Last month, federal regulators pulled the plug on a wide-ranging review of wrongful foreclosures by 10 mortgage lenders at the heart of the 2008 financial crisis. The review's failure isn't just a crying shame — it encapsulates everything that's wrong with our regulatory culture.
The review set out to analyze the individual loans of 3.8 million Americans foreclosed on between 2009 and 2010 in search of unfair practices. Its goal: determine how much victims of those abuses should get in restitution. Those practices included the infamous "robo-signing," placing people in default who weren't and improper cancelation of loan modifications — in many cases, misdeeds that led to people losing their homes.
By now, we all know the story. We're not talking about paperwork errors here, but felonies knowingly committed to cover for an earlier set of felonies. Having fraudulently approved mortgages for countless unqualified borrowers, the banks found themselves saddled with heaps of toxic debt. In a blind panic to dump those assets, the banks, with utter indifference to the lives they were ruining, improperly foreclosed on people by the thousands — sometimes on a pretext as flimsy as a single late mortgage payment, sometimes with no grounds at all.
The review was victims' last, best hope for justice. But 14 months into it, with no end in sight and nearly $2 billion in fees down the drain, the Office of the Comptroller of the Currency threw in the towel. Without consulting any of the more consumer-oriented regulatory bodies like the FDIC, it struck a shady, backroom deal with the 10 mortgage lenders — effectively destroying any hope of fair compensation for the wronged.
The agreement scraps the case-by-case reviews in favor of an $8.5 billion settlement, with only $3.3 billion of that going directly to homeowners. That works out to — wait for it — $1500 per household (although payouts will range from a few hundred dollars to $125,000 based on the type of "servicing error" affecting the borrower).
Bankers rejoice! The settlement is a tiny fraction of the financial — never mind the psychological — damages their abuses inflicted on homeowners, and by extension the economy as a whole. For running over Joe Public, they face nothing harsher than a speeding ticket.
So why'd the OCC agree to such a raw deal on behalf of consumers?
The term "conflicts of interests" doesn't begin to convey the inefficiency, bungling, and double-dealing that plagued the review from the outset. Then again, what do you expect when the "consultants" hired to pore over a bank's foreclosure paperwork are employed by the bank?
Yep, you read right. Lacking the manpower to run the review themselves, regulators ordered the banks to hire third-party contractors. (This happens all the time — since 2008, 130 enforcement actions taken against financial institutions were entrusted to firms on the banks' payroll.)
Left to their own devices, banks did what banks do. They hired stooges — firms with longstanding ties to the banks and who understood that telling the truth was unlikely to win them repeat business. The resulting review so grotesquely understated the extent of wrongdoing that the OCC mothballed the whole endeavor to save itself any further embarrassment.