Why the Independent Foreclosure Reviews Were Doomed to Fail

Apparently part of the bank flaks' talking points regarding the foreclosure reviews is that to the extent homeowners harmed by wrongful foreclosures, they were actually drug dealers. The message: we didn't foreclose on anyone who didn't deserve it. We were just foreclosing on some scumbags and doing you all a favor by getting the meth lab out of the neighborhood before it blew up. We're part of the war on drugs. 

This talking point is particularly revealing, I think, both about how seriously our largest financial institutions take sanctity of contract, and about the nature of the whole independent foreclosure review sham.  

Running a meth lab in your basement may be an event of default on a mortgage--but if that's going to be the default that triggers a foreclosure, the bank is going to have to prove that you've been running a meth lab on the property. The lender's relationship with the borrower is contractual, not moral. If the borrower does something morally objectionable, it only matters if there is a breach of the contract. If sanctity of contract matters as a social principle, then even meth lab owners rights' must be respected. We have criminal forfeitures to the government, but that doesn't result in civil forfeitures to private lenders other than pursuant to contract. We've seen this vigilante foreclosure line before. 

I think this points at the fundamental problem of the independent foreclosure reviews:  it was a process that was nominally supposed to provide a remedy for various legal harms, but it was not a legal process.  Instead, it was an entirely ginned-up review procedure that lacked any legitimacy: the OCC and Fed were negotiating with the banks over consumers' rights. The gap between regular legal process and the "independent" foreclosure review process is where the problems lie. I have no idea if the outcomes would have been different from IFR if consumers were to actually prosecute their claims in court, but I do know this--their procedural rights would be have been clear and legitimately established and they would get a reasonably fair shake as a result.  

Instead, what the OCC and Fed gave consumers was a jury-rigged, improvised kangaroo system. The avoidance of formal legal process is a hallmark of how bank regulators operate--no prosecutions, just consent decrees, informal supervisory feedback, etc.  This is nothing new--the law firm Kaye Scholer got the short end of this stick in 1992 when OTS froze its assets for representing Charles Keating. That got a settlement real fast. 

Informal, improved process might serve well-enough for prudential regulation, but it clearly will not do when dealing with consumer protection, because the process matters every bit as much as the outcomes. Absent a consistent, fair process, there will always be the suspicion that bank regulators were favoring banks (their true constituency) at the expense of consumers.  Put another way, the independent foreclosure reviews were almost doomed to failure (although not necessarily as egregiously as we have seen) because their design lacked any legitimacy.  

At this point, the foreclosure remediation situation is so bollixed up, that I can't see any satisfactory resolution. I take some comfort in perhaps optimistically thinking that the great foreclosure cover-up might be the last gasp of the pre-CFPB age of bank regulation; hopefully the dynamics of regulation have changed sufficiently that we will not see something like the independent foreclosure review process emerge again. I wonder, though, will the prudential bank regulators ever learn that they cannot keep dealing with banks through ad hoc, informal processes if they want political legitmacy?  Do they even care? And if not, can we make them? 

Comments

[Stupendous Man - Defender of Liberty, Foe of Tyranny]

"Absent a consistent, fair process, there will always be the suspicion that bank regulators were favoring banks (their true constituency) at the expense of consumers."

It isn't just a suspicion.

[FRANK PERCH]

Maybe I missed something, but I didn't see anything in the linked article saying that the banks were claiming "that to the extent homeowners [were] harmed by wrongful foreclosures, they were actually drug dealers," i.e. that most or even many wrongfully foreclosed borrowers were running meth labs. All the article seems to be saying is that one of the consequences of abandoning the individualized review process is that SOME payments will go to meth-lab borrowers -- according to either the regulators or "housing advocates," it seems. I don't see any banker being quoted that there is no wrongful foreclosure problem because most defaulters were drug dealers.

I'm not saying the review process or the settlement payout are great, but let's keep the facts straight.

[Richard Davet]

" I wonder, though, will the prudential bank regulators ever learn that they cannot keep dealing with banks through ad hoc, informal processes if they want political legitimacy? Do they even care? And if not, can we make them? "

It is obvious that they have no "political legitimacy". If they "cared" they would not even have the job. Let's have some dialog and suggestions on how "we can make them".

[Charles Reed]

They are painting a picture as Obama paints this negative picture of anyone his program did not help as other than a good homeowner.

So why does Obama who came out again on Mar 6, 2012 and said that people wronged were to be compensated $125,000 and whatever equity in the home they had.

So who actually is this White House protecting? It Ginnie Mae who in up to their eyeballs, in these illegal foreclosures of government insured loans (FHA, VA, USDA). The Ginnie Mae pools requires that signed endorse in blank Notes, hawever because they cannot buy or sell a home mortgage loan, but is in possession of the blank Notes which makes the Notes no longer Notes because they don't contain any debt.

The 100% wholly owned Federal Government Ginnie Mae is in bed with the enemy which make Obama in bed with them, he is in charge of the Federal Government!

[Intestinal Parasite?]

Of course, as we learned from Saul Goodman in an immortal scene from
Breaking Bad, the existence of a basement meth lab may be something that needs to be voluntarily disclosed to subsequent purchasers of the property.

"How about it, counselor? Do you concur?"

[Adam]

FRANK PERCH--I didn't quote anything, but you'd have to be willfully blind not to understand what is going on. From the article: "Bank of America, for example, will have to pay borrowers who were evicted for running a methamphetamine lab, according to three people with direct knowledge of the findings." Why would that even be mentioned if not to cast aspersions on the borrowers as a whole or at least to indicate that some bad guys will be helped along with some good guys, so if we hate meth makers more than we like our neighbors, we shouldn't care about the SNAFU.

[James in Texas]

Presumption of guilt without trial. Hmmm!

[MARGARET]

No not all have meth labs How about the people that didnt have jobs Maybe if I had a meth lab or drug dealer i could afford my house