The New Math

My college academic adviser, a math professor whom I now count as friend, is a patient teacher. Years after my having branched off into economics and business, he summarized for me the essence of mathematics. I had missed the overarching point of all those problem sets in the calculus, logic and set theory, linear and abstract algebra. In one of our intermittent phone conversations over the years, the professor shared the following observation of his field:

“Math is about getting the definitions straight, and asking the right questions.”

Reflecting on this insight, I was embarrassed for having failed to reach the same conclusion on my own. The professor’s point validated what I had learned in my business career; specifically, once definitions are set, and their implications fully explored, the limits to our ability to solve even the most complex problems often recede. Conversely, the absence of clear definitions can render the simplest problems insoluble.

The ramifications of this insight are relevant to the challenges facing ordinary homeowners. For example, in today’s mortgage servicing industry, the absence of a consistent definition of “fraud” poses a fundamental problem for a number of homeowners. In a class-action lawsuit underway in U.S. District Court of Massachusetts, several former Bank of America employees accuse the bank of engaging in deceptive practices in its implementation of the government program known as “HAMP” (for Home Affordable Modification Program). Be sure to read some of the testimony in the case document before dismissing the witnesses as disgruntled former employees in search of whistle-blower awards. One of the common threads across affidavits is the firing of employees who objected to the alleged practices, indicating the misdeeds in question were organized, and not perpetrated by a few “rogue” employees.

Coincidentally, the report released this week by Joseph A. Smith, Jr., the national mortgage settlement monitor, appointed as part of the 2012 bank settlement with the U.S. Justice Department and 49 state attorneys general, adds heft to the former Bank of America employees’ testimony. As highlighted on, Smith states in the report, “Servicers have more work to do, both in their efforts to comply with the national mortgage settlement, and to regain their customers’ trust.” (The national mortgage settlement is distinct from the district court case.)

The saga that emerges from the Bank of America HAMP case is heartbreaking. According to the witness testimony, numerous mortgage holders applying for assistance under HAMP filled out every form and made every payment requested of them, and still lost their homes to foreclosure. In some cases, it would appear that the homeowner’s only “sin” was to enroll in the program.

If the allegations leveled by the witnesses in the HAMP case are true, homeowners hurt by the deceptive practices may have a basis to pursue civil damages from mortgage servicers for years to come. While the presumption of innocence is fundamental to American jurisprudence, the witnesses’ sworn affidavits make for compelling if not sickening reading. Any reasonable person reading the testimony will find a fundamental question left begging; specifically, if the alleged actions do not constitute fraud, then what does?

The following excerpts from the case indicate the breadth of the alleged deceptive practices (exhibit-specific hyperlinks from

·         Exhibit #1: Declaration of William E. Wilson, Jr., dated June 5, 2013 (p. 4 of 6)

“Bank of America employed a common strategy of delaying HAMP applications.”

“Approximately twice a month, Bank of America would order that case managers and underwriters “clean out” the backlog of HAMP applications by denying any file in which the financial documents were more than 60 days old.”

“On many occasions, homeowners who did not receive the permanent modification that they were entitled to, ultimately lost their homes to foreclosure.”

·         Exhibit #2: Declaration of Simone Gordon, dated May 23, 2013 (p. 4 of 5)

“Beginning in 2009, I regularly spoke to people who had received HAMP Trial Period Plans, made their trial payments, and who were calling to inquire about the status of their expected permanent loan modification. Using the Bank of America computer systems I saw that hundreds of customers had made their required trial payments, sent the documents requested of them, but had not received permanent modifications. I also saw records showing that Bank of America employees had told people that documents had not been received when, in fact, the computer system showed that Bank of America had received the documents. This was consistent with the instructions my colleagues and I were given. We were told to lie to customers and claim that Bank of America had not received trial payments (when in fact it had). We were told that admitting that the Bank received documents would “open a can of worms” since the Bank was required to underwrite the loan modification within 30 days of receiving those documents, and it did not have sufficient underwriting staff to complete the underwriting in that time.”

·         Exhibit #4: Declaration of Steven Cupples, dated May 15, 2013 (p. 6 of 7)

“I observed that Bank of America reported to the Treasury department and made public statements regarding the volume of loans it was successfully modifying, and efforts it was making to catch up with the volume. Often this involved double counting loans that were in different stages of the modification process. It also involved counting loans that were entitled to modifications as having been modified – only to foreclose on those same loans later. It was well known among Bank of America employees that the numbers Bank of America was reporting to the government and to the public were simply not true.”

Even the most ardent adherents to free-market ideology should agree that the fact that homeowners were struggling under the weight of under-water mortgages did not justify deceiving them into foreclosure under the auspices of a government program intended to enable them to avoid losing their homes. There is a phrase for that type of practice: bait and switch.

Then again, perhaps I am missing the point (again!), and the deceptive practices alleged to have taken place in this case do not constitute fraud in today’s legal and regulatory framework. Not for mortgage servicers, that is. Rest assured, ordinary citizens – certainly, financial planners, investment advisors and their representatives – who engage in deceptive practices in the context of a financial transaction risk legal action including fines and/or prison sentences.

Since these allegations of HAMP abuses surfaced, no executives of mortgage-loan servicers have been subject to criminal prosecution for allegedly engaging in deceptive practices such as destroying documents, lying to customers or falsifying program test results provided to the U.S. Treasury. Instead, their employers have been subject to civil penalties. Employers settle, pay a fine, and admit no wrongdoing.

Time will tell, but the new math that appears to govern the mortgage banking business is antithetical to the mathematics taught through the ages. The clarity, precision, and certainty of math are scarce. Instead, ambiguity, conflicts, and uncertainty abounds.

The national mortgage settlement and its monitoring program are a step in the right direction. However, much more in the way of legal and/or regulatory revamping remains. Taken together, the cited testimony and reports indicate the need for a universal definition of financial fraud, consistent enforcement patterns of such crimes, and the implementation of a transparent legal and regulatory regime that empowers its officials to challenge market participants regarding the integrity of their core business practices.

In the absence of consistent prosecution of deceptive practices by businesses as well as individuals, the scales of justice will continue to tip in favor of businesses like the mortgage servicers. Without a clear definition as to what constitutes a crime, and regulators empowered to question management, the scales of justice will never rebalance.

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