Yves 03.05.13

Transcript: Yves Smith Interview

HARRY SHEARER INTERVIEWS YVES SMITH

LE SHOW, APRIL 28, 2013

Listen to the podcast here.

A link to Yves’ IFR e-book is here.

Interview recorded Thursday, April 18, 2013.

HARRY SHEARER:  This is Le Show, and today I’m welcoming back a familiar voice to these microphones, always with useful information, today I think even probably more so than usual because she’s just been doing some spectacular reporting on a subject that has been largely ignored, strangely enough, by the national media. The subject is the ongoing F-bomb, the foreclosure crisis, the foreclosure mess, and specifically the Independent Foreclosure Review. And the guest is the author/editor/owner/proprietor/entrepreneur of nakedcapitalism.com, Yves Smith. Yves, welcome back to Le Show.

YVES SMITH:  Harry, thanks so much. Great to talk to you again.

HARRY SHEARER:  You too. On the broadcast a week or two ago we had a clip of Elizabeth Warren, from the first set of hearings on the Independent Foreclosure Review, browbeating the representative of the Office of the Comptroller of the Currency and the Federal Reserve about their apparent inability or unwillingness to release any of the information they gathered in this review to the public or to possible homeowners filing suit, which was a good little browbeating. But let’s get the larger picture. What was the Independent Foreclosure Review? Who started it and why?

YVES SMITH:  Okay. It was officially entered into in April of 2011, and even the back story sort of explains why it came out – well, a part at least of why it came out the way it came out, which is that in, if you recall, in the fall of 2010 the robosigning scandal became national news. Now that, if you’d been following the story in local courtrooms, there had actually been a lot of foreclosure defense attorneys trying to mount defenses based on the fact that the mortgage securitizations actually had not been done correctly, and you know separately the borrowers would be trying to get modifications from their bank – they’d think that they were good candidates for modifications, and historically if a borrower got in trouble you’d always be better off settling for half a loaf rather than none. But instead, foreclosure attorneys starting increasingly looking at whether the party that showed up at the court was actually the right party to be foreclosing. Then you had the robosigning scandal break. Then you had a big scramble among federal regulators, frankly to try to pretend this was not a problem. You had a big review by 11 regulators that implausibly claimed there were no problems in November, December 2010. Nevertheless a bunch of state attorney generals started getting troubled by this and formed a group that started negotiating with the banks around this issue. A number of federal regulators joined, and again it all goes back to Elizabeth Warren.

Elizabeth Warren was sort of invited into this group and began just using fairly straightforward arguments to basically say the banks pay a lot of money merely based on how much they’d save through bad servicing, not even looking at the harm they had done to borrowers. Well the Office of the Comptroller of the Currency was part of these discussions and they didn’t like the way they were going and so they broke from those negotiations and put this settlement in place in an attempt to torpedo the other negotiations. That’s why this whole discussion of settlements becomes very confusing, because there actually have been two going on. There’s this OCC one that’s created this big brouhaha, and then the big state Attorney General federal one, the rest of the regulators, was concluded a little bit more than a year later in January 2012.

HARRY SHEARER:  That was the one that had the banks paying supposedly $25 billion dollars–

YVES SMITH:  That’s correct, that’s why this – since they all started from the same place, but the OCC split off with this one. And that one, people who had been watching it closely knew that the OCC one, not just from its history but from the consent order itself, was really not a good-faith effort. I mean one part of the consent order was basically that the banks should service the loans better, except “better” was really just an affirmation of existing law. There really was nothing really new in the servicing provisions at all. You know, so you’re just going to tell them again to obey the law when you’ve, you know, not enforced this in the past? Why would we take this seriously?

HARRY SHEARER:  Let me just break in for a second. “Servicing” in the current usage means the agency which may be owned by the bank, or may not be, which collects the money month-to-month on a mortgage and does other things that in the old days would have been done by the bank that made the loan in the first place.

YVES SMITH:  That made the loan. That’s right. That’s the problem we have now is that the roles are all split up, unfortunately. You know, finance should not be complicated. The fact that it’s now become complicated is a bad sign. But you now have, when a mortgage is securitized, meaning it’s been eventually sold to investors, you have a split of roles. So the bank that originates the loan may or may not be the one that services the loan, which as you say it collects the payments, deals with the investors, and also is the one that handles the foreclosure.

