Yves here. The OCC made the not-surprising confession in Senate hearings last week that if it had to do them all over again, it would have handled them differently.
On the assumption that the OCC is sincere in its repentance, Michael Olenick offers one way to have executed the reviews at vastly lower cost than the botched process that resulted.
However, there is no particular reason to believe that. As we and other observers said from the announcement of the Fed and OCC consent orders, the IFR was never intended to be a serious exercise. The approach of having bank-friendly consultants hired by the banks assured a compromised outcome. Sadly, Sherrod Brown unwittingly gave the OCC a pass on this issue:
Mr. Stipano, OCC: The critical factors in our minds, first and foremost, is that any consultant that’s brought on have the right resources and expertise to do the job. I mean, that’s separate really from independence, but nonetheless very important. On the independence point, it is not realistic in most cases to expect that independent consultant would have no prior ties to the institution. I mean, they’re used so widely throughout the industry that most consultants that have the resources and the expertise have done work before. So trying to find consultants that are totally pristine in that regard is not really practicable…
Sen. Brown: We’re not – you used the word pristine. We don’t expect pristine here. That sounds too difficult.
Notice that it is taken without question that managing this sort of project requires special expertise. It did, but the regulators focused on the wrong kind. You needed serious real estate knowledge. Bank of America’s temps at Tampa Bay, who were paid $23 to $30 an hour, had vastly more relevant knowledge than better credentialed (fancier schools and degrees and big corporate work experience) contract consultants hired by Promontory for $60 and hour that were believed to have been billed out at $150 or more an hour. And while we are on the subject of expertise, as we discussed in our whistleblower series at some length, Promontory was lacking both in any relevant expertise (it knew bupkis about mortgages and servicing) and in the headcount to do the job. Yet thanks to its incestuous connections to the OCC, starting with the head of the firm, Gene Ludwig, having been a Comptroller of the Currency, its ability to do the job was never questioned.
By Michael Olenick, a regular contributor on Naked Capitalism. You can follow him on Twitter at @michael_olenick
The critical factors in our minds, first and foremost, is that any consultant that’s brought on have the right resources and expertise to do the job. Daniel P. Sipano, Deputy Chief Counsel, OCC
Years mired in the world of foreclosure fraud leaves one aghast at the level of sheer chutzpah people exhibit. It was difficult, in this context, to believe that the OCC could sink to a new low – especially now that Julie Williams, Chief Counsel of the OCC, exited her regulatory role, through the revolving door of course, and straight to Promontory, a firm she helped enrich enormously by approving it for three large consulting projects in the Independent foreclosure review. But the OCC managed to do the impossible last week in continuing to claim that the consultants they’d approved, and who demonstrated themselves incapable of managing the foreclosure reviews, were actually up to the task.
Some background: I work with computers, creating software that does smart things, usually with the goal of helping smart people. This year I’m fortunate enough to be working with a well-known business school. Last year it was a database of mortgage remittance reports. The year before that it was a systematic study of court cases enabling the ACLU to prove due process violations. I’m guessing readers get the picture…
In between some of those projects I thought I’d try something different and created a web-based program I called Find the Fraud. I uploaded a couple hundred thousand iffy documents, cross referenced to the data behind them, and put together a framework for people to systematically identify problems.
Despite my best intentions, the software never really caught on, probably because while the whole thing sounds cool it’s actually mind numbingly boring to systematically click through documents identifying patterns. Still, the software worked, guiding people first through one level review, then another depending upon what the first found, then another. We could create any number of reviews, and set things up so that reviewers were only presented with documents that were pertinent based on the results of past reviewers.
Listening to the OCC, the Federal Reserve, and the consultants testify last week you’d think I’d created the equivalent of cold fusion in my spare time, then pitched it after a few friends received electrical shocks from touching my beaker. Of course finding the software would have been brutally complex: thanks to it being in the prior intro to my NC articles it required searching for exotic keywords like “foreclosure fraud software.” Since nobody at the OCC knows how to use a search engine, and I’m sure not a single person there noticed any of my posts, it makes sense that nobody ever asked for help.
