Mortgage Settlement Monitor Hires Firm that Has Worked on Countrywide Matters

By Michael Olenick, creator of NASTIACO, a crowd sourced foreclosure document review system (still in alpha) and Yves Smith

Sadly, there is a reason that the Obama Administration believes that any problem can be solved by better propaganda. It often plays out that way. Consider the horrorshow of the mortgage settlement. Even media outlets generally friendly to the Administration, like the New York Times, have found it impossible not to ‘fess up to the fact that Team Obama failed to implement serious measures on the housing front, and the resulting economic damage has put Obama’s reelection at risk. Yet these accounts, in keeping with Democrat efforts to put the best face possible on failed policies, omit how the Administration made saving bank balance sheets a top priority, and airbrush out the biggest sop to the banks, namely, the “get out of liability for close to free” card of the mortgage settlement.

But even with the settlement designed to favor banks, its monitor, Joseph Smith, looks to be failing to make sure even these weak terms are adhered to. It appears that Smith is either unable interpret conflict of interest properly or is simply unwilling to implement the settlement’s clear requirements.

Curiously, most commentators skipped over the part of the first report of The Office of Mortgage Settlement Oversight that was highlighted at the front of the report, that of the selection of a consultant that will serve as their primary oversight firm, BDO. Yet the choice of this firm and the partner managing this engagement, Anthony M. Lendez, appear to in violation of the conflict of interest provisions of the settlement.

According to his resume, Lendez worked for “outside counsel for Countrywide and its officers and directors related to various accounting issues, including allowances for loan losses, residual interests, mortgage servicing rights, and repurchase reserves” from 2008-2010. Countrywide was acquired by Bank of America in 2008, and Bank of America is one of the five primary banks involved in the settlement. Lendez himself made much of his experience in working for mortgage servicers when Smith announced that BDO had been chosen as the primary professional firm working for him on oversight of the settlement. Per a June 4, 2012 press release from the Office of Mortgage Settlement Oversight:

BDO has significant mortgage industry experience servicing large retail mortgage lenders and financial institutions, having conducted related assessments and investigations subject to regulatory oversight,” added BDO Consulting partner Anthony M. Lendez. “Having managed numerous multi-disciplinary, multi-firm project teams to complete complex and time-sensitive matters, we believe our experience and qualifications will provide value in assisting the monitor.

Repeated phone calls to Lendez, to clarify the Countrywide engagement and others, went unanswered. However, Lendez’s biography shows a long list of other prior engagements, all of which are through counsel for the companies involved and include:

American Home Mortgage in 2010

Barclays Bank, which has since admitted to manipulating the LIBOR rate governing virtually every adjustable rate mortgage, in 2010

Morgan Keegan & Company on “accounting principles applicable to the valuation of investments in structured products, including collateralized debt obligations, collateralized mortgage applications, home-equity backed securities, various types of asset-backed securities, and certificate-backed obligations,” in 2010-11

Prudential Financial, regarding, among other things, “other-than-temporary impairment (‘OTTI’) of asset-backed securities (‘ABS’),” in 2010-11

The former Officers of Fannie Mae, regarding “various accounting issues, including alleged earnings management, debt repurchases, REMICs, credit issuance, and low income housing tax credits,” in 2007-2008

The former officers and directors of Enron, for “analyses of the accounting for numerous complex transactions and the independent auditor’s consideration of those transactions,” in 2003-6

This history does not square well with the requirements of the settlement. The Bank of America consent judgment, which is substantially similar to the other consent judgments, requires that (emphasis ours):

[t]he Monitor and Professionals (Lendez and BDO) shall not have any prior relationship with the Parties that would undermine public confidence in the objectivity of their work… (Bank of America Consent decree, Appendix E-2, Section 3)

Joseph Smith,indicated he was aware of Lendez’s work for Countrywide and sees no conflict of interest. He answered in a written statement minutes after Lendez’ biography detailing the conflict was emailed to him (emphasis ours):

BDO disclosed the engagement during our vetting process. The relationship in question was litigation consulting services related to accounting issues, including allowances for loan losses, residual interests and mortgage servicing rights, among others. [Lendez] was retained by counsel for Countrywide. It was a discreet and completed engagement and it was an immaterial portion of BDO’s revenue. We reviewed this engagement with BDO and I determined, based on my review, that it did not violate the conflict of interest provision in the consent judgments, and that there are no current conflicts.

