I have to tell you right up front that I’m damn tired of vacillating regulatory initiatives that produce feeble or even flaccid responses to issues that are unnecessarily destroying the lives of millions of Americans and preventing our national economy from any sort of meaningful recovery… all while the administration blathers on about the budget and Libya while playing golf, and our legislature continues to engage in petty politics while shining the shoes of Wall Street’s elite.

Think that was too harsh?  Really?  How so?  That’s precisely what continues to go on… am I missing something?  Is there some aspect of our government where an outbreak of competence is being overlooked?

Still, I’m committed to covering this subject even when doing so means that I have to start drinking at 9:30 in the morning… kidding, I’m just kidding… so, here’s the news on the FEDS and their “enforcement actions,” and I use that term very loosely, because I’m pretty sure that at the end of the proverbial day, comparatively I will have gotten in more trouble back in high school for having a party while my parents were out of town.  Maybe not… there’s more to come and I suppose I could be wrong… but don’t bet on it.

The Office of the Comptroller of the Currency (“OCC”), the Office of Thrift Supervision (“OTS”), and the Federal Reserve have apparently concluded their investigations into the mortgage servicer and supporting firm practices… including allegations of “robo-signing”, and have announced formal enforcement actions against fourteen servicers and two related servicer providers, Lender Processing Services (“LPS”), and the Mortgage Electronic Registration Systems… or MERS, for short.

The list of servicers, in alphabetical order, includes: Ally Financial/GMAC, Aurora Bank, Bank of America, Citigroup, EverBank, HSBC, JPMorgan Chase, MetLife, OneWest Bank, PNC Financial, Sovereign Bank, SunTrust, U.S. Bancorp, and Wells Fargo.

According to a report titled: Interagency Review of Foreclosure Policies and Practices, which lists the Federal Reserve System, OCC and OTS as its sponsors:

“The reviews found critical weaknesses in servicers’ foreclosure governance processes, foreclosure document preparation processes, and oversight and monitoring of third-party vendors, including foreclosure attorneys. While it is important to note that findings varied across institutions, the weaknesses at each servicer, individually or collectively, resulted in unsafe and unsound practices and violations of applicable federal and state law and requirements.  The results elevated the agencies’ concern that widespread risks may be presented—to consumers, communities, various market participants, and the overall mortgage market. The servicers included in this review represent more than two-thirds of the servicing market.  Thus, the agencies consider problems cited within this report to have widespread consequences for the national housing market and borrowers.”

Now, that all sounds pretty toothy, right? Yeah, I thought so too when I first read it, but as has consistently been the case when looking at our government’s actions where bankers are concerned, a stern talking to is about as far as it goes.  After that, it’s pretty much threats on par with eliminating hot towels in bank executive washrooms, and when all is said and done, they don’t even do that.

The federal agencies involved in the investigation used what they refer to as “standardized work programs” to guide their assessment and document their findings. Here they are verbatim, as presented in their final report, followed by my brief commentary in blue type:

1. Policies and procedures - Examiners reviewed the servicers’ policies and procedures to see if they provided adequate controls over the foreclosure process and whether those policies and procedures were sufficient for compliance with applicable laws and regulations.

Well, obviously servicer controls over the foreclosure process have been something less than “adequate” to ensure compliance with applicable laws and regulations… right?  I mean, that is why we’re even talking about this… right?

2. Organizational structure and staffing - Examiners reviewed the functional unit(s) responsible for foreclosure processes, including their staffing levels, their staff ’s qualifications, and their training programs.

Even the bankers/servicers have been bemoaning how they are inadequately staffed and prepared to handle the unprecedented volume of foreclosures and applications for loan modifications, so obviously there are problems in this area… right?

Of course, they’ve been lamenting this lack of preparedness for the last three years, so it would seem that this rather pedestrian issue could have easily been solved by now… right?  I mean to say… they could have built the damn space shuttle several times over by now, if they wanted to… right?

3. Management of third-party service providers - Examiners reviewed the servicers’ oversight of key third parties used throughout the foreclosure process, with a focus on foreclosure attorneys, MERS, and default-service providers such as LPS.

Obviously this is another problematic area… right?  I mean, I couldn’t even count the number of court decisions that have highlighted the problems with LPS and MERS, so I’d have to think that all of those judges can’t just be flapping their gums, as it were.

4. Quality control and internal audits - Examiners assessed quality-control processes in foreclosures. Examiners also reviewed internal and external audit reports, including government-sponsored enterprise (GSE) and investor audits and reviews of foreclosure activities as well as servicers’ self-assessments.