And the whole problem goes back to the fact that when they set up these securitizations, they provided for ways for the banks to be paid if they foreclose. They don’t provide for them if they modify a loan, and a modification is actually much more work, so of course the banks foreclose even though foreclosures are worse for the borrower and worse for the investor. You know, the only party that wins out of this is the bank. Nobody else. Everybody else comes out much worse off.

So let’s, so we’ll dial back to the 2011 consent order. So one part was the servicing guidelines which said, “You guys obey the law,” basically. The second part was that they were going to provide for these, what, again, what you correctly called the Independent Foreclosure Reviews, but they were – “independent” is a bit Orwellian. The banks were direct-to-hire, quote, “independent consultants,” except these independent consultants were hired by and paid for by the banks.

And, you know, people for example like Sheila Bair in her book, you know, she’s got a book called Bull by the Horns where she talks about her experiences at the FDIC. And she had one experience where she was sort of forced in a regulatory process with the Fed and Treasury to have a bank use an independent consultant, and she describes, rather colorfully, how egregiously, you know, appallingly bank-favorable the report was. It just wasn’t credible. And so the FDIC has a very dim view of these independent consultants.

The OCC, by contrast, is a very bank cronyistic regulator, the most bank cronyistic regulator. So you could see this whole thing was baked in to basically be a cover-up.

The thing that turned out to be rather strange was that when – the consultants basically appeared to have viewed this as a fee-gouging opportunity and the OCC didn’t give very clear – first, they didn’t really understand the task. You know, there were 4.3 million borrowers that were potentially eligible for review. The OCC strangely defined the objectives as to find all the borrower harm, I mean, which is – you know, no honest review could do that, particularly for so many mortgages. And they set up a very confused process where they had one track where borrowers would write in and ask for their loan to be reviewed, and there was a second track where the servicers and their consultants were supposed to come up with a statistical sample, and somehow they were to sample in a way that would unearth all the borrowers that hadn’t sent in letters. There’s, there is – I mean, I can go through the long-form statistical part of it, but there’s just basically no way to do that. You’ve got sort of two conflicting objectives in the statistical part, because if you wanted to find all the harm, that’s really not a statistical process, and then the way they went out to try to find the patterns of harm led to sampling that wasn’t random. You know, for instance, every state’s got different foreclosure laws. That meant your sampling would have to cover all 50 states. Well, let’s face it. Most of the foreclosures, particularly most of the really bad loans, were originated heavily in a handful of states. I mean, if you’d want to do 80/20, nearly all the bad foreclosures – not nearly all but a just vastly disproportionate proportion of the bad foreclosure activity took place in, you know, Florida, California, Arizona –

HARRY SHEARER:  Nevada.

YVES SMITH:  Nevada! Right. So, you know, if you have 50 states, that’s going to overweight the states that the subprime lenders flew over, like Iowa, and there’s no question that this – I would suspect the consultants understood full well the implications of some of the way the OCC structured its request and went along. And then the OCC began finding problems as they went along with how they were doing it – their guidance wasn’t clear, they had wanted this to at least be consistent across all the servicers or appear to be consistent, they were having consistency issues – so they kept revising their standards with the consultants. So the whole thing just led to this explosion of costs. By the time they got done, they had only reviewed 100,000 loans, at a cost of $2 billion dollars. That’s $20,000 per loan.

HARRY SHEARER:  And a contributor to your blog, Michael Olenick, said in a recent posting that with software he had devised and with the knowledge that he had of how to do this kind of work, adding layer upon layer of profit and overcharging he could only figure out how to spend about, I think his figure was roughly $250 million on something that the consultants ended up spending $2 billion dollars on. Is that right?

YVES SMITH:  Well, that’s correct. You know, and that was one thing that we found in our – I had nine whistleblowers come forward, and one thing that they described was just the incredible managerial incompetence, that, for example at one of the smaller servicers, PNC – when you think of smaller, it should mean it was more manageable. They literally had one person from Promontory, 140 to 150 consultants – you can’t have one person supervise 140 to 150 people, particularly with, you know, sort of a novel, you know, set of tasks. And they would literally sit around in a room for months waiting for instructions for what to do.