Creating the technology and frameworks for the reviews, the official line goes, is staggeringly difficult and requires enormous organizations. Or maybe not. IFR mega-consultant Promotory has only about 400 people, total, and many of those are high-level types whose jobs seem more like lobbyists than fraud auditors. It’s impossible to envision, say Julie Williams or Mary Shapiro picking through loan level files to see if the affidavits of indebtedness add up, or if the line items even make sense.
Actually there’s no need to imagine Julie wearing a green accountants visor because it didn’t happen. We know that the vast majority of “consultants” who actually touched loans were temps. An inside source told me about 1/3rd were paralegals – some with experience in this field but many without – while the rest had backgrounds more aligned with the culinary arts. Billing the Barista at $250 hour, while paying them their old wage, sounds like a quick way to make a couple billion dollars while finding essentially nothing, which is exactly what happened.
Radical idea though it might be the OCC could have hired me, or somebody like me, or a few of us, and had us quickly build out the technology and processes for these reviews. They could have simultaneously hired somebody who knew about staffing agencies to find both the temp reviewers and, being temp agencies, set up the rest of the infrastructure. They could have even found young lawyers who know state law – it’s a prerequisite of getting a license to practice – to double-check the work of the paralegals for state law compliance.
The OCC reports they reviewed 100,000 files at a cost of $2 billion, $20,000 per file. It’s impossible to ignore that many of the foreclosed properties probably sold for substantially less than that price at auction. Twenty thousand dollars could provide a substantive down-payment for those families rather than a month of country club dues for the consultants.
Left’s figure out how long it takes to review a file. I’ve been told by top-notch foreclosure defense lawyers two hours of lawyer review, max, plus a few hours of paralegal review depending on how messy things are. I’ll estimate high and dedicate eight hours of admin/data entry, four hours of bookkeeper review, four of paralegal review, and two for attorney review. I’ll pay an average of $15/hr. for data entry clerks, $26/hr. for bookkeepers and paralegals, and $85 for lawyers (these are junior lawyers and the legal field isn’t exactly booming right now: document review attorneys routinely work for about $35/hr.). Then I’ll mark the fees up three times because that’s the way it’s done.
Those extremely conservative figures – especially on time – comes to a cost of $498/file and a billing rate of $1,992/file. That comes to $199.2 million for our 100,000 files, including $149.4 million in profit, for about a years work. Not A Bad Gig.
We know reaching the borrowers and attracting their attention was difficult so let’s send them up to two certified letters; two more certified letters than they sent. We can have a professional designer create them so that they’re readable, and maybe we’ll even use some language like “Official Government Communication: Criminal Penalties for Misuse” to wake them up. At full certified first-class rates – this crowd doesn’t do discounts – and a steep $2 per piece printing budget, that comes to about another $49.5 million, and people may have noticed and answered the letters.
Finally there’s the technology. Let’s charge per file, since pay-as-you-go is the rage with tech lately. 100,000 files at a steep $200/file comes to another $20 million; let’s double that, with a setup charge, because money seems to be no object and throw $40 million to the techies.
I know I skipped overhead but some is baked into the temp rates and the rest is what the $150 million in profit is for, which would probably still leave many, many millions for whomever landed this project.
So the whole review could have cost $284.7 million. Since we’re padding everything else let’s round that up to $300 million, about 15% of the figure the consultants actually charged. Oh yeah, this process – unencumbered by managers shopping for their private islands – may have even found some fraud.
Realistically my figures are ridiculous. Nobody pays a 300% markup when purchasing 225,000 FTE days of labor, nor does a one-time-use document management system with business rules attached cost $40 million. Two dollars per letter for printing costs, when producing about four million – for material that is basically a government form, without postage – is so steep no printer would dare bid that high. I know the USPS is ailing so maybe they can be paid full price for the eight million certified mailings, though I’ve baked in an assumption the entire second mailing is necessary: that nobody answers the first. However, even when using these inflated rates, and marking that up, we get nowhere close to the figures these firms charged.
When the usual suspects are being investigated for fraud it may not make sense to rely upon the same people, using the same practices, and the same business processes to investigate the fraud. I’m not surprised that they only found only negligible fraud, nor that they were massively overpaid to do so; overcharge and under deliver seems to be the rallying cry of high finance. But when regulators claim, with a straight face, that they had no other alternative we’ve reached a new low in honesty or, more accurately, the lack thereof.