Personally, I’d be shocked out of my shoes to find out that there even are any meaningful “quality control processes” in place at the major servicers, and I say that because none of them have gotten any better at this over the last three years and that’s no easy feat.  I mean, what if I forced you to play golf every day for two or three years.  Do you think you could be no better at golf after two years of playing every day even if you tried your hardest not to be any better?  I doubt it.

I’m not even gong to comment on the colossal messes that are Fannie and Freddie, what would be the point?  And I happen to know for a fact that investor audits are near meaningless in terms of impacting servicer behavior or performance.  As to servicer “self-assessments,” all I can say is: Bwahahahahahahahaha!  Sell that somewhere else, would you please.

5. Compliance with applicable laws - Examiners checked the adequacy of the governance, audits, and controls that servicers had in place to ensure compliance with applicable laws.

Oh shut up!  If any of the federal regulators involved in this investigation were doing their job in the first place, they wouldn’t need to be conducting this “special” investigation now… right?  I mean, shouldn’t the OCC, OTS and the Fed already KNOW the answers to these questions?

6. Loss mitigation - Examiners determined if servicers were in direct communication with borrowers and whether loss-mitigation actions, including loan modifications, were considered as alternatives to foreclosure.

This one is a no brainer… right?  I mean, it’s only a question of degree… and the hellish torture borrowers must endure to receive such “consideration”… right?

7. Critical documents - Examiners evaluated servicers’ control over critical documents in the foreclosure process, including the safeguarding of original loan documentation. Examiners also determined whether critical foreclosure documents were in the foreclosure files that they reviewed, and whether notes were endorsed and mortgages assigned.

Obviously, this is a problem area, considering court decisions such as the Massachusetts Supreme Court’s “Ibanez” case in which neither Wells Fargo nor US Bank were able to come up with a single piece of paper showing that they were in fact the holders of the mortgages in question.

One bank brought in a blank Pooling and Servicing Agreement that was downloaded from the SEC’s Website, and the other showed up with a blank Private Placement Memorandum… neither could produce a schedule of loans allegedly assigned to the applicable trusts.  And this, after more than two years to prepare.

Look, if the serivcers had the paperwork they needed to foreclose, they wouldn’t have needed “robo-signers” to sign their names to lost note affidavits ten thousand times a month… right?

8. Risk management - Examiners assessed whether servicers appropriately identified financial, reputational, and legal risks and whether these risks were communicated to the board of directors and senior management of the servicer.

