It’s raining checks in the United States — and, as usual, no one is happy. Also proceeding par for the course, the well-intentioned compliance of mortgage servicers is falling woefully short of everyone’s lofty expectations. The result of this conundrum, as has happened time and time again, is not the intended relief, but rather the greater pain it causes.

For the briefest of moments in late spring, when millions of homeowners impacted by foreclosures during the recession finally received settlement payments from loan servicers, no one could be blamed for believing the worst was finally behind everyone. 

For many of these borrowers, who lost homes as far back as 2009 and 2010, the payments bring to mind the old adage “too little too late,” as the win-win soured into a lose-lose.

But for mortgage servicers and the entire housing finance system, the failure of these settlements to ease the ongoing pace of foreclosure-related litigation remains a national concern. Not to mention, these types of settlements over legacy servicing issues routinely reach the multibillion-dollar range. What emerges in its wake is a suggestion that no matter how much money is spent, foreclosure issues will continue to linger in the background, haunting banks and the entire housing finance system.

Despite a recent settlement that ended a national probe into foreclosures filed by 13 different servicing shops — and a $25 billion national mortgage servicing settlement reached by numerous state attorneys general and five servicers in 2012 — litigation against servicers continues to surface, despite the enactment of these broad settlements. It seems that every time the industry attempts a good-faith action to show its improvement, another hit lurks around the corner. 

Earlier this year, New York Attorney General Eric Schneiderman filed suit against HSBC Bank USA and its mortgage division, claiming the companies put distressed borrowers at risk by tactically delaying the filing of state-mandated foreclosure settlements. 

And this is not Schneiderman’s only trip to the litigation rodeo, so to speak. 

He announced in May a willingness to sue Bank of America and Wells Fargo for violating terms of the $25 billion National Mortgage Settlement. Schneiderman claimed his office documented 339 violations of servicing standards outlined in the settlement, prompting the announcement of a potential suit. 

But while massive, high-stakes settlements are supposed to streamline and resolve outstanding mortgage issues, more often than not they fail to end the situation for good, leaving a degree of uncertainty in the mortgage finance space. 

So is there any real gain when it comes to the enactment of massive servicing settlements? It depends on whom you happen to ask. 

“At one level, the settlements are establishing operational standards for servicing,” said Christopher Whalen, an investment banker with Carrington Investment Services, when discussing not only the $25 billion servicing settlement, but the Office of the Comptroller of the Currency consent orders from 2011 that established single-point-of-contact requirements for borrowers and banned robo-signing. 

“When someone buys a non-performing loan today, you have to talk to the borrower and first determine if you can keep them in the house. That came out of the settlement and was codified by the CFPB, and it’s a benefit.” 

But all of the servicing-related litigation still percolating throughout the system can be paralyzing, Whalen suggests. “Big banks are losing money on servicing.” And it’s true. The banks are heading for the exits. Bank of America sold more than $10 billion in MSRs to Nationstar in June 2012. 

That is just one deal, but it exemplifies the desire of the big lenders to free themselves of the troubles associated with mortgage servicing. It’s a great opportunity for the likes of Nationstar, Walter Investment and Ocwen, which for now aren’t subject to onerous capital requirements from Basel III or other types of regulations and restrictions. Investment research teams at FBR Capital Markets now expect Nationstar will post a significant improvement in servicing profitability over the next 12-18 months.

Enter stage left?

Specialty servicers are even buying to make themselves larger. Special mortgage servicer Wingspan Portfolio Advisors announced the acquisition of hazard insurance claims management company Dimont & Associates, after buying the JPMorgan Chase mortgage servicing facility in Melbourne, Fla.

Can the big banks be blamed for de-emphasizing mortgages? Citing data from the Mortgage Bankers Association and public filings, Whalen believes servicing expenses alone cost twice the income received from the practice. 

“If you are a special servicer, you are already set up for dealing with distressed assets, but if you are a big bank, you have to slowly retrofit all of these compliance mechanisms into the business process,” he noted. Besides, the big banks are chasing mortgage originations as the next big thing. This appears a great move: They have the natural capacity to deal with the mind-numbing raft of underwriting required later this year in the form of the final qualified mortgage and qualified residential mortgage rules. 

