There is a big discrepancy between the strong test results to date and the massive number of consumer complaints, says Joseph A. Smith Jr., the settlement monitor. Consumers have filed more than 112,000 complaints with regulators, servicers and housing counselors since October 2012, mainly claiming that servicers are still too slow to determine if borrowers are eligible for loan modifications.
"Borrowers still don't know what the rules of the road are and how long will it take for a servicer to look at a loan mod application and decide whether they get relief or not," says Smith.
The biggest potential challenge for servicers could come in April when four new tests go into effect that specifically address consumer complaints about shoddy billing practices, lax communications, and widespread denials of loan mods.
The results of those tests won't be available until the end of 2014 so it may be some time before it becomes clear how well servicers are complying with the servicing requirements in the settlement. If servicers are deemed to be lagging they would have to fix the problems and face fines if issues are not addressed.
"I think they've made some progress but it's not mission accomplished," says Smith, the former banking commissioner of North Carolina. "The acid test ultimately is whether the great body of public opinion believes we're doing the right thing."
Smith admits it's unclear whether the testing process will ultimately be deemed a success by borrowers.
"I'm not saying the new metrics will address all the problems, but they have a greater ability to stop the music, to stop foreclosures and dual-tracking," he says, referring to the process by which distressed borrowers can still be put into foreclosure at the same time that they are trying to get a load mod.
Smith is under pressure from borrowers and the state attorneys general who negotiated the February 2012 settlement to ensure the servicers are held to its terms. He has listened to borrowers describe what he calls "absolute horrific, terrible, unhappy situations," in which they have fallen behind on their mortgage payments and "are caught up in a web and can't get out."
Meanwhile, advocates for borrowers continue to pressure servicers by picketing banks' headquarters and delivering petitions signed by thousands of consumers. Advocates say the monitoring process is too weak and that the protracted testing period has worked against homeowners trying to save their homes from foreclosure.
"The experience of lots of borrowers out there is that banks are still slow to respond, they lose peoples' paperwork and give consumers the runaround," says Kevin Whelan, campaign director for the Home Defenders League, a consortium of nonprofit housing advocacy groups. "It doesn't seem like banks have fundamentally altered their behavior in exchange for the liability they were released from in the settlement."
The $25 billion mortgage settlement, which grew out of the robo-signing scandal, required that the top five servicers—Bank of America, Citigroup, JPMorgan Chase, Wells Fargo and Ally Financial, formerly known as GMAC—dole out $20 billion in consumer relief in the form of principal reductions, refinances, loan modifications and short sales directly to borrowers.
Smith also has been auditing the banks' progress in meeting that $20 billion monetary requirement, which all of the servicers say they've completed. But there has been widespread criticism that the banks gave out the vast majority of aid in the form of short sales and forgiveness of second liens, while just 20% of relief was in the form of principal reduction of borrowers' mortgages.
(The servicers paid another $5 billion in cash to individual states and the federal government when the settlement was signed last year.)
Mortgage servicers had previously been subject to little or no regulation, and when the housing crisis hit, they were overwhelmed by requests for loan mods.
"We have gone from a model that was not monitored ever before to a process that is monitored on a second by second basis," says Ron D'Vari, CEO of New Oak Capital, a New York advisory firm that oversees servicing for private label investors. "They are trying to bring discipline to a process that really was not measured before, and they are working damn hard to get it done. But it's complex and unfortunately, because of mistrust, it has to be very precise."
In a compliance report released in December, Smith identified just seven failed tests in the first half of the year by three servicers—B of A, Citigroup and JPMorgan Chase—out of nearly 250 tests conducted so far. Wells Fargo, the largest servicer, passed all of the tests with no failures.
None of the failures identified so far have resulted in any harm inflicted on borrowers.
But a key issue is the long lag time of nearly six months between the testing and the monitor's reports.
The monitor established 29 original tests that would determine whether the banks were complying with more than 300 servicing standards. The tests were phased in over the course of a year, and the banks were able to pick which tests they wanted to do first, allowing them to choose the low-hanging fruit that was easily fixable, according to two accountants with independent oversight of two servicers.
So it won't be until June 2014 that Smith will have a year-over-year comparison of banks' compliance with all the servicing standards.
Smith had to singlehandedly set up a quasi-regulatory agency in just six months with extensive work plans, overseen by 270 independent accountants and advisors. So far, the banks have paid $41 million for the settlement monitor's work. The majority of the money has been paid to professional advisory firms including BDO Consulting, which developed uniform standards for determining whether the banks were in compliance.
Smith says most of the criticism has been about the structure of the settlement, not how he is overseeing it.
"I'm not pimping for the banks, I'm not their lawyer," Smith says. "I'm putting stuff in the public domain about how this process works. I'm proud of it."