Feb 28th Update: Thirteen of the original banks/servicers have agreed to a new plan that includes $3.6 billion in direct cash payments and $5.7 billion in modification relief.  For more information, visit our blog post:

Independent Foreclosure Review: Update on $3.6 Billion in Cash Payments and $5.7 Billion in Modification Assistance.

Background:  In 2010, three banking regulators conducted reviews at 14 loan servicers, and examined 2,800 foreclosure files for homeowners who were in foreclosure between 2009 and 2010.  The regulators found: “The reviews found critical weaknesses in servicers’ foreclosure governance processes, foreclosure document preparation processes, and oversight and monitoring of third-party vendors, including foreclosure attorneys. While it is important to note that findings varied across institutions, the weaknesses at each servicer, individually or collectively, resulted in unsafe and unsound practices and violations of applicable federal and state law and requirements.”

As a result of these findings, the 14 servicers and banks agreed to hire independent contractors to review the files of homeowners who were in foreclosure from 2009 to 2010 and who requested a review.  Approximately 4.3 million homeowners were in foreclosure during this time period.  In cases where the review found that a bank or servicer inappropriately processed a homeowner’s file, or incorrectly foreclosed on a homeowner, the homeowner could receive financial compensation ranging from $500 to $125,000 plus lost equity.

The problem:  Due to limited marketing, and the fact that very few homeowners have been notified about the results of their review, only a small fraction of homeowners are aware of the review and have applied to have their case reviewed.  In fact, the GAO released a 74- page report earlier this year that was highly critical of the outreach methods used to contact potentially eligible borrowers.  The low numbers of homeowners applying is partly why the deadline was extended three times in 2012. The current deadline to apply for the review is December 31, 2012, yet few homeowners have applied, and for those who have applied, very few have been informed of the results of their review.

Beyond the regulator’s review of files in 2010, there is clear evidence that robo-signing happened and caused harm to homeowners.   As the Huffington Post noted, a research report released in November found that 800,000 more homeowners should have qualified for the Making Home  Affordable program, but did not because of a few large servicers who modified loans at a much lower rate than  their peers.  Ironically, one of the report authors works for the Office of the Comptroller Currency, while another two of the authors work for the Federal Reserve.

In addition to the lack of awareness, a recent media report suggests that for every $1 a homeowner may receive as a result of the review, a bank is spending $4 to pay the consultants who are conducting the review of the homeowner’s case. (See: American Banker: “Foreclosure Reviews: Exorbitant for Banks, Gold Mines for Consultants”)

There have also been numerous questions raised about how independent the review actually is, and whether or not banks are playing too large of a role in judging their own mistakes. (See: Propublica: “Is BofA’s Foreclosure Review Really Independent? You Be the Judge”)

The solution:  The Federal Reserve, and the Office of the Comptroller Currency, who created the agreement, should postpone the deadline to apply for the program until two months after at least 215,000 homeowners have been notified of the results of their review.   This is a reasonable number and represents only five percent of the 4.3 million homeowners that were in foreclosure from 2009-2010. 

Far better than the current last-minute marketing plan, this would allow for word-of-mouth marketing from homeowners who were found to have been financially injured because of the mistakes made by their banks or servicers.  

In addition, this would allow the general public, housing advocates, and investigative reporters to judge the results of the review and see if they are in fact “independent.”   Under the current system, very few homeowners have been notified about the results of their review, despite the fact that the program started accepting applications over a year ago.  For more information about ForeclosureHelpSCC, visit: www.foreclosurehelpscc.org.