Bank Lawyer's Blog

How About A Moratorium On Moratoriums?

Word came today from Teresa Rice, General Counsel of the Minnesota Bankers Association, that a major amendment was made on the Minnesota Senate floor on Monday of this week that exempts loans originated by state or federal banks, savings banks, or credit unions from the one-year foreclosure "deferment" provided by the Minnesota "Subprime Borrower Relief Act of 2008." The law has been making banks in the land of a thousand lakes sweat a bit (a lot, actually). In an e-mail to me today, Tess stated that the proposed legislation "is the first major bill in a long time that the Minnesota Bankers Association has had to completely oppose." At the rate the cynics in state legislatures across the country are churning out this chum, it may not be the last.

At least we didn't have to face the astonishing prospect of federally-chartered banks and thrifts pulling out the big stick of federal preemption and then having state banks, thrifts and credit unions cry about a competitive disadvantage (or simply switch charters). Then again, "eligible foreclosed loans" that were originated by non-financial institution lenders and purchased by banks and thrifts (and securities that are backed by such loans) are still in for impairment.

Housing Wire's Paul Jackson reported yesterday on a similar one-year moratorium bill passed by the New York Assembly (along with three other consumer protection measures). It does not appear to contain an exemption for banks, thrifts and credit unions. If it makes it through the Senate and is signed by the governor, perhaps we'll get to see how "astonishing" are the actions of federally-chartered banks and thrifts in pushing preemption. The legislation would give the trial court the right and obligation to determine a new mortgage payment for the duration of the moratorium in an amount "which will preserve the relative financial interests of both parties under terms which are equitable and just." Cool. No rewrite of the mortgagee's contract there, is there? No, there isn't, according to one of the bill's sponsors.

Under the terms of the bill, lenders would need to certify their complete cost of carry — traditionally, around 1.5 percent of unpaid principal balance per month — which would be paid by the borrowers in lieu of their full mortgage payment during the stay period.

Specifically, the bill says that the “lender must establish to the satisfaction of the court the minimum monthly amount necessary to preserve their relevant financial position so as to prevent an erosion of the mortgagee`s financial position.”

Amusingly, the bill also says that “the purpose is to postpone the mortgagee’s profit and not to cancel or alter the terms of the mortgage agreement.” For one thing, lenders don’t profit from a foreclosure, so the bill is essentially winding up losses for all parties, not postponing some sort of phantom profit; for another, the bill most certainly alters the terms of the borrower’s mortgage agreement — that’s the very textbook definition of a one-year moratorium on payments.

Don't throw ugly facts into a perfectly positioned political spiel, Paul. The force of logic's irrelevant to a cynic. Speaking of which, Sheila Bair ought to be on board with this bill, regardless of its financial impact on any FDIC-insured institutions. It appears to be pro-consumer, and underlying financial reality is not a consideration.

The long-term foreclosure moratorium appears to be the flavor of the day for pols eager to show the voters that they'll stand up for the little guy and face down evil  mortgage lenders. New York State Assembly Speaker Sheldon Silver spun it so well.

"The federal government was quick to bail out big businesses like Bear Stearns from near-collapse, but seems to have all but forgotten the everyday common household victims of this national crisis," said Silver. "We in the Assembly Majority want to see New York's families stay in their homes and our communities to remain intact. Our package is not a bail out. It's an assistance program to help homeowners in our state keep the American dream from turning into a nightmare."

That's right, the unique "bailout" of Bear Stearns to prevent a general collapse of the financial system (which even economic moralists like Warren Buffet and Charlie Munger thought was a justified exception to the "moral hazard" rule) is the same as artificially delaying the foreclosure of thousands of subprime loans to borrowers who can't pay them now and won't be able to pay them in a year. And the fact that it's an election year means that "the Assembly Majority" doesn't give a rat's tukus that the effect of such legislation won't make a silk purse out of a sow's ear, which will still be attached to the same lipstick-wearing pig when the moratorium expires. Of course, that will be after November 2008, won't it? At that point, while the voter/borrower pigs are butchered, the legislator pigs will be back grunting at the public trough.

True Men Of PR Genius

The past week's Stevie Wonder Award, presented to the financial institution or affiliated party that was so blind it could not see that it was stepping in a public relations cowpie of epic breadth and depth, goes to...[drum roll]...:

It's A Tie!

Ladies and germs, we have a dead heat this week between payday lender Rent-A-Center ("perennially persecuting the penniless from its world headquarters in scenic Plano, Texas") and bank director William Farr of Denver-based Centennial Bank Holdings Inc. ("in racial sensitivity training classes since 1992").

