The independent foreclosure reviews abruptly ended by regulators in January failed from a lack of objectivity, oversight and consistency in the loan sampling process, said Lawrance Evans, director of financial markets and community investment for the Government Accountability Office.
And judging by Evans declarations to the Senate Banking Committee Wednesday, the now-defunct IFR process is likely to be studied continuously in the months ahead.
The controversial settlement allowed for a one-time $8.5 billion payout to homeowners in the form of cash reimbursements and soft dollars to cover loan modifications and other initiatives in exchange for ending the massive independent foreclosure reviews launched more than a year ago to locate and compensate borrowers hurt by robo-signing and other foreclosure processing issues.
The $8.5 billion settlement eventually morphed into a $9.3 billion deal when two additional servicers signed on.
Despite having a large portion of the funds already in the mail to homeowners, Evans says GAO’s probe into how the IFR was handled is far from complete.
He told lawmakers GAO plans to conduct more studies on how regulators came up with the multi-billion dollar settlement figure when there is no data to show how that number was chosen or exact calculations on how many homeowners were, in fact, harmed by foreclosures.
He pointed out that "regulators’ statistical sampling approach did not include mechanisms to allow the regulators to monitor consultants’ progress toward finding as many harmed borrowers as possible."
Without data on how many borrowers were actually harmed, the GAO representative says his office wants answers on how the compensation figures were determined by the OCC and Federal Reserve.
Both agencies in the past have defended the settlement as needed to reimburse borrowers in a more efficient and cost-effective manner.
But Wednesday’s panel’s discussion shows lawmakers and housing advocates still circling officials once tied to IFR, looking for more data.
Debby Goldberg with the National Fair Housing Alliance used her testimony to bring up concerns about how servicers are credited for achieving so-called soft-dollar foreclosure assistance in the form of loan modifications, short sales and deficiency waivers.
About $5.7 billion of the 13 servicers pledged assistance falls under this category. Goldberg notes that servicers gain credits toward their homeowner assistance goals by providing these various soft-dollar incentives.
"Our greatest concern is that, unlike the National Mortgage Settlement, the Independent Foreclosure Review settlement bases the amount of credit the servicer receives on the unpaid principal balance of the loan, rather than the amount of assistance provided to the borrower," Goldberg testified.
"In other words, if a servicer forgives $50,000 worth of principal on a $500,000 loan, it receives soft-dollar credit not for $50,000 but for $500,000."
Goldberg suggests this formula inflates credits to servicers and creates incentives to focus loss mitigation efforts on higher-priced homes with larger unpaid principal balances to buoy these soft-dollar credits.
When asked if this calculation is being used, David Holland, executive vice president of Rust Consulting – the firm handling aspects of the Alternative Resolution Settlement for servicers– told lawmakers he could not confirm whether Goldberg’s soft-dollar calculations are in fact correct.
Rust Consulting is the firm originally engaged by servicers to handle aspects of the independent foreclosure review process. Holland told the Committee his firm was later selected by 13 of the settling servicers to act as the paying agent under the new settlement.
"As part of the settlement, Rust provides comprehensive daily statistical reporting to the OCC, the FRB and the servicers," Holland told the panel. "Daily conference calls are held with the servicers covering project execution. Two times weekly, conference calls are held with the OCC and the FRB covering project execution and future deliverables."