Oh, they have to be kidding about this one.  Tell you what… if anyone can find a single bank Board Member or servicer senior manager who will admit that they knew anything about anything in this regard, I’ll carry you piggyback from LA to Wall Street… hopping on one foot… naked… with a smiley face painted on my butt… while whistling a happy tune the whole way… how’s that?

~~~

Okay, so I’m sure you’re all wondering how the investigations came out, as was I after reaching this point in the report.  I mean, obviously something triggered the “enforcement actions,” so what was it?  How did the servicers rate as related to the “standardized work programs,” as described above?  Well, I’m going to tell you… verbatim… again directly from the Fed’s report.

The interagency reviews identified significant weaknesses in several areas.

Well, thank the good Lord for that, wouldn’t you say?

A. Foreclosure process governance - Foreclosure governance processes of the servicers were underdeveloped and insufficient to manage and control operational, compliance, legal, and reputational risk associated with an increasing volume of foreclosures. Weaknesses included:

• Inadequate policies, procedures, and independent control infrastructure covering all aspects of the foreclosure process.
• Inadequate monitoring and controls to oversee foreclosure activities conducted on behalf of servicers by external law firms or other third-party vendors.
• Lack of sufficient audit trails to show how information set out in the affidavits (amount of indebtedness, fees, penalties, etc.) was linked to the servicers’ internal records at the time the affidavits were executed.
• Inadequate quality control and audit reviews to ensure compliance with legal requirements, policies and procedures, as well as the maintenance of sound operating environments.
• Inadequate identification of financial, reputational, and legal risks, and absence of internal communication about those risks among boards of directors and senior management.

Okay, so correct me if I’m wrong, but isn’t the essence of what was said there that NON ONE IS WATCHING THE STORE?  Inadequate policies, procedures and controls covering ALL ASPECTS of the foreclosure process?  I mean… pardon me, but isn’t the foreclosure process what servicers are in business… and entrusted to handle?

Inadequate monitoring of external law firms and third-party vendors?  A lack of sufficient audit trails, AND inadequate quality control and audit reviews to ensure compliance with legal requirements AND inadequate identification of risks combined with the ABSENCE of communication about those risks to Boards and senior managers?  (See, I told you no one at the top would know anything.  Guess I’m pretty safe on that whole piggyback from LA to Wall Street bet.)

So… basically… the servicers are doing nothing right where foreclosures are concerned… right?

B. Organizational structure and availability of staffing - Examiners found inadequate organization and staffing of foreclosure units to address the increased volumes of foreclosures.

And, no surprises there.  As I said, the servicers have been whining about this point for years now… I suppose where they live there’s full employment so they have a dickens of a time hiring and training anyone.  Must be tough…

C. Affidavit and notarization practices - Individuals who signed foreclosure affidavits often did not personally check the documents for accuracy or possess the level of knowledge of the information that they attested to in those affidavits. In addition, some foreclosure documents indicated they were executed under oath, when no oath was administered. Examiners also found that the majority of the servicers had improper notary practices, which failed to conform to state legal requirements.

These determinations were based primarily on servicers’ self-assessments of their foreclosure processes and examiners’ interviews of servicer staff involved in the preparation of foreclosure documents.

Okay, so that says that bank employees did in fact lie on affidavits… fraudulently signing them for use in court, and failing to comply with state laws governing notarization of documents.  Want to know what would happen to any of us if we got caught doing any of that?  We’d very likely find ourselves in jail… or in a lot of trouble, at the very least.

If we got caught doing it tens of thousands of times a month for a couple of years… in order to foreclose on people’s homes… we’d be sharing a cell with Bernie Madoff, sure as shootin’.

And the Feds determined this through servicer self-assessments and interviews with servicer staffers?  That’s a hoot!  Shows you just how willing those employed by servicers are to cover for their employers.  Just imagine what the Feds might find if they actually INVESTIGATED the affidavits for themselves instead of accepting the servicers’ self-assessments.

So, basically… the Feds asked: What up with the robo-signers?

And the servicers replied: Yep, we did it… you caught us… no need to do any further checking.

D. Documentation practices - Examiners found some—but not widespread—errors between actual fees charged and what the servicers’ internal records indicated, with servicers undercharging fees as frequently as overcharging them. The dollar amount of overcharged fees as compared with the servicers’ internal records was generally small.

Oh, who cares?  I have no trouble believing that servicers are entirely incompetent as opposed to being evil… evil organizations are never as obtuse as servicers have proven themselves to be.

E. Third-party vendor management - Examiners generally found adequate evidence of physical control and possession of original notes and mortgages.  Examiners also found, with limited exceptions, that notes appeared to be properly endorsed and mortgages and deeds of trust appeared properly assigned.

The review did find that, in some cases, the third-party law firms hired by the servicers were nonetheless filing mortgage foreclosure complaints or lost-note affidavits even though proper documentation existed.

What a total crock of crap that is… adequate evidence of properly endorsed and assigned, physically possessed original notes and mortgages?  Attorneys including Max Gardner have told me that they’ve never seen a properly assigned or endorsed note or mortgage possessed by a servicer… and they’ve reviewed hundreds or even thousands of case files… but I’ll tell you what…

Fine… since the Feds say servicers have everything in order in this regard… then they shouldn’t object to having to show it to the judge when in court, or providing a signed declaration stating that they have the proper assignments and/or endorsements prior to foreclosing… right?

If they’ve got it… then show it.  Shouldn’t be an issue… okay, so major problem solved right there.

I wonder why it is, however, that the servicers throw such a fit whenever legislation shows up at the state level that would require servicers to either produce such documentation prior to foreclosing… or even just requires them to submit a declaration that they have such documentation… does the banking lobby go into panic mode, making all sorts of thinly veiled threats about how such a law will increase borrowing costs for homeowners and basically destroy our collective economic future?

What I’m describing was recently the case in Arizona where the State Senate passed a bill 28-2 that would have required servicers to produce a declaration that they were in possession of the proper chain of title documentation prior to foreclosure.

I’m going to be writing an article about what happened in the Arizona case later today, but suffice it to say that the bill… while on its way to the Arizona House of Representatives… over a weekend… managed to completely DISSAPPEAR… replaced by a bill using the same alpha-numeric identifier, but now having to do with the funding of firefighters.  And that should scare the hell out of anyone who cares about our democracy in the least… any of the Founding Fathers would turn over in their graves… where are we anyway… Iran?  Hugo Chavez’s Venezuela?

F. Quality control (QC) and audit - Examiners found weaknesses in quality control and internal auditing procedures at all servicers included in the review.

Yeah, yeah, yeah… like I said earlier… I’d be shocked to learn that any quality control or internal auditing procedures existed at any of the servicers.  In light of the rest of the investigation’s findings, for what in the world would it even be used?