First, Rent-A-Center.

According to last Friday's The Wall Street Journal, Rent-A-Center executives repeatedly called an Ohio food-bank association and demanded that they withdraw from a coalition that supports legislation that would make it tougher for payday lenders to do business in Ohio.

In a series of telephone calls in recent weeks, Rent-A-Center executives warned America's Second Harvest and its Ohio affiliates that Rent-A-Center would yank charitable contributions from hunger programs in the state unless the local food banks withdrew from the Ohio Coalition for Responsible Lending. The coalition has been pressing the state legislature to cap high interest rates charged on payday loans.

Wednesday, the Ohio House passed a bill that would cap the annualized interest rate on payday loans at 28% and limit borrowers to four loans of $500 each a year. Ohio's governor said last week that he supports a cap.

Rent-A-Center currently charges interest rates on one-week payday loans that are equivalent to an annual rate of as much as 782%, according to a company Web site. In Ohio, the average borrower pays $15 for each $100 borrowed, and the typical loan is repaid in 19 days, a 288.16% annual rate, the company says.

Well, if the legislation will effectively put Rent-A-Center out of the payday lending business in Ohio, you can understand why it would be irked that a non-profit association it funds might be supporting such legislation. Nevertheless, you have to weigh the disproportionately negative effect that appearing to strong-arm a food bank that feeds the poor will have on your fight against that legislation against the benefit gained from "repeatedly" calling officials of the food bank to express your displeasure. As it turned out, the incident was featured prominently in a major pro-business newspaper in a way that didn't help Rent-A-Center's cause. It gave proponents of the legislation a chance to paint the payday lender as a brow-beater.

As for Mr. Farr (no relation to actor Jamie Farr, I hope), his sense of humor is a bit "unrefined."

William Farr, up for re-election to Centennial's board of directors, is likely to come under fire for a poorly received joke he made about U.S. presidential candidate Barack Obama at a National Western Stock Show banquet in January, [activist shareholder Gerald] Armstrong said.

According to news reports, Farr pretended to read a telegram from the White House, then quipped "they're going to have to change the name of that building if Obama's elected."

Yeah, it took me a minute to parse that out, too. My conscious mind refused to accept what my subconscious mind immediately grasped. I mean, I realize that we're talking about a stock show, but that doesn't mean that reporters wouldn't be in attendance, even if Mr. Farr assumed that every attendee was a bigot.

"People in Northern Colorado are concerned about it," Armstrong said. "They don't think he should be on any board, anywhere."

Well, there might be some payday lenders who could use such a sensitive soul on their boards.

Sheila's Singing The Same Old One-Note Samba

Sheila Bair won't quit. Like the Everyready Bunny, she just keeps going, and going, and going, on and on, singing the same old tired, sad, off-key tune. The fact that her intended audience continues to passively-aggressively ignore her when she talks to them and, when her back's turned, to give her a derisive middle finger, not only doesn't discourage her, it apparently energizes her. Obviously, she's deep into the D/S scene, and not on the "dominant" side of role playing.

In today's The Wall Street Journal, reporter Michael Crittenden faithfully reports yet another public yap-fest by Sheila in which she berates "[p]olicymakers, banks and other players in the housing market" for continuing to review loan portfolios "loan-by-loan" instead of just grabbing huge fistfuls of subprime loans and implementing "a more systematic approach to moving homeowners into more affordable loans." In other words, damn the facts and rational analysis, damn concepts of equity, damn what people in the mortgage business might consider to be in their own best financial interest, full speed ahead!

A normal, rational person who heads a powerful government regulatory agency might actually start to rethink a position if those who are supposedly subject to her influence pay her lip service, then continue doing things the old fashioned way.  Obviously, the "players in the housing market" have decided something: Sheila's not a player, or, if she is one, she can go play with herself.

Since we're talking about a career pol and academic, however, here's an idea for Sheila to chew on. Since she obviously knows better than other market participants what's in their own best interests, her position on wholesale loan modifications MUST BE the path to safety and soundness for the financial institutions the FDIC insures. As to those market participants who are subject to the FDIC's regulatory control, which, frankly, since she's so obviously right, would include all FDIC-insured institutions, even those whose primary federal regulator might not be pushing the same agenda as Sheila, she should be forcing them to adopt wholesale loan modification programs. Since the OCC, the OTS and the Federal Reserve don't know slime-from-shinola about this issue, and state bank and thrift regulators are equally ignorant and/or ineffectual, the FDIC should use its primary and backup enforcement authority to force the issue, to make these cretins fall in line. Any rational person would have to agree that a loan-by-loan analysis is not acceptable, right, so force those participants that you can reach to do what you want them to do.

