Bank Lawyer's Blog

Julian Is Julienned

Juilan Castro, the head of HUD, has taken his lumps lately over his amateur-hour performance on The Daily Show. Apparently, he just can't catch a break. Last week, he had the misfortune to appear before the House Financial Services Committee where he suffered the ultimate humiliation. No, not being grilled by Republican hit man Jeb (Clampett) Hensarling. That's a badge of honor with Castro's crowd. Rather, it was having to listen to Maxine Waters publicly praise him that had to cause him to spit up a little bit in his mouth. I know that she had that effect on me.

U.S. Rep. Maxine Waters, D-Calif., Ranking Member of the Financial Services Committee, was one of the few to praise Castro.

"Secretary Castro, although today you will likely take a fair amount of criticism from my colleagues on the other side of the aisle for your decision, I’d like to take a moment to remind them that when the private sector virtually left our struggling housing market during the worst of the crisis, the FHA stepped up and provided the liquidity that kept it afloat. Despite the steps toward recovery the economy has taken since then, the housing sector continues to suffer from a tight lending environment – and a strong FHA is still very necessary," said Waters.

"I would also note that FHA is far from bankrupt, holding approximately $40 billion in reserves, continuing to generate revenue, and taking critical steps to recover its capital reserves, which are projected to show a positive balance in 2015," she added.

You heard that right: when the private sector collapsed, the FHA hung in there. Of course, the FHA had no choice. It couldn't file "bankruptcy" like a private entity, even though it was insolvent, because its insurance is backed by the full faith and credit of the United States, it is required to fulfill its statutory purpose of providing mortgage insurance to back mortgages to qualified borrowers (many of whom turned out to be unqualified, but that's another story), and it has been used by clowns like (the Bridge Over Troubled) Waters to apportion housing credit to a constituency that appreciates the fact that the FHA being the lender that loans where angels fear to tread and votes accordingly. I think that putting Freddie Mac and Fannie Mae into conservatorship and pumping government money into those giant slush funds for progressive housing policy ("A Chicken In Every Pot and An Illegal Honduran Gardner In Every Malibu McMansion") did more to prop up the housing market than FHA insurance. Then again, who am I to argue with a brainiac like Maxine.

Hensarling and his henchman on the Republican side of the far divide are a bit perturbed with recent actions by the Master of the Selfie Stick in the White House, who reduced the annual mortgage insurance premiums for FHA by 50 basis points, from 1.35% to 0.85%, at a time when the FHA has still not restored its capital reserve ratio to the legally mandated level of 2%. In fact, it's 0.41%. The $40 billion that Maxine crowed about is supposed to over $200 billion.

Castro's response was as dynamic and on point as were his masterful responses to John Stewart. [Editor's Note: The previous sentence was sarcastic, for those readers who seem to take everything I write here in dead earnest.] Castro said that everything's great, we've never been better, nothing to see here, let's all fly to Colorado and score some "Hashey Bars."

Hensarling was not amused.

"With all do respect (Castro), we have heard that before, and you are sincere. But this committee has been told that once, twice, three times, and it hasn’t proven true,” said Hensarling. “Once again, you are in violation of the law and that has got to stop."

Except, Jeb, it won't stop. You know it, and so does everyone else with an IQ above that of a chunk of week-old Limburger cheese. The Republican-controlled house could pass legislation to punish the FHA, perhaps even threatening its funding. Even if the majority in the House did pass such an unpopular measure, Democrats in the Senate would likely thwart its progress in that chamber with procedural maneuvers, and the Perpetual Campaigner would veto it even if both houses pass it. By the time that useless exercise has run its course, there will be a new occupant in the house-is-not-a-home at 1600 Pennsylvania Avenue and Castro will be back to doing what he does best: looking dynamite in Armani formal wear.

Yes, we know: this is all about press releases for 2016. Keep up the good work.

Disparate Impact: Liz Goes Loony

In full-spittle mode, Lizzie Warren let the hysterics and flop-sweat fly last week in an Op-Ed piece for the Wapo, in which she warned that if the SCOTUS strikes down "disparate impact" in the context of fair lending laws, the space-time continuum will be ripped to shreds.

