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IRS Audits Poor Taxpayers At Same Rate As Richest One Percent

Every year, the IRS, starved of funds after years of budget cuts, loses hundreds more agents to retirement. And every year, the news gets better for the rich — especially those prone to go bold on their taxes. According to data released by the IRS last week, millionaires in 2018 were about 80 percent less likely to be audited than they were in 2011.

But poor taxpayers continue to bear the brunt of the IRS’ remaining force. As we reported last year, Americans who receive the earned income tax credit, one of the country’s largest anti-poverty programs, are audited at a higher rate than all but the richest taxpayers. The new data shows that the trend has only grown stronger.

Audits of the rich continue to plunge while those of the poor hold steady, and the two audit rates are converging. Last year, the top one percent of taxpayers by income were audited at a rate of 1.56 percent. EITC recipients, who typically have annual income under $20,000, were audited at 1.41 percent.

Part of the reason is ease. Audits of EITC recipients are largely automated and far less complicated.

“While the wealthy now have an open invitation to cheat, low-income taxpayers are receiving heightened scrutiny because they can be audited far more easily. All it takes is a letter instead of a team of investigators and lawyers,” said Sen. Ron Wyden, D-Ore., the ranking member of the Senate Finance Committee.

“We have two tax systems in this country,” he said, “and nothing illustrates that better than the IRS ignoring wealthy tax cheats while penalizing low-income workers over small mistakes.”

In a statement, IRS spokesman Dean Patterson acknowledged that the sharp decline in audits of the wealthy is due to the agency having lost so many skilled auditors. And he didn’t dispute that pursuing the poor is just easier.

Because EITC audits are largely conducted through the mail by lower-level employees from a central location, they are “less burdensome for taxpayers than in-person audits as they mail in their documentation and don’t have to take time out of the workday,” Patterson said.

“Correspondence audits are also the most efficient use of IRS’ limited examination resources.”

In April, Wyden, citing ProPublica’s reporting, asked IRS Commissioner Charles Rettig to deliver a plan to address the agency’s disproportionate focus on auditing the poor. The deadline has passed, but Wyden’s office said the senator still expects a response. The IRS did not comment on the delay.

The agency audited 382,000 recipients of the EITC in 2018, accounting for 43 percent of all audits of individuals last year. When we mapped the estimated audit rates for every county in America, the counties with the highest audit rates were poor, rural, mostly African American and in the South, a reflection of the high number of EITC claims there.

Natassia Smick and her husband were among those unlucky 382,000 households. We wrote about them last year. They live outside Los Angeles and saw their entire refund frozen in February 2018. For a couple who earned about $33,000 in 2017, that $7,300 refund was big money ($2,000 of it stemmed from the EITC). When it didn’t come, Smick said she had to abandon plans for catching up with her credit card debt.

After Smick sent in all her supporting documents, it took until this May to get a final answer from the IRS. Fourteen months after it all started, the IRS said it agreed Smick and her husband were due about $7,000, she said. But the agency disagreed on the remaining $350, because it couldn’t verify her husband’s employment for part of the year. Smick said the IRS was wrong to hold back the $350, but she couldn’t afford to contest it and further delay the $7,000.

“I’m not going to fight anymore,” she said. “We have already waited too long, and we are not in a financial position to wait another three months to appeal.”

A new study by academic and government researchers shows that there has been a big cost to these audits: They’ve discouraged hundreds of thousands of families who might qualify for the credit from claiming it in future years.

For poor taxpayers, the worst part of the EITC audits is usually the beginning. That’s because they almost always begin with the shock of the refund being held.

But the audits also hardly ever end well. According to data in the new study, most end without the taxpayer responding at all, and the poorer the audit target, the more likely that is to happen. Those with wage income under $10,000 per year, for instance, didn’t respond at all in 64 percent of the EITC audits. For those with income over $40,000 per year, that rate dipped to 35 percent.

The diminished response rate of the poorest taxpayers in part reflects that they are harder to reach: In 15 percent of those audits, the mail couldn’t be delivered. But earlier studies have also shown that many poor taxpayers don’t understand they are being audited or have trouble deciphering what the IRS is asking in its letters.

The EITC is aimed mainly at low-income workers with children. Last year, 26 million households received an average credit of about $2,500. Most EITC audits require taxpayers to dig up documents to show that a child meets the legal threshold of a “qualifying child,” a status that’s distinct from a dependent. The IRS has long blamed the law’s complexity as the main reason taxpayers may incorrectly claim the credit.

Smick was among the rare audit veterans who prevailed. Taxpayers rarely win against the IRS regardless of how likely they are to qualify for the credit, according to the new study, which was done by Day Manoli, an assistant professor of economics at the University of Texas at Austin, and researchers with the IRS and Treasury Department.

The authors sliced the population of EITC recipients into categories. At one end of the spectrum were tax returns with red flags that made it almost certain they would be audited. On the other end were returns very unlikely to be audited. But, looking over time, the outcomes of those audits weren’t all that different. When those returns with red flags were audited, the taxpayers prevailed seven percent of the time. The taxpayers at the other end of the spectrum — the group seemingly most likely to qualify for the credit — only prevailed 10% of the time.

The audits have a long-term impact on the lives of those who go through them, the study found. In the years after they were audited, wage earners were 68 percent less likely to claim the credit compared with similar taxpayers who had not been audited. They were even 14 percent less likely to file taxes at all.

These taxpayers surrender “benefits from potentially legitimate EITC claims,” the study authors write, and, when they fail to file taxes at all, leave money on the table in the form of other credits and withholdings.

Because the IRS conducts so many EITC audits — between 380,000 and 600,000 per year over the past decade — at the very least, hundreds of thousands of taxpayers have likely avoided claiming the credit in response to having it denied through an audit. By discouraging people from claiming the credit, the audits clash with an avowed goal of the IRS: to encourage people to claim it. About a fifth of those eligible for the credit don’t claim it, and the IRS runs education campaigns to increase uptake.

EITC recipients are audited at such a high rate in part because Republicans in Congress have long pressured the IRS to reduce incorrect payments of the credit.

The IRS estimates that there was about $18 billion in incorrect claims in 2018. In most contexts, $18 billion is a big number, but when compared with the full scope of unpaid taxes, which likely total more than $600 billion each year, it’s not so big.

And while that $18 billion number, which Republicans touted as a “big problem” in the April hearing, is often cast as a kind of government waste, the study shows things are far more complicated.

