In February 2011, I was testifying before the House Financial Services Subcommittee on Capital Markets. Ranking member Maxine Waters asked each of the panelists whether we thought national mortgage servicing standards were necessary in response to the robo-signing scandal. To the best of my memory I responded that while I am no expert on servicing standards, I did think that a national standard would be unwise because it would open the system up to corruption worse than what we are dealing with currently.
Now that we have the detailed documents from the national mortgage settlement, it is becoming clear that these concerns are valid. As I will cite below, there have been a number of critics railing against the new mortgage servicing standards that were included in the legal agreement between the top five banks and the state and federal regulators negotiating with them. While these standards only apply to the five banks that agreed to them, they will impact over 50 percent of mortgages in the country. And there are a number of provisions that basically codify theft. This is basically regulatory capture 101. Public choice professors should take note.
For a full run down of problems with the mortgage settlement’s servicing standards, see Abigail Caplovitz Field’s article over on HuffPo from yesterday. Here are a few of the dazzlers (all references are to Exhibit E that can be found in all five settlement documents; here is Wells Fargo’s):
Let’s start with the metric called “incorrect loan mod denial.” (Top of page E-1-2.) This metric is supposed to ensure that when you qualify for a loan mod, you’re given a loan mod. According to Column C, the loan level error tolerance for income errors in this metric is 5%. As a practical matter, here’s what that means: Imagine your household income is $80,000. Imagine that at $80k the bank’s formula says you get a modification and thus you can keep your house. But the bank doesn’t use $80k in its math; it uses $77,000. So the computer rejects you, and you lose your home to foreclosure. Does law enforcement care about the bankers wrecking-your-life error? No, because the $3,000 error, while enough to deny you the mod, isn’t 5% of your income. The error was too small to count. If that doesn’t count, what incentive do the B.O.B.s have to eliminate errors, or at least fundamentally minimize them? Doesn’t law enforcement understand that people whose homes depend on the banks’ math need much, much better? […]
Since most people don’t pay more than what they owe each month, posting less than you paid would seem to make you delinquent when you’re not. How can that be ok? What are the consequences? The servicing standards say the banks have to take your payment if you’re within $50, (See page A-5 at 3.a) but if your mortgage payment is $2000/month, 3% is $60. What if you start facing fees? What if you were trying to bring your account current and the bank screws up the data entry and starts foreclosing? Why isn’t that potentially devastating error reportable? […]
take the very first metric in the table, page E-1-1, “Foreclosure sale in error”. If it happens, that means the B.O.Bs sold your house when they weren’t supposed to. On first glance, things look good: no loan level error is tolerated (Column C is N/A). Column D looks tough, but only if you don’t think much about it: only a 1% error is tolerated… [And according to the settlement] it’s not reportable error to sell your house even though you weren’t in default, so long as you foolishly cured the default too close the sale date and the B.O.Bs tried to stop the sale of your home.
The thing is, if any one of these banks were to write up their servicing procedures like this on their own one of tow things would happen: either a regulator would say this is ridiculous and force them to change their process, or the servicer would be publicly shamed for their thieving system and see market share slip away as customers flock to alternative firms.
But these bogus standards are not just approved by the regulators, they are blessed by the regulators across state lines and instituted at the top five “alternatives”. The regulators have been captured by the banks, and if the other main servicers come on board the agreement (as is being discussed) there will soon be almost nowhere to run.