Foreclosure settlement a billion-dollar bust

• %27Justice%27 for most affected homeowners will mean a %24300 check
• Critical details of the settlement remain a mystery%2C even to members of Congress
• Regulators decided that independent review of cases was slowing down the process

Steven and Joan Bailey say they're two-time victims of a broken foreclosure system.

In 2010, they lost their North Carolina home to a foreclosure they say shouldn't have happened because they were seeking a loan modification at the time. This year, they eagerly awaited their check from a big bank settlement engineered by the government to compensate millions of borrowers for past foreclosure abuses. They expected at least $6,000 or even the maximum — $125,000.

Their check arrived in April — for $800. Less than a month's rent on their apartment.

"Another disappointment," says Steven Bailey, a land surveyor who has become a foreclosure activist in Colorado.

Almost all the checks have gone out from a settlement that government regulators initially touted in 2011 as their most aggressive effort to root out banks' errors, hold them accountable and right the wrongs done to many homeowners. The outcome falls short of the vindication many borrowers expected.

Regulators initially promised independent case reviews to millions of homeowners involved in foreclosures in 2009 and 2010. They abandoned that pledge this year when they renegotiated the 2011 settlement with the banks, a trade-off they said was necessary to get money in borrowers' hands faster.

Nearly $3.4 billion has been paid out to 3.9 million borrowers since mid-April. An additional 300,000 or so borrowers will get their payments in the coming weeks.

The payouts, far from closing the books on an economic catastrophe that rocked millions of households in the worst years of the Great Recession, have instead reignited old feelings of anger and frustration. As Bailey and others like him see it, the banks and the government have at last put a price on foreclosure injustices — and it's too low.

The renegotiated settlement created a $3.6 billion pot to compensate borrowers for shoddy foreclosure practices that ran the gamut from wrongful foreclosures to lost consumer documents.

About two-thirds of the recipients received $300 — the smallest possible amount. Fewer than 1,200 got $125,000, the most allowed. The rest fell into one of 10 other categories for compensation, mostly in the $400 to $7,500 range.

How exactly individual borrowers' compensation was determined is just one of many questions being asked about the settlement's design and fairness. Regulators defined the categories for compensation, set the amounts and laid out the rules for mortgage servicers on how to slot people. Those who fit in more than one category were assigned to the one paying the highest amount, regulators say.

Some critical details about the settlement remain a mystery to the public and even to members of Congress, including how many foreclosure errors were discovered in a limited number of cases that were actually reviewed.

"I am deeply concerned by the lack of transparency surrounding this settlement and by the fact that we still have no idea how many illegal foreclosures each bank committed," says Rep. Elijah Cummings, D-Md.

Sen. Elizabeth Warren, D-Mass., has criticized regulators for allowing companies that allegedly broke mortgage servicing laws to assign borrowers to the various compensation categories for payment. "I just find this one amazing," Warren said at a recent Senate hearing.

The agreement the government made with the banks leaves consumers little recourse. They cannot appeal their payouts to banks or the regulators. But they can still sue their servicers.

"It's outrageous. People were clearly expecting more than $300," says Bruce Marks, chief executive of the homeowner advocacy group Neighborhood Assistance Corp. of America.

The primary banking regulator for the settlement, the Office of the Comptroller of the Currency, has received about 2,000 complaints or inquiries about the settlement, including 900 questioning payment or their compensation category, OCC spokesman Bryan Hubbard says.

PROMISES MADE BUT NOT KEPT

The settlement is far different from what OCC and Federal Reserve officials said would happen when they announced enforcement actions against 14 big banks, including Bank of America, JPMorgan Chase and Wells Fargo, on April 13, 2011.

After allegations surfaced that many foreclosure documents had been improperly prepared in what became known as the "robo-signing" scandal, bank examiners spent months reviewing the banks' departments for servicing mortgage loans and processing foreclosures. Describing their examiners' findings, the OCC and Fed news releases used phrases such as "pattern of misconduct and negligence," "significant and pervasive compliance failures" and "unsafe and unsound practices."

As part of the settlement, regulators said anyone involved in a foreclosure case in 2009 or 2010 on their primary home whose case was handled by one of the servicers could ask for a review — and they'd get one. Almost 500,000 did. The banks hired consulting firms to conduct the reviews, and regulators oversaw the process.