In the years following an audit, the study found, children who were claimed on one taxpayer’s return often were claimed on a different taxpayer’s return. In other words, the kids might have just been claimed on the wrong return, and if that’s the case, the money should have been paid out, just to someone else.

The authors distinguish between the $18 billion in “gross overpayments” of the credit, which would include such misdirected payments, and what they call “net overpayments,” money that shouldn’t have been paid out at all. The “net” number, they say, could be one-third to one-half smaller than the “gross” one.

The IRS, in its statement, said the study had focused on a sample of only one type of taxpayer (single and head-of-household filers), and so the estimate of “net overpayments” should not be generalized to the entire EITC-claiming population.

ProPublica is a Pulitzer Prize-winning investigative newsroom. Sign up for The Big Story newsletter to receive stories like this one in your inbox.

IMAGE: U.S. Senator Ron Wyden (D-OR) speaks with reporters as he arrives for the weekly Democratic Caucus policy luncheon at the U.S. Capitol in Washington. REUTERS/Jonathan Ernst

Lawmakers Confront IRS Over Tax Audits That Target The Poor

Over the past six months, ProPublica has detailed the myriad ways the IRS has been gutted and how that has impacted its ability to do its job. In sum: The wealthy escape scrutiny while the working poor, an easier target, are audited at high rates.

This week, Congress, in two separate hearings, confronted IRS Commissioner Charles Rettig with the findings.

“How can the Congress stand by a tax-enforcement system that punishes working people and gives the wealthy a green light to cheat?” asked Sen. Ron Wyden, D-Ore., ranking member of the Senate Finance Committee, during his opening statement on Wednesday.

Wyden was referring to a ProPublica investigation last week into the fate of the elite unit the IRS formed to keep up with the complicated tax-avoidance schemes of the wealthy. Faced with staff cuts and blowback from the wealthy and their tax representatives, the effort fumbled and was scaled way back.

Wyden demanded that Rettig produce a plan within 30 days on how his agency will change a system that is “stacked in favor of the wealthy” and “against the most vulnerable.” Rettig promised to do so.

One day earlier, at a hearing before the House Appropriations Committee, Rettig was also questioned about a map showing where in the country IRS audits are most concentrated. The top five most audited counties, ProPublica found, were rural, mostly African American ones in the Deep South. (On Wednesday, Wyden called the map “shameful.”)

Rep. Charlie Crist, D-Fla., displayed the map during the hearing and asked: “The map looks like the IRS is targeting black, Hispanic and Native American populations for audit. Is that the case?”

Rettig said that it wasn’t, adding that the IRS did not screen for race when selecting returns for audit.

But Crist said the findings amounted to “disparate impact,” the idea that even if unintentional, systems can produce “racial discrimination in practice.” He asked how the IRS would avoid “implicit or explicit” bias going forward.

Rettig didn’t have a clear answer. The IRS audited such a large number of low-income families because they claimed the earned income tax credit, he said. The EITC is one of the country’s largest anti-poverty programs. But the IRS estimates that of the more than $70 billion paid out last year through the program, $18 billion was claimed improperly, Rettig said. This made the program a priority for the IRS to audit, he said. As previous IRS commissioners have done, he blamed the complexity of the law as the main cause of those incorrect claims.

While that $18 billion figure sounds impressive, experts within and outside the IRS have argued that the agency’s estimate is far too high, largely because low-income taxpayers are much less likely to have competent representation to dispute the IRS’ conclusions.

The $18 billion is also just a pittance when compared with the vast universe of unpaid taxes. The IRS produces an estimate of what it calls the “tax gap,” which is how much tax is actually paid compared with what should have been paid. It’s been a few years since the last estimate, but assuming the rate of compliance has not changed (if anything, it’s gotten worse), the tax gap in 2018 would have been between $600 billion and $700 billion. At most, incorrect EITC payments account for around three percent of that.

By comparison, in 2017, the last year for which data is available, audits of EITC recipients accounted for 36 percent of all audits.

Since the 1990s, Republicans have put pressure on the IRS to address incorrect EITC payments, and Republican senators in Wednesday’s hearing continued that pressure.

“This is a big problem,” said Sen. Pat Toomey, of Pennsylvania, referring to improper EITC payments. “This is where the money is,” said Sen. Bill Cassidy, who represents one of the most heavily audited states, Louisiana.

Rettig expressed a willingness to work with Congress to address incorrect payments of the EITC, perhaps by simplifying the requirements. He notably did not suggest that the IRS might scale back the number of audits. As ProPublica reported last year, the IRS is understaffed, so people who are audited for claiming the credit and send in documents supporting their claim often must wait a year to find out if their proof is accepted.

When it comes to auditing the wealthy, Rettig did say that one of his “focal points” was “to get the audit rates up for the more wealthy taxpayers.”

“I’m an enforcement person,” he assured lawmakers on Tuesday after they expressed concern about how far the audit rate has fallen. “I’m an enforcement-minded person. … Personally, I have both eyes focused on enforcement.”

ProPublica is a Pulitzer Prize-winning investigative newsroom. Sign up for The Big Story newsletter to receive stories like this one in your inbox.

Alabama Senator Tells IRS To Stop Picking On Southern Poor

On Monday, ProPublica published a map showing where IRS audits are most concentrated. The South stood out.

The reason is because of an intense focus at the IRS on auditing recipients of the earned income tax credit. The EITC is one of the country’s largest antipoverty programs, in the form of a tax refund for low-income workers, especially those with children. The typical EITC recipient earns less than $20,000 per year.

In practice, the IRS’ emphasis on EITC recipients means states with concentrations of low-income workers see the highest audit rates. One of those states is Alabama. Sen. Doug Jones (D-AL), wasn’t pleased.

“To take such a large portion of limited IRS resources and to focus them so intensely on rural communities in Alabama and the Southeast makes little fiscal sense,” Jones wrote in a letter to IRS Commissioner Charles Rettig. “Moreover, the practice appears to be blatantly discriminatory.” (An agency spokesperson previously told ProPublica that audit subjects are chosen without regard to race or where the taxpayer lives.)

The map, which stemmed from a study by Kim M. Bloomquist, formerly a senior economist in the tax agency’s research office, showed that the highest audit rates were to be found in rural, mostly African American counties in the South. Among states, Alabama had the fifth highest audit rate in the country, behind Mississippi, Georgia, Louisiana and Florida.

“In an effort to focus its resources and ensure fair treatment of all taxpayers, I believe the IRS should undertake a full and thorough review of the policies and practices that led to such a disparate geographic impact of its annual audits,” Jones wrote. He ended his letter with a number of questions about IRS audit policies.

