(This was initially posted to my Outrun Change blog. It’s getting reposted here, on the Attestation Update blog, because I’ve decided to move my banking conversations to this blog.)
I’m scratching my head about the $8.5 billion settlement between 10 banks and regulators. Is it a shakedown or are the banks getting off easy?
Do we need to be asking even more questions about what happened in the Great Recession?
I’ll highlight a few articles so you can start to explore the issue for yourself.
The Wall Street Journal has summary of the settlement in their article Banks, Regulators Reach Foreclosure Settlement.
A one sentence summary from the article:
The settlement announced Monday with the Office of the Comptroller of the Currency and the Federal Reserve requires 10 large banks to pay $3.3 billion in cash to 3.8 million mortgage borrowers who were foreclosed upon in 2009 or 2010.
When I look at the risk matrix from the OCC/Fed found here, that average settlement of under $1,000 per person foreclosed is implying there was a rather small portion of those people who were actually harmed.
Getting off easy?
Francine McKenna describes the situation in very helpful detail in her Forbes article, Settling The Foreclosure Reviews: Winners and Losers.
The big winners include the consultants who were reviewing the files. Her article says that two firms were the biggest recipients of the funding. That work comes to a screeching halt with the settlement.
The article makes it clear that Ms. McKenna believes the banks are winners because they will not have to finish the detailed review of each foreclosed loan to determine exactly which homeowners were harmed and the exact amount due them. Instead, from what I’ve read elsewhere, it looks like the banks can do a cursory review of each file, assign it to a ‘harm’ category, then write a check.
Putting all the pieces of information together, Ms. McKenna believes the banks are better off paying a determinable $8.5M now rather than a larger, indeterminate amount later. Her summary:
Ten mortgage servicers have agreed to pay more than $8.5 billion in cash and other assistance to help borrowers now rather than pay billions later based on the results of the foreclosure review process.
The Wall Street Journal editorial on 1-7-13 has a different perspective. Just the title, The foreclosure Shakedowns – Politicians keep looting the banks to pay people who weren’t harmed, says where they are going.
Regarding the number of people actually harmed, the editorial starts with,
Another search party has returned from the foreclosure litigation swamp. And once again, our brave regulatory first responders found few actual victims. …
Look at the minor extent of damage:
To be exact, the staff of the Office of the Comptroller of the Currency (OCC) told reporters on a Monday conference call that, according to the agency’s review of a random sample of the affected borrowers, a mere 6.5% suffered financial harm at the hands of banks. Yet 100% will receive compensation, though many of them never lost their houses.
That relatively few people were harmed, according to the WSJ citation of OCC comments, is consistent with the low average payout I mentioned earlier. The payout amount implies far less harm that the headlines suggest.
After paying the external consultants about $1.5B for their analysis with no apparent end in sight, it dawned on all involved that continuing the review wasn’t worth it.
In any case, banks, regulators and even consumer advocates soon realized that the main achievement of the “independent” review was to make the consultants conducting the review independently wealthy.
The final troubling bit in the editorial is this comment, which indicates that the vast majority of the loans under review were for people seriously delinquent. That makes it a little difficult for me to figure out what widespread, grievous harm was suffered:
The regulators have previously made clear that virtually all of the borrowers under review—the 3.8 million customers of the settling banks who entered foreclosure in 2009 and 2010—were seriously delinquent. So we’re not talking about people who paid their bills and somehow lost their homes.
Note: I will post this in my Outrun Change blog, since this discussion is getting a bit far outside the scope of my blogs on the NPO and accounting worlds.
Update: Discussion will move to my Attestation Update blog.
Next post: more questions to explore.