~~~

Alrighty then… so what’s the next step, federal regulator people?  What’s involved in the “enforcement actions” you have so proudly announced are being taken against 14 servicers, LPS and MERS?  Whatcha’ gonna do, betches?  Are you going to take away hot towels from their executive washrooms?

Here’s what the report says… VERBATIM, once again.

Based on the deficiencies identified in these reviews and the risks of additional issues as a result of weak controls and processes, the agencies at this time are taking formal enforcement actions against each of the 14 servicers subject to this review to address those weaknesses and risks. The enforcement actions require each servicer, among other things, to conduct a more complete review of certain aspects of foreclosure actions that occurred between January 1, 2009… and December 31, 2010.

OH DEAR GOD… NOOOOOOOOO… you’re not going to make the servicers conduct a more complete review of certain aspects of foreclosure actions… that’s going way too far.  And what about the hot towels… they need hot towels… I’m overcome here… the tears won’t stop… just give me a minute…

I have a quick, if perhaps slightly unrelated question before I wrap this up and provide a few links so you can find the various related documents and press releases for yourself.  I don’t want to offend anyone here, but why do we even need the word “F#@K” if you can’t use it here?  Okay, it’s rhetorical, but I’m serious here… what’s that word for if not for situations such as this one?

Okay, I’m back.  So… there you have it.  Before I sign off, here are a few links you might want to check out… assuming you’re a glutton for punishment that is.  Here’s the press release from the Federal Reserve describing the investigation’s conclusion: For Immediate Release from the Federal Reserve Board of Governors

And here’s the press release from the OCC, which has links to the actual enforcement actions against the eight servicers called out by that agency’s investigation: OCC Takes Enforcement Action Against Eight Servicers for Unsafe and Unsound Foreclosure Practices

In closing…

I should mention that this farce of an investigation by our federal banking regulators is not precluding the state attorneys general from continuing to pursue their own independent… and God willing… more stringent settlement with the mortgage servicers… and reports are that they will continue to do just that.  Not that I have much faith that the 50 AGs are going to do all that much more… but I don’t see how they could accomplish any less.

And those critical of the Fed’s investigation and “enforcement action,” if it can even be called that, are making their voices heard with literally dozens of consumer advocacy organizations speaking out against the wholly insipid outcome, arguing that the consent decrees do not hold servicers accountable for illegal practices or stop avoidable foreclosures.

Numerous agencies signed onto a letter sent to Ben Bernanke, Sheila Bair, John Walsh (OCC) and John Bowman (OTS) asking that the Feds work with the state AGs on a tougher settlement.  Among other things, the letter states:

“Millions of homeowners have been victimized by the fraudulent and abusive practices of mortgage servicers whose staff are trained for collection activities rather than loss mitigation, whose infrastructure cannot handle the volume and intensity of demand, and whose business records are a mess.  Servicers falsify court documents in large part because they have not kept the accurate records of ownership, payments and escrow accounts that would enable them to proceed legally.   The robo-signing allegations are the most obvious evidence that servicers are routinely failing to comply with the requirements of the laws and contractual provisions to which they are subject and the tip of the iceberg of servicer noncompliance.

These proposed consent orders also appear to do nothing to ensure that homeowners will be protected from past and existing abuses in the mortgage servicing process.  The standards and methodology for the third-party review are vague.  The proposed orders also provide no guidelines on loss mitigation or on evaluations for core servicing abuses, including application of payments, assessment of fees, or force placed insurance.  Finally, the servicers may seek to inappropriately use these self-fashioned reviews as shields against other actions against them by homeowners or government enforcement agencies.

The proposed consent orders do not provide the accountability and rigor required to right this foreclosure crisis.   They are clearly not intended to do so.  We request that you withdraw the proposed orders and work with the state Attorneys General and United States Department of Justice on a joint settlement.”

~~~

So… what will happen next? I honestly have no idea.  On one hand, I’d like to believe that my fellow citizens could not possibly abide this kind of flagrant corruption, dereliction of duty and at the utmost best… absolute ineptitude.

On the other hand, are you following American Idol this season?  I just love the guy that plays the stand-up bass, don’t you?  He won’t win, but he has great taste in music, I think.  And what about Obama’s birth certificate… Trump in ‘12?

Mandelman out.