As we explained in December, Republicans in Congress have pressured the IRS since the 1990s to prevent payments of the credit to people who aren’t eligible for it. Meanwhile, critics, some within the IRS, such as Taxpayer Advocate Nina Olson, have long criticized the focus on EITC audits as disproportionate, especially since IRS studies show that far more revenue is lost through cheating by those higher up the income scale. Furthermore, in recent years, budget cuts have hampered the IRS’ ability to pursue wealthy taxpayers, while audits of EITC recipients, which are largely automated, have been slower to decline. The result is an increasingly unequal mix of audits.

Lawmakers will have an opportunity to ask Rettig about the audit choices in a hearing next Wednesday before the Senate Finance Committee.

“There are two tax codes in America, and there are also two enforcement regimes,” said Sen. Ron Wyden, D-OR), the committee’s ranking member. “It takes significant resources to go after wealthy tax cheats with savvy lawyers and accountants, and the IRS simply doesn’t have those resources after years of Republican attacks. Ensuring wealthy taxpayers pay what they owe shouldn’t be a partisan issue, and this will be a focus with Commissioner Rettig.

ProPublica is a Pulitzer Prize-winning investigative newsroom. Sign up for The Big Story newsletter to receive stories like this one in your inbox.

IMAGE: Senator Doug Jones, the Alabama Democrat who criticized the IRS for conducting too many senseless audits of his rural poor constituents.

Without Fanfare, Equifax Makes Bankruptcy Change That Affects Hundreds Of Thousands

Reprinted with permission from ProPublica.

For what appears to be decades, the credit rating agency Equifax has quietly layered three more years of tarnish on the credit histories of hundreds of thousands of people who had filed for bankruptcy under Chapter 13.

While its competitors, TransUnion and Experian, placed a flag on such histories for seven years, Equifax left it on the reports of Chapter 13 filers who failed to complete their bankruptcy plans for 10.

After ProPublica asked about the difference in its policy, the company said it now leaves the flag on for seven years, but refused to say when and why the change was made.

The consequences of Equifax’s harsher policy were likely life-changing for some unlucky people. As Experian warns consumers on its website, “having a bankruptcy in your credit history will seriously affect your ability to obtain credit for as long as it remains on your report. It can also affect your ability to qualify for things like an apartment, utilities, and even employment. Even car insurance rates may be affected.” Without knowing why, consumers could have been turned down for apartments because landlords checked their Equifax report rather than those from Experian or TransUnion.

Why Equifax’s policy was different is unclear and the company would not address it. But that such a discrepancy had gone unnoticed and unaddressed for so long underscores how lightly regulated the industry is.

ProPublica contacted all of the major credit agencies earlier this year as part of our ongoing series on consumer bankruptcy. The policies of TransUnion and Experian were similar: People who filed under Chapter 7, which wipes out most debts, would have a flag on their report for 10 years; those who filed under Chapter 13, which usually involves five years of payments before debts are forgiven, would have a flag for seven.

Equifax had the same Chapter 7 policy. But the company had a key difference in its policy for Chapter 13 filers: Those who were unable to complete their five years of payments and had their cases dismissed were saddled with a flag for three additional years.

This difference had the potential for widespread impact. About half of Chapter 13 cases are dismissed, usually because debtors fall behind on payments. From 2008 through 2010, 574,000 Chapter 13 cases were filed and subsequently dismissed, according to our analysis of filings. Under Equifax’s policy of keeping the flag on for 10 years, all those debtors would have a flag on their Equifax report through the end of 2017, but not on their TransUnion and Experian histories.

“It’s a problem, because you have a disparate treatment of debtors depending on which credit rating agency is reporting,” said Tara Twomey, an attorney with the National Consumer Law Center. “We really need consistent credit reporting for this system to work.”

Equifax’s policy also disproportionately affected black consumers, because, as our analysis showed, black debtors are more likely than whites to choose Chapter 13and have their cases dismissed.

ProPublica wrote the company again in July, prior to its recent disclosure that its records had been hacked, laying out the potential impact of its policy on consumers and asking why it differed from competitors. In an email, Equifax spokeswoman Nancy Bistritz-Balkan wrote that the company had “recently modified the length of time for how long a dismissed Chapter 13 bankruptcy remains on file.” Under the new policy, she wrote, “Equifax removes the flag for a Chapter 13 bankruptcy after seven years, regardless of outcome.”

She would not say what “recently” meant, only saying, “The change we referenced was not implemented after we received your inquiry.” As to why Equifax made the change, she wrote, “At this time, I do not have additional details about how the change was made.”

It might seem puzzling that such a meaningful policy is not governed by law. While some aspects of credit reporting are, others are simply decided among the agencies themselves. Bankruptcy is a mix of the two. Under the Fair Credit Reporting Act, the longest a bankruptcy can stay on someone’s credit report is 10 years. The credit rating agencies have voluntarily decided to treat Chapter 13 cases differently because Chapter 13 typically involves the repayment of some debt, while Chapter 7 does not. Bistritz-Balkan made a point of saying that Equifax’s previous policy had been legal.

Initially, Chapter 7 and Chapter 13 have a similar effect on debtors’ credit scores, one that diminishes over time. Bankruptcy is a negative mark on a debtor’s history, but that doesn’t mean that declaring bankruptcy will invariably damage someone’s credit score. In fact, research shows that most people who declare bankruptcy actually see their score rise in the following months. That’s because the typical score is so low that the negative effect of the bankruptcy is outweighed by the positive effect of wiping out debt.

According to Zachary Anderson, a spokesman for FICO, the median FICO score for consumers who declared bankruptcy between October 2009 and October 2010, when filings peaked during the Great Recession, was 558 — lower than all but 20 percent of consumers with a credit score.

A recent analysis of credit files by Paul Goldsmith-Pinkham, an economist with the Federal Reserve Bank of New York, shows how scores change before and after bankruptcy. In the months prior to filing, as consumers fall deeper into debt, the average credit score plunges. The analysis, using a credit score generated by Equifax that works similarly to a FICO score, found that the average score fell to a low around 520-530, but recovered sharply over the next 6 months, then gradually increased thereafter.

The next noticeable bump was seven or 10 years later, depending on the chapter, when the bankruptcy flags were removed. Consumers’ credit scores then jumped by about 10 points.

The consumers with the lowest credit scores, the analysis found, were those who had their Chapter 13 cases dismissed. That would be due, in part, to the fact that they tend to be disproportionately low-income and black, two groups with lower credit scores on average.

