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Joseph Smith was the North Carolina Banking Commissioner until early this year. The $25 billion mortgage servicing settlement with Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial was being finalized, and he was asked to be its monitor. He remained quiet for months during the negotiations, trying to figure out what the rules were going to be like for the rest of us. As of April, when this interview took place, he had an office in Raleigh, N.C., and was just about to get his second full-time employee. So, say to hello to Mr. Smith.
He'll take it from here, and this is what he has planned over the next four years.
HousingWire: First, How did you get the job?
Joseph Smith: I was called by my friend and colleague early this year (North Carolina) Attorney General Roy Cooper. He asked me was I interested in being the monitor, and I said it was not something I was expecting, and we talked through some of the details. I said I would think about it, and then I got a call from my friend AG Tom Miller (of Iowa, who headed up the AG task force) asking the same question.
I was told I had to give up my job as N.C. commissioner of banks. I couldn't do that job and this job, and that turned out to be absolutely right for all kinds of reasons not just workload. I was told I didn't have to move, and that was the right answer to that question. After some further discussion, I agreed to accept the position. A month later I left the position of commissioner of banks on the assumption that they were close to an agreement, and it was going to be filed quickly. As it turned out it took a bit longer than I anticipated, but quite candidly it allowed me more time to prepare, which has really been very helpful.
HW: What sort of infrastructure do you have in place now?
JS: I've set up a nonprofit corporation. Its sole purpose in life is to be the administrative arm of my operation and take money in and pay money out, and have audited financial statements and that will be transparent for sure. I've retained a couple of law firms and two accounting firms to advise me in just preparing for all of this. I actually have hired our second full-time person, and we may hire some more folks. A small staff here now, mainly retained from law firms I've talked about. I think I'm going to have a significant amount of people working for me, and I think many are going to be from accounting and other services firms that I've retained rather than being full-time employees.
I met with AGs in early March, a spring meeting in Washington, and then met the following week with the banks in Charlotte. I've met with three of five banks since that time and a meeting with the fourth of five in Raleigh, and then I'll meet with the last of the banks by the middle of May.
Those meetings we've generally walked through a detailed but still very general scope of their operations: Where they're located, what kind of loans they've got, how many are portfolio, how many are in securitization and how many are GSE guaranteed and so on. Also, their organization chart and what they're thinking about how they'll do their own internal monitoring. We've had very good progress with that. We're still a work in progress, but we're way along on that. The banks were interested in going forward pretty quickly even though the orders haven't been done yet. So, I did an interim budget, a budget submitted to them. I have an interim budget now through June, and we'll get a full-year budget starting July 1.
HW: What amount was that?
JS: It was $3.75 million for March through June 30, just for start-up cost really.
We just sent out requests for qualifications to between 30 to 40 firms from whom we'll pick a primary professional firm. We hope to go through these responses pretty quickly and have a primary professional firm chosen soon, so that firm can finalize the final work plans for each of the banks in accordance with the schedule, which we have to have done by Independence Day.
I believe the work we're doing is setting up the infrastructure, and that's the big piece of infrastructure. The work plans detail what what the banks will do internally to monitor their own performance and what I will do to review their work and what additional work I will do if I need to confirm it and to test it. I think we have a very good chance, and we're committed to meeting the schedules in the documents. We got some smart help, too. I think the big bulk of people I retain are going to be the accounting, auditing and forensic firms, rather than staff.
HW: So, if a servicer is found to have one of these potential violations in a given quarter, what can they expect in the meeting with you?
JS: The first thing I'll do in the meeting is review with them the noncompliance or the violation. And I will ask them what they will do to correct it. The settlement documents give them an opportunity to cure. I hope the discussion will go toward a prompt and immediate remediation program where they tell me how they're going to fix the problem they have. If they think they don't have a problem or they tell me they're not going to do something additional or if they do something half-hearted and it doesn't work over a quarter, we'll have another meeting, and it will not be as nice a one.