The Supreme Court appears poised to continue its systematic assault on our core civil rights laws. After gutting the Voting Rights Act just two years ago, the court set its sights on our country’s fair housing laws when it heard oral arguments today in Texas Department of Housing and Community Affairs v. The Inclusive Communities Project. As with the voting rights decision, a decision limiting the scope of the housing laws would ignore the will of Congress and undermine basic principles of racial equality. But there is even more at stake in the fair housing case, because the wrong decision would reduce economic opportunities for working families and raise the risk of another financial crisis.

After correctly pointing out the inconvenient truth that proving actual discrimination is a bitch, she uses that "high bar" as a reason to lower the bar.

Intentional discrimination cases are notoriously hard to prove because they require evidence of a person’s state of mind. As a result, most housing segregation cases are brought on the second basis: disparate impact. Those cases are no easy lift either. To find a disparate-impact violation, a court must conclude that a challenged practice has a disproportionately negative effect on otherwise similar racial groups and that there is no nondiscriminatory explanation for the practice. Despite that high bar, disparate-impact claims have been the main tool for attacking some of the most persistent practices contributing to housing segregation.

"No easy lift" my petite, firm tukus. If "disparate impact" is a "high bar," then her idea of a prototypical NBA center must be Verne Troyer. As Princess Fauxcohontas understands well, outfits like her evil spawn the CFPB, HUD and the DOJ have used regression analysis to find discrimination in places even the starship Enterprise has not yet gone. Because it's so expensive to wage battles on a field where figures don't lie, but liars figure, the accursed accused have generally permitted themselves to be bullied into settlements not because they think the claims against them are warranted, but on a pure cost-benefit basis. It's cheaper to settle than to wage war with the fiscally unaccountable.

She also touts the fact that 17 states have joined the Obama administration in supporting disparate impact. That leaves almost twice as many states with their middle fingers raised at Lizzie. If she's arguing that there's majority support for the doctrine as a matter of popular opinion (which, I suppose in her intellectually dishonest universe, trumps sound legal reasoning), then she screwed the pooch in that paragraph.

Undercutting our fair housing laws also would increase the risk of another financial crisis. In the wake of the 2008 economic collapse, the Justice Department found that several big banks and other mortgage lenders had violated the Fair Housing Act’s disparate-impact standard by steering borrowers of color into more expensive mortgages than white borrowers with similar financial profiles. While lenders profited in the short term, these families were unable to keep up with their payments when housing prices fell, contributing to the chain reaction throughout the financial system. As the crisis demonstrated, we need stronger fair housing laws, not weaker ones that allow lenders to return to the risky — but lucrative — practices that set the stage for the last crash.

That's been her (and the CFPB's) consistent meme over the past seven years: the 2008 financial meltdown was caused by a catastrophic failure of consumer protection. Hubris, greed at all levels of society (including the vaunted consumer level), and federal government policies that encouraged putting gardeners from Guadalahara in California McMansions had absolutely nothing to do with it.

Rather than waste further time with that tiresome tool, read an interview with Ballard Spahr's Mike Skojec. Mike's insights are much less fevered and much more cogent. Then again, he's not making a run for higher office on a platform based upon the truth of the adage that you can fool most of the people some of the time and some of the people all of the time.

The Fair Lending Extortion Racket Runs On

The law firm of King & Spalding recently highlighted a problem that we last discussed eighteen months ago, and, since then, has only gotten worse.

Cities and counties that have experienced increased foreclosure and vacancy rates in the aftermath of the housing market crash of 2007-2008, perhaps emboldened by recent court decisions, have recently filed several new “predatory lending” cases under the federal Fair Housing Act (“FHA”) against financial institutions. In the last six months, for example, Los Angeles, Miami, Providence, and Cook County, Illinois, have filed lawsuits under the FHA against a variety of mortgage lenders to attempt to recover lost property tax revenues and other damages.