As we showed in our story about bankruptcy in Memphis, where Chapter 13 dismissals are incredibly common, these debtors can find themselves worse off for having tried bankruptcy. They might be even further behind on their debts after their cases are dismissed, making it harder to re-establish their credit. The effect of a dismissal lasts for years. At the very least, Equifax’s change in how it handles Chapter 13s means that the shadow cast by a past bankruptcy isn’t quite as long.

 

Bank Of America Lied To Homeowners And Rewarded Foreclosures, Former Employees Say

by Paul Kiel ProPublica.

Bank of America employees regularly lied to homeowners seeking loan modifications, denied their applications for made-up reasons, and were rewarded for sending homeowners to foreclosure, according to sworn statements by former bank employees.

The employee statements were filed late last week in federal court in Boston as part of a multi-state class action suit brought on behalf of homeowners who sought to avoid foreclosure through the government’s Home Affordable Modification Program (HAMP) but say they had their cases botched by Bank of America.

In a statement, a Bank of America spokesman said that each of the former employees’ statements is “rife with factual inaccuracies” and that the bank will respond more fully in court next month. He said that Bank of America had modified more loans than any other bank and continues to “demonstrate our commitment to assisting customers who are at risk of foreclosure.”

Six of the former employees worked for the bank, while one worked for a contractor. They range from former managers to frontline employees, and all dealt with homeowners seeking to avoid foreclosure through the government’s program.

When the Obama administration launched HAMP in 2009, Bank of America was by far the largest mortgage servicer in the program. It had twice as many loans eligible as the next largest bank. The former employees say that, in response to this crush of struggling homeowners, the bank often misled them and denied applications for bogus reasons.

Sometimes, homeowners were simply denied en masse in a procedure called a “blitz,” said William Wilson, Jr., who worked as an underwriter and manager from 2010 until 2012. As part of the modification applications, homeowners were required to send in documents with their financial information. About twice a month, Wilson said, the bank ordered that all files with documentation 60 or more days old simply be denied. “During a blitz, a single team would decline between 600 and 1,500 modification files at a time,” he said in the sworn declaration. To justify the denials, employees produced fictitious reasons, for instance saying the homeowner had not sent in the required documents, when in actuality, they had.

Such mass denials may have occurred at other mortgage servicers. Chris Wyatt, a former employee of Goldman Sachs subsidiary Litton Loan Servicing, told ProPublica in 2012 that the company periodically conducted “denial sweeps” to reduce the backlog of homeowners. A spokesman for Goldman Sachs said at the time that the company disagreed with Wyatt’s account but offered no specifics.

Five of the former Bank of America employees stated that they were encouraged to mislead customers. “We were told to lie to customers and claim that Bank of America had not received documents it had requested,” said Simone Gordon, who worked at the bank from 2007 until early 2012 as a senior collector. “We were told that admitting that the Bank received documents ‘would open a can of worms,'” she said, since the bank was required to underwrite applications within 30 days of receiving documents and didn’t have adequate staff. Wilson said each underwriter commonly had 400 outstanding applications awaiting review.

Anxious homeowners calling in for an update on their application were frequently told that their applications were “under review” when, in fact, nothing had been done in months, or the application had already been denied, four former employees said.

Employees were rewarded for denying applications and referring customers to foreclosure, according to the statements. Gordon said collectors “who placed ten or more accounts into foreclosure in a given month received a $500 bonus.” Other rewards included gift cards to retail stores or restaurants, said Gordon and Theresa Terrelonge, who worked as a collector from 2009 until 2010.

This is certainly not the first time the bank has faced such allegations. In 2010, Arizona and Nevada sued Bank of America for mishandling modification applications. Last year, Bank of America settled a lawsuit brought by a former employee of a bank contractor who accused the bank of mishandling HAMP applications.

The bank has also settled two major actions by the federal government related to its foreclosure practices. In early 2012, 49 state attorneys general and the federal government crafted a settlement that, among other things, provided cash payments to Bank of America borrowers who had lost their home to foreclosure. Authorities recently began mailing out those checks of about $1,480 for each homeowner. Earlier this year, federal bank regulators arrived at a settlement that also resulted in payments to affected borrowers, though most received $500 or less.

The lawsuit with the explosive new declarations from former employees is a consolidation of 29 separate suits against the bank from across the country and is seeking class action certification. It covers homeowners who received a trial modification, made all of their required payments, but who did not get a timely answer from the bank on whether they’d receive a permanent modification. Under HAMP, the trial period was supposed to last three months, but frequently dragged on for much longer, particularly during the height of the foreclosure crisis in 2009 and 2010.

ProPublica began detailing the failures of HAMP from the start of the program in 2009. HAMP turned out to be a perfect storm created by banks that refused to adequately fund their mortgage servicing operations and lax government oversight.

Bank of America was far slower to modify loans than other servicers, as other analyses we’ve cited have shown. A study last year found that about 800,000 homeowners would have qualified for HAMP if Bank of America and the other largest servicers had done an adequate job of handling homeowner applications.

Photo: Brian Katt via Wikimedia Commons

Exec Who Allegedly Enabled Fraud Runs Chase’s Effort to Compensate Foreclosure Victims

by Paul Kiel, ProPublica.

An executive the Justice Department says facilitated a scheme to defraud Fannie Mae and Freddie Mac is now spearheading JPMorgan Chase’s role in the government’s program to compensate victims of the big banks’ abusive foreclosure practices.

The executive, Rebecca Mairone, worked at Countrywide and Bank of America from 2006 until earlier this year, when she left for JPMorgan Chase, according to her LinkedIn profile.

In a lawsuit filed last month in federal court in New York, Justice Department attorneys allege that Countrywide, which was bought by Bank of America in 2008, perpetrated a two-year scam to foist shoddy home loans on Fannie and Freddie. Neither Mairone nor any other individuals are named as defendants in the civil suit, and no criminal charges have been filed against her or anyone else in connection with the alleged misconduct. But Mairone is one of two bank officials cited in the suit as having repeatedly ignored warnings about the “Hustle,” as the alleged scheme was called inside the company, and she prohibited employees from circulating some of those warnings outside their division.

Mairone was chief operating officer of the Countrywide lending division that allegedly carried out the “Hustle.” She took the helm of JPMorgan Chase’s involvement in the Independent Foreclosure Review this summer, according to a former Chase employee.

The review, overseen by federal banking regulators, requires the nation’s biggest banks to compensate victims for harm they inflicted on borrowers. Victims can receive up to $125,000 in cash or, in some cases, get their homes back. But the review has already been marred by evidence that the banks themselves play a major role in identifying the victims of their own abuses, raising the question of whether the review is compromised by a central conflict of interest.

