9 ways feds bungled foreclosure crisis

Regulators got buried under a mountain of pricey consultants, biased reviewers, financial quibbling and ruthless banks.

By Kim Peterson Jan 16, 2013 9:10AM
The foreclosure crisis that devastated the economy in 2009 and 2010 was a many-headed monster, a disaster unlike anything the federal government had ever seen.

And it's becoming clear that not only did the government have no idea how to handle it, but every fix it tried didn't work. It was an epic failure, and federal regulators jumped on the opportunity to sweep it under the rug this month with an $8.5 billion settlement with 10 banks.

The settlement effectively ends the government's investigation into much of the foreclosure mess. And let's hope we never have to go down this road again, because everyone who was supposed to work for taxpayers -- from regulators to middlemen to investigators -- was clearly out of their league.

Here are 9 ways the government flubbed the foreclosure crisis:

1. No one's getting much.
Only $3.3 billion is actually going to people who have been in foreclosure. The government tried unsuccessfully to review a small portion of 3.8 million foreclosed homes, The New York Times reports. But no one knows how many of those borrowers were harmed, so all 3.8 million will get the money regardless if they were wronged. That comes to $868 per home, writes columnist Joe Nocera.

2. Skewered by fees. The government got banks to hire expensive consultants to review every foreclosure from 2009 and 2010, Nocera reports. It was so slow and tedious that the consultant fees, sometimes coming in at $250 an hour, eventually topped $1 billion. "The feds and the banks finally threw up their hands," Nocera writes. "The settlement made the whole thing go away."

3. Biased reviewers. The banks hired those consultants, and so of course the consultants were biased in favor of their employers. The questions used in the review "were indecipherable" and failed to uncover harm, reviewers told The New York Times. Another reviewer said that when she did find problems, her bosses buried them.

4. Inexperienced reviewers. Those pricey consultants included some people who had no experience reviewing mortgages. Kind of explains their claims of indecipherable questions, doesn't it?

5. Bored reviewers.
Some consultants sat around with no work for a month while still being paid, the Times notes. "We would just read our books," one told the newspaper.

6. Quibbling over $5. Other reviewers said they wasted time analyzing ridiculous issues, such as whether one homeowner had been overcharged $5 for lawn mowing.

7. No oversight. Consultants originally said that each review would take a maximum of eight hours. But reviewers would spend up to 20 hours on a single case. And there was little government oversight to rein this in.

8. Banks get paid for everyday activities. A separate $25 billion foreclosure abuse settlement announced last year ends up crediting banks for normal business practices. Banks demolish abandoned homes all the time, but now they can get out of $2 billion in payments under the settlement for doing it, The New York Times reported.

9. Harmed borrowers get shut out. Some banks spent much more on consultants than they did on actually helping those homeowners they abused. A now-bankrupt mortgage servicer called ResCap spent $250 million to review its loans. It will probably only pay $35 million to $60 million to homeowners who were harmed, reports American Banker.

"This is Kafkaesque," an industry source told American Banker. "The reviews don't provide any closure [to borrowers], and their cost is going to be orders of magnitude beyond what banks pay out."

More on Money Now

Jan 16, 2013 1:49PM
You left out the first and biggest mistake. Encouraging lenders to give loans to people who could not pay them back.
Jan 16, 2013 2:28PM

  i  will  keep  on screaming  this.........  it  was   barney  fag,  and   chris dodd  that  were   at  the  forefront  of  the  mortgage  "crisis"  fannie  mae   and freddie  mac  were  right  behind  them... you   no  we  needed  to  "get  everyone  in their  own  house"

Jan 16, 2013 4:40PM
Just the beginning folks - prepare for your daily transfusions - these parasites are not even close to being done with the American consumer yet... they know they are backed by the full power of the bought and paid for crooks in congress no matter what they do and have no fear of anything..... 
Jan 16, 2013 2:52PM
This was to be expected.  Banking and lending is not something the our government knows much about.  Our government's knowledge is much better in the area of heath care.  It said so on the internet.
Jan 22, 2013 12:40PM
Again we in the industry's ops and risk world, all knew that this would happen the moment it was announced that the banks would be the ones hiring the "independent" reviewers, and that is was happening as the reviews were underway. Yet no one with the power to stop it did so BEFORE it became a cash cow to the consulting industry AND the Banks as the Banks are being paid to provided services that should have been a normal part of a proper and cost effective default servicing operations.  The numbers bear it out.  The banks designed the most ineffective outreach program I've seen in my 25+ years in this industry as the mailings are the least expensive path.  To be effective, the outreach it should have included a tier two of in-person counseling, among many other value added actions, as all have acknowledged that the letters were too confusing. Hence the 5% response rate reported by in the GAO Audit Report. The OCC could have improved the process at each of the extensions but did not, despite having received numerous suggestions for improvement from the industry, choosing instead, it seems, to keep repeating the same in-effective process but expecting what, better results? Is anyone surprised?  Unfortunately, what could have been a great opportunity combined with the perfect timing to require a transformation of the servicing industry, has now turned into a discussion about abuses in government sponsored / funded assistance, and it's legacy will seriously inhibit the ability to provide this type of assistance when (not IF) the next housing crises occurs. 
Jun 2, 2013 11:46AM
Sure as can be expected, Our government screwed up again and of course they through more tax payer money at the problem instead of fixing it.  So now what??? The banks win not only did our very smart leaders give the banks a pile of money years ago in order to keep them in business but now after the banks set up this scam to keep everyone in the dark, They just walk away and head out for a summer vacation while the people that got the shaft go to work so that they can pay more taxes and that hard earned money be wasted by our leaders. now myself every program that had been set up for the home owners will not work for me Wells Fargo has my mortgage and being a disabled Veteran I struggle each and every month to make the payments and most of the time I must choose between paying bills or eating it is all the same my dad called it the golden rule "THE PEOPLE WITH THE GOLD MAKE THE RULES"  Dad you are so right wherever you may be. Just know this all of the B.S. that keeps being feed to us the public will not last forever, and believe me this is not what I fought for it is time for it all to stop and someone must tale control in order to save this once great country of ours. I wonder what would happen if a group of honest people were appointed to look closely at the finance problems our country faces and made daily reports to the people and any bank that did not produce everything that was asked for was dealt with on a criminal level that would most likely show how much corruption we live with every day and how if you have the right connections and enough money you can get away with anything it makes me sick and it should make you just as sick. I just wish that what I have said here today helps in some way to fix things for our children.  Everyone take care and have a nice day.   GPS>>>>>>>>>>>>>>>>>>>>>
Jan 21, 2013 1:14PM
This mess is not going to stop the  lenders are still a bunch of crooks still doing those nasty things every chance they get  till they get  in trouble by then the whole country will once again be trying to dig our self out.  The big Q.is how many did they throw in jail I don't now of any that just wasn't important as cleaning up the harm they did that's why they will do it again wait for it   wait for it then it will be a big surpise once again..........................  It's the people in charge you just can't fix supid we just pay for stupid.   
Jan 16, 2013 11:47PM
again what a bunch of ****. Great job to the guys that try to run this thing.
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