In other words, Sheila, put up or shut up. The jawboning isn't working and is making you look not only foolish, but weak, which in D.C., is the bureaucratic kiss of death.

It might be that Ms. Bair realizes that she's on the sidelines and is not attempting to do anything other than conducting a PR campaign to build up her gravitas for her next job as the head of ACORN, a professor of finance at Bryn Mawr, or the Consumer Credit Commissioner of a state of her choice. Colorado's in the process of turning from red to purple, which ought to make it an attractive (or at least tolerable) destination for someone like Sheila (plus, she'd be only an hour away from radical snowboarding venues). So no one misunderstands where Ms. Bair's coming from in this "hurry-up-and-modify" world she lives in, she "demolished" the entire idea that there are any borrowers who might not be entitled to a loan modification.

She stressed the need for consumers to contact counseling groups and their lenders to try and prevent foreclosures. But describing a recent foreclosure prevention event she attended in California, Bair said policymakers need to better address the plight of consumers.

"I think we miss the human side of how this is impacting borrowers," Bair said, criticizing efforts by some policymakers to cast troubled borrowers as investors or speculators.

  "I didn't see a lot of house flippers," Bair said of the California event.

Ms. Bair attended an event in California and did not see "a lot of house flippers" there. Which is evidence of nothing, except that Ms. Bair views the world through a glass darkly.

Is it 2009 yet? Is there a new administration in the White House yet?

What We Have Here Is A Failure To Truncate

The Wall Street Journal's Law Blog had an update last Friday about the status of class action lawsuits filed by aggrieved consumers (in other words, by class action attorneys who've "discovered" lead plaintiffs) to punish merchants who left too much information on electronically-printed credit card receipts in violation of the Fair and Accurate Credit Transactions Act (FACTA). Oddly, the Law Blog's link to FACTA ties to a Yahoo article by Chris Kelleher ("an award-winning small-business advisor and attorney") about the disposal requirements of FACTA, not the truncation requirements. Oh well, "close" is enough in horseshoes and law blogging, right?

The latest post is an update of a post earlier in April that discussed a split in lower courts, with one trial court denying class action status partly on the basis of an "annihilation defense" (class action damages would "annihilate" the defendant), and another court declining to strike down class certification on that basis. One commenter to that post points out that the "overwhelming majority" of the 300 class action lawsuits filed involve the failure to delete the expiration date of the consumer's credit card on the receipt, not all but the last five digits of the credit card number. The commenter alleges that "[t]he expiration date is of NO benefit to an identity thief..." I'm not certain that's correct, since it's one piece of information that, taken with others, can aid an identity thief. Moreover, its elimination is technically required by FACTA, and the failure to delete it exposes these defendants to between $100 and $1,000 per class plaintiff (and, of course, the always-beneficial-to-society class action attorneys' fees), so there you have it. If the plaintiffs can prove reckless or willful disregard for the law, then the upper limit of damages is a real possibility.

A commenter to the earlier post who claims to be an attorney whose firm is defending some of these suits makes the claim that the liability should be covered by the retailer's liability insurance, and, therefore, "so as long as we can keep the settlements reasonable, it won’t spell the end of the companies (just their ability to acquire reasonably-priced insurance in the future)." That's certainly a very practical take on the problem. Once again, the insurance company pays over the short run, but everybody pays over the long run through higher premiums, although this isn't an issue that's likely to be recurring, is it?

It might be because I followed FACTA so closely for some of my clients, but I'm not sympathetic to the ignorance of retailers, especially some of the large ones, who claim ignorance of the law (never a sufficient excuse in any event). In an article in last April's WSJ, an attorney for a retailers trade group blamed credit card companies for doing a lousy job of notifying retailers. I thought that was the job of retailers trade groups.  I simply don't see the equities lying in favor of the businesses in this case. With identity theft such a high profile crime, and with the  lead time provided to businesses to comply, the stick-your-head-in-the-sand approach doesn't seem to garner much sympathy, notwithstanding the fact that, once again, it's our favorite punching bag, class action plaintiffs' attorneys, trolling town for consumers with "nontruncated" credit card receipts.