There will come a point where I will take a set of circumstances — I would have informed the monitoring committee, which is comprised of a number of AGs, the Department of Justice, and the Housing and Urban Development Department about the situation. I will meet with them and we will determine what recourse they need to take, and that will probably go to a court to get injunctive relief — a court order to get the bank to comply.
Or we'll seek penalties. So that's how it will work. I am hopeful to have a process where the bank itself identifies and begins to work on correcting its own problems so that we never have to go to war, but if we do we do. The settlement provides me and my colleagues on the monitoring committee a significant amount of firepower if we need it.
HW: Say their internal review process shows they have a problem, and the next quarter the internal review finds the change didn't work or in fact it was half-hearted, could we see no remediation for three or four quarters?
JS: There will be a lot more significant contact after that. The truth of the matter is that the banks have met with me even though settlement terms don't require a preliminary meeting. Because they're supervised entities, they're comfortable with a continuous process. If there's a problem, we'll be talking with them pretty regularly. My experience with banks, particularly with smaller banks, and I don't think this changes with size, is that if there is a problem, they want to be in contact a lot. They want to show continual progress, because what they want me to do is to not take it to the monitoring committee. We will keep working with them until it is fixed. Now, it's all theoretical right now. We'll see how it shapes up.
There will come a point where enough is enough. When that is will depend on the actual facts and circumstances. What we do will depend on the seriousness of the problem.
HW: There is concern that it will be something similar to the Home Affordable Modification Program — a lot of bark, but no bite. Do you foresee yourself being more concrete or resolute in how you set up your processes to deal with noncompliance?
JS: It's in everyone's interest that this process be open and that it be and seem to be rigorous and fair. I'm not looking for a fight. However, it is in no one's interest for me to be or seem to be slow to act or half-hearted in action. If we need to get correction, we'll get it. My goal is to reform the process, not punish. But there are times when strong action is necessary. I have experience with that. In my prior life, we did what we needed to do.
HW: The major concern is principal reduction. In your early talks with them, have they given some idea as to how many portfolio write-downs they'll do compared to private-label reductions?
JS: Well, they get more credit for portfolio than private-label paper. Every indication from them to date is that they intend to work their portfolio loans fully. My sense is that that's where the benefit comes earliest, and with the least heartburn frankly. They have every incentive to do that. I think they're going to work their existing books very hard.
HW: Has there been a threshold set up for if you see too much private-label reduction happening you'll step in?
JS: Right now we're beginning to discuss their overall programs in some detail. They have a fair bit of discretion to grant consumer relief. But here's the other point. I'm not going to be watching the process alone. They have state reports to give to 49 states every quarter and additional reports to be given to the states of Florida and California in particular. They are going to be a lot of monitors of this process, not just me.
HW: How much of this will be publicly disclosed?
JS: I'm required to file documents with the court after I receive the second quarterly reports from the banks, which will be year-end. But there will be other reports required of the banks before that time, the report to the states, and the separate reports to California and Florida. I have a hard time believing those won't be public. It is the required minimum, and so we're still working on it with the parties on a coordinated disclosure approach. The more we can disclose the better.
I haven't got a format of my own just yet, but I did look at the HAMP reports. I did look at that one. It looks like good work.
HW: When compliance and relief will be in full swing?
JS: There is a phase-in of compliance with standards that can go as long as 180 days from the date of the entry of the order. I have a plan for the banks for how they're going to do all that. They are large organizations, and I think they're just being careful. It will be a full six months. We will know pretty soon what the phase-in process will look like, but the monitoring will start at the end of the six-months process.I'm hopeful we'll see some pretty good response from that, but we'll see.
The consumer relief, I think, will be pretty front-loaded. The banks have a good idea of how they are going to comply with this, how they're going to go about this. I think we'll see a lot of action in the first full year. In fact, some of the stuff started in March. Much of that is in process. You will see significant results certainly before yearend and maybe even before that.
HW: After your job is finished do you expect the process to be fixed and that robo-signing will be over and the foreclosure abuses will be over, and investors will be confident that the servicing process will end up streamlined?
JS: I hope so. I don't think this alone will do it, but I'm hopeful it will play a significant part to that end.
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