Mairone’s role raises additional questions about the Independent Foreclosure Review.

The review “never seemed designed to place first the interests of those who were supposed to be helped — victimized homeowners,” said Neil Barofsky, the former federal prosecutor who served as the special inspector general for the Troubled Asset Relief Program (TARP), better known as the bank bailout.

“Finding out that the person running it for JPMorgan Chase is a person whose conduct in the run-up to financial crisis was allegedly so egregious that she somehow managed to be one of the only people actually named in a case brought by the Department of Justice goes beyond irony,” he continued. “It speaks volumes to the banks’ true intent and lack of concern for homeowners when addressing the harm that they caused during the foreclosure crisis.”

In response to ProPublica‘s questions about Mairone’s role in the foreclosure review and the suit’s allegations, Chase issued a brief statement confirming that Mairone is a managing director who is “working on the Independent Foreclosure Review process.” The statement added, “It would not be appropriate for us to discuss another firm’s litigation.”

Chase declined to make Mairone available for comment, and she did not return a message left at her home number.

The Suit’s Allegations

Countrywide was the industry leader in subprime loans, which are typically given to borrowers with a troubled credit history. In 2007, the subprime market began to collapse as more and more of those borrowers defaulted on their loans. Countrywide grew desperate to find ways to keep profiting from issuing mortgages.

Fannie and Freddie guarantee home loans, relieving banks of the risk that borrowers will default. So in 2007, the government’s suit alleges, Countrywide began the Hustle to pass a huge number of risky loans, many with phony incomes attributed to the borrowers, on to Fannie and Freddie.

At that time, the two mortgage giants were restricting their underwriting guidelines, making it harder for lenders like Countrywide to find borrowers who qualified for Fannie- and Freddie-backed loans.

The suit alleges that Countrywide deliberately gutted its system for detecting unqualified borrowers, leading to a flood of flawed and outright fraudulent loans backed by Fannie and Freddie.

The new modus operandi was called the “High-Speed Swim Lane”; its motto was “Loans Move Forward, Never Backward,” according to the suit. The company allegedly paid bonuses to its employees based on the number of loans they pushed through, not on whether the loans were sound. According to the suit, the new system created a torrent of loans that often featured inflated borrower incomes, accelerated by employees who had every incentive to fabricate numbers to get the loans into the “High-Speed Swim Lane.”

The suit says a number of employees within Countrywide raised alarms about the Hustle before it launched, but that Mairone and the division’s president “ignored” those warnings.

Once the new system was up and running, one concerned executive had underwriters run checks on the loans. Mairone allowed the checks, but said they should be run parallel to the loan funding process so, according to the suit, they didn’t “‘slow the swim lane down.'”

The tests found a “staggering rate of defects,” the suit says, but Mairone did not “alter or abandon the Hustle model.” Instead, the suit alleges, she “prohibited” underwriters from circulating the results outside of the lending division. “As warnings about the Hustle went unheeded,” the complaint alleges, “Countrywide knowingly churned out loans with escalating levels of fraud and other serious material defects and sold them to” Fannie and Freddie.

The Hustle continued “through 2009,” the Justice Department alleges, well after Bank of America acquired Countrywide. The scheme led to more than $1 billion in losses at Fannie and Freddie as borrowers defaulted, according to the suit.

The government took over Fannie and Freddie in 2008, and since then taxpayers have pumped in $187.5 billion to keep them afloat.

The federal suit was first brought under seal as a qui tam suit under the False Claims Act by a former Countrywide and Bank of America executive, Edward O’Donnell, who says he tried to stop the Hustle. A qui tam suit allows a private citizen to sue on behalf of the government and receive a portion of the settlement or judgment if the suit is successful. The Justice Department joined O’Donnell’s suit in October in the Southern District of New York, filing its own complaint and trumpeting it in a press release.

A Bank of America spokesman disputed allegations in the suit that it had refused to repurchase the faulty “Hustle” loans from Fannie Mae after they defaulted in large numbers. “Bank of America has stepped up and acted responsibly to resolve legacy mortgage matters,” said spokesman Lawrence Grayson. “At some point, Bank of America can’t be expected to compensate every entity that claims losses that actually were caused by the economic downturn.”

A Career Spans the Crisis

Mairone’s career has spanned the entire lifecycle of the foreclosure crisis.

After working for Countrywide and Bank of America’s lending divisions, Mairone moved to the bank’s servicing division in 2009. There, at the height of the crisis, she was in charge of deciding how to deal with homeowners who could not pay their mortgages and wanted to modify the terms of their loans.

It didn’t go well. The big banks all signed up for the government’s main foreclosure prevention program and agreed to provide modifications for qualified borrowers. But as we’ve reported over the years (we even interviewed Mairone herself in early 2011), the biggest banks often botched loan modifications and regularly subjected customers to errors and abuses, some resulting in mistaken foreclosures. The big banks in general did a poor job, but analyses have shown that Bank of America performed the worst of all. Homeowners had less of a chance of getting a modification from Bank of America than any other major mortgage servicer, studies show.

Such failings eventually led to government efforts to compensate homeowners for the banks’ errors and abuses. The Federal Reserve and the Office of the Comptroller of the Currency launched the Independent Foreclosure Review in late 2011. About 4.4 million homeowners are eligible for the review, and those who are determined to have been harmed can receive up to $125,000 in cash compensation.

Regulators required each of the banks to hire an outside consultant to independently conduct the review, but as ProPublica has reported, there is abundant evidence that the banks themselves are playing a large role. The program has also been marked by low participation by borrowers and a lack of transparency.

Regulators have said the banks are only playing a supporting role in the review, and that the consultants are entirely responsible for deciding how borrowers are compensated.

Mairone’s current employment at Chase was first reported by The Street, an online news service that covers finance, but the story did not say Mairone was working on the bank’s Independent Foreclosure Review. She oversees hundreds of Chase employees who gather documents for the reviews, according to the former Chase employee. Chase declined to say how many employees Mairone oversees or detail her job responsibilities.

Chase’s main regulator, the Office of the Comptroller of the Currency, said its policy is not to comment on specific individuals or ongoing litigation. “The OCC and the Federal Reserve are monitoring the conduct of the Independent Foreclosure Review to ensure reviews are conducted fairly and thoroughly,” said spokesman Bryan Hubbard.