At least one commenter claimed that class action litigation caused companies to change their practices, which is undoubtedly true, and which is used a justification for class actions. Ironically, a publication from September 2007 on this topic by Jones Day offers "prompt corrective action" as a tactic for defeating class action status.

At least two federal district court judges have denied class certification for these types of cases. When comparing the plaintiffs' failure to show any actual harm against the potential harm to the defendants in the tens of millions to hundreds of millions of dollars, the court determined that class actions were not the best method to adjudicate these claims...That both defendants immediately corrected their error upon filing of the complaints served as a major consideration behind these decisions...

Maybe an indication as to how much of a non-issue this hubbub might eventually turn out to be is demonstrated by the settlement outlined in the most recent Law Blog post.

In a settlement approved on Tuesday in the Western District of Pennsylvania, Kings Family Restaurant agreed to offer the plaintiff-class one of the following four options:

• a free ‘appeteaser’ and a free mini-sundae, with a retail value of up to $ 4.68; or

• a free homemade bowl of soup and a free slice of apple or pumpkin pie, with a retail value of up to $ 4.78; or

• a free cup of soup and a free ‘appeteaser,’ with a retail value of up to $ 4.38; or

• a free dinner salad and a free single scoop of Kings Premium Ice Cream, with a retail value of up to $ 4.38.

According to the opinion, defendant has further agreed to donate 500 gift certificates for kids’ soft drinks, with a retail value of $ 0.99 per drink, to First Tee, a non-profit organization which offers underprivileged children the opportunity to play golf. Defendant also agreed to pay plaintiffs attorneys fees and costs not to exceed $75,000.

The Law Blog states that only 165 class members (less than 1% of the class) obtained "coupons" (I assume the author meant the right to obtain the free "goodies" offered by the restaurant), which meant that the attorneys fees exceeded the recovery by 100 to 1. That's a relatively sweet deal for the lawyers, but not much reward for the class members, unless you're into "appeteasers."

As a parting observation, you have to love the comment by one anonymous person, presumably a lawyer: "I say 75 k is not worth my time." No wonder so many people hate lawyers.

Payday Legislation Larded Up, Then Buried

A cadre of Colorado legislators set out on a jihad earlier this year to eradicate the stink of payday lending from the pristine air of the Mile High State. They vowed to drive the bottom-feeding, blood-sucking, tobacco-spitting varmints back into their burrows and make the world safe again for those lenders to folks on the margins who have a historical right to that kind of business.

People like this guy:

 

Or this guy:

Or even worse, THIS GUY:

The solid solons introduced legislation to accomplish that crackdown and had some early success. Opponents rightly noted that the law would likely put regulated payday lenders out of business.

"Where are these people going to go if these financial providers are no longer in the community?" asked Rep. David Balmer, R-Centennial.

Where they went wasn't the point. The point was that people who patronized payday lenders were too irresponsible to fend for themselves, so the legislature had to fend for them.

Rep. Terrance Carroll, D-Denver, said whether or not the payday lending industry survives is beside the point.

"This is about our moral obligation to protect the most vulnerable members of our society from predatory lending," Carroll said.

Take that, Balmer, you amoral SOB!

The bill narrowly passed the House and made it out of a key Senate committee intact and passed a first reading. The missteps of Internet payday lender Sonic Cash even gave the impetus for the legislation a little PR boost.

Then all hell broke loose.

Opponents started sticking amendments to the bill like bankers stick "Kick Me" signs to the back of Sheila Bair. Soon, the bill looked like any other piece of legislation: the inside of a sausage casing.

Crying "Foul!" (or simply crying), the bill's sponsors are rolling up their campaign and taking their hurt feelings back to their offices, where young interns are expected to suffer the severe punishment meted out to the innocent when the guilty are frustrated.

Sponsors said Tuesday that they plan to kill a bill that would have restricted the payday lending industry in Colorado, saying the bill no longer does what was originally intended.

House Bill 1310 would have capped the interest rate on a payday loan at 45 percent, cut lender fees and imposed a 30-day minimum repayment period, sponsors said.

But amendments added onto the bill would have allowed "endless loan fees" and set a seven-day repayment period, "making it even harder for borrowers to get out of the cycle of debt," sponsors said in a statement.

"We are killing this bill because as amended it no longer protects hardworking Coloradans," Senate President Peter Groff, D-Denver, one of the bill's sponsors, said in a statement. "The bill as it sits now protects industry profits that are garnered with interest rates that average more than 350 percent. That just isn't right."

"We began this effort to rein in excessive fees earned on the backs of hardworking Coloradans," said Rep. Mark Ferrandino, D-Denver, the bill's other primary sponsor, in a statement. "The amendments to the bill actually make the situation worse for Coloradans."

