WASHINGTON — One of the enduring scandals of the 2008 financial crisis was the government's half-hearted effort to provide relief to distressed homeowners while generously bailing out banks and allowing those who presided over the disaster to collect multimillion-dollar bonuses.
Now, a new report adds another grievance to this catalog of woe. The Government Accountability Office last week detailed how federal regulators botched an effort to rectify the sloppy and sometimes fraudulent foreclosures by the banks, which drove millions of families from their homes.
In cutting short an Independent Foreclosure Review before it was completed, the GAO found, bank regulators may have underestimated the extent of errors, so that the $3.9 billion in cash compensation the banks were ordered to pay to homeowners was lower than it might have been.
The review and settlement covered 4.4 million cases in 2009 and 2010 where widespread errors, resulting in part from robo-signing of unverified documents, were made in home foreclosures.
Moreover, the report found, an additional requirement of $6 billion in foreclosure prevention relief by the 15 banks involved — actions such as loan modifications designed to keep more people in their homes — was fulfilled in part by measures the banks had already taken, and in any case, were never fully vetted by the regulators.
The top democrat on the House Financial Services Committee, Maxine Waters of California, was quick to criticize the regulators.
"I'm troubled by the recent GAO report," Waters, one of the four lawmakers who asked the GAO to investigate, said in a statement, "which shows that … regulators claimed $6 billion dollars of settlement payments that never truly occurred."
Waters also faulted the settlement for failing to ensure that foreclosure victims received compensation commensurate with the harm done, because the early end to the review left regulators with insufficient data to determine individual cash payouts.
The independent consultants had completed review of fewer than 15% of the cases when the IFR was shut down in early 2013. The consultants had already collected $1.9 billion while working at a snail's pace to get through the reviews.
In negotiating the subsequent settlement for cash compensation, regulators projected an error rate of 6.5%. However, the GAO found that some of the consultants had found error rates as high as 27% or 16%, while others reported no error rate because they did not complete any reviews.
Nonetheless, the GAO found that "that the final negotiated amount generally fell within a reasonable range" given the assumptions about harm done. Whether a $300 payment, which is what some of the eligible victims received, would be deemed reasonable by those who lost their homes is another issue.
The GAO report came down hardest on procedural shortcomings in the foreclosure prevention part of the settlement, faulting regulators for not setting up a system to verify the banks' claims about their policies.
"Without specific procedures, regulators cannot assess implementation of the principles and may miss opportunities to protect borrowers," the report said.
The lack of structure and specific objectives in the settlement also meant that banks had considerable leeway in what they counted toward fulfilling their portion of the $6 billion agreement.
For instance, they could credit the full amount of a mortgage benefiting from relief rather than just the amount of relief provided. The report used a hypothetical example to show how this technique alone could result in relief to a third as many borrowers.
The GAO also criticized the lack of transparency on the processes used to determine the cash compensation. The methods of categorizing borrowers and the compensation they were entitled to remain murky as decisions were made with insufficient data.
As a result, a chance was lost to boost confidence in the regulatory process — one of the points of the whole exercise.
"In the absence of information on the processes," the GAO said, "regulators face risks to public confidence in the mortgage market, the restoration of which was one of the goals of the file review process."
The GAO recommended that the regulators, the Office of the Comptroller of the Currency and the Federal Reserve, adopt more rigorous testing of the foreclosure-prevention measures and provide additional communication about the compensation process. As of March, according to the Federal Reserve, more than 3.6 million checks worth $3.2 billion, or about 84% of the overall settlement, had been deposited.
The regulators, apparently unfazed by the report, were non-committal in their responses. They are totally on top of reviewing compliance with foreclosure prevention, they claimed in letters attached to the report, and as for more transparency on the criteria for compensation, they'll give that some thought.
In Congress, Waters renewed her call for her committee chairman, Rep. Jeb Hensarling, R-Texas, to hold hearings on the foreclosure review and settlement. Last month, Rep. Elijah Cummings of Maryland, the ranking Democrat on the House Committee on Oversight and Government Reform, asked his chairman, Rep. Darrell Issa, R-Calif., to hold hearings on foreclosures after his staff's review of OCC documents indicated a high error rate.
So while the new GAO report documents another sorry chapter in the mortgage debacle, it is not likely to be the end of the story.
Darrell Delamaide has reported on business and economics from New York, Paris, Berlin and Washington for Dow Jones news service, Barron's, Institutional Investor and Bloomberg News service, among others. He is the author of four books, including the financial thriller Gold.