HARRY SHEARER:  (laughs)

YVES SMITH:  So that’s part of how they got here, that they hired people and then had them do nothing. And then it was also, at least on PNC and I suspect this happened on some of the other banks, is there were, increasingly there were leaks on the Promontory s– Promontory, now Promontory, back up. Promontory is one of the independent consultants. They handled two of the largest reviews. They handled Bank of America and they handled Wells Fargo and they also handled PNC, which is the third one I mentioned, the small one. And they are believed to have pulled out the overwhelming majority of the fees, because they went and hired outside staff, they had never – they didn’t have a history of running big projects like this, they’re only a 400-person firm.

The other big consultants in this were Deloitte Touche and PricewaterhouseCoopers. They’re both big accounting firms. They at least know something about securitizations. They are regularly used on securitization – I mean they’re not expert in this part of securitization and servicing, but they know the space generally. And accounting firms get called in to do ginormous projects on a much more regular basis, so they weren’t as incompetent at this as Promontory was.

And what happened with Promontory was there were increasingly leaks. Pro Publica had a story in October – the first one. They did several, but the first was in October [2012] where they basically questioned, correctly questioned, the independence of the reviews at Bank of America, because at Bank of America – remember I described two tracks. The one track where they reviewed the borrower letters was being done by temps on a Bank of America site under the direction of Bank of America. Promontory, all Promontory did was provide the software that the answers were logged into. And when that leaked out, there was apparently a huge scramble at the OCC because they had been exposed as not being sufficiently concerned about independence, and apparently at PNC they threw out all of the work that had been done through October. These reviews – this had started in September – now this is from September 2011 to October 2012, all that work was thrown out. So that’s how they got to such big bills. You know, most of the work was not even used.

HARRY SHEARER:  Promontory is an independent consultant increasingly in the news, and I think one of the things that you spotlighted is that the revolving door doesn’t begin to describe the number of former high-ranking members of the supposed regulatory establishment in Washington who have left government and shown up as high-ranking officials at Promontory. Is that correct?

YVES SMITH:  That’s correct. I mean most recently Mary Schapiro, who was the last head of the SEC, has joined Promontory. A bit sus looking is that the last general counsel – sorry, they call them chief counsels. General counsel’s a corporate term. The last chief counsel at the OCC was a woman named Julie Williams. She had been the – she was hired by Gene Ludwig, who is the head of Promontory, when he was Comptroller of the Currency. They have particularly deep relationships at the OCC because, you know, of Ludwig’s tenure there. So Ludwig had hired Julie Williams. She was clearly key in negotiating these consent orders with all of the banks, and then she went to Promontory. Alan Blinder, I believe he’s a former vice chairman of the Fed, is an adviser to Promontory. So they’ve got, you know, very senior people as well as a lot of people at the next layer for pretty much all of the regulators. I mean, if you read – you know, there are a lot of, for example, people at Treasury who were involved in the TARP negotiations. Promontory has roughly 400 professionals, and I think it’s something like 100 of them – of the 400, roughly 100 are ex-regulators.

HARRY SHEARER:  Wow. Now let’s talk about your whistleblowers. The reporting based on the whistleblowers’ evidence, you’ve gathered into an e-book, and we’ll tell listeners how they can get the book at the end of the broadcast, but highlight for us some of what they reported about how they went about this work of reviewing these mortgage files.

YVES SMITH:  I mean, what’s sort of ironic about the whole thing is that Bank of America actually on some level was far more serious about having people look at this. I mean, they actually, they got 18– ultimately it was roughly 1800 people in multiple locations going through files based on the borrower letters, and they hired through various temp agencies people who were pretty well qualified, at least initially. They started downgrading it as it went on, and hiring lower and lower skilled people who were less capable. But the initial people they hired, for example the people I spoke to who all worked in Tampa Bay, the least experienced one had been a paralegal for five years at a foreclosure defense firm. So they all were very knowledgeable about mortgage documentation and mortgage procedures. And they were told by the temp agency that their job was to find borrower harm, so they (laughs) thought their job was to find borrower harm. And they were trained to use the computer systems, they went and dug through stuff, you know, and then the weird part of it was they would find harm and then there’d be layers above them. For example, they called it Quality Assurance, another Orwellian term.

HARRY SHEARER:  (laughs)

YVES SMITH:  But they had a Quality Assurance department which would then look at what the reviewers found, and basically they would undo their work.

HARRY SHEARER:  They would say no harm?

