doing to keep people in their homes.

The GAO also determined that the regulators, despite all of the criticism, negotiated a fair payout for consumers.

Wonder whether the folks with those $300 checks would agree.