Imagine a bill intending to help actually making things worse for its intended beneficiaries! What is this world coming to?

Well, there's always next year.

Subprime (Sorta) Mea Culpa

Dallas Morning News business columnist Cheryl Hall recently interviewed Richard Bitner, a former subprime lender based in the Dallas suburb of Plano, Texas, and the author of an ex-insider's look at how the subprime debacle occurred and how to prevent it from happening again, entitled Greed, Fraud & Ignorance: A Subprime Insider's Look at the Mortgage Collapse. Cheryl calls the book "part confessional and part sermon."

Rating agencies, paid by the investment banks, handed out Triple-A ratings on mortgage-backed securities that were clearly not that safe. Appraisers said homes were worth much more than they were to keep the mortgage brokers coming in. Mortgage brokers were free to play fast and loose without being held accountable.    

Well-intentioned companies like his realized the situation was nuts but thought the industry would regain its sanity.

It didn't.   

Proving either that he was prescient or the truth of the old adage that it's better to be lucky than smart, Bitner sold old his interest in his firm (Kellner Mortgage Investment) to his partners in 2005, well ahead of the deluge. As in many walks of life, timing is everything. He made a boat-load of money and, according to Ms. Hall, appears a bit defensive about that fact. He shouldn't be. As he notes, early on, no one was concerned about "creative" loans that helped the poorer members of society realize "the American dream" of home ownership. It was when, as Mr. Bitner notes, "loan terms became more and more screwy" that mortgage brokers like Bitner saw the handwriting on the wall.

Home appraisals were fantasy-based. Mortgage brokers were cattle herders roping in customers regardless of their creditworthiness. "These loans [usually a two-year adjustable-rate loan] were always designed to be a Band-Aid or an in-between for somebody," he says. "You lost your job. You had a problem. But you can still afford this payment. You keep it for two years, fix your credit and you move on. "Unfortunately, it went from being a niche product to being a standard staple given out to 25 percent of the mortgage business in the United States."

Many were too addicted to the money "jones" to stop being enablers. While no one should get dew-eyed over Mr. Bitner's timing, they should give him his "props" for his foresight and, perhaps, having a conscience. I don't know if I agree with his contention that Kellner Mortgage Company "did far more good than harm in the long run," but I don't know what it's track record was. He may very well be right.

Mr. Bitner occasionally posts opinion pieces on this topic and related topics at Housing Wire, an excellent information source, by the way. It's publisher, Paul Jackson, thinks that Bitner posts intelligent thoughts about how to fix the mess. I agree.

Much of what Mr. Jackson hears from consumer groups is "a gross oversimplification of things – 'lenders bad, consumers good' caveman logic."

He wants policymakers and regulators – among the 2,500 subscribers of his site – to have more informed information when they put together the next bill or regulatory standard. He says Mr. Bitner offers that.

"It's not popular to say now, but the concept of subprime lending was rooted in a good idea," Mr. Jackson says.

"It was just executed beyond horribly, thanks to a complex and unregulated financial web that spun out of control."

Mr. Bitner boils it down to a simple truth: "If the industry had correctly charged interest rates commensurate with the risk, there's a strong chance none of this ever happens."

There's also a strong chance that the same policymakers who now are calling for the heads of the "crooks" in the subprime mortgage business would have excoriated that same group for its failure to address the mortgage needs of the poor and downtrodden. "Informed information" has little to do with any legislator's thought process when proposing, supporting or opposing legislation. "Caveman logic" rules.

HUD Punts DAP Denial

I know it's spring, but today I broke out the hockey skates, rang up The Devil, and went ice skating in Hell. I also agreed with the Editorial Board of The New York Times.

Alphonso Jackson, the Secretary of Housing and Urban Development, shocked an audience of business leaders two years ago when he told of denying a government contract solely because the head of the bidding company spoke ill of President Bush.

“Why should I reward someone who doesn’t like the president, so they can use funds to try to campaign against the president?’’ Mr. Jackson asked with bare-knuckled glee. After the ensuing controversy, he claimed his comments were merely “anecdotal,” and insisted he did not believe in such punishment.

Funny thing: now Mr. Jackson stands accused of just these sorts of shenanigans. Specifically, he is the subject of investigations by Congress into allegations that he rewarded developer friends and abused political enemies in doling out taxpayers’ funds.

And the calls have begun for his resignation.