YVES SMITH:  They would say no harm, but then the reviewers were given the opportunity to rebut it. Then it would go to Promontory, which would inevitably find no harm. I mean, so there’s this whole, like, you know, the whole thing was like this bizarre, costly charade. I mean, I’m not, you know, so they – but the point was that because they set these temps (who ultimately obviously have no loyalty to Bank of America because they’re temps) loose on these files, who knew something, they found a lot of stuff. And the most disturbing thing is they found what again foreclosure defense attorneys have claimed has been going on, just because they’ve seen it so frequently it can’t be an accident, they saw patterns of systematic abuse. You know, things that could not be accidents because they happened so often.

For instance, when people would get modifications, they would typically have all of the expenses they’d gotten like – typically people don’t get modifications unless they’ve been late. So they would get a modification. They would have all of the late fees and other charges that were due on the account wrapped into the principal balance. So let’s say, you know, the balance had been 150,000, the bank says you have, you know, X in what you’re behind, plus other fees we’ve incurred, so now your balance is 150,000 + X. The problem is the X at least half the time was an amount that just wasn’t legitimate. They would often show attorneys’ fees of more than $5,000, and there are state guidelines, there are, you know, Fannie and Freddie, the two big investors in mortgages, guidelines that limit – you know in a completed foreclosure you’re not supposed to get to more than $5,000 unless it’s contested, in most states. And in a foreclosure that wasn’t completed, this is a number that’s just not plausible. And yet again and again and again they’d see numbers like that.

Similarly, in bankruptcy, if somebody goes into bankruptcy, the whole idea of bankruptcy is – a chapter 13 bankruptcy – is that the court figures out how much you the borrower can pay to your creditors if you live basically very austerely for 60 months. You live very austerely for 60 months and you make your payments and you emerge from the bankruptcy clean. And during that period, any payment that is made through the court process is on time. So let’s say your mortgage originally said you were supposed to pay on the 10th but the bankruptcy trustee – a lot of times in a lot of states they pay the bankruptcy trustee rather than writing a whole bunch of checks, and the bankruptcy trustee then pays the bank. Whenever the bankruptcy trustee pays the bank, that’s on time. Well, that’s not how it was done. The banks, Bank of America would accumulate late fees during the bankruptcy. They might also include pre-bankruptcy fees that should have been reported to the court. They’re supposed to report all, anything they think they’re owed to the court during the bankruptcy process. They’d wrap all that stuff and they’d hit the borrower as soon as they emerged from bankruptcy, when the borrower is broke, by definition. The borrower is supposed to emerge from bankruptcy debt-clean with basically no spare cash. So the borrower’s got no money to fight the bank at that point, and a lot of people lose their house that way. I mean at that point, if you’ve got no money, $2, 3, 4, 5,000 of charges post bankruptcy is going to kill most borrowers.

Another one was force-placed insurance. Countrywide was notorious for this. They were the biggest player in this game. Force-placed insurance is where a bank finds that a borrower has – and oftentimes not validly, but they’ll claim that the borrower has either insufficient insurance or the policy has lapsed, and they’ll put their own policy in place which is 5 to 10 times what it should cost in the marketplace, and typically they’ll have some kind of kickback arrangement with the broker so that they skim an extra fee off of this.

HARRY SHEARER:  With the insurance broker.

YVES SMITH:  With the insurance broker. In this case Countrywide had its own captive insurer –

HARRY SHEARER:  Nice.

YVES SMITH:  – so it’s even worse.

HARRY SHEARER:  Nice.

YVES SMITH:  So in any event, if somebody applied for a modification, they would be required to take what is called forced escrow, whether or not their mortgage actually required escrow, and that escrow would include force-placed insurance. And that forced escrow would stay in place whether or not they got the modification.

And there’s more! (laughs) I mean, this is just a partial list.

HARRY SHEARER:  Yeah. I think we’ll probably have to go back for another helping, but let’s bring this up to date. This process then was called to a halt by the Office of the Comptroller of the Currency, the OCC, what, late last year, early this year.

YVES SMITH:  Right. They started negotiating it appeared in December and they shut it down at the beginning of January.

HARRY SHEARER:  And they said, “We’re not going forward with this review because it was faulty and costly.” And then what happened?

