Two days ago, the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) issued its quarterly report to Congress on the status of the TARP program, which included a damning assessment of the management of the Home Affordable Modification Program (HAMP).
This report could become the catalyst for big problems for the money centers, which is where the majority of the residential mortgage loans that are eligible to be considered for loan modifications are held.
There are three principal organizations involved in the administration and oversight of the federal government's loan modification programs, all of which were born out of the last housing crisis.
The first is the Making Home Affordable Program, which was created by the current executive administration and is managed by the Treasury Department, which is part of the executive branch.
The second is SIGTARP, which was created by Congress and reports to Congress as a watchdog for the legislative branch in the administration of TARP.
The third is the Consumer Financial Protection Bureau (CFPB), which was created by Congress as a part of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The CFPB is a part of the Federal Reserve and is the federal organization to which individual consumers can lodge grievances against banks and other financial firms, including the loan modification programs.
In short, the banks administer and manage the loan modification process, and the Treasury Department (executive branch and fiscal authority) funds it, while the Congress (legislative branch) and the Federal Reserve (monetary authority) monitor compliance by the banks and Treasury Department.
Through the SIGTARP quarterly report, the Congress has now called out both the Treasury Department and the banks for improprieties in the administration of the federal loan modification programs that have resulted in millions of mortgagors being inappropriately, and perhaps illegally, precluded from being allowed to successfully complete a loan modification.
One of the most important issues with respect to this is that it is a top-down, vs. bottom-up, critique of the administration of the programs by the banks and Treasury Department.
This is an assessment that is independent of any bottom-up critique of the administration and administrators of the program that would have come from the CFPB operating in its capacity as a consumer advocate, and that's critically important.
On one side of this program is the individual borrower/homeowner. On the other is their lender and the Treasury Department.
The critique of the lenders and Treasury Department by another branch of the government, independently from any complaints lodged by individual borrowers through the CFPB, is quite similar to the IMF intervening on behalf of Greece in assessing that the country's creditors are not dealing with Greece fairly.
In this case, the SIGTARP quarterly report could easily become the catalyst and support for state governors and their attorneys general to pursue lawsuits against the lenders and the federal government (Treasury Department) on behalf of their constituency that's been affected by this impropriety.
This would be a similar tack to that pursued by the individual states against the tobacco industry a generation ago that resulted in the largest class action suit and settlement in history in 1998 at about $206 billion with a payout period of 25 years.
It is most logical that such is already under consideration in many states following the SIGTARP report release and may be viewed as well as support for the eminent-domain push by the states against the lenders for the same reasons, which I wrote about two years ago in the column, "Eminent Domain Spells Trouble for Banks."
I've written many columns over the past several years about the treatment of nonperforming mortgages by the banks.
I also have had firsthand professional experience in dealing with the lenders over the past several years with respect to loan modifications and used to lecture on the subject for a company that provided education to real estate professionals on the specifics of the multitude of loan modification programs that were available at the time.
My professional assessment has always been that the programs were introduced as political cover in an attempt by politicians at the national level to show they were doing something to address the problem but without ever expecting to budget enough for the Treasury Department to fund the programs.
The SIGTARP report may be the beginning of blowback that could have consequences for many parties, but most importantly to the subject of this column, for the money centers and their shareholders.
