I sing the praises of former banking regulator Bill Black in my book, In Bed with Wall Street, for many reasons.

Black stands up, speaks out, and tells it like it is while all too many in our nation’s capital and regulatory offices prostrate themselves in service and homage to powerful financial elites. Major props to Black for bringing attention today to another in a long line of betrayals of American homeowners.

The WSJ and other periodicals recently made passing reference to an egregious travesty within the bank settlements of foreclosure abuse. Props to Barry Ritholtz at The Big Picture for providing the forum for Black to expose real fraud in the system and the accompanying degradation of the rule of law in the process. Let’s navigate as Black provides the transparency that is truly the great disinfectant to a system that smells:

The Ethics-Free WSJ Story on the Regulator’s Latest Betrayal of Homeowners

The context of this WSJ story is the broader series of betrayals of homeowners by the regulators and prosecutors led initially by Treasury Secretary Timothy Geithner and his infamous “foam the runways” comment in which he admitted and urged that programs “sold” as benefiting distressed homeowners be used instead to aid the banks (more precisely, the bank CEOs) whose frauds caused the crisis.

The WSJ article deals with one of the several settlements with the banks that “service” home mortgages and foreclose on them.  Private attorneys first obtained the evidence that the servicers were engaged in massive foreclosure fraud involving knowingly filing hundreds of thousands of false affidavits under (non) penalty of perjury.

As a senior former AUSA said publicly at the INET conference a few weeks ago about these cases – they were slam dunk prosecutions.  But you know what happened; no senior banker or bank was prosecuted.  No banker was sued civilly by the government.  No banker had to pay back his bonus that he “earned” through fraud.

Naturally, the WSJ provides none of that context, but what the article does discuss remains a travesty.  It is entitled “GAO: U.S. Foreclosure Review Could Have Generated Higher Payments: Review Could Have Delivered $1.5 Billion More to Consumers if Not Halted, Federal Watchdog Finds.”

I’ve added emphasis to the dishonest euphemisms the WSJ employs (and quotes) for the “f” word (fraud).

“The Government Accountability Office, in a report being released Tuesday, evaluated federal bank regulators’ decision last year to cancel a prolonged review of foreclosure-processing and loan-assistance mistakes.”

“The GAO report shows that the settlement ‘was reached without adequate investigation into the harms committed by the servicers,’ Rep. Maxine Waters (D., Calif.) said in a prepared statement.”

“‘Many of the files did not contain complete data, making it impossible to know whether borrowers were disqualified from the possibility of the greatest cash payouts’ [the WSJ quoting Water’s prepared statement].”

But finishing this process would have been a long and complicated affair. Doing so, the GAO said, would have taken up to two more years for consulting firms to scour thousands of foreclosure files for errors, at a cost to banks of about $4.6 billion.

The foreclosure review was ordered three years ago by the Office of the Comptroller of the Currency and the Federal Reserve, which told banks to hire independent consultants to evaluate allegations the firms used shoddy practices when handling a huge volume of foreclosures during the housing bust.

Sadly, I tend to read the underlying documents and the truly bad news is that the GAO report uses the “f” word only once and is otherwise a mass of euphemisms.  This sentence will give you an accurate flavor of the Report.

“In September 2010, allegations surfaced that several servicers’ documents in support of judicial foreclosure may have been inappropriately signed or notarized” [GAO 2014: 7, emphasis added].

In addition to the euphemisms and the fact that the sentence reads like it was written by the banks’ criminal defense counsel, it is a sentence crafted to mislead.  By that time there were sworn statements by a series of servicer personnel admitting that their offices engaged in systematic foreclosure fraud through filing affidavits that were known to be false.  They admitted to tens of thousands of criminal acts by their organizations.

The one time the GAO uses the word fraud is to report that the foreclosure payout program carefully protects itself from fraud by the victims – by providing that the checks expire after 90 days [GAO 2014: 34 n. 51].  In a very dark Irish humor kind of way I find this hysterically funny.  By contrast, when the GAO discusses real frauds the passage again reads as if it were drafted by the bank’s criminal defense lawyers.