And so, add litigation risk on top of that pile of worries and the servicing settlements begin to look like a long, drawn-out war rather than a steady fix. Whalen sees a benefit in the servicing settlements’ emphasis on market standards, but says that will not deter authorities when they want to make a point over the servicing guidelines. 

“Then you have the political issue,” he observed. “The second piece is the attorneys general led by Ms. Harris out of California. They treat these settlements as a fundraising opportunity.”

Robert Jarvis, a law professor at Nova Southeastern University, shares a similar, slightly more cynical viewpoint. 

“I don’t think there is any question that there is still bad lending, underwriting and servicing practices going on,” he said. “But there’s also no question that [the settlement deals and investigations] are very political. The banks are hated by everyone and they are an easy target.”

The settlements have attracted criticism not only from interested parties in the mortgage space, but from consumers who feel a genuine lack of transparency and clarity about what happened to their foreclosure file review, and how their final payout was calculated. 

But before delving into their particular complaints, it’s important to highlight the two massive servicing settlements that have shaped the post-recession mortgage market thus far. 

One settlement after another

In 2011, 14 mortgage servicers inked a deal with federal regulators, agreeing to follow certain servicing practices – such as a dual-track and robo-signing ban — while simultaneously launching an independent national probe into the handling of foreclosures that occurred in 2009 and 2010. 

These so-called “look-backs” were designed to catch any processing or foreclosure-related errors that unfairly impacted borrowers. 

At the same time, the consent orders created best practice guidelines for servicers, forcing the industry to put new systems and operations in place.

Servicers also were prompted to add staff and adopt rules such as the single-point-of-contact requirement. 

By the start of 2013, the OCC had already reached its breaking point with regards to the independent foreclosure review investigations. 

With $2 billion spent to probe the foreclosure files — and only minor progress made — prudential regulators eventually opted to end the review of individual foreclosure files in January 2013, replacing that part of the process with a $9.3 billion settlement. Of that amount, $3.6 billion was slated to compensate impacted borrowers. All but one of the original 14 servicers signed onto the newest settlement deal, including Aurora Bank, Bank of America, Citibank, Goldman Sachs, HSBC, JPMorgan Chase, MetLife Bank, Morgan Stanley, PNC, Sovereign Bank, SunTrust, U.S. Bank and Wells Fargo. 

But did this resolve anything? If you ask the OCC, then the answer is yes. 

The financial regulator says that by late 2012, consultants working on the review of loan files had completed only 100,000 — generally a small amount considering what was still left. 

“There were more than 700,000 files slated to be reviewed in total,” said Bryan Hubbard, a spokesman with the OCC. 

The OCC is still reviewing all of the data today and hopes to eventually provide more details about what was discovered during the yearlong look-back process, Hubbard said.

While the settlement has caught flack for failing to provide specific details on what type of foreclosure issues surfaced and how borrowers were compensated, Hubbard says the agency cannot comment on the public’s perception — only the reality as to why the decision was made. 

“We have stated many times that there was a change in course — and the change in course allowed us to provide compensation to eligible borrowers much more quickly than otherwise would have been possible,” Hubbard added. 

Furthermore, much like Whalen, Hubbard sees a benefit in the national servicing standards outlined in the consent orders.

But if you’re a borrower or financial firm, the months following the end of the foreclosure reviews generated more questions and, in some cases, more bad blood. 

“The sending of the checks was fine, but I think it’s too little,” noted Jarvis, the law professor. “The base should have been 10 times that amount.”

Check the mail

By the time the checks landed in the mail in spring, the majority of the homeowners were pulling in $300 settlement checks, with a small minority receiving up to $125,000 in compensation. 

Even the distribution of the funds to borrowers became an epic fail at times. The party handling the payments, Rust Consulting, faced complaints after some checks bounced and fell short of their intended goals early on. All of the problems were quickly resolved, but this Hail Mary pass type of settlement continues to catch flak, stumbling time and time again over its own nebulous reputation. 