Jonathan Gandal, a spokesman for Deloitte, the consultant Chase hired for the review, said, “We are conducting an independent review of the files and it is our review and analysis alone that will drive our recommendations. Beyond that, we are not at liberty to discuss matters pertaining to our services.”

Photo credit: AP/Mark Lennihan

Doubts About Independent Foreclosure Review Spread

by Paul Kiel, ProPublica

The idea behind the Independent Foreclosure Review seems simple. During the peak of the foreclosure crisis, the banks broke laws and made errors that hurt homeowners. In response, the government mandated they compensate the victims.

But there is growing evidence some banks are playing a major role in identifying the victims of their own abuses, raising the question of whether the review is compromised by conflicts of interest.

Last week we reported that Bank of America, according to bank employees and internal memos and emails, is performing much of the work itself. Now, a ProPublica examination of contracts that outline what work the banks would do on the review shows that America’s four largest banks all planned to participate heavily in evaluating whether homeowners were harmed. Three of the four banks would even help set how much compensation victimized homeowners would receive.

The four banks — Wells Fargo, Citibank, JPMorgan Chase, and Bank of America — together account for about three quarters of the 4.4 million homeowners eligible for the program.

The review was designed to work like this: Each bank or mortgage servicer would hire an “independent consultant” to evaluate that bank’s foreclosure cases, identify who was harmed and determine how much compensation each victim deserved. The maximum cash compensation a homeowner can receive through the review is $125,000. No money has been awarded yet.

However, the secrecy of the program makes it impossible to know for sure how it’s actually being conducted. After being pushed by Congress and borrower advocates, bank regulators publicly posted the contracts between each bank and the consultant each hired last year to provide the “independent” review of foreclosure cases. It’s these contracts that show that the banks planned to perform much of the work themselves.

Yet the main regulator for the biggest banks, the Office of the Comptroller of the Currency (OCC), said the contracts don’t accurately describe how the reviews work now. “Much has changed,” OCC spokesman Bryan Hubbard told ProPublica.

The OCC did confirm that some banks’ mortgage servicing divisions are coming up with “self-identified findings of harm/no harm” and presenting them to the independent consultants. But the OCC would not specify which banks are doing this.

Moreover, said Hubbard, any such finding by the banks “does not influence the consultant.”

Advocates disagree. “It’s hard to imagine that it doesn’t influence the outcome,” said Alys Cohen of the National Consumer Law Center. “The consultant is supposed to act like an arbiter between the mortgage servicer and the homeowner — except the consultant is not only paid by the servicer, the servicer can put their finger on the scale. Meanwhile, the homeowner is totally in the dark once they send in their application.”

What the Contracts Say

Like Bank of America, the other three big banks hired their “independent consultants” last year. Their contracts all describe a similar process for handling homeowner claims: After a homeowner submits a form detailing the bank’s ostensible errors or abuses, the bank itself would perform a review of the case to determine if the homeowner was victimized by the bank’s own practices. The bank would then pass on its findings to the consultant, which would make the final decision of how much compensation, if any, the homeowner would receive. The program launched in November of 2011, a couple of months after the contracts were signed.

Two companies — Promontory Financial Group and PricewaterhouseCoopers (PwC) — won half of the contracts awarded so far: Promontory is handling the reviews for three banks, PwC for four.

Wells Fargo’s contract with Promontory states that the bank would “process the complaint, prepare a recommended disposition, and provide the complaint, the recommendation, and supporting documentation to Promontory for independent review and decisioning [sic].”

Promontory, which is also serving as the consultant for Bank of America’s foreclosure review, referred ProPublica back to the same comment it made in response to our previous story and declined to comment further. In response to Bank of America internal documents that indicated Promontory would be relying on Bank of America’s analysis for its determinations, a Promontory spokeswoman called the bank’s work merely “clerical” and said Promontory employees analyze the material assembled by Bank of America “independently with no involvement from the servicer.”

Wells Fargo did not directly respond to ProPublica’s questions about whether its employees were analyzing homeowners’ files. Instead, spokeswoman Vickee Adams said the bank’s role “is focused on providing relevant documents and information to the independent consultants, clarifying or confirming facts or findings and providing all details surrounding the events that occurred related to the foreclosure process.”

Citibank’s contract language with its consultant, PwC, is very similar to Wells Fargo’s. “It is the responsibility of Citibank to prepare the case file and conduct the initial review of the complaint,” it states. “Citibank will then forward the in-scope complaints, a report of Citibank’s findings and its proposed resolution to PwC for independent review.”

A PwC spokesperson declined to comment. Citi spokesman Mark Rodgers said only, “We are compliant with the process we agreed to with the regulators.”

Chase’s contract with Deloitte & Touche (D&T) is a little different. It says that the consultant would do its own review of homeowner complaints, while Chase “will also conduct its own review. D&T may consider the results of [Chase’s] review in preparing its findings.”

Neither Chase nor Deloitte responded directly to ProPublica’s questions about the bank’s role in the reviews. “We continue to work closely with the Independent Consultant, the regulators and the consortium [of banks involved in the program] on the final steps in the Independent Foreclosure Review process,” was the entire response from Chase spokeswoman Amy Bonitatibus.

“We are conducting an independent review of the files and it is that review alone that will drive our recommendations,” said Deloitte spokesman Jonathan Gandal. “Beyond that, we are not at liberty to discuss matters pertaining to our services.”

Smaller Banks

The contracts of many smaller banks are different. The contracts of four banks — Ally Financial/GMAC, MetLife Bank, U.S. Bank, and Sovereign Bank — have clauses that say the banks would gather documents for the consultant’s review, but there is no mention of their employees actually analyzing the files and forwarding recommendations to the independent consultants. One bank, OneWest, had no language at all in its contract about bank employees gathering documents or reviewing files. OneWest declined to comment.

The contract between GMAC Mortgage, the fifth largest servicer, and PwC states that GMAC is “responsible for assembling the documents necessary for the review” and should see which files require “immediate action.” (The parent company for GMAC Mortgage, which declared bankruptcy earlier this year, is Ally Financial.)

GMAC spokeswoman Susan Fitzpatrick said the servicer only reviewed complaints when the homeowner had not yet been foreclosed on. The purpose of those reviews, she said, was to postpone the foreclosure sale before it occurred if it appeared that any errors had taken place. Regulators have said homeowners who submit complaints while still in foreclosure will “receive expedited attention.”

GMAC is not reviewing the files of homeowners who have already lost their homes, said Fitzpatrick, and the servicer “will not propose borrower resolutions,” she said. PwC alone makes the final assessment, she said.