The cases allege either traditional redlining (excluding minority areas from lending activity) or "reverse redlining" (targeting minority for subprime, Alt-A, and other high-cost loans). As is the rage these days, the plaintiffs use the doctrine of "disparate impact" to undergird their claims of violation of the Fair Housing Act. The authors allege that decisions of federal district courts that refuse to dismiss the lawsuits, as well as the settlement of the Mt. Holly case  before the Supreme Court could hear oral arguments (much less decide it), have emboldened cities and counties to pursue these claims. Of specific import are recent decisions of a federal district court in lawsuits filed by the City Los Angeles against Wells Fargo and Citigroup, in which the judge held that the Sixth, Ninth, and Tenth Circuit Courts of Appeal have all determined that "disparate impact" under the FHA is a viable theory. As K&L Gates also discussed not long ago, the Fifth Circuit recently applied HUD's "disparate impact rule" in a fair lending case.

The settlement of the Mt. Holly case is cited by both firms as a setback for lenders and an encouragement for municipalities that want to blame mortgage lenders for their broken neighborhoods. That's not because the theory of "disparate impact" in fair lending cases is likely to be upheld, ultimately, when the US Supreme Court finally gets a chance to decide the issue (and there are powerful arguments against the application Of the theory to the FHA), but because of the obvious problem we've repeatedly noted: these cases, being based on sophisticated statistical analyses that require high-priced consultants and attorneys, are expensive for the defendants. We'd love to see them slug it out to the bitter end and to never settle, because, as King & Spalding concludes, settling questionable claims only encouirages more questionable claims. However, the best business decision for a specific insitution may very well be to pay off the plaintiffs and put the matter behind them. At least, until the next busted pesthole of a city decides to blame decades of mismangement, high taxes, and anti-business laws and regulations manned by sometimes-corrupt bureaucrats, entirely on lenders who are not themselves pristine.

On a positive note, the more the City of Los Angeles sues businesses, the more California-based businesses become Texas-based businesses.

Disparate Impact Ate My City

Another broken city, buried under a mountain of economic malaise caused by its own mismanagement, is attempting to blame its woes on a big bank, and, in the process, squeeze some money out of it.

The city of Providence, R.I., is suing Santander Bank in federal court claiming the bank has refused to make prime home loans in minority neighborhoods.

[...]

The city is claiming that Santander, a Spanish banking giant with U.S. headquarters in Boston, deliberately cut back on lending to qualified homebuyers in minority neighborhoods in recent years while increasing mortgage lending in predominantly white areas.

[...]

Providence alleges that Santander has followed a pattern of discrimination across its New England footprint. The lending declines, the city says, are not the result of economic conditions. While Santander mortgage originations in minority neighborhoods fell, other banks, including Citizens Bank, made home loans in much greater numbers in the same areas.

Such practices, dubbed 'redlining' over allegations that some lenders used red highlighters on maps to outline off-limits neighborhoods, violates the federal Fair Housing Act as well as the Equal Credit Opportunity Act. Providence is demanding a jury trial and is seeking an injunction against Santander as well as unspecified compensatory and punitive damages.

“We categorically reject this accusation and will vigorously defend ourselves against the legal action," Santander said in a statement. "However, we are willing to work with the City of Providence to allay its concerns."

In other words, "we we'll pay blackmail, as long as it's not exorbitant."

This suit is based on the same "disparate impact" theory that the Department of Justice, HUD, and various municipal nirvanas like Cleveland and Baltimore have been using to offer misdirection to the fact that, as I once put it so amiably, "[c]rime, poverty, high taxes, a business-unfriendly environment, a lack of cohesive vision for the future and the will to implement that vision even if it existed, all might have had something to do with" each city's current woes. The fact that the municipalities are being kicked out of court on the issue of causation doesn't deter them. After all, it's the taxpayer picking up the tab.

