Don’t hate Louis Pizante. He worked for a Wall Street firm that made mortgage-backed securities, but he personally never touched subprime.

Still, now seems like a good time to pick his brain on what the heck is going on in Wall Street’s world and where we go from here.

Pizante, 37, previously was an associate in the investment banking arm of Greenwich Capital Markets, a bond specialist based in Greenwich and owned by the Royal Bank of Scotland. Before that he worked for New York-based Nomura Asset Capital, Goldman Sachs, and Deloitte & Touche.

These days Pizante, who has a law degree from New York University School of Law, is chief of Irvine-based Mavent Inc., a company that automatically checks if home loans comply with more than 300 federal, state and local consumer protection laws. His clients range from Fannie Mae, the largest U.S. funder of home loans, to Wall Street firms such as Citigroup and Morgan Stanley.

Pizante gives Mortgage Insider his scorecard on Wall Street winners and losers as well as what regulators should or shouldn’t do next.

Q. What do you think of the brouhaha over rating agencies giving investment grade blessings to subprime-related debt that now doesn’t look so investment grade?

A. Clearly a great many of those ratings were — to be kind — wide of the mark. Critics point to several problems, including: (1) inherent conflicts of interest because issuers pay the agencies; (2) bad advice because ratings are based on data taken at face value and supplied by issuers; and, (3) oligopolistic inefficiencies because financial regulations require ratings.

These are difficult issues to resolve. The agencies have introduced some meaningful, albeit limited, changes to their businesses. But the most practical solution would be an independent standards board with policing authority, similar to the accounting industry. And investors have to do more due diligence themselves. Of course, it may all be moot depending on when the market comes back and what it looks like then.

Q. So how do you rate the performance of your former Wall Street investment banking colleagues during the credit boom and bust?

A. The writedowns provide a pretty unambiguous scorecard on the Street’s performance. Clearly some institutions — such as Goldman and JP Morgan — get high marks. But others got high on their own supply, holding onto the less marketable classes of mortgage-laced securities. Unquestionably, greed got ahead of good judgment.

But lost in all this is that for a while the subprime and securitization markets did provide meaningful liquidity to an underserved borrower segment, increasing homeownership rates nationally. The problem is that the market as a whole, and its regulators, did not exercise responsible checks and oversight. In this light, is levying a wholesale indictment of Wall Street akin to throwing the baby out with the bathwater?

Q. What’s your fix for the Wall Street side of this mess?

A. Of the many things that can be said about Wall Street, few can disagree that the subprime correction started before the regulators and media became involved. The current rush of investigations and enforcement actions may be warranted. But none of this will prevent what has already happened and its future impact is questionable. The fact is that Wall Street’s present deal flow is slower than a wounded snail towing a tank. We know Wall Street will come back, but it will look and smell a whole lot different. In the meantime, lawmakers need to be careful not to hastily introduce new rules crafted for a market that no longer exists.

Q. On the consumer side, what do you think of the government fixes so far (raising conforming loan limit, getting lenders to extend introductory teaser rates on loans etc.)? Will any of them work?

A. These government fixes are well-intentioned. But they don’t look like a very good bargain from the point of view of taxpayers and responsible consumers. They’re also not very fair to responsible lenders. Raising the conforming loan limit will affect a very small number of neighborhoods. Even then, most borrowers in those neighborhoods still will not qualify for a new loan. Freezing interest or payment rates and retroactively changing bankruptcy rules will ultimately result in higher cost loans. Lawmakers and regulators should focus on enforcing existing consumer protection laws. Several existing laws afford victimized borrowers adequate remedies and protections. Enforcement provides relief to those truly aggrieved borrowers, while forcing those lenders and investors that broke the law to bear the costs.

Q. Here are three key fixes suggested by columnist Jonathan Lansner: Let everyone make home loans including Wal-Mart, make brokers and lenders have as much fiduciary responsibility to consumers as stock brokers, and make the income reported by a borrower under a “stated income” loan go automatically to the IRS. What do you think?

A. These suggestions are worth consideration. Not surprisingly, the mortgage industry considers “fiduciary duty” the f-word. Brokers who claim to get their clients the best rate are arguably holding themselves out as agents and should have fiduciary obligations accordingly. Imposing fiduciary duties on lenders is a tougher sell. Is it sensible to force one party to a contract to protect the interests of the other party? In any event, fiduciary standards are subjective and fact-sensitive. This makes them difficult to enforce and harder to fulfill. Regarding “low doc” loans, borrowers should be legally required to verify income or assets. If this means that a few truly well off terrorists and drug dealers are unable to obtain financing, so be it.

Q. Speaking of the consumer side, consumer activists say California regulators have been too lax in their oversight of lenders and brokers. What do you think?

A. Enforcement is a problem for consumers and for mortgage lenders. Lax enforcement creates an uneven playing field that benefits unscrupulous lenders and puts responsible lenders out of business. But to solve the problem it is first important to understand who it is that regulates mortgage institutions.

Most mortgage institutions that were engaged in subprime lending are licensed by the state. In California, the Department of Corporations (DOC) had 25 examiners at the peak of the boom to oversee more than 4,800 state-licensed lenders. But some of the largest financial institutions are federally regulated. Wells Fargo, for instance, is a national bank regulated by the Office of the Comptroller of the Currency (OCC). The OCC has 34 examiners assigned to Wells. However, the OCC is primarily concerned with “safety and soundness” not consumer protection. In fact, the OCC has been very aggressive in preempting state consumer protection laws and blocking state attorneys’ general from investigating allegedly systemic fair and predatory lending claims. So, in some cases the enforcement problem is created by resource shortfalls and in others policy decisions.

Q. Your statement that the OCC has been very aggressive in preempting state consumer protection laws echoes a recent commentary in the Washington Post by Elliot Spitzer, current governor of New York and former AG there – he basically said the same thing. The Comptroller of the Currency John Dugan responded by saying: “Almost everyone who has paid attention to the subprime lending crisis has concluded that OCC-regulated national banks were not the problem. Instead, the worst abuses came from loans originated by state-licensed mortgage brokers and lenders that are exclusively the responsibility of state regulators.” Dugan said state regulators should have done a better job. So who is right?

A. I think that is an interesting story. They are both a little bit right. The national banks were not as aggressive in subprime as state licensed lenders like Ameriquest and New Century. But there were operating subsidiaries of national banks that did engage in some of this lending and national banks did fund the state licensed lenders either by providing warehouse lines or purchasing their loans for securitization. So I do think it’s a little bit of both.

Q. Let’s talk more about the federal level. Critics say the Federal Reserve under Alan Greenspan was too ideological. Under his free market ideology, the Fed did not enforce consumer protection power granted to it by the Home Ownership and Equity Protection Act (HOEPA) of 1994, critics say. Your take?

A. The criticism that federal regulators did little to restrain lenders and protect consumers when the boom was under way has some merit. But it only goes so far in explaining what went wrong. The most expansive reading of HOEPA grants the Fed limited authority. It does not address deceptive broker representations or a borrower’s ability to repay. This notwithstanding, there are other federal consumer protection laws aside from HOEPA, such as the broader Truth-In-Lending (of which HOEPA is part), UDAP, RESPA and CRA. The current crisis makes clear that the federal agencies need to do a better job of balancing institutions’ “safety and soundness” with the enforcement of these laws and consumer protection more generally.

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