Friday, October 29, 2010

SIGTARP: Abuse of service of hemp under the direction of unjustified Foreclosures

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The latest SIGTARP (Special Inspector General of the Troubled Asset Relief Program) report is, if such a thing is possible, even more damning than its previous quarterly reports. It slams the Treasury for abject failure to meet the program’s own objectives, its lack of proper control and metrics, its “Mission Accomplished” declarations, its phony accounting, particularly with regard to AIG, and its abject failure on loan modifications (note one of TARP goals was to preserve homeownership. The Economic Populist has a good summary of the report.

It’s distressing to see that this account, which is unusually forthright in its criticism because the performance of the TARP is so terrible, get short shrift in the MSM and even in the blogosphere. Unfortunately, this suggests that Team Obama is proving Jospeh Goebbels to have been correct: tell a big enough lie and keep repeating it, and the public will eventually come to believe it. And the lie is the one the Administration has been hawking for some time, that TARP was a success. The big reason is that they’ve sold the canard that the TARP was profitable. First, that is counting chickens long before they are hatched; in particular, as SIGTARP points out, the Treasury claims on AIG are a whooper, and there is also $80 billion in funds committed that might still be deployed. And the Treasury has included a $2 billion credit line as part of its proposed AIG resturcturing, which seems a bizarrely small amount. One time insurance analyst (and successful AIG short) John Hempton says the $2 billion really is a statement that AIG is being supported. [Update: Hempton was short, but in comments says he made "next to no money" but friends of his did better].

But the biggest reason to be skeptical of TARP touting is that it is utterly meaningless to look at TARP in isolation. It was merely one of a long list of “rescue the banks” initiatives, including the ongoing program of super low interest rates from the Treasury, which imposes costs on all savers (via negative real interest rates) to the benefit of financiers.

While the foregoing is only a partial list of why one should view the TARP with considerable skepticism, let’s focus on one aspect, the HAMP modification program, that is even more of a disaster than is widely acknowledged (and it wasn’t all that well regarded to begin with).

When the Treasury had a small meeting with bloggers last August, even then it could not pretend that HAMP was anything other than a failure. Huffington Post had done a series detailing how few borrowers were getting permanent mods (and even they were misnamed, those mods were five year payment reduction plans). The stories also described how servicers were keeping borrowers far longer in the so-called trial mods, which looked like a cynical effort to milk them. Why? Because when they were not approved for a permanent mod, as happened in a considerable majority of cases (and remember, borrowers were often given false hope by the servicer), they were hit not only for the difference between the trial mod payment and their normal amount due, but also, I kid you not, penalties and late fees! Even if a borrower had been conservative and banked the payment reduction, consider the impact of, say, seven months of late fees. That’s enough to put stressed borrowers over the edge (particularly since the late fees continue to compound until the account is brought current).

From Steve Waldman’s write-up of the Treasury meeting:

On HAMP, officials were surprisingly candid. The program has gotten a lot of bad press in terms of its Kafka-esque qualification process and its limited success in generating mortgage modifications under which families become able and willing to pay their debt. Officials pointed out that what may have been an agonizing process for individuals was a useful palliative for the system as a whole. Even if most HAMP applicants ultimately default, the program prevented an outbreak of foreclosures exactly when the system could have handled it least. There were murmurs among the bloggers of “extend and pretend”, but I don’t think that’s quite right. This was extend-and-don’t-even-bother-to-pretend. The program was successful in the sense that it kept the patient alive until it had begun to heal. And the patient of this metaphor was not a struggling homeowner, but the financial system, a.k.a. the banks. Policymakers openly judged HAMP to be a qualified success because it helped banks muddle through what might have been a fatal shock. I believe these policymakers conflate, in full sincerity, incumbent financial institutions with “the system”, “the economy”, and “ordinary Americans”. Treasury officials are not cruel people. I’m sure they would have preferred if the program had worked out better for homeowners as well. But they have larger concerns, and from their perspective, HAMP has helped to address those.

I disagree with the “not cruel people” assessment. Ignoring the plight of someone who is being harmed, particularly when you are playing an active part in the process, is a form of cruelty. The senior staff at Treasury project the impression of having arranged their lives so as to convince themselves that they are powerless, that they have no influence over the systems of which they are a critical part. It’s no doubt the same logic process used by the conductors of trains that took Jews to concentration camps. They must have noticed that they shuttled passengers only one way, and that the number they were bringing in over time was disproportionate to the size of the camps, but they weren’t about to think about that too hard.

For instance, Geithner more or less said that the servicer gaming of HAMP was disturbing, and he said Treasury needed to get to the bottom of it. But he immediately tried to shed responsibility by saying Treasury didn’t have much power over servicers. I said that Treasury had quite a few ways to make life uncomfortable for the banks in which the servicers lived, Treasury was not lacking in influence. Geithner pointedly avoided acknowledging the particular devices I mentioned.

