Report: Banks Used Mortgage Shortcuts to Dodge $20 Billion in Costs

Tuesday, 29 Mar 2011 02:51 PM

 

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Bank of America Corp. and Wells Fargo & Co. led U.S. mortgage servicers that may have jointly avoided more than $20 billion in costs since 2007 by cutting corners on collections and foreclosures, confidential estimates by the Consumer Financial Protection Bureau show.

The bureau provided the analysis in a seven-page Feb. 14 presentation to state attorneys general led by Iowa’s Tom Miller, who are pressing banks to accept billions of dollars in fines and concessions, including principal reductions on home loans, after a probe of foreclosure practices. A $5 billion penalty would be “too low,” and banks can afford more, the agency found.

“Rough estimates suggest that the largest servicers may have saved more than $20 billion through under-investment in proper servicing during the crisis,” the bureau wrote in the document. “A penalty based on servicing costs avoided would have little effect on Tier 1 capital ratios,” a measure of financial strength, it said.

JPMorgan Chase & Co. and Citigroup Inc., both based in New York, are also among banks listed as saving the most money. The estimate, spanning the period from 2007 to Sept. 30 last year, assumes that “effective special servicing” of delinquent mortgages would have boosted firms’ costs 75 basis points annually. A basis point is one-hundredth of a percentage point.

In talks on a mortgage servicing settlement, regulators and state attorneys general in February floated a possible $20 billion to $25 billion penalty for banks, according to two people briefed on the talks.

Bank Resistance

Banks are resisting the penalties on grounds that federal agencies haven’t found widespread examples of unjustified home seizures. John Walsh, acting Comptroller of the Currency, told lawmakers last month that his agency’s investigation had found only a “small number” of wrongful foreclosures.

The presentation, with seven slides, was published on the Huffington Post’s website yesterday after business hours in Washington. Its authenticity was confirmed to Bloomberg News by a person with knowledge of the discussions.

A bar chart in the presentation shows that Bank of America, based in Charlotte, North Carolina, and San Francisco-based Wells Fargo may have each avoided about $7 billion in costs. The graphic doesn’t specify the exact amounts. JPMorgan saved about $5 billion, while Citigroup and Detroit-based Ally Financial Inc. saved about half of that, it shows.

Spokesmen for Citigroup, Bank of America and Ally declined to comment. JPMorgan spokeswoman Kristin Lemkau wasn’t immediately available.

Wells Fargo

Teri Schrettenbrunner, a spokeswoman for Wells Fargo, said the bank has incurred various costs to keep people in their homes, including hiring and training more than 10,000 “home preservation staff” for a total of 16,000.

“Without seeing the CFPB’s analysis, we don’t know if the agency has considered all of the costs involved in our home retention efforts,” Schrettenbrunner said in an e-mail.

Miller, a Democrat, is negotiating with the biggest servicers and key federal regulators. Federal agencies and state attorneys general on March 3 delivered a 27-page settlement proposal that would set standards for how companies would service loans and conduct foreclosures. That document didn’t include any estimates of potential penalties.

In a March 9 letter to Treasury Secretary Timothy F. Geithner, Representative Scott Garrett, a New Jersey Republican who is chairman of a Financial Services subcommittee, criticized the role of the consumer bureau in the settlement talks, singling out Elizabeth Warren, the Treasury and White House adviser charged with setting up the agency.

Bank of America, JPMorgan, Wells Fargo, Citigroup and Ally submitted a 15-page proposal to government officials with their ideas on how to settle allegations of abuses in the mortgage- servicing business, the Wall Street Journal reported today. The proposal includes time lines for processing modifications, third-party reviews of foreclosures and a single point of contact for borrowers having difficulty repaying their loans, the newspaper said.

© Copyright 2014 Bloomberg News. All rights reserved.

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