Now-settled mortgage servicing violations permeated every step of the foreclosure process and were monitored by top executives across the entire industry, according to findings released by the Department of Housing and Urban Development Inspector General.
The $25 billion settlement filed in court Monday concluded negotiations between state and federal prosecutors that lasted more than one year. It is still pending court approval.
Investigators sifted through nearly 400 defaulted Federal Housing Administration loan files and interviewed employees at the five largest servicers Bank of America ($13.51 0%), Wells Fargo ($40.20 0%), JPMorgan Chase ($52.29 -0.01%), Citigroup ($51.60 0%), and Ally Financial.
In every case, employees and inhouse notaries said they signed sometimes hundreds of affidavits per day, and were pushed by their supervisors and executives to process more.
While narratives and reports have long chronicled foreclosure problems at these and other firms, the HUD OIG report was sealed from the servicers and used by Justice Department officials during the settlement talks.
Commentators were disappointed with the details of the settlement, and it appears the scope of the relief provided clashes with even the findings of the relatively limited HUD probe and the severe negative equity problem that continues to haunt the recovery.
John Sim, a securities analyst with JPMorgan, described the settlement's effect on the market as "a damp squib."
A hindered review
Each servicer either attempted to keep HUD OIG investigators from interviewing those who prepared the affidavits or simply didn't have the ability to provide data requested. In the report, investigators described it as a "hindered review."
They studied FHA claims sent by the servicer from Oct. 1, 2008, through Sept. 30, 2010. Over those two fiscal years, the FHA paid $6 billion in claims to servicers on defaulted mortgages handled by these firms in the 23 judicial states where notarized affidavits are required by law.
A number of affidavit signers at Wells Fargo told investigators they signed up to 600 documents per day, the most any one employee admitted to doing at the five firms, according to the report.
At Ally Financial, one employee signed 400 per day. BofA and Citi processors said they signed between 60 and 200 documents per day.
Chase executives disclosed a production goal of 40 affidavits daily, but many employees interviewed said they signed up 70 per day. A stack of up to 700 affidavits landed in their inbox at any one time to be finished within a week.
Daily volume at BofA often reached as high as 20,000 affidavits, with half being duplicates for bank records. One employee admitted to signing "12- to 18-inch stacks of documents at a time without a review," according to the report.
Notaries were also fast-tracking reams of paperwork. One notary said BofA set a target of completing 75 to 80 documents per hour and often brought up his production in reviews. The 10 most active notaries at BofA handled up to 77,000 foreclosure documents over the two-year period HUD OIG investigated.
At Wells Fargo, up to 1,000 documents were notarized without witnessing the signature per day, according to the report.
Investigators concluded the servicing executives implemented the policies many of those interviewed described as "industrywide" practices. The report shows a lack of oversight at every firm, and it may have something to do with the executive backgrounds.
"For example, immediately before Wells Fargo hired an individual to be vice president of loan documentation, the person worked at a pizza restaurant and as a bank teller. Another had been a department store cashier and daycare worker, while another had worked on the production line in a factory," according to the report.
Servicers claim the scandal resulted in few wrongful foreclosures.
Still, the investigator found some inaccuracies stemming directly from the lack of oversight. At BofA, seven of the 118 FHA loan claim files reviewed showed miscalculated interest and discrepencies with some interest totals.
"In her testimony, one manager responded that her direct supervisor, a vice president, was aware and approved of the industry standard being followed," according to the report. "She assumed her supervisor's boss would have approved and been aware of the same."
Pushing FHA to the brink
The report covered only FHA loans, which account for nearly one-third of the market. Still, the fund is in trouble, slipping to the brink of insolvency because of still climbing default levels.
Settlements attached to the $25 billion agreement and increased insurance premiums will keep the FHA fund from needing a bailout, according to government officials.
The servicers who were a part of the settlement said they have since corrected the costly problems and are installing changes under consent orders signed in April and new standards to fit the wider settlement.
"The memorandum references activities from over a year ago that have been addressed as we do all we can to modify loans when possible and to ensure foreclosures are fair when they are unavoidable," a BofA spokesman said.
"The matters raised in the report cover observations that are 2- to four-years-old and they have been addressed. Wells Fargo has made significant strides with implementing a number of changes in line with industry and regulatory servicing standards," a Wells spokeswoman said in a statement.
Citi noted it began correcting its practices as foreclosures began to mount and fully implemented the changes in 2010.
"Citi centralized its foreclosure operations into one unit, added staff and enhanced training for greater efficiency and control," a spokesman for the bank said. "Citi limited the volume of documents that staff processes and requires annual certification of its employees' understanding of the proper procedures. Also, managers were made accountable for regularly reviewing files to make certain that employees comply with the procedures."
Ally claims senior management addressed issues as soon as they were made aware.
"As we have stated previously, we regret that possible procedural deficiencies with respect to certain affidavits occurred; however throughout reviews of this matter, there was no evidence of someone being foreclosed on without being in significant default of their loan," an Ally spokeswoman said.
A spokesman for Chase did not immediately reply to requests for comment.
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