That plan changed early this year. The reviews were stopped with fewer than 104,000 completed. Regulators said they were taking too long. Servicers paid about $2 billion for them.

Instead of the reviews, $3.6 billion was to be split among the 4.2 million eligible borrowers. Everyone would get something, whether they were harmed or not. An additional $5.7 billion would go into mortgage relief programs. Regulators largely gave up on identifying who was harmed and in what way.

The new plan would "get more money to more people more quickly," said OCC Director Thomas Curry when it was announced Jan. 7.

Federal banking regulators devised 12 payout categories, including:

• $125,000 for borrowers who lost homes even though they weren't in default or were in the military and had some legal protection from foreclosures.

• $25,000 to $50,000 for people who lost homes even though they were meeting requirements of written trial loan plans.

• $3,000 to $6,000 for those who lost homes and had loan modifications denied.

• $300 to $500 for "all other loans."

The regulators instructed the servicers on how to slot people based on how far they'd gotten in the foreclosure process. Someone involved in a completed foreclosure sometimes received more than a person whose foreclosure was halted.

DISPUTES AND DISAGREEMENTS

Max Caycoya, 42, an engineer in Houston, got a $500 payout that left him angry and confused. He says he had a loan modification request denied in 2010, so he expected $6,000 for being in the "modification request denied" category. The $500 meant that he landed in either the "all other loans" or "modification request approved" category.

"This makes no sense to me," Caycoya says.

John Failla, 47, a casino supervisor in Tucson, was denied a loan modification from Bank of America, he says. He expected $6,000 and got $500.

BofA says Failla was never denied a loan modification because he was never considered for one. The bank says Failla, after requesting a modification, called to say he'd decided to pursue a short sale.

Failla disputes that. He says he filled out a loan modification application and pursued a short sale only after the modification was denied. He's complained to BofA about his payout. "I'd like my other $5,500," he says.

The Baileys have a slightly different story.

They fell 30 days behind on their mortgage payments in 2009 but caught up, according to a credit report from Equifax that they provided.

They say Wells Fargo then invited them to enter the government's loan modification program, and bank employees told them not to make payments for several months until the trial modification started.

A payment history from Wells Fargo, which the Baileys also provided, shows they made their three trial payments on time. They say they continued to make those new lower payments for months afterward.

In April 2010, they learned they'd been denied a modification and that they owed $13,750 — the sum of the payments they missed before their modification started and the difference between their trial payments and their old higher ones. The couple didn't have the money, and their house was sold in a foreclosure auction that fall.

Many other homeowners had similar experiences, says Neil Barofsky, who formerly headed a government watchdog team that monitored federal spending for bailouts and foreclosure prevention programs during the financial crisis. Homeowners were wrongly told to skip payments to qualify for trial modifications, got stuck in long ones, then were denied, he says.

The Baileys say they deserved a $125,000 payout because they were current on their mortgage at the time they entered the government's modification program and did all that was asked of them while in it.

Wells Fargo refused to comment on individual cases. The Baileys, like many others, began their trial modification when the U.S. government was pushing servicers to start trial modifications without checking to see whether consumers could afford the payments and qualify for a permanent modification, says Tom Goyda, Wells Fargo spokesman.

"It wasn't clear for the customer because they'd get in and ultimately not qualify," Goyda says.

In terms of slotting people for payouts, "we followed the rules as they were set up" by regulators, Goyda says.

CASE CLOSED, QUESTIONS REMAIN

Settlement critics question the size of the settlement pot, given that so few reviews were actually done.

It's impossible to draw any conclusions from the completed reviews about error rates at particular companies, testified Lawrance Evans of the Government Accountability Office at a Senate hearing in April. Not enough reviews were done in a statistically valid way, he said.

Consumer advocates question how good the actual reviews would have been, given that servicers were paying for them. But they would have provided more insight into foreclosure errors than is known now, housing advocate Marks says.

The settlement "was going in the right direction. They were going to find harm and provide restitution," he says.

Instead, just as before the original settlement was announced, borrowers who think they were harmed are left to fight that battle on their own.

Failla, for one, wishes that the actual reviews had been done, even if they had taken years: "I'm sure I would've gotten more than $500."