It is difficult to find Smith’s hair splitting about Lendez working for the attorneys for Countrywide/BOA, as opposed to working directly for Countrywide/BOA, persuasive. First, the majority of foreclosure fraud was committed by attorney’s and agents for the banks, rather than the banks themselves. Under Smith’s reasoning the banks’ behavior is buffered by use of lawyers. But if that same reasoning were used initially there would be no settlement. Second, if the normal conduit for work for BDO in this space is indeed through counsel representing banks, this does not alleviate the conflict of interest concern. The major law firms that might direct financial-services-relatated business to BDO work virtually without exception on the side of banks. So how motivated do you think BDO will be to ask tough questions?

Third, Smith contends that the work that Lendez touted as proof of BDO’s expertise really wasn’t that meaningful to the firm in economic terms, and in any event, BDO didn’t have any current conflicts. While that may be true, that is not necessarily germane. This sort of work was significant to the Lendez’s P&L. And it is also hard to imagine that at least Lendez, and perhaps others at BDO, are seeking to get more assignments from mortgage servicers.

Finally, besides being disingenuous the distinction is also pointless because the settlement requires disclosure of “any known current or prior relationships to, or conflicts with, any Party, or any Party’s holding company, any subsidiaries of the Party or its holding company, directors, officers, and law firms.” (Bank of America Consent decree, Appendix E-2, Section 3(a)). That is, the Attorney Generals’ thought of this argument – the advisors worked for the lawyers of the banks, not the banks themselves – and specifically rejected it. Maybe Smith believes Lendez’ statement about “significant mortgage industry experience,” met the requirements of disclosing prior conflicts of interest. If so, that hardly seems adequate.

Understand what this means: The conflict language was strong and unambiguous. Smith could have chosen to waive conflicts, but the settlement allowed no discretion in not disclosing the conflicts. He also did not have discretion to argue the Countrywide work was an insignificant part of the revenue; there’s no provision for that at all. In other words, even at this early stage, Smith, who has been tasked to enforce the mortgage settlement agreement, is refusing to comply with it.

Moreover, numerous commentators, including this blog, criticized the fact that the overwhelming majority of the borrower “relief” attributed to the settlement comes from short sales. The servicers will be receiving settlement credits for a portion of the loss on the mortgage balance (which in most cases are losses to investors, not the bank). But as Dave Dayen highlighted:

This “relief” being described won’t even all count toward the settlement. But that didn’t stop the oversight monitor from including all the short sales in his analysis. Because it looks good to have a really big initial number.

This episode raises additional questions: was it really necessary to hire an outside firm to do this work? The monitor isn’t required to produce a report until the first quarter of 2013, and aside from providing Obama with a bit of pre-election PR, it hardly seems worth having jumped the gun to issue what is largely a puff piece. As Adam Levitin noted:

I don’t want to be too critical, but I hope future reports are more informative. Most of the report consists of summarizing the settlement. There is a lot of data, but almost no analysis. Apparently the report from the first quarter of 2013 will evaluate performance under the settlement by 29 metrics. We’ll see how demanding that evaluation is.

Given the 3:1 or greater markups of staff pay by consulting firms, the number of seasoned people with banking, accounting, and regulatory experience who are un or under employed, and that Elizabeth Warren was able to “stand up” a Federal agency, a much bigger operation than a settlement monitor, in seven months, it looks like Smith took the easiest way out in picking one firm to do most (all?) of the settlement nitty gritty, rather than setting up a de nov o operation or parsing out narrower, lower-skill tasks out among more firms.

Given this troubling situation, Smith needs to answer these questions:

How much is Smith getting paid to act as the settlement nonitor?

Does he have any prior relationship with BDO?

How did contract get awarded?

– Did they do a traditional request for proposal and require all respondents to report on conflicts of interest and submit mitigation plans?

– Did any applicants have zero conflicts?

It is possible that Smith, whose previous experience is as the state banking regulator for North Carolina, a bank friendly state, and a general counsel for a bank, has spent so much time in close proximity to the regulatory revolving door that he has lost all sense of what conflicts of interest look like. If so, he is yet another indicator of the level of corruption among our elites. Just as we’ve had a general defining down of deviancy, so too, apparently, we’ve had a liberalization of what is considered to be a conflict.

But it is far more likely that Smith was chosen precisely he would take a bank-friendly approach to enforcement. Thus his willingness to ride roughshod over a clearly written provision of the settlement agreement meant to reduce bank influence over enforcement is a harbinger of things to come.