PricewaterhouseCoopers Paid $1 Billion as Consultant on Mortgage Settlement

Francine McKenna has a useful column in American Banker about the 50 state AG mortgage settlement.

The foreclosure reviews are a “look back” at the past. No one hates admitting and paying for mistakes more than banks. The “independent consultants” selected by the banks in November, after more than six months of contract negotiations, haven’t calculated any final damage numbers yet. It wasn’t until June of this year that, 15 months after the consent orders were signed, regulators finally issued a “financial remediation framework” prepared by the consultants.

Rest assured the consultants are getting paid, even if borrowers are not.
Settlement monitor Joe Smith continues to emphasize strong deference to bank executives. Back in April, Smith said the following.

“If litigation against the banks continues and plaintiffs’ claims continue to contradict what I’m hearing from bank leadership,” Smith says. “I’ve got to pay attention to it.” 

In other words, if bank executives continue to lie to him, he might have to start paying attention to the lies. This is an interesting and important perspective, because it comes from someone who is considered to be on the left side of the aisle. My liberal Democratic sources like Smith; he was the banking commissioner of North Carolina, where Bank of America was headquartered, but he had a reputation as an ally of community banks. He also investigated predatory lending practices, and had a reputation as a fair-minded regulator. He’s part of the left-leaning slice of the financial establishment, and was appointed to head the Federal Housing Finance Agency a few years ago (though the Senate wouldn’t confirm him). Since his appointment to the position as settlement monitor, his behavior has followed the basic template of liberal reformers. He basically supports the existing leadership of the regulatory and banking worlds, while seeking slight modifications of their behavior. For instance, as settlement monitor, Smith chose not to build a public regulatory agency, he chose to build a private one that would not be subjected to Federal pay caps, Freedom of Information Act requests, and ethics and campaign contribution restrictions. This firm (BDO) serves as he put it, as “his eyes and ears and arms and legs” in the banking landscape.
 

Smith also has a deregulatory mindset. Here he is just a few days ago.

“The thing the policymakers need to be discussing is the cost of compliance with a necessarily more rigorous mortgage regulatory system,” he says. “I am not saying it’s wrong to have those costs. But I think the banks are going to reduce the number of loans that they are making and reduce the number of counterparties from whom they buy loans. The level of competition in the marketplace overall” will decrease.

“There is a chance,” Smith says, “that the cost of this will reduce competition in the marketplace, and we don’t know how that will affect the availability and cost of credit in the future.”

Smith figures the standards will be loosened, eventually.

“I think the standards we’ve got are effective to address the abuses we’ve had in the past,” he says. “I am not entirely convinced all of them will be needed going forward and can’t be streamlined over time. But it’s not the time to streamline yet. Let’s get them in place and see what works and what doesn’t.”

According to American Banker, the big banks are going to end up paying “$5 billion to consultants just to find out how much they owe.” That’s a large amount of money, and enough to establish a real temporary public agency that could actually enforce real servicing standards. By way of comparison, the Consumer Financial Protection Agency has a 2013 budget of less than a tenth that. Obviously you can’t scale a massive multi-billion dollar agency that quickly, but you can certainly get something up and running that doesn’t allow the banks to regulate themselves. What is necessary for a regulatory model that doesn’t have the obvious conflicts of interest and lack of accountability or competence so clearly in evidence with the settlement monitor is a new ideological framework that prioritizes adversarial relationships between banks and regulators, and a clearly delineated personnel separation between public and private entities.

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