The editorial runs through the recent allegations against Mr. Jackson, many of them mentioned in previous posts (just search this blog under the heading "HUD"). It ends with a scathing reference to last week's letter by Senator's Dodd and Murray to The Decider in Chief that called for Alphonso's head on a silver platter resignation.

A reporter called me last week and asked to interview me for comments on the recent federal district court decision out of Washington, D.C. that invalidated a regulation that HUD attempted to issue that would have put an end to the practice of homebuilders funneling downpayment assistance (DAP) to borrowers on FHA-insured loans through non-profit corporations. In my most recent post on the topic, written at the time that the same district court had issued a preliminary injunction against HUD's enforcement of the regulation, I expressed incredulity that HUD hadn't made a case  in support of its regulation that would survive a challenge under the Administrative Procedures Act. Obviously, I hadn't counted on the absolute arrogance, blazing incompetence, or both, of the powers that be at HUD.

Parsing the obviousness of the final opinion, it's absolutely astounding that HUD extracted from a GAO report, issued in 2005, that supported, with much data, the proposition that loans with DAP defaulted at much higher rates than loans without it, only some hearsay from unnamed Fannie Mae and Freddie Mac officials about the supposed effect of DAP on sales prices. It's even more astounding that the only "hard evidence" (after the court disregarded the "soft evidence") used by HUD to support the sole basis HUD stated in its proposed rule (i.e., that DAP causes higher sales prices and loan balances, which are bad for both borrowers and for HUD) was an internal HUD report that was cited in the final rule, but not in the proposed rule. The judge intimated in footnotes, but did not decide, that Alphonso Jackson prejudged the rule and wasn't going to let HUD seriously consider any evidence that supported a contrary opinion (based upon some fairly asinine public statements to that effect by Jackson). The judge also wryly commented upon the attempt of HUD's trial lawyers to build a case in support of the final rule by noting that the APA requires that the "case building" exercise be undertaken as part of the process of adopting the rule, not after the fact.

I humbly beg the pardon of the judge in this case. I just assumed from the evidence at hand that even Forrest Gump could have concocted a prima facie case for the rule and that the judge was misguided. My bad!

It takes a big man to admit he's wrong. It takes an even bigger man to sit there and cry like a little girl while other men laugh at him for being wrong. I am that bigger man.

There was also a decision by another federal district court judge in California, who not only prevented enforcement of the rule, but barred Alphonso from participating in the rule making process if and when HUD tries a "do-over." I haven't read that opinion, although I'm sure it's full of gems of equal worth. At this point, even Stevie Wonder could see that HUD under Jackson is staring to look like the gang that couldn't shoot straight.

As I noted in an update to my earlier post, when I was informed by one of HUD's opponents that HUD's failure was more one of not following the procedural requirements of the APA than it was the non-existence of factual support for the rule, this is one more reason why Alphonso has got to go.

P.S. DAP's still a scam and, if logic prevails and a rule is formulated by beings with opposable thumbs, it will eventually bite the dust.

Separating Some Of The Chaff From The Rest Of The Chaff

Colorado's new mortgage broker licensing law has already kept some questionable characters out of a profession where a good man (or woman) is sometimes hard to find. According to a recent story in The Rocky Mountain News, Colorado's Director of Real Estate Erin Toll (whose battles with title insurers as Insurance Commissioner were previously profiled here) has, like Melanie Griffith's character in the movie "Working Girl," a bod for sin but a head for business (or "bidness" as we like to say in The Lone Star State).

One person pleaded guilty to criminally negligent homicide.

Another committed lewd and lascivious acts in the presence of a child. Another is a burglar and thief and is being sued by the office of the attorney general for alleged violations of the Colorado Consumer Protection Act.

What they have in common was a desire to be licensed as mortgage brokers in Colorado.

These criminals were among 73 people who have had their request denied or have been disciplined by the Colorado Division of Real Estate since Gov. Bill Ritter signed a law last year licensing brokers for the first time.

The law went into effect Jan. 1.

Erin Toll, the director of the real estate division, believes the actions will help reduce the record foreclosures in the state and save consumers millions of dollars.

"What this means is that we are doing our job of protecting consumers," Toll said.

"We're left to imagine where we would be in terms of foreclosures if we didn't have so many bad actors in the mortgage business in the first place," Toll said.

"Now that we're getting bad actors off the street, it is bound to mean that foreclosures will not grow as fast as they were," she said.

[...]

"I do think it's fair to say we have spared millions of dollars in potential fraud," Toll said.