In a recent article in the American Banker (paid subscription required), lawyers Valerie Hletko and Ann Wiles discuss the potential impact on disparate impact lawsuits filed by municipalities, of the US Supreme Court's decision Lexmark International v. Static Control Components, which doesn't address disparate impact but, nevertheless, throws a giant monkey wrench into the gears of this litigation juggernaut. According to Hletko and Wiles, "the court held that, in order to have standing to sue under a federal statute, a plaintiff must fall within the statute's 'zone of interest' and also show 'proximate cause.' In other words, a plaintiff's injury must flow directly from a violation of the statute, and the plaintiff must be the party Congress wanted to protect in enacting the statute."

The Supreme Court said in Lexmark that the Lanham Act's stated purpose of preventing injury to a commercial interest in reputation or sales requires "no guesswork." Nor does the FHA's. The FHA's statement of purpose is "to provide, within constitutional limitations, for fair housing throughout the United States." It protects integrated housing patterns and persons discriminated against in housing transactions on the basis of race, color, national origin, religion, sex, familial status and disability. It does not protect the tax receipts of municipalities.

Justice Antonin Scalia's 9-0 opinion acknowledged that the Supreme Court's earlier standing discussions now look "misleading" in light of Lexmark. While Lexmark has yet to be applied to the FHA, this higher standard is likely to eviscerate standing for a range of theories of liability. While banks will have to wait for another disparate impact case to make it to the Supreme Court for a ruling on whether disparate impact claims are viable under the FHA at all, they may now avoid FHA disparate impact claims brought by plaintiffs alleging daisy-chain standing well outside the statute's zone of interest.

I don't know whether Santander is going to roll over and play dead or come out swinging. If it takes off the gloves, one of the first punches thrown has got to be based on the Lexmark decision.

HUD Defends The Middle Ground

HUD, which took a proactive stance on the controversial doctrine of "disparate impact," issuing regulations that codified the criticized doctrine in order to attempt to require the federal courts that construe it to give HUD's interpretation judicial deference, has decided that when it comes to the equally controversial scheme of a number of municipalities to "condemn" underwater residential mortgage loans, HUD must remain "neutral."

Housing and Urban Development Secretary Shaun Donovan kept his carefully neutral stance this week on the potential use of eminent domain to restructure underwater mortgages.

Mortgage and housing industry groups have asked HUD to rule that Federal Housing Administration-insured loans will not be used to refinance mortgages on properties that are condemned and seized by local government under eminent domain.

But Donovan said that the use of eminent domain to force the sale of private-label mortgages out of securitized trusts must be decided by the courts.

There are very specific rules about the use of eminent domain, Donovan said at a Politico event Wednesday, and “it needs to be decided by the courts.”

The application of the doctrine of disparate impact to fair lending laws must also be decided by the courts. That fact hasn't stopped HUD from issuing regulations on the subject. The least the agency could do is to take a stand on the potentially detrimental impact on the residential mortgage lending business, including FHA mortgages, caused by the use of eminent domain to sieze mortgage loans from lenders. The FHFA has weighed in to protect its interests, which happen to be aligned with the lenders from who FNMA and FHLMC buy loans. Why can't HUD?

Perhaps the fact that the expansion of the conflating the disparate impact doctrine into the fair lending arena and a creating a crackpot scheme like condemning mortgage loans are both anti-lender, pro-populist theories dreamed up by Leftist activists might have something to do with it. In HUD's case, as in the FHFA's, hurting lenders harms the agency, so the laws of self-interest would seem to dictate that HUD oppose both of them. Ultimately, however, the losses of HUD are back-stopped by the US taxpayer, and as we all know, neither side of the political spectrum has been overly concerned with taxpayers when it comes to serving a "higher cause."

Blowing The Whistle On Foreclosure Lawyers

The Colorado Attorney General's Office has been investigating the major foreclosure law firms in that state for allegedly inflated billing practices. Most of you outside of Colorado may have heard little about it, since, as Housing Wire publisher Paul Jackson points out, the trade press has been strangely silent (other than Paul's Housing Wire). Paul suggests a reason for that silence: "at least one trade media outlet owns their own attorney guild."