YVES SMITH:  Well, and then they negotiated a settlement without knowing who was harmed, but wanting to pay the borrowers money. So, some money. Some token. The excuse was, “Oh, you know, this was taking too long and we needed to get money faster.” Well, what is the good of getting money if you have no idea, as Elizabeth Warren in particular pointed out, if you have no idea if it was enough money because you never finished the work, or never did enough work, to have an idea of what an adequate amount was? Now of course this gets back to that’s assuming these guys had good intention, which I sincerely doubt. So you basically conclude that either they were incompetent or corrupt, so you can take your poison on this one. But in any event, the point was they got this pot of money –

HARRY SHEARER:  $3.2 billion, is that right?

YVES SMITH:  It started out – the number sort of increased. They got initially 3.3, but then a couple of other servicers joined the settlement later so it ultimately was 3.6 billion. And there’s another portion that’s sort of noncash booty, so sometimes you’ll see a number that’s 9 billion-ish reported? Forget about the 9 billion number. I mean, it’s all smoke. That is smoke and mirrors. In fact in the hearings yesterday, there was a separate set of hearings yesterday, Senator Merkley demonstrated that they could basically satisfy the rest of – if they really wanted to game the system, they could satisfy the rest of that 6 billion obligation with basically 12 million, M with a million, of mortgage modifications. That’s how badly the other part was structured. So throw away the other 6-ish billion. The 3.6 billion across 14 servicers, they had to distribute – and there were specific numbers for each servicer. You know, every servicer had their, you know, piece. But they had to figure out how to distribute this money with no idea, with no – with not enough information to do this in any sensible way. So they basically, it emerged in the second round of hearings that effectively the way they did it was they just took the borrowers who were the furthest along in the process and gave them the most money. They’re the first loan in foreclosure, the first – you know, so basically if you were early through the gate you got more.

HARRY SHEARER:  Wow. So it’s a reward for either sending a letter in quickly or having a bank or a servicer respond to you quickly.

YVES SMITH:  Yeah. That’s right. So the whole thing is just – it was going to be arbitrary no matter what, and on top of that the amounts and who got them were determined strictly by the OCC and the banks. So again, as Elizabeth Warren pointed out, this was basically letting, you know, the guys who caused the problem decide who was going to get the money.

HARRY SHEARER:  I think the representative from the GAO who testified at the second set of hearings said that the data are incomplete, the data does not allow us to render any conclusions about error rates at a particular servicer or make comparisons between or amongst servicers despite what’s been reported in the press, so this, the result of this process is sending money to whom, based on what?

YVES SMITH:  Well, no, that’s what I’m saying. I mean, there’s a very tidy looking schedule (PDF) that divides people into categories of harm, but, you know, basically, just think about it. You had a fixed pot of money that you’re going to have to figure out how to distribute not even knowing who was hurt. So any process – I mean, any process is going to be arbitrary. I mean, that’s just inherent. So they produced this pretty-looking schedule, and then I think that maybe what the GAO person is reacting to, whenever people looked at the schedule and said “Gee, they’re claiming that so many people were harmed” – no, this is just made up. (laughs) You know, I mean, this should not be – just because people put numbers on a page does not mean the process had any dignity. You have to understand, the process was baloney and they just came up with some arbitrary way to hand out the money. That’s what this amounts to.

And the only thing that I believe probably happened is that the banks have been very sensitive to violations under the Servicemembers Civil Relief Act, and that’s longstanding law where basically active-duty servicemembers are not supposed to be foreclosed on. And there were also additional provisions where they were supposed to have interest rates lowered to, if they were in a high-interest loan, the ceiling was 6%. And there were a lot of SCRA violations. And the banks don’t want to – you know, it’s a real media problem for them if they beat up on, you know, if they’re mean to, you know, soldiers. Plus the Veterans Affairs Committee – you know, the banks don’t spend money on those senators. So they’re more likely to –

HARRY SHEARER:  They’re not captives?

YVES SMITH:  They’re not captives. So they’re really afraid of blowback from there. So I would say it’s possible that the abused servicemembers may have gotten something approaching adequate relief. Any other category, forget it.

HARRY SHEARER:  We heard numbers I think in the bit of media coverage of the settlement that the relief would average out to about – and I think Elizabeth Warren used these figures as well – like $500 to $600 for somebody who had lost their house.

YVES SMITH:  Right. Yeah. And the other thing is you’ve got people – you know, like I had one person show up on my blog who said – remember this, again, because it’s arbitrary, you’ve got people getting money who actually should have been foreclosed on. I mean, who really were behind, who you know knew they couldn’t save their house, who you know they just threw it in and left, you know threw it in and left or threw it in and got a deed in lieu or whatever. I mean, I had one of those show up on my blog, clearly somebody who was expecting not to – you know, didn’t think they deserved any money. I think he got a $500 check.

