More than 25% of foreclosure review funds went to grossly overpaid consultants
Crony capitalism has replaced free markets in America. We instituted too-big-to-fail banks during the Great Recession partly because the financial interests have become so powerful in Washington that nobody dared suggest we let these behemoths fail and let the bonuses of incompetent bankers disappear.
The relationship between corporations and the government is closer than any time since the late 19th century. Perhaps we could use a little Teddy Roosevelt type trust-busting to clean up our broken financial system. Until the next TR comes along, we get to watch scandal after scandal were former government officials go to the private sector to peddle their influence and get outsized paydays (like Robert Rubin at Citibank).
The latest abuse of power and influence comes from the independent foreclosure review mandated by the bank settlement agreement. A company run by a former government official ended up with almost 25% of the money earmarked for former homeowners “harmed” by foreclosure.
I’m torn on this issue. First, nobody was “harmed” by foreclosure proceedings. All the borrowers who lost their homes were not making payments, and the banks processed foreclosures per the mortgage agreement signed by the borrowers. Any irregularities or problems with paperwork and processing do not override the fact that these people weren’t paying their mortgages. In my estimation, they deserve nothing.
However, since there were so many delinquent borrowers who were forced to vacate their former houses after a foreclosure auction, political pressure mounted to placate these “aggrieved” former loanowners. As a result, the banks agreed to pay a few pennies in guilt money to former loanowners, mostly to get these complainers and their politically opportunistic supporters off their back.
So when it turns out that about 25% of the money that should have gone to pay hush money was instead used to pay a crony capitalist insider a huge fee for accomplishing very little, I don’t know whether to decry the corrupt system or be quietly pleased that whining loanowners didn’t get a few more pennies for not paying their mortgage. I’ll let you sort it all out.
Completed payouts from the Independent Foreclosure Review settlement agreement reached nearly 2.7 million checks valued at $2.4 billion this past week, the Office of the Comptroller said Friday.
Those figures account only for checks that have been cashed or deposited.
To date, 3.9 million checks – valued at $3.4 billion – have been sent to eligible homeowners harmed by foreclosures that occurred back in 2009 and 2010.
The payout is part of the $9.3 billion Independent Foreclosure Review settlement reached by 13 mortgage servicers and financial regulators in January to replace a yearlong probe of foreclosure files enacted back in 2011.
The original settlement included a plan to probe into old foreclosures, looking back for mistakes or issues that harmed homeowners. But the strain and costs associated with investigating loan-level data prompted prudential financial regulators to end the look backs this year and settle for $9.3 billion – allocating $3.6 billion to compensate borrowers.
The first checks from the $3.6 billion went out in April, with the final payout expected mid-summer.
Of the $3.6B allocated to compensate borrowers, how much went to paying the foreclosure reviewers?
Consulting for big banks pays well — really well.
A prominent Washington consulting firm run by a former top U.S. banking regulator was paid $927.5 million to conduct a review of foreclosure files, according to a letter sent by Promontory Financial Group to the Senate Banking Committee.
The settlement earmarked $3.6B to pay the aggrieved former loanowners. Do you think the nearly $1B paid to consultants was added on to this total or taken out of this total?
The disclosure comes as lawmakers on Capitol Hill and New York’s top banking regulator push regulators to more closely scrutinize the relationship between consulting firms and banks, amid concerns that the consultants are not truly independent.
They were probably independent in that they didn’t care if the banks were guilty or not. The banks were going to pay the money one way or another. It was only going to be a matter of how many former owners got to share in the proceeds.
What was more interesting to these consultants was how much of the pie they got to consume themselves. The more man-hours they poured into studying these cases, the more money they made.
Earlier this week, Deloitte LLP’s financial advisory services unit agreed to pay $10 million and accept a one-year ban from consulting for New York-regulated banks to settle regulators’ allegations the firm mishandled its anti-money-laundering work for U.K. bank Standard Chartered PLC.
Under the agreement with New York’s banking regulator, Benjamin M. Lawsky, Deloitte also agreed to overhaul its internal safeguards and create standards to increase its independence from clients.
Federal bank regulators to adopt similar standards, including the disclosure of conflicts of interest and boosting regulators’ monitoring of consultants, says Sen. Sherrod Brown, (D., Ohio), a member of the Senate Banking Committee. The Office of the Comptroller of the Currency and Federal Reserve should “act immediately to create a similar set of written standards for independent consultants,” Mr. Brown wrote in a letter sent Friday to the two regulators.