Maybe yes, maybe no. Whatever the reason, it is odd that Housing Wire seems to be the only trade press publication that is running with the story.

The investigation centers around allegedly inflated charges for foreclosure costs, such as costs for posting of notices. Here's how Paul explains the issue.

At the core of the investigations, sources tell me, is how foreclosure law firms billed for allowable “costs” in conjunction with the foreclosure – with the lever being loans insured or guaranteed by Fannie Mae, Freddie Mac or the Federal Housing Administration.

While the GSEs set a public and fixed-fee schedule for foreclosures, they also allow law firms to bill for variable, additional reimbursable costs — typically things like process of service or posting and publication of notices, as well as filing fees with the courts. These pass-through costs are typically borne by the law firms and then billed back to their clients as an allowable cost; and in some cases, like filing fees, the fees are set by the court.

But in other cases, the fee structure is much more flexible. And it’s in these reimbursable costs that serious questions are starting to be asked by both Federal and state officials.

Here’s why: it turns out that many of the major law firms responsible for managing foreclosures for the GSEs also have a controlling interest in the ancillary service firms that generate the variable fees that appear as “costs” on the lawyer’s bill. Many law firms either outright own, or their partners have a significant interest in, the company that is posting and publishing notices; or they may own or have an interest in the company that manages process of service, as well.

It's not illegal for a law firm to own such a business, but it is illegal to inflate the "costs" of foreclosures by use of those firms, which is what is alleged to have happened. In one of the press reports that Paul links to (the Denver Post has been following the story as a matter of local interest), a whistleblower in one of the firms has alleged that is exactly what has occurred. The spread of the investigation to other firms indicates that the Colorado AG thinks that the practices may be widespread. According to Paul, Colorado may be the canary in the coal mine.

According to sources I’ve spoken with, similar investigations into foreclosure billing practices are already active in key states on the Eastern seaboard, too, even if the subpoenas haven’t been made public.

If there's substance to these allegations (and the fact that an attorney in one of these firms would risk her career by blowing the whistle gives some initial weight to the allegations), this is going to get very nasty. The law firms likely won't go down without scorching some earth, as the discussion indicates in one of the articles, where the law firm claims that the whistleblower was a "special counsel" to the law firm on the issue and, therefore, cannot divulge confidences of her "client" or breach attorney-client privilege.

If other states also make public similar investigations, maybe the rest of the trade press will begin to report on this, as well. After all, the story has all the elements the average American loves to hate: lenders, foreclosures, and attorneys.

UPDATE 08.19.13: EDITED TO FIX BROKEN LINK TO JACKSON'S BLOG POST.

Tighten Up! No, Loosen Up!

The Obama administration’s recent call for mortgage lenders to loosen underwriting standards on residential mortgage loans to less-than-“Qualified Mortgagors” as long as the FHA (i.e., the American taxpayer) is taking most of the risk of default, generated some pretty strong reaction from the usual suspects.

"If that were to come to pass, that would open the flood-gates to highly excessive risk and would send us right back on the same path we were just trying to recover from," said Ed Pinto, a resident fellow at the American Enterprise Institute and former top executive at mortgage giant Fannie Mae.

[…]

"There's always a tension that you have to take seriously between providing clarity and rules of the road and not giving any opportunity to restart the kind of irresponsible lending that we saw in the mid-2000s," said a senior administration official who was not authorized to speak on the record.

Ya’ think?

The administration is also purportedly urging the Justice Department to ease up on lenders who make loans in accordance with the administration-encouraged looser and goosier FHA underwriting critera. The FHA also claims that it hopes to encourage "by example" Fannie Mae and Freddie Mac to follow along. It's as if the subprime meltdown never occurred and Dodd-Frank was never passed, except for the fact that the federal banking regulators, including the CFPB, are taking a directly contrary approach to mortgage underwriting. Moreover, loan originators live in mortal fear of Freddie and Fannie repurchase requests, which have been massive, since those two publicly-controlled giants are the conventional residential mortgage market.

This whip-saw of inconsistency evidences a major example of cognitive dissonance.