HARRY SHEARER:  And most recently you reported that some of the first recipients of checks from this process reported that the checks bounced.

YVES SMITH:  That’s correct.

HARRY SHEARER:  (laughs) That’s insult to injury, is it, or – ?

YVES SMITH:  Yeah! Well, and it also looks like, you know there’s also this disconnect in that it looks like again like they’re not making good-faith efforts, because – and this the GAO criticized the first time around. The GAO said, when they were setting up the mailings, the same firm that’s handling the payments is the one that handled sending the letters trying to find people who were eligible for review. And so what was the first thing they tried doing? I am not making this up. They sent letters to the addresses where people had been foreclosed on.

HARRY SHEARER:  (laughs)  Nobody home.

YVES SMITH:  Nobody home. So the GAO sort of got all over them and told them that they had to do – embarrassed them enough that they started doing more outreach, like, you know, advertising in certain communities, so forth and so on. But even then when the letters were sent out they were written at basically a second-year college level when the federal guidelines for sending out any kind of official communication is it should be written at the sixth- to eighth-grade level. So, you know, again, is this incompetence or is this bad faith? I mean, I’m inclined to bad faith but you can argue incompetence, but either way you go back to this firm Rust Consulting. So, this is the second time they’ve had a settlement where they haven’t had the cash in the bank. They had one in 2006, ironically on force-placed insurance, where they didn’t have the money all there before they started sending checks out. You know, that’s – a lot of pla– you know I thought check kiting was a crime, you know? I don’t understand why they aren’t being fined or sanctioned for this.

And then there’s all sorts of stuff. Like, for example, letters – the checks have to be cashed in 90 days. You know, why is that? You know? I mean aren’t most checks, my understanding is they’re normally good for, you know, 180 days to a year minimum. I mean, they’re sort of putting – you know, and then the flip side is at the hearings – you, you know, it sounds like you looked through the hearing testimony, but in the hearings the Rust guy sort of went on and on and stressed the lengths and the processes they used to find if they, you know, if the letter came back or they couldn’t find the right address. Well, again, I had somebody show up – you know, and how many readers do I have? I mean, you know, I don’t have that enormous a readership base. I mean it’s pretty good but it’s not, you know, it’s certainly not like the New York Times or major media. You know somebody shows up on my blog today and says, you know, a couple days ago, and says, “Oh, hi. You know, our law firm doesn’t do anything in the mortgage and foreclosure space and Rust Consulting sent us a check on behalf of a woman we never heard of.”

HARRY SHEARER:  (laughs)

YVES SMITH:  And according to Rust Consulting process, it’s not conceivable that if they had used the process they described for finding people who are hard to find, that this law firm would have gotten the check. And then when he called Rust to find out what to do, he got, you know, they got this enormous runaround.

HARRY SHEARER:  Let’s talk a little bit more about the specifics of what these people were doing during the review process itself. I mean, you did a five-day series of very detailed reports from these people, and it seemed a lot of the problems were definitional. Harm was defined away. Can you get into that a little bit?

YVES SMITH:  Yeah. Well they were doing their best to narrow the scope of the reviews. So for instance they had different teams handling different aspects. So one group of reviewers would handle modifications only. And modifications were ones where there were some of the biggest problems. So the reviewers would go in, and one thing that happened quite often, at least at Countrywide and Bank of America, was if somebody applied for a modification and then got a trial modification – well actually two bad things would typically happen. One would be, and this one was reported frequently in the media, that they were supposed to send in documentation of their status, their financials, and the bank would keep saying, “We didn’t get it.” You know. And they would make them fax it in again and again and again and again and again to different numbers and they kept claiming they didn’t get it and then would not give them the permanent modification. Well of course these temps would find in fact that the borrower had sent the paperwork in. They would find the scanned images of the paperwork in the system. It was just an out-and-out lie that they didn’t have the paperwork. Which isn’t surprising, but that’s what happened.