“We are actively at work on a set of standards governing the use of consultants retained by national banks and federal thrifts to satisfy a regulatory order, and we expect to finalize them in the near future,” said Bryan Hubbard, a spokesman for the Office of the Comptroller of the Currency. A Fed spokeswoman said the central bank would respond to the letter.
The foreclosure-relief settlement has come under stiff criticism on Capitol Hill, with lawmakers questioning whether it adequately compensates homeowners who may have been subject to foreclosure errors. The settlement, initially reached in January, has expanded to 13 banks and is now worth $9.3 billion.
Promontory, which is run by Comptroller of the Currency Eugene Ludwig defended its review of more than 250,000 mortgage files. Regulators shut down the probe, which launched in 2011, amid dissatisfaction about the review’s escalating costs and the time involved.
Konrad Alt, a Promontory managing director who was a top OCC official in the 1990s,
There is the crony capitalist connection. How did this one company get so much work?
wrote that the company “performed several million hours of labor” and “an amount of information comparable in magnitute to all the written materials held by the Library of Congres.”
And was all that work necessary? Or was it a giant rip off where millions of labor hours was billed in an effort to get a giant piece of the settlement pie rather than actually determine if banks were guilty of something or if loanowners deserved anything?
Mr. Alt emphasized that banks, rather than taxpayers paid for the review.
The fact that taxpayer dollars were not directly used to pay these bills probably emboldened these companies to stick their necks out a little farther to get a bigger piece of the pie. If they knew they were ripping off taxpayers, they probably correctly reasoned there would be a more stringent investigation. Ripping off former loanowners isn’t going to generate near as much public outcry.
Other consulting firms also defended their work in letters to the Senate panel. Owen Ryan, a Deloitte LLP audit and enterprise risk partner, said “our independence as a consultant was not influenced in any way by the financial institution.” Deloitte, which was paid $465 million for its work.
James Flanagan, leader of the U.S. financial services practic at Pricewaterhouse Coopers LLP, said his company acted as “impoartial and objective consultants” in the forcelosure reivew. The company was paid $425 million for its work.
In the end, nothing will come of this. The loanowners will all complain about how little they got, but they would have lodged those complaints no matter how large the payout. The crony capitalists will chalk this one up as a victory. It’s unlikely they will repay any of the excessive fees, and they’ve proven that connections with the right people in Washington can make you billions of dollars.
That $2,000,000 came in handy
The former owners of today’s featured property extracted about $2,000,000 in mortgage equity withdrawal in only three years.
Is it just me, or does that seem like a lot of money?
When these people purchased the property, they did put $885,000 down, but they extracted every penny of that money and then some with a $2,450,000 Option ARM and a $1,450,000 stand-alone second in March of 2006. The followed that with a $3,500,000 refi in late 2007 that included another $500,000 HELOC. It looks like a private party extended them even more credit in late 2010 and early 2011. They quit paying their mortgages sometime in 2011, and they were allowed to squat for about two years.
I wonder if they got any of the settlement money?
[idx-listing mlsnumber=”OC13117673″ showpricehistory=”true”]
$2,990,000 …….. Asking Price
$2,950,000 ………. Purchase Price
7/1/2004 ………. Purchase Date
$40,000 ………. Gross Gain (Loss)
($239,200) ………… Commissions and Costs at 8%
($199,200) ………. Net Gain (Loss)
1.4% ………. Gross Percent Change
-6.8% ………. Net Percent Change
0.1% ………… Annual Appreciation
Cost of Home Ownership
$2,990,000 …….. Asking Price
$598,000 ………… 20% Down Conventional
4.74% …………. Mortgage Interest Rate
30 ……………… Number of Years
$2,392,000 …….. Mortgage
$624,683 ………. Income Requirement
$12,463 ………… Monthly Mortgage Payment
$2,591 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$623 ………… Homeowners Insurance at 0.25%
$0 ………… Private Mortgage Insurance
$460 ………… Homeowners Association Fees
$16,138 ………. Monthly Cash Outlays
($2,482) ………. Tax Savings
($3,015) ………. Principal Amortization
$1,076 ………….. Opportunity Cost of Down Payment
$394 ………….. Maintenance and Replacement Reserves
$12,110 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$31,400 ………… Furnishing and Move-In Costs at 1% + $1,500
$31,400 ………… Closing Costs at 1% + $1,500
$23,920 ………… Interest Points at 1%
$598,000 ………… Down Payment
$684,720 ………. Total Cash Costs
$185,600 ………. Emergency Cash Reserves
$870,320 ………. Total Savings Needed