Just think how many more millions you would have saved if you'd licensed legislators!

However severe the crackdown on scofflaws might seem, it's not as if you have to be fresh out of the seminary to get a broker's license in Colorful Colorado.

Still, the vast majority of people who have applied for licenses have received them.

As of early March, there were 9,146 licensed brokers in the state.

"We have about another 680 in the pipeline, so we are almost at 10,000," Toll said.

At the rate they're grinding out mortgage brokers, they'll soon be pressing attorneys as the fastest growing license to steal.

The benefits of licensing are difficult to quantify, but some observers are giving it a shot anyway.

Zachary Urban, who runs the Colorado Foreclosure Hotline (1-877-601-HOPE) and who also sits on the real estate division's board, said the biggest benefit of the licensing can't be measured.

"What I think licensing is doing is making a much larger number of folks make the conscious effort not to even begin the process" because they know they won't meet minimum standards.

Not all of those who have been denied a license are merely going to fade into the sunset, return to robbing banks, or run for Congress. Some are engaging in a favorite American pastime: civil litigation.

Senate Bill 203, which created the Mortgage Broker Licensing Act, among other things, prohibits brokers from engaging in 24 specific activities, including misrepresentation, fraud, conflicts of interest and obligations to consumers.

It does not prohibit a convicted murderer, for example, from becoming a mortgage broker. Several of the convicted felons are challenging their denial of a license by Toll, but none of the cases has been resolved yet.

"Murder may not fit exactly as fraud, but under common law, I think if we asked the (murder) victim's family, we might find that the victim may have been lured or deceived before they were dragged into the bushes and killed," Toll said.

"It's sort of a gray area, and we've decided to err on the side of the consumer. After all, mortgage brokers often go into people's homes."

If Osama bin-Laden eventually gets flushed out of Pakistan, it's nice to know that there will be a plaintiff's attorney willing to take up his cause and take on fascists like Erin Toll who are blatantly exercising their "homicide-o-phobia" in an attempt to deny murderers the right to earn an honest buck as a Colorado mortgage broker. After all, even a Holy Warrior has to make a living.

Moral Hazards

A colleague and friend wrote to me recently about what I thought of this article in last Sunday's The New York Times by Gretchen Morgenson, that starts off with a typical focus for The Grey Lady: the venality of big banks.

What are the consequences of a world in which regulators rescue even the financial institutions whose recklessness and greed helped create the titanic credit mess we are in? Will the consequences be an even weaker currency, rampant inflation, a continuation of the slow bleed that we have witnessed at banks and brokerage firms for the past year?

Or all of the above?

Stick around, because we’ll soon find out. And it’s not going to be pretty.

Morgenson's ire is focused mainly on the Fed-engineered "rescue" of Bear Stearns by JPMorgan Chase. She points to all the greed and grime that Bear Stearns has left in its rough-and-tumble wake as it gorged itself on the subprime feast. She labels it "this decade's version of Drexel Burnham" and advocates forcefully that, like Drexel, it should be "left to die."

She makes a telling point when she quotes William A. Fleckenstein, president of Fleckenstein Capital in Issaquah, Wash., and co-author with Fred Sheehan of “Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve.”

"Why not set an example of Bear Stearns, the guys who have this record of dog-eat-dog, we’re brass knuckles, we’re tough?" asked [Mr. Fleckenstein]. "This is the perfect time to set an example, but they are not interested in setting an example. We are Bailout Nation."

Morgenson agrees with Fleckenstein.

And so we are. After years of never allowing any of our financial institutions to fail, they have become so enormous that nobody will be allowed to sink beneath the waves. Otherwise, a tsunami would swamp the hedge funds, banks and other brokerage firms that remain afloat.

If Bear Stearns failed, for example, it would result in a wholesale dumping of mortgage securities and other assets onto a market that is frozen and where buyers are in hiding. This fire sale would force surviving institutions carrying the same types of securities on their books to mark down their positions, generating more margin calls and creating more failures.

Inevitably, she brings the "moral hazard" argument into the mix, through another quote, this one from Graham Fisher & Company analyst Joe Rosser.

"The Fed has now crossed the line in a very clear way on ‘moral hazard,’ because they have opened the door to the view that they are required to save almost any institution through non-recourse loans — except the government doesn’t have the money and it destroys the U.S.’s reputation as the broadest, deepest, most transparent and properly regulated capital market in the world."