PwC declined to comment.

Regulators Differ

The OCC is the primary regulator for most of the 14 banks conducting the foreclosure reviews, but the Federal Reserve oversees four of them. The Fed says that none of its banks are performing regular analyses of the borrower complaints.

But some of the banks overseen by the Fed do have language in their contracts saying the banks themselves would be reviewing the homeowners’ complaints. SunTrust, for instance, has language in its contract very similar to what’s in Bank of America’s. The Fed is also overseeing the review for a subsidiary of Chase, EMC Mortgage Corporation, which has the same language in its contract that Chase does for its main servicing divisions.

Federal Reserve spokeswoman Barbara Hagenbaugh said that regardless of the contracts, none of the servicers it is overseeing are forwarding analyses of the homeowner files to the consultant. “For a brief period of time early in the process, we understand one servicer forwarded a preliminary analysis of files to its consultant,” she said. “The consultant has assured us these files were not relied on for its assessments and those analyses are no longer forwarded.

“Federal Reserve examiners are monitoring the consultants and servicers closely to ensure the process remains independent.”

By contrast, the OCC described a general procedure followed by the banks it oversees that includes the bank analyzing the homeowners’ files and forwarding that analysis to the consultant.

“[The] servicer generally performs its own review of how it administered the file, and will communicate its rationale and self-identified findings of harm/no harm to the independent consultant,” the OCC’s Hubbard wrote in an email to ProPublica. “The independent consultant may review the servicer’s rationale/findings, but will conduct its own review and draw its own conclusions.”

 

Foreclosure Fail: Study Pins Blame On Big Banks

by Paul Kiel, ProPublica.

Over the past several years, we’ve reported extensively on the big banks’ foreclosure failings. As a result of banks’ disorganization and understaffing — particularly at the peak of the crisis in 2009 and 2010 — homeowners were often forced to run a gauntlet of confusion, delays, and errors when seeking a mortgage modification.

But while evidence of these problems was pervasive, it was always hard to quantify the damage. Just how many more people could have qualified under the administration’s mortgage modification program if the banks had done a better job? In other words, how many people have been pushed toward foreclosure unnecessarily?

A thorough study released last week provides one number, and it’s a big one: about 800,000 homeowners.

The study’s authors — from the Federal Reserve Bank of Chicago, the government’s Office of the Comptroller of the Currency (OCC), Ohio State University, Columbia Business School, and the University of Chicago — arrived at this conclusion by analyzing a vast data set available to the OCC. They wanted to measure the impact of HAMP, the government’s main foreclosure prevention program.

What they found was that certain banks were far better at modifying loans than others. The reasons for the difference, they established, were pretty predictable: The banks that were better at helping homeowners avoid foreclosure had staff who were both more numerous and better trained.

Unfortunately for homeowners, most mortgages are handled by banks that haven’t been properly staffed and thus have modified far fewer loans. If these worse-performing banks had simply modified loans at the same pace as their better performing peers, then HAMP would have produced about 800,000 more modifications. Instead of about 1.2 million modifications by the end of this year, HAMP would have resulted in about 2 million.

That’s still well short of the 3-4 million modifications President Obama promised when he announced the program back in early 2009. But it’s a big difference, and a reasonable, basic benchmark against which to compare the program’s failings.

The report does not identify these poor performing banks, but it’s not hard to ID them. A “few large servicers [have offered] modifications at half the rate of others,” the authors say. The largest mortgage servicers are Bank of America, JPMorgan Chase, Wells Fargo and Citi.

Bank of America in particular (the largest of all the servicers when HAMP launched) has been far slower to modify loans than even the other large servicers, as other analyses we’ve cited have shown.

Rick Simon, a spokesman for Bank of America, said the banks’ “home retention results are significant and in line with our industry peers to date.”

The Home Affordable Modification Program (HAMP) paid subsidies to mortgage servicers on the theory that doing so would convince them to embrace modifications. The authors say that voluntary approach apparently didn’t have much effect with the biggest servicers. They weren’t very good at modifying loans before HAMP was launched and weren’t much better after it launched.

The authors wrote that while they can’t be sure why these banks underperformed, they “may not have responded to the program since doing so would involve changing their business focus from processing and channeling payments to actively renegotiating loans. In addition, this may have involved significantly altering their organizational capabilities, such as building appropriate infrastructure and hiring and training servicing staff.”

That echoes on our reporting on how ill-suited the big banks were when it came to modifying loans. The result inside the banks has sometimes been chaos. As one Bank of America employee complained, “The whole documentation collection thing has got to be purposely not funded. Like, I can’t get a fax. I work for a huge bank that has tons of money, and you’re telling me that I can’t get a fax?”

Since HAMP’s oversight has been lax — the Treasury Department, which runs the program, has responded indulgently to mortgage servicers breaking HAMP’s rules — banks haven’t had to worry much about their low modification rates. (You can see this explained with a song. It’s also a big part of our book on the foreclosure crisis.)

A Treasury spokeswoman, responding to the new report, said HAMP had resulted in “one of the most comprehensive compliance reviews of mortgage servicing operations in the country. Servicers in the Making Home Affordable Program are subject to an unprecedented level of compliance oversight.”

The report did have some positive findings concerning HAMP. As we’ve reported, modifications in the program have been more generous to homeowners than modifications done outside HAMP. The authors also found that the program did boost the number of modifications — i.e. it caused modifications that likely would not have happened if not for the program.

The authors also say that HAMP might have induced more modifications if the program had not required such extensive screening of homeowners seeking a modification. From the program’s launch, the administration emphasized that the program wouldn’t help the wrong sort of “irresponsible” homeowner. That emphasis led to requirements that homeowners send in lots of paperwork to prove their income, which in turn further taxed the big servicers’ inadequate systems.

Despite the recent stabilization in home prices and a drop in the rate of homeowners falling behind on their payments, HAMP’s limited impact remains a very relevant issue. Even in the sixth year of the foreclosure crisis, the country remains saddled with an extraordinarily high number of loans in foreclosure — about 2 million. That backlog hasn’t improved much in the last couple years, meaning it’s still hard to forecast when the foreclosure rate will return to a normal level.

Guiding You Through The Government’s Foreclosure Compensation Maze

by Paul Kiel, ProPublica.

If you’re a victim of banking abuses during the foreclosure crisis, the government says it’ll make sure you receive compensation from your bank. It’s a simple idea. But for victims, determining who’s eligible, how to apply, and when you might get a check in the mail isn’t simple at all.