Private reaction from bankers and bank lawyers with whom I attended the recent Texas Bankers Association Annual Legal Conference in Austin, Texas, was even more derisive.  Much time during that conference was spent parsing the nuances of “Qualified Mortgages” and “Qualified Residential Mortgages,” which will make qualifying for a residential mortgage loan much more difficult for many potential homeowners. In addition, the plethora of new regulations being spewed out by the CFPB makes consumer lending, including making single family mortgage loans, riskier and more expensive. The bottom line for a number of community bankers is that they will be making few, if any, residential mortgage loans, at least not directly. In addition, bankers who decide to make residential mortgage loans are definitely not crazy about making anything other than loans that will fall under the QM safe harbor.

I would say that it’s amazing that the administration could talk so glibly out of both sides of its mouth, except that it’s not at all amazing. It’s what these cynical, pandering clowns do as naturally as breathing in oxygen and exhaling carbon dioxide.

We Pause For An Off-The-Wall Moment

The most recent column by Scott Burns advocates a "hair of the dog" strategy concocted by statistician Michael Castleman that, I'm certain, will inspire a number of readers to experience a profound "WTF?" moment.

Michael Castleman has an idea that could do wonders for anyone who owns a house. It could also do wonders for our economy by boosting home sales, and boosting employment related to home building, home buying, and the furnishing of homes. Basically, this is an idea that would have a positive impact on three big factors in our economy— jobs, home values and consumer confidence.

[...]

His idea is simple. I call it “the-hair-of-the-dog-strategy”, after the well-known antidote for hangovers. In this case the hair-of-the-dog isn’t more tequila shooters.

It’s more lending.

Here are the high points for readers who are pressed for time:

Congress passes legislation that orders the FHA, FNMA and FHLMC to make a trillion dollars in home loans at an interest rate of 3%.That generates servicing and origination income, and, Castleman expects, related service industry income (e.g., Home Depot). This will "add enough demand to bring the supply/demand balance of residential real estate back to normal levels— levels that will support stable or rising prices."

As to those critics who allege that in order to make that many loans in the four-to-five-year period proposed by Castleman's plan, underwriting standards would have to be lowered, Castleman asserts that those standards are so tight now that they're choking off credit, which is exacerbating depressed home prices. In that respect, loosening them would be a good thing. He also asserts that even if 40% of the new loans go sour and the foreclosed homes are sold for only 60% of original loan value, the $240 billion loss is a pittance to what the US taxpayer is expected to plow into Fannie Mae and Freddie Mac before those money pits are finally "resolved" (current estimate: somewhere north of $400 billion).

The difference is that there would be an upside.  What we have today is a formula for years of stagnation and homeowner hurt.

It's an idea that is not only "hair-of-the-dog," but is likely to be seen by Congress to be as attractive as a "hair ball." In my estimation, Castleman's proposal has as much chance of being enacted as Lindsay Lohan has of winning the lead role in a motion picture biography of Mother Teresa because "they share so many personality traits in common" (like inhaling oxygen and exhaling carbon dioxide).

Still, it's bold, in the way that extending the payroll tax moratorium and pumping hundreds of billions of dollars into public infrastructure are not. Moreover, Burns' conclusion is right (even if his slogan is as tired as conventional thinking): we do need to "think outside the box." Unless, of course, you love the economic stagnation in which we're currently wallowing, in which case, we should just "stay the course."

Unfair Market Appraisals

The American Banker recently ran an article (paid subscription required) that discussed one of those hare-brained legislative schemes that pop up in times of economic crisis and that lead us to conclude that when states rights advocates refer to states as "laboratories of democracy," they are referring to the laboratory of Doctor Frankenstein (pronounced "Frank-en-steen" for all you "Young Frankenstein" afficianados). This scheme involves the plans of four states, Illinois, Nevada, Missouri and Maryland, to enact legislation "that would prohibit or restrict appraisers from using distressed sales, such as those of foreclosed properties, as comparable sales when assessing the value of a home." The promoters of the legislation say that widespread foreclosures and short sales in those states have "distorted" the market, driving down the prices of houses generally, because the distressed sales are used as "comparables" by appraisers. As a result, homeowners can't exercise their "right" to refinance their homes from high interest rate mortgages to low interest rate mortgages. Obviously, you'd need a healthy hit of peyote before reading a state constitution closely enough to find that right enshrined therein, but we've become a society where the term "right" is loosely defined and peyote prevalent.

