Independent Foreclosure Review Program Scrapped by Lawmakers

The New York Times reported Sunday night in a surprising decision by regulators that the “independent foreclosure review program” has been scrapped in favor of a $10 billion settlement with 14 banks.

Since the housing market crashed, foreclosed homeowners have complained that their mortgage company made a mistake in the management of their home loan, such as the common practice of foreclosing on someone making payments on a loan modification trial and/or payment plan. The Independent Foreclosure Review emerged from an agreement in April 2011 between 14 mortgage companies and bank regulators over these abusive “servicing” practices. The Independent Foreclosure Review was supposed to give homeowners a chance to have an unbiased third party review their foreclosure and loan and determine whether they might qualify for a cash payout of up to $125,000.

The program was slow to catch on as homeowners, and their representatives, complained that the application forms were confusing and lacking what compensation would be provided.

While the reason for scrapping the program is not clear, it may have been a pending report by the Government Accountability Office, a nonpartisan investigative arm of Congress, which was investigating the review program.

One problem the GAO was likely to highlight in its report was an “unacceptably high” error rate of 11 percent in a sampling of bank loan files. The sample files were chosen at random by the banks from their pool of foreclosed homeowners, who had not necessarily applied for relief. The data suggests that of the 4 million families who lost their homes to foreclosure, more than 400,000 had some bank-caused problem in their loan file. It also suggests that many thousands of those who could have applied for relief didn’t; because they weren’t aware of the review program or weren’t aware that their bank had made a mistake. Some of these mistakes pushed homeowners into foreclosure who otherwise could have afforded to keep their homes.

It is unclear what will happen to the approximately 250,000 homeowners who have already applied to the Independent Foreclosure Review for monetary relief. It is further unclear how the settlement money would be distributed or how many current and former homeowners who lost their homes to foreclosure might qualify.

In recent months ProPublica, an investigative nonprofit organization found that supposedly independent third-party reviewers looking over Bank of America loan files were given the “correct” answers in advance by the bank. These reviewers could override the answers, but they weren’t starting from a blank slate.

If they did not find a “compensable error,” the banks figured they should not have to pay anything, and thus giving the banks motivation to not find any flaws it their own files. The program was said to be flawed from the start as there were no true “neutral” parties reviewing the loan files in order to ensure that homeowners were properly compensated; many who were not.

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