Federal regulators announced an $8.5 billion settlement yesterday involving 10 major banks. The twist in this case is that regulators are tacitly admitting they might have been a bit over-zealous in their regulating.
The settlement is a result of the so-called “robo-signing” scandal that broke a few years back when it was discovered that banks had been signing off on foreclosures without actually reviewing the paperwork on each home. Not only was this a serious violation of the law, but it wound up violating individual property rights when the mismanaged paperwork led to homes being erroneously foreclosed on.
In light of the allegations, federal regulators set up the Independent Foreclosure Review board and invited the 4.4 million homeowners who were foreclosed on in 2009 and 2010 to submit claims if they felt they had they had lost their homes due to a bank's error. Since then, federal regulators have been burrowing deep into the mortgage servicing community, trying to root out every dubious practice and structural problem to keep this from happening again.
That process has brought something striking to light: Most people were properly foreclosed on. Many of the people who had their homes taken were well behind on their payments; robo-signing just sped up a process that was going to happen anyway.
The banks still broke the law and should be fined, but the evidence suggests homeowners who were current on their payments, but lost their homes, were an anomoly. (The Independent Review has only processed 315,000 claims over the past two years, according to ProPublica.)
The Independent Review was costing banks significant sums—consultants making $250 per hour will add up over time—and the review process had turned from an honest attempt to find borrowers wrongly foreclosed on to regulators granting sweetheart contracts to consultants to dig into bank practices that were well unearthed.
While it is difficult to have any sympathy for the banks that only exist today because of taxpayer bailouts, the Independent Review process did more to line the pockets of consultants, hurt bank shareholders (and banks), and stretch regulators' resources than it did to right wrongs created by the robo-signing process. Monday's settlement ended that process and in exchange created a $3.3 billion pool of money to settle any remaining claims of wrongful foreclosure.
However, similar to a settlement in February 2012, the 10 banks are also committing $5.2 billion to help out current borrowers who are struggling to pay their mortgages. This is where the settlement goes from an understandable fine to a political headache. Why should regulators make banks pay "restitution" to borrowers who are currently in their homes but unable to pay? How is that a way of resolving mistakes the banks made regarding borrowers already foreclosed on two-to-three years ago?
In the settlement last February, attorneys general from several states, the Department of Housing and Urban Development, and the Justice Department reached a $25 billion settlement agreement with the top five mortgage servicers—and only $1.5 billion of it was used for restitution related to anyone wrongly foreclosed on. Most of that settlement has been put towards helping current homeowners struggling with paying their mortgage by reducing their monthly payments.
The reason for this mismatched fine and crime is, of course, politics. Federal officials want to help struggling homeowners now, so they extract more than necessary from the banks to get a political win under the guise of punishing banks for previous misdeeds.
This settlement should have narrowly focused on resolving claims of improper foreclosure, shutting down the Independent Foreclosure Review program, and—most importantly—forcing the banks to admit their guilt so that future failures could be punished harsher. Naturally that did not happen, and like nearly every other settlement, regulators have been happy to let the banks slide. Cheers for regulators backing down from their overzealous investigation, but shame on them for their willingness to just accept Washington's version of justice.
(Just to be clear, this $8.5 billion settlement related to bad mortgage practices in 2009 and 2010 is separate from an $11.6 billion settlement Bank of America signed with Fannie Mae related to bad mortgage practices during the years leading up to the bubble crash. I discussed this on HuffPost Live earlier today.)