It's amusing that legislators who think nothing of "distorting the market" if that distortion curries favor with the average homeowner, a homeowner who might like the idea of the state government artificially propping up the value of his home, would likely blanche the color of Caspar if you proposed allowing banks who invested in commercial real estate loans to amortize their losses over an extended period of time, which, as regular readers recall, was a legislative proposal first included, then removed, in the small business lending bill passed last year by Congress. After all, there are a lot more homeowners than there are community bankers.

The critics make their case that such legislation will have deleterious effects:

• artificially inflated housing prices were the cause of the last bubble and there's no reason to think that they won't lead to another.
• Fannie, Freddie, and the FHA may very well refuse to accept appraisals written in those states (so, good luck encouraging more home lending).
• Appraisers would be violating federal appraisal standards.

Bill Uffleman, president of the Nevada Bankers' Association, asks: "Part of the problem in creating the false housing economy was shaky appraisals," Uffelman said, "and now we want to sanction a new round of shaky appraisals?" Yes, Bill, that's exactly what "we" want to do, if by "we" you mean some pinhead legislators who understand many laws, but apparently not the law of unintended consequences.

Too Big Not To Dismember

"Break 'em up!" That's what independent community banks are crying about the "too-big-to-fail" giant banks, and Jerry Walker, CEO of the Independent Bankers Association of New Mexic,o tells New Mexico Business Weekly reporter Dennis Domrzalski why.

"This financial crisis started with the big guys, but the little guys have wound up paying a disproportional price.”

As the story discusses, consolidation of the banking business in New Mexico, which has seen the number of banks in the state halved in the last 25 years, mirrors what's happened on a national scale, especially since the enactment of the Gramm-Leach-Bliley Act in 1999. That law battered down the wall between commercial and investment banking and added racket fuel to the growth of the nation's biggest banks.

“Since the change in the law, the largest 20 firms have increased their control of the nation’s banking assets from about 35 percent to an astonishing 70 percent,” [Federal Reserve Bank of Kansas City President Thomas] Hoenig said. “Even more striking, perhaps, is the fact that some of these firms are now 30 to 40 percent larger than they were when this [U.S. financial crisis] began, and as you know, many of these firms were protected during the crisis.”

Banking consultant Joe Bidal expressed a view held by many community bankers, inside and outside of New Mexico, when he talked about how the federal regulators catered to and saved the biggest banks while lopping off the heads of local lenders like Charter Bank (previously discussed on this blog here and here).

“When you lose a Charter, which invested almost exclusively in New Mexico, it makes it more difficult for local businesses to finance their needs. You add that to the incredible pressure that federal regulators are putting on local banks to reduce their exposure to commercial real estate and you have a big problem.”

Yes, you have a big problem. And it's a problem that's growing with every seven-bank "Bank Fail Friday" like the one we had last week. A paranoid person might suspect that there's a method to this madness, that the federal regulators have decided to nationalize the entire commercial banking system of this country, in the same way that it's in the process of effectively nationalizing the residential mortgage lending business through its de facto nationalization of Fannie Mae and Freddie Mac and its dramatic expansion of FHA lending. The fewer the number of banks, the easier the system is to capture.

A cynic, on the other hand, would simply assume that the inmates are currently running the asylum, and that the damage they are inflicting is due to the fact that their reality and everyone else's reality are operating on mutually exclusive planes of existence, rather than from the execution of any grand conspiratorial plan. As for me, I'm a cynic.

Whichever view is correct, let's hope that the damage that is being done to the community banking industry is not so irreparable that it can't be fixed, staring with the off-year elections this November.