The SIGTARP report takes the criticism of the Treasury’s performance on HAMP up a notch or two:

Treasury’s decision to declare such uniform success for so many failures disregards the harm and suffering that often accompany failed trial modifications…..SIGTARP has provided examples of the harms these failed trail modifications have inflicted…They all paint a similar picture of many HAMP borrowers, already contending with other hardships, who end of often unnecessarily depleting their dwindling savings in an ultimately futile effort to obtain the sustainable relief promised…..Others, who may have somehow found ways to continue to make their mortgage payments, have been drawn into failed trial modifications that have left them with more principal outstanding on their loans, less home equity (or a position further “underwater”) and worse credit scores. Perhaps worse of all, even in circumstances where they never missed a payment, they may face back payments, penalties, and even late fees that suddenly become due on their “modified” mortgages and that they are unable to pay, thus resulting in the loss of their homes that HAMP is meant to prevent.

In its section on Servicing (starting on p. 163), SIGTARP describes the economics of servicing and the possible outcomes of a HAMP program from both the borrower and the servicer persepctive (ie, the type of fees they would earn).

SIGTARP set up a Hotline to take borrower complaints about HAMP, and many reported violations of HAMP rules and guidelines. For instance (from p. 172):

“I entered into an agreement with [my servicer] through the Making Home Affordable program in April 2009. I have made every payment on time; that, they said, would result in the modification becoming permanent after six months. They have had us…submit the same paperwork seven times in the last two year. Now they have, in their words, ‘decided not to go forward’ and put a notice on the house of a sheriff’s sale….a negotiator (who has never contacted me) made the decision to stop the modification with no reason as to why. I have not been late or missed a payment in 13 months.”

From page 174:

“I called to try to get an update and to try to get a payment processed by phone. I gave [the servicer employee] my bank information for payment and then asked if there was any update she could give me. She responded by telling me that [the servicer] had sent me to the attorney for foreclosure! How do you tell me not to pay, tell me for months I am not allowed to send in payments, tell me to pay down other bills with the money, and then two weeks later try and foreclose on my home Your moratorium is why I stopped sending in the money.”

There are quite a few more examples, some of which appear to have been provided by attorneys.

There are two points to recognize here. One is that the servicers clearly gamed HAMP. Treasury said as much in the blogger meeting; the servicers took advantage of the HAMP fees ($1000 at the outset of the mod program plus and extra $500 in the case of borrowers who are current) and delivered very little in the way of “permanent” mods. But the hotline examples also make it clear that the banks took advantage of the borrowers by keeping them in the trial mods longer, presumably so they could charge larger penalties when they kicked them out and to extract more cash from borrowers who were terminal.

Now consider: if servicers abused a program when Treasury, and now SIGTARP, is in a position to look at their handiwork, why would you assume they behave any better on an ongoing basis with homeowners when there is no oversight? Mike Konczal, in a recent post, pointed to a widespread pattern of servicer abuses:

Let’s get some quotes from bankruptcy judges in here:

“Fairbanks, in a shocking display of corporate irresponsibility, repeatedly fabricated the amount of the Debtor’s obligation to it out of thin air.” 53 Maxwell v. Fairbanks Capital Corp. (In re Maxwell), 281 B.R. 101, 114 (Bankr. D. Mass. 2002).

“[t]he poor quality of papers filed by Fleet to support its claim is a sad commentary on the record keeping of a large financial institution. Unfortunately, it is typical of record-keeping products generated by lenders and loan servicers in court proceedings.” In re Wines, 239 B.R. 703, 709 (Bankr. D.N.J. 1999).

“Is it too much to ask a consumer mortgage lender to provide the debtor with a clear and unambiguous statement of the debtor’s default prior to foreclosing on the debtor’s house?” In re Thompson, 350 B.R. 842, 844–45 (Bankr. E.D. Wis. 2006).

(Source.) Notice that consumer rights groups were flagging this as a major problem back in 1999 and 2002 because judges were noticing it was a major problem in their bankruptcy courts. If the late 1990s to 2006 period is a Renaissance period of servicer fraud then we can contrast it with the period we live in now, the Baroque period of servicer fraud. Whatever unity there used to be between the forms and functions of the sloppy documentation and outright fraud in the art of servicing have become detached.

Yves here. While the media has suddenly started to recognize servicer abuses in the foreclosure process, the examples above, both from SIGTARP and indirectly from Konczal (the inability or refusal of the servicer to provide the correct principal balance is a stunner), point to a pattern and practice of extractive practices as a part of ongoing servicing. I’ve heard quite a few accounts of predatory servicing from attorneys, including one where a single, disputed $75 late fee compounded into a foreclosure action that was halted only by an 11th hour bankruptcy filing (and yes, Virginia. the borrower could prove he had made every single monthly payment from the beginning of his mortgage).

So if you assume that every person facing foreclosure is a deadbeat, you need to think twice. Many people who fight foreclosures think they are victims of servicing errors and abuses. And the evidence on the ground suggests that some, perhaps most, are correct in their beliefs.

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