“Failure to review documents filed in support of a judicial foreclosure may violate consumer protection and foreclosure laws, which vary by state and which establish certain procedures that mortgage servicers must follow when conducting foreclosures” [GAO 2014: 7 n.13].

Everyone involved in the faux foreclosure review – the “consultants” hired who to do the review, the mortgage servicers, the (non) regulators, and the GAO performed abysmally.  The “review” was an expensive farce.  The regulators did not conduct the review.  The servicers did not conduct the review.  The consultants were chosen by the servicers, which the regulators should never have allowed.  The consultants were allowed to have additional conflicts of interest such as having worked on the loan foreclosures they were reviewing.  The “design” of the (non) study was an embarrassment.  The (non) study collapsed almost immediately because it turned out that many of the servicers’ files were so pathetic that the study “design” could not be followed.

Rather than stop and reconsider the implications of those file defects for the likelihood that the servicers engaged in fraud in order to foreclose the regulators decided to continue.  The more severe the file defects the greater the incentive of servicers to engage in foreclosure fraud.

The consultants were soon hopelessly behind schedule and budget because of the severity of the loan file defects.  Eventually, the (non) regulators gave up and brought the (non) study to an end, not with a bang but with a whimper.  Real regulators would have had great negotiating leverage.  The servicers had agreed to conduct the study and failed.  It would cost the servicers more to complete the review than simply boost the payout by several billion dollars.  The two obvious answers were to continue the study and order interim payouts or to stop the study and in return for a significantly larger payout to homeowners.

Naturally, the Office of the Comptroller of the Currency (OCC) and the Federal Reserve found a third, far worse choice.  They left the cash on the table that could have gone to the homeowners.

The GAO was no stronger.  They do agree that the OCC and the Fed left billions on the table but they also give them a pass, saying that the settlement is in the “range” that would emerge from the regulators assumed rate of bad foreclosures.

The problem, as the facts disclosed in the GAO’s report make clear, but GAO’s analysis ignores, is that the regulators’ assumed rate of bad foreclosures had no reliable basis and was proven to be far too low an estimate by the fact that the loan files were so incomplete that the consultants could not complete the study.  So, there is no reliable basis for GAO’s claim that there is any “range” of reasonableness for the payments to homeowners.  This passage from the GAO report conveys the GAO and the regulators’ unique approach to (non) quantification.

• Failure to maintain sufficient documentation of ownership. Although the 2010 coordinated reviews found that servicers generally had sufficient documentation authority to foreclose, examiners noted instances where documentation in the foreclosure file may not have been sufficient to prove ownership of the mortgage note. Likewise, during the subsequent consent order file reviews, some consultants found cases of insufficient documentation to demonstrate ownership [GAO 2014: 55].

“Generally,” “instances,” and “some consultants found cases” – billions of dollars were spent to produce nothing but these useless, vague phrases.  The “study” “results” were so worthless that the GAO reports that the consultants did not even bother to create reports on their work. Instead, and this is hilarious, the OCC and the Fed held “exit interviews” with the consultants. Only a PR “expert” planning to put lipstick on a wild boar would spend even more money on such a useless exercise.”  The GAO tells us that many of the regulators’ exam teams given the exit interview materials concluded that they were useless.

How and why is it that abuse of countless American homeowners can go on without meaningful justice and proper restitution? Well, when those at the OCC and Federal Reserve charged with pursuing that justice and restitution are warmly ‘in bed with Wall Street’ then we may be dismayed by these results as detailed by the GAO but we should not be surprised.

By the same token, those at the OCC and Federal Reserve and atop Capitol Hill as well should not be surprised that the American public holds them in utter contempt.

Thank you Bill and Barry.

Navigate accordingly.

Larry Doyle