It didn’t help matters when the Government Accountability Office released a report and testified in front of Congress about the settlement’s shortcomings. 

“I think overall transparency and accountability are the most salient issues,” said Lawrence Evans, director of Financial Markets and Community Investment at GAO. 

GAO will continue to study the foreclosure look-back reviews and hopes to uncover additional information in regards to what type of information was collected, what it revealed about mortgage servicing issues and whether the repayment agreement with borrowers accurately reflects what they were finding during the probes.

And GAO is not alone in asking these questions. Lawmakers are now probing the handling of the foreclosure reviews. 

One of the Senate’s chief banking critics, Sen. Elizabeth Warren, D-Mass., noted, “The OCC and Federal Reserve have not yet provided enough information so that Congress can assess the adequacy of the Independent Foreclosure Review process or determine the scope of the illegal actions taken by the banks. By all accounts the whole process has been plagued with problem after problem, and there needs to be more transparency.”  

Warren spent the spring asking tough questions about how the final settlement amount was determined and continued to push for the release of more data on the reviewed loans.

Joining Warren is Rep. Elijah Cummings, D-Md., who introduced the Mortgage Settlement Monitoring Act — a piece of legislation designed to create a monitor who could oversee how the funds are distributed.

But for banks, all of this means more uncertainty at a time when the nation needs lenders back in the game, or at least ready to play a vital role in the economy, Jarvis points out. 

“The one thing that does trouble me — I find it disingenuous for the government to say to the banks you have to help us out, and now the banks are being vilified for taking over lenders like Countrywide,” he said. “A lot of the problems Bank of America is now having are because they took on Countrywide.”

The legacy mortgage issues at Countrywide alone placed BofA squarely in the litigation storm as servicing issues popped up in the marketplace. 

The fact that each settlement tends not to resolve the issue — or fails to create a final resolution — only means a delay in a return to healthier financial markets, Jarvis suggested. 

Yet, Jarvis is not an apologist for the affected banks. “The banks have continued to make themselves an easy target because we know, even today, the banks are not functioning properly.”

That’s $25 billion spent — now more litigation

Not long after the OCC and Federal Reserve enacted consent agreements with 14 mortgage servicers, the $25 billion national mortgage servicing settlement captured headlines, suggesting that numerous state attorneys general, regulators and five national servicers could easily reach an agreement on how to compensate borrowers impacted by foreclosures while establishing national servicing standards to move the mortgage market ahead. 

Since then, the $25 billion settlement has done very little to lessen fears about what goes on in the servicing marketplace. And much like the OCC’s settlement and then re-settlement, it is still heavily criticized. 

Housing advocacy groups — including Americans for Financial Reform and the Consumer Federation of America — recently sent a letter to U.S. District Judge Rosemary Collyer with the United States District Court for the District of Columbia asking for help in obtaining data from the National Mortgage Settlement Monitor Joseph Smith, who oversees the massive settlement deal. 

The groups want access to Smith’s loan-level servicer data to ensure compliance with standards while offering additional oversight. Their overarching concern is that even with the $25 billion settlement distributed and an oversight monitor in place, there is still a lack of clarity in the market.

“We are deeply worried that the goals of the settlement are not being met fairly, and we urge you to require full public disclosure of the distribution of principal reduction and other loan modification benefits under the settlement so that you, the signatory parties, and the public can evaluate the outcomes adequately,” the agencies wrote in a letter to the judge.

But as ineffective as the reviews may seem, the constant haranguing back and forth is stalling an inevitable recovery, Jarvis suggests. “The review process is really an agreement between the government, banks and servicing industries saying, ‘Yes, we didn’t do a very good job, and we are sorry and are going to pay a very big fine.’”

The only question involves whether these resolutions are in fact a settlement that moves all the market players forward by simply paying a big fine. Considering they are moving big banks out of the space and into originations, this may be a more natural fit for these kinds of lenders. Originations are not litigation remote, of course, and the large lenders may yet find their backs against the wall, possibly right as these servicing issues reach a final resolve. 

By that time, specialty servicers should have regained the capacity to help the “too-big-to-fails” out of the hole once more.