In the wake of the financial crisis, banks mishandled foreclosures on such a scale that regulators stepped in. Led by the Office of the Comptroller of the Currency, they ordered banks to hire independent outsiders to identify homeowners who were wrongly foreclosed on and to provide compensation.
Instead of righting a large-scale wrong, however, the "lookback" reviews have become nearly as controversial as the original servicing blunders. Consumer advocates have blasted the reviews as lacking in independence. They allege that regulators have allowed banks to subvert the program by choosing their reviewers, weighing in on whether borrowers were harmed and even appealing consultants' decisions.
Obscured in the feuding is an issue potentially even more troubling than the questions about the consultants' independence: the cost of running the reviews has spiraled out of all proportion to their potential benefits.
Designed to compensate wronged homeowners, the review programs are almost certain to deliver several times more cash to the consultants overseeing them. Bankruptcy filings by ResCap, the former GMAC mortgage servicer slated to be acquired by Ocwen, state that the company will pay consultant PricewaterhouseCoopers $12,500 to review each of 20,000 loans for a total cost of a quarter-billion dollars. Yet ResCap expects to pay only $35 million to $60 million to harmed homeowners.
PwC employees working on the review are billing between $235 and $630 an hour, depending on seniority. The auditing firm declined to respond to emailed questions on the cost and its procedures.
Other servicers appear to be paying foreclosure reviewers similar fees per file, and the OCC has offered no reason not to use ResCap's filings as a proxy for the costs of its peers. The massive bills being incurred indicate that the banks aren't calling the shots, industry sources argue — the institutions are simply following orders and footing the tab for a program that has gone off the rails
"This is Kafkaesque," says an industry source who requested anonymity to avoid angering the OCC and independent reviewers. "The reviews don't provide any closure [to borrowers], and their cost is going to be orders of magnitude beyond what banks pay out."
Many of the independent foreclosure reviews' alleged flaws can be seen in the Bank of America loan lookback, run by consultant Promontory Financial Group. A spokesman for the bank offered a general description of its review operation for this story, but directed questions about the costs and design of the program to the OCC and Promontory.
The OCC and Promontory concede that performing the reviews has required more work than anticipated, but say that the disarray in banks’ records is at least partly to blame. The reviews are essential to compensate borrowers and restore confidence in the mortgage market, they say. The cost of the review for banks is not among the OCC’s concerns,Deputy Comptroller for Large Banks Morris Morgan wrote in response to emailed questions.
"The OCC has two primary objectives," he wrote. "One is to determine what was broke and to fix it. The second one is to ensure eligible borrowers receive a fair and impartial review ... Servicers will need to bear the necessary costs."
The Federal Reserve, which is overseeing the ResCap engagement and three smaller servicer reviews, declined comment.
Consumer advocates are not buying that the process is functioning as it should. Instead, they argue that regulators have bungled the job of creating an effective foreclosures revpiew and compensation process.
"A system to compensate the maximum number of homeowners as efficiently as possible would not look at all like the system that's in place," says Diane Thompson, of Counsel for the National Consumer Law Center.
Independence has been a sticking point in the foreclosure reviews since their start. The OCC and Fed gave banks the responsibility of selecting, and paying, independent consultants to design and implement foreclosure reviews.
The list of entities that won the work included mortgage due diligence specialists, like Clayton Services, auditors such as Deloitte and PricewaterhouseCoopers, and banking industry consultants Promontory and Treliant Risk Advisors.The hires reflected the scarcity of independent entities that both understood mortgage servicing and could be expected to handle the scale of the review projects, industry sources argue.
"They're all big companies doing financial services consulting," says one such person. "Are they really independent? No. Of course not."
Most of the consultants declined to address concerns about their relationships with banks. Promontory, which has done consulting work for Bank of America in the past, was the only one contacted by American Banker that was willing to discuss its process. It has no other current engagements and says it's now in everyone's interest to clean up past mistakes.
"Bank of America has been entirely open with us," says Elizabeth McCaul, the head of Promontory's New York office and an architect of its foreclosure review program. "They [bank executives] have not made it difficult for us to do the review despite the intrusiveness of it."