9 ways feds bungled foreclosure crisis

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."

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