But the second bit was that, you know, when somebody had a trial modification they would be told to send in – you know, obviously a trial modification payment is smaller than the original payment. Those payments would be sent in and instead of being credited to the borrower’s account, they wouldn’t know where to put them. They somehow hadn’t set up the systems for what to do with these smaller payment amounts, and they would be put in something called “suspense” –

HARRY SHEARER:  (laughs)

YVES SMITH:  – so not credited to the account, and then the borrower would be treated late, and late fees would start being accumulated, and then they’d be, you know, rejected for the modification, and then they’d be foreclosed on. And they came on just sort of numerous examples of this sort of activity happening.

The other case would be just a computer screwup error, not on sort of the HAMP mods, which were the most – there were multiple modification programs, but there were also cases of just where the mod wasn’t, as they put it, the term of art is “boarded.” Somehow, even though the borrower had sent back a signed – the bank had, you know, sent the letter out, the borrower had sent the letter back with the first payment – somehow it wasn’t boarded, it wasn’t loaded into the system as being modified, even though, again, the reviewer could see the scanned borrower document that they had signed it. And there was one case which was particularly charming, back to your defining away harm, where the bank just sent the check back. They would send the checks – you know, they had an approved mod, the bank just sent the checks back and said, “Oh, they’re not sending a sufficient payment amount,” because the mod hadn’t been boarded, right? They thought the old payment amount was in place. And so the reviewer flagged that as being harm. That was sent up the line and Quality Assurance rejected it. You know, they tried sending it back, and Promontory said, “Well, the payments were being returned because the borrower wasn’t making any.”

HARRY SHEARER:  (big laugh)

YVES SMITH:  That’s literally what the notes said. So this was the kind of stuff you saw. I mean, and this, this was kind of normal in terms of the crazy ways things would get rejected. And then there were other things that were just of, you know, sort of more scandalous and troubling. I mean, for instance, one of the things that they were asked to – this was a different test, but they were asked to check on, was whether the borrower had been, and the term of art is “breached properly.” That the first step in a foreclosure is to send out what is called a breach letter which says, “You’re in trouble, you’re behind, you know, we’re going to start a foreclosure action unless – but there is a way you can get yourself out of the hot soup. If you send us this amount of money by this date to this address, you’ll be okay.” So there are specific things that have to be in a breach letter for it to be a legal breach letter. Well, for a whole class of borrower – you know, there was a whole set of borrowers where the breach letters were missing. Then suddenly all at once these missing breach letters appeared. They were on – they had the wrong Bank of America – they were Countrywide loans. Not only did they have a Bank of America logo for loans that were Countrywide loans, it was the 2011 Bank of America logo when there was a different logo in 2009 and 2010.

HARRY SHEARER:  Meaning that it’s been manufactured after the fact.

YVES SMITH:  They’d been manufactured after the fact.  And they weren’t even proper breach letters. Okay, because a proper breach letter should say, “Dear –” you know, it should have the borrower name and address, you know, it should have as I said the payment amount and a payoff mailing address. And these letters would be “Dear Customer,” no address, no name, and they wouldn’t have the payoff amount. And one of the temps, you know, went and brought it to one of the better managers and just said, “This doesn’t even wash,” and the manager looked at it and said, “Yeah, you’re right.” And then all those breach letters disappeared.

So there’s evidence – what’s very troubling is that there’s evidence – and this may be another reason why the cost escalated. You know, I question whether there was – you know, there’s evidence at Bank of America that there was basically document fabrication going on, so was the reason that some of these costs got so high is that the consultants were helping the banks fabricate documents on the side? I mean that’s, frankly the evidence at Bank of America says that was at least some of the activity, and that the costs of the Promontory reviews look to be out of line with the ones by the accounting firms. Was Promontory doing this sort of thing at the other banks too that it was reviewing?

HARRY SHEARER:  Now you have probably legally astute readers, people in the law business. Has anybody weighed in with the analysis that this rises to the level of fraud?

YVES SMITH:  No one has said that yet because we don’t quite have a smoking gun.  This certainly looks like fraud because it was – well, I – the flip side is, I’ve got – there are – I am in contact with a fair number of foreclosure defense attorneys and they have been saying fraud for a very long time. So the problem is, even before this there have been people saying fraud. Again to your point about the national media, the national media doesn’t want to hear this because the implications for the banks would be too devastating.