So we built a list of Frequently Asked Questions. It guides homeowners and other readers through the two separate government efforts: the National Mortgage Settlement and the Independent Foreclosure Review.

While both share the goal of providing some compensation to homeowners who were harmed by their banks’ abuses or errors, the two have very different approaches.

The National Mortgage Settlement is a deal struck by attorneys general from 49 states and the federal government with five of the biggest banks, and it takes a pragmatic approach. Instead of trying to calibrate compensation to how badly each homeowner was harmed, officials opted instead for a one-size-fits-all solution. Everyone who qualifies for compensation will get the same amount of money. And the paperwork will be minimal: Homeowners will only have to check a box saying they were harmed.

Even with this simplified process, it will take months before people can expect to see the check in the mail. The best guess now is in the first three months of 2013.

And the check, critics contend, will be small. Exactly how much each homeowner will get depends on how many people claim they were harmed. Officials in charge of the settlement have estimated that 750,000 people will respond, and since $1.5 billion has been set aside, that means each victim would receive about $2,000. If only 500,000 people responded, the payments would jump to $3,000. If a million responded, the payments would drop to $1,500.

The Independent Foreclosure Review is much more complicated. Conceived and overseen by federal banking regulators, the review aims to calculate each homeowner’s exact “financial injury.”

The effort got underway last November when 4.4 million letters went out to homeowners. As of May 24, fewer than 200,000 homeowners had replied, a response rate of just 4.5 percent, according to regulators. Homeowners have until July 31, but there’s no doubt the response is underwhelming.

Housing counselors say a major reason is that homeowners are confused or intimidated by the forms. The mailing was a four-page questionnaire called a “Request for Review Form” that contains 13 questions, some of them specific and technical, such as: “Do you believe you were protected by an insurance policy issued by the servicer or an affiliate that would have made your payments in the event of unemployment, disability, or illness, but did not do so?” Many homeowners thought the letter was a scam, didn’t know how to fill it out, or didn’t understand what they stood to gain from filling it out, according to a recent survey of counselors by the California Reinvestment Coalition.

In addition, regulators have not made the form available online — a protection against fraud, they say. So homeowners must obtain a form marked by an individual code; that form can only be received in the mail or by calling a specific phone number, 1-888-952-9105 (Monday through Friday, 8 a.m. to 10 p.m. or Saturday, 8 a.m. to 5 p.m. Eastern time).

The form is crucial; if a homeowner doesn’t send it in, there is no guarantee his case will be reviewed. (Some cases will be flagged for automatic review — but so far just 142,390 out of 4.4 million.)

Bryan Hubbard, a spokesman for the Office of the Comptroller of the Currency, the main regulator for the biggest banks, said the response was likely to grow because regulators were continuing an ad campaign (such as this one) and would be sending a second form to those who hadn’t responded to the first.

As we reported back when it launched last year, many aspects of the Independent Foreclosure Review aren’t transparent. While some details have been released — such as which companies have been hired to conduct the reviews (see the FAQ for a list) — other key details remain secret. In particular, regulators still haven’t released how they will calculate “financial injury.” Even the form of compensation — cash or something else — remains unclear. An example of non-cash compensation, said OCC’s Hubbard, could be repairing a borrower’s credit report. Hubbard said regulators are developing answers to these questions, but it’s not clear when they will release them, let alone when homeowners can expect to receive any kind of compensation.

The OCC has made one major determination: Homeowners will not be asked to waive any legal rights in return for compensation, said Hubbard.

Given how much remains unclear, we will continue to update our FAQ as the process develops. To help us continue reporting on this issue, homeowners going through the process can fill out our foreclosure questionnaire or contact us to let us know what’s happening.

Excerpt: At Goldman Sachs Servicer, ‘Total Disaster’

by Paul Kiel, ProPublica.

 

Yesterday, we published “The Great American Foreclosure Story,” our latest Kindle Single. The narrative gives readers a comprehensive look at the foreclosure crisis. Part of that story is the government’s inadequate response, particularly its Home Affordable Modification Program, HAMP. In the excerpt below, Chris Wyatt, a former employee of Litton Loan Servicing, then a Goldman Sachs subsidiary, tells what it was like at the company during the program’s first, crucial years.

In 2009, during the first few months of its participation in the program, Litton put tens of thousands of homeowners into trial modifications. That was easy, because nothing had to be documented. Under the agreements, if the borrower made the lowered payments for the three-month trial period, they’d receive permanent modifications.

The hard part was for Litton to collect the borrowers’ papers and crunch the numbers to verify the terms of the permanent modifications. That, he says, “turned out to be a total disaster.”

Wyatt led Litton’s “Executive Response Team,” which was charged with handling customer complaints. Litton employees, overwhelmed and undertrained, frequently made basic errors when calculating a homeowner’s income, he says. HAMP guidelines often weren’t followed, because Litton was “way understaffed” and couldn’t keep up, he recalls. But the worst part was the way Litton dealt with homeowners’ documents, he says.

When homeowners faxed their documents, they didn’t go to Litton, Wyatt says. They went to India, where a low-cost company scanned and filed the documents 2014 but often misfiled or lost them. Wyatt says Litton routinely denied modifications because homeowners had not sent their documents when, in fact, they had.

In a process internally referred to as a “denial sweep,” Litton’s computers would automatically generate denial letters for every homeowner who, according to Litton’s records, hadn’t sent their documents. But untold numbers of those documents had been lost on another continent. Wyatt complained about the practice in multiple meetings with senior management, he says, but managers were chiefly worried about reducing the overwhelming backlog.

In general, Wyatt recalls, Litton was much more careful about granting modifications than denying them. Yes, HAMP gave financial incentives for each modification Litton and other servicers made, but modifications also meant closer scrutiny from the program’s auditors.

As of the end of 2010, fewer than 12 percent of the borrowers who’d applied for a HAMP modification with Litton were granted one. The vast majority of those denials, Wyatt says, were not legitimate. Goldman Sachs’ emphasis on maximizing profits rather than preventing foreclosures is typical of the servicing industry, he says, particularly the larger banks.

“They could have addressed the crisis way earlier. Had companies changed their philosophy and said, ‘You know what? We’re not going to beef up our collections staff; we’re going to beef up our loss mitigation staff.’ Had they done that and come up with loan modification scenarios that were reasonable and put people into more affordable payments early on, we wouldn’t be where we are now.”

A spokesman for Goldman Sachs said the company disagreed with Wyatt’s account but offered no specifics.

You can read “The Great American Foreclosure Story” in its entirety here.