Borrowers may give up future claims in foreclosure reviews

A mortgage servicer may be granted a waiver from future claims depending on what sort of remediation a borrower gets from the foreclosure reviews conducted under federal consent orders.

Independent consultants, approved by the Office of the Comptroller of the Currency and the Federal Reserve, will review nearly 4.5 million foreclosure files over the next several months. They will be looking for any harm caused by improper practices uncovered last year.

The OCC, Federal Reserve and the 14 largest servicers are working out how to pay for any borrower claims for which consultants find the banks culpable. OCC Chief Counsel Julie Williams faced down skeptical lawmakers in a Senate subcommittee hearing Tuesday, pledging the consultants were independent and that the reviews would be thorough.

But she also revealed in some instances, they would be final. In some cases, a borrower would not be able to bring future claims against the servicer if he or she takes the payout.

“There could be situations where it may be sensible where a servicer gets a waiver. If the borrower gets the home back, expenses paid, maybe a lump sum payment on top of that, for a package of remediation like that, a waiver would be appropriate,” Williams said, adding that borrowers would be able to make that decision before agreeing to the deal.

A mailing campaign began Nov. 1. Borrowers who went through the foreclosure process at some point in 2009 or 2010 are eligible to apply by April.

It’s still unknown how any borrowers affected by the problems will be paid. The OCC provided 22 examples for what would constitute a “financial injury” (found on page 13 of Williams’ testimony).

But on the form filled out during the claims process, borrowers will have other options.

“The way the form is designed is it clusters some specific questions around the injury guidance,” Williams said. “But there is a portion of the form where the borrower can tell their story. What we want is the borrower to tell their story for how they were injured, and we will certainly try to get the message out about those.”

Anthony Sanders, a professor of finance at George Mason University, was concerned about the cost and time spent during the reviews, which may not net very many actual claims. He estimates the reviews will cost more than $11 billion if costs $2,500 per loan file. He said he expects less than 100 instances of wrongful foreclosures on military members and less than 50,000 modification errors would be found.

“In terms of technical errors (such as robo-signing), it is difficult forecast how many there will be, but technical errors like robo-signing should not result in any financial harm to borrowers since they would be foreclosed upon after the documentation error is corrected,” Sanders said in testimony.

It is still up in the air how borrowers would be compensated for robo-signing, the term used to describe how servicers and their third-party firms signed foreclosure affidavits en masse without review of the loan documentation.

According to Williams’ testimony, one of the examples of financial harm would be when “the servicer was not the proper party, or authorized to act on behalf of the proper party, under the applicable state law to foreclose on the borrower’s home, and this resulted in or may result in multiple foreclosure actions or proceedings.”

Konrad Alt is the managing director for Promontory Financial Group, which is conducting the reviews for Wells Fargo (WFC: 25.79 -1.90%) and Bank of America (BAC: 5.32 -2.39%). He said they are still waiting on direction from the OCC on whether robo-signing would result in a pay out to the borrower.

“Many things can go wrong with a mortgage or a foreclosure, and reviewing a particular file to ascertain what if anything did go wrong can be both difficult and time consuming,” Alt said.

The OCC did not disclose any past history between the consultants and the servicers but Williams did assure the subcommittee it caught any conflicts of interest. The Fed has not released engagement letters, yet.

Chief Counsel Scott Alvarez said in written testimony he expects the Fed “to disclose significant portions of the final engagement letters, consistent with the need to protect proprietary financial information and personal privacy.”

“We believe we are independent,” Alt said. “Our entire business model is based on independence not only in this instance but in all instances. If we fall short in this manner it would be fundamentally detrimental to our long-term success.”

Lawmakers on the subcommittee were not convinced the reviews will be transparent nor fair enough. Foreclosures will continue for those borrowers still in the process while being considered for remediation, and some senators were concerned the servicers were given too much room when choosing the consultants.

“The last thing homeowners need after so many challenges is one more process where there’s not full and accurate disclosure. The failure to stop the foreclosure process while saying there may be a remedy is a continuation of this,” said Sen. Jeff Merkley, D-Ore. “It’s disturbing.”

by JON PRIOR