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Turns out much-hyped settlement still allows banks to steal homes

By David Dayen, Salon

Thursday, May 2, 2013 11:08 AM EDT

The absolute least Americans can hope for from a major government settlement with a large industry over well-documented crimes is that the industry wouldn’t, after signing the settlement, just continue to commit the same crimes day after day. After all, following the tobacco industry settlement, cigarette makers did manage to stop advertising to teenagers that their product had no medical side effects.

But new evidence reveals the nation’s largest banks have apparently continued to fabricate documents, rip off customers and illegally kick people out of their homes, even after inking a series of settlements over the same abuses. And the worst part of it all is that the main settlement over foreclosure fraud was so weakly written that it actually allows such criminal conduct to occur, at least up to a certain threshold. Potentially hundreds of thousands of homes could be effectively stolen by the big banks without any sanctions.

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As writer and attorney Abigail Field first pointed out last year, for all of these different servicing standards, the banks have a “threshold error rate” that allows them to violate their obligations, up to and including illegally taking someone’s home, a certain amount of times. For the vast majority of standards, the threshold error rate is 5 percent (for a few it’s as high as 10 percent). That means that banks could violate these standards, which often leads to illegal foreclosures, on one out of every 20 mortgages they service, and the settlement monitor has no ability to do anything about it. For context, RealtyTrac estimated 1.8 million foreclosure filings just in 2012. Under the National Mortgage Settlement, 90,000 of those could be fraudulent, without sanction.

I asked Alan White, law professor at City University of New York with expertise on foreclosures, if this was accurate. “Abigail Field’s analysis is essentially correct,” White replied. “The cases described in the [Center for Investigative Reporting/NBC Bay Area] report would violate the terms of the settlement, but would not result in enforcement by the monitor or monitoring committee unless the number of similar cases detected exceeded the thresholds.”

It gets worse. That 5 percent threshold is based on “reportable errors” in a given reporting period, such as a quarter. The settlement monitor, Joseph Smith, does issue quarterly reports, but as it says right in the Office of Mortgage Settlement Oversight FAQ and in the settlement language, the oversight process begins with compliance reports from the banks themselves.

An “Internal Review Group” tests the servicing standards to compute the quarterly metrics. They are allegedly “independent from the line of business whose performance is being measured,” but they are still paid by that bank, and they compose the baseline review that the settlement monitor uses. The monitor can solicit more information from the banks if he perceives a noncompliance problem (though he doesn’t really have the resources to engage in a full review). But really, their job is one of checking the banks’ work. If this is such a good idea, we should stop sending out food inspectors and let agribusiness self-report their findings on tainted meat and produce, and the inspectors will sit back in Washington and verify everything. (Oh wait, we’re doing that too.)

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When announcing the National Mortgage Settlement, President Obama said that it would “end some of the most abusive practices of the mortgage industry, and begin to turn the page on an era of recklessness that has left so much damage in its wake.” It does not appear that any of those abusive practices have ended. And the government, at all levels, has basically walked away from its responsibility to protect homeowners.