Morgenson ruefully expects "the taxpayer," the poor, old, beaten-down taxpayer, to ultimately pick up the tab if the failures continue. Being one of those taxpayers, I suppose I, too, ought to share her sense of outrage at the "bailout" of Bear Stearns. However, I think the taxpayer shouldn't be looked upon as a blameless "victim" of rampant Wall Street greed.

Many of us (including yours falsely) in the fat and happy land of milk and honey, have been busily filling our pie holes and demanding a larger share of an economic pie that we expect will grow larger and larger until the sun burns out (or we croak, whichever comes first), and are complicit in fostering attitudes that institutions like Bear Stearns merely reflect. After all, Bear Stearns is nothing more or less than the collection of human beings who own and run it. It's not as if the legal fiction that is "Bear Stearns" could "strike a pose" or "have an attitude."

I think the crux of the problem with many aspects of American life is that many of us want, with a libertarian ferocity, absolute freedom of economic action and, simultaneously, an absolute freedom from suffering any adverse economic consequences as the result of those actions. Would Wall Street have idly stood by if Congress, state legislators, and/or federal or state regulators "stifled" their ability to create the subprime mess ("You're thwarting innovation and depriving the poor of access to credit and the American dream of home ownership.")? No, they would not, and they would have been supported by consumer advocates and many of the political and regulatory hacks who now are all over the "innovators" like Lindsay Lohan on a line of coke. As long as everybody was making money, home values were rising, and Americans were using their homes as self-replenishing piggy banks that would always be full, so that they could live the good life, here and now, there were "no worries, mate." If anyone in the government had moved to turn off that gushing spigot prematurely, they would have been crucified.

As the inevitable excesses unwind, does anyone really expect that the majority of the American public, even those who most heartily wring their hands about "moral hazards," would be willing to suffer the economic dislocation that would likely occur if the federal government didn't intervene (especially in a presidential election year) to cushion the blows so that the hot-house flowers that so many of us have become won't wilt under the severe recession that might very well ensue? It's great to teach the "big boys" lessons about "moral hazards" as long as I can still afford my Venti Caramel Macchiato and raspberry scone. The federal government is doing precisely what the average Jack and Jill wants them to do: "Make my life painless."

If the Bear Stearns "bailout" (and ask the employee-shareholders how $2.00-a-share sounds as a retirement plan) is symptomatic of a "moral hazard," it's a hazard that menaces more streets than "Wall." Try "Main."

The Coalition of the Wilting

In addition to keeping busy squawking about the slow pace of across-the-board loan modifications for subprime mortgagors (h/t Calculated Risk), an alert reader pointed out that our "Little Mz. Sheila" has been busy with one of her pet projects: roping poor FDIC-insured commercial banks into making unprofitable "affordable small dollar loans" (unsecured, of course) to subprime borrowers. When we last visited this bad idea, both lenders and state bank regulators in North Carolina were sleeping in late at the prospect of engaging in this line of banking business. Of course, whether or not the biz actually makes banks any money is irrelevant to Ms. Bair. As the world knows by now, her agenda is all about what's good for the consumer, not what's good for the institutions her agency insures and regulates. She's on record as saying that what's good for consumers is always good for banks. You know, like what's good for General Motors is good for the country, and vice versa.

Key features of small dollar loan programs at these banks include loan amounts of up to $1,000, payment periods that extend beyond a single pay cycle, interest rates below 36 percent, low or no origination fees, and no prepayment penalties. Many of the programs also include features such as automatic savings components, streamlined processing of loan applications, and access to financial education.

Yep. Those are all the constrictions that are sure to make these loans a regular Roto-Rooter to any bank's net worth. Where can I get a piece of that action? Excuse me: I've got a short seller on hold. I'll be right back.

These banks might as well fly to Vegas, take a limo to the Bellagio, walk up to the roulette table, half-smile at the croupier, utter the immortal line, "Bond, James Bond,"  as they flash their French-linked shirt cuffs outside the confines of the sleeves of their white dinner jackets, and lay all the bank's capital down on black 35. Now, THAT'S a winning strategy!

Nevertheless, on Monday, the FDIC announced that it had lassoed a passel of banks (twenty, to be exact) and corralled them long enough to brand them with the mark of the Anti-Christ "affordable small loan lenders." The FDIC even has one in North Carolina listed, and an uncomfortable number of Texas-based banks, as well. Maybe they all can use the "extra credit" toward CRA compliance that is promised by the FDIC.

I assume they all get to put the following sign outside their premises, right next to the "FDIC-Insured" logo:

As long as they're well-stocked with ukuleles, they might actually make a buck, no matter what happens with the loans.