You know, one firm that I’d really hoped would get busted was one called Lender Processing Services, which does a large portion of the mechanical activities of the best way to – they call themselves a software platform, but one of the things they do is that they manage the relationship with the attorneys, and about 60% of the servicers use them. Bank of America uses them. One of the things that one of the consultants at PNC said was very clear was that the OCC in the later stages said that they wanted backup for the third-party charges, which would be the attorney fees. And they said that Lender Processing Services could not deliver any support for the attorneys’ fees. And Lender Processing Services got paid by basically getting kickbacks from the attorneys. So, again, LPS would have a huge incentive to inflate the attorneys’ fees in order to inflate their compensation. So –

HARRY SHEARER:  Is Lender Processing Services not the firm one of whose subsidiaries was DocX, a business now out of business whose business model was document fraud– fabrication?

YVES SMITH:  That’s correct. So, yeah. And Attorney General Masto in Nevada was going after them fairly systematically. She launched a criminal case against some lower-level employees and she was clearly hoping to sort of roll that up to more senior employees. And that’s just, you know, that was basically abandoned when the big federal/state attorney general settlement I mentioned was entered into. That was, she just dropped that.

HARRY SHEARER:  So, we have very detailed reporting by you on the activities of these whistleblowers inside the Independent Foreclosure Review. How can listeners – it’s in the form of an e-book. How can people access it? What’s the, where do they go?

YVES SMITH:  The easiest way would be to google “Naked Capitalism” in quotes and “e-book.”

HARRY SHEARER:  Okay, that’s your only e-book?

YVES SMITH:  That’s my only e-book. Yeah. So you will –

HARRY SHEARER:  So far.

YVES SMITH:  Yes, so far. So that way you will find it.

HARRY SHEARER:  And it’s free.

YVES SMITH:  And it’s free.

HARRY SHEARER:  Okay. And, it’s –

YVES SMITH:  And when you find it, it’s got a little sad piggy (laughs) on it, a broken piggy bank.

HARRY SHEARER:  Aww, no, a sad pig.

YVES SMITH:  Yeah. Yes.

HARRY SHEARER:  How could you? It’s – I read the whole series. It’s stunning. You have given us just a glimpse of the horrors inside the places where these reviews were going forward, and it is – even for people who think themselves unshockable, which I think you and I both do, it’s pretty shocking stuff.

YVES SMITH:  Yeah, I was really stunned when the whistleblowers came forward. And even when you know it’s bad, when you hear just the detail and the extent of it, it’s really frankly nauseating.

HARRY SHEARER:  One more point, which I think I recall from your series. Were certain reviewers even told that “we are not, it’s not in our mandate to look at what’s illegal, what’s been illegally done to these people”?

YVES SMITH:  Oh, yeah, there were several points where the reviewers at Tampa Bay would find things and they would, for example, be told, “We’re not looking at that. That’s federal law. Federal law is not our responsibility.” You know, for example on the bankruptcy violations. When, again, the consent order specifically said they were supposed to review state and federal violations. I mean, the instructions were just completely inconsistent with what was claimed was being done.

HARRY SHEARER:  All right then. The New F-Bomb continues to spread its particles among us. Yves Smith, the mistress of nakedcapitalism.com, incredible job of reporting on this story. Thank you for sharing it with us today, and I hope to talk to you again – I hope it’s not necessary to talk to you again soon but I think it probably will be.

YVES SMITH:  Unfortunately, I’m afraid, yes, this is, as we discussed before we started taping, this is a target-rich environment and it’s sad. Finance should not be complicated and certainly shouldn’t be criminal.

HARRY SHEARER:  Right. That sounds hopelessly naïve, but all right, we’ll buy it for the moment.

YVES SMITH:  (laughs)

HARRY SHEARER:  Yves, thank you again.

YVES SMITH:  Thank you. Take care.

HARRY SHEARER:  You too.

*  *  *

HARRY SHEARER:  That’s going to do it for this edition of Le Show. The program returns next week at the same time over these same stations, over NPR Worldwide throughout Europe, on the USEN 440 cable system in Japan, around the world through the facilities of the American Forces Network, up and down the East Coast of North America via the shortwave giant WBCQ The Planet, on the Mighty 104 in Berlin, around the world via the internet at two different locations live and archived whenever you want it, harryshearer.com and kcrw.com. Available for your smartphone through stitcher.com and available as a free podcast through iTunes Sideshow Network and kcrw.com. And it would be just like the banks playing by the rules if you’d agree to join with me then. Would you? All righty. Thank you very much, uh huh.

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