Bank Lawyer's Blog

More Of The Same Old Sleaze

We once thought that Clinton appointee Franklin Raines had a sweet deal at Fannie Mae (even though he had to--kind of--sort of--pay back a wad of his "compensation"). On a per-hour basis, Franklin had nothing on current White House Chief of Staff Rahm Emanuel. Emanuel, appointed to Freddie Mac's Board of Directors by Clinton, stayed a smidge over a year at Freddie Mac, didn't serve on any of the committees where the actual work of the Board was performed, and still pocketed a cool $320,000. Even if he forced himself to attend seven board meetings (the board met only every other month) and actually stayed awake during them, what's that work out to, $46,000 an hour? Wow, even Eliot Spizer wouldn't pay that much for an hour of straight sex.

 And, boy did Freddie get its money's worth of strict oversight out of Rahm ("Eagle-Eye") Emanuel!

On Emanuel's watch, the board was told by executives of a plan to use accounting tricks to mislead shareholders about outsize profits the government-chartered firm was then reaping from risky investments. The goal was to push earnings onto the books in future years, ensuring that Freddie Mac would appear profitable on paper for years to come and helping maximize annual bonuses for company brass.

The accounting scandal wasn't the only one that brewed during Emanuel's tenure.

During his brief time on the board, the company hatched a plan to enhance its political muscle. That scheme, also reviewed by the board, led to a record $3.8 million fine from the Federal Election Commission for illegally using corporate resources to host fundraisers for politicians. Emanuel was the beneficiary of one of those parties after he left the board and ran in 2002 for a seat in Congress from the North Side of Chicago.

The board was throttled for its acquiescence to the accounting manipulation in a 2003 report by Armando Falcon Jr., head of a federaloversight agency for Freddie Mac. The scandal forced Freddie Mac to restate $5 billion in earnings and pay $585 million in fines and legal settlements. It also foreshadowed even harder times at the firm.

Many of those same risky investment practices tied to the accounting scandal eventually brought the firm to the brink of insolvency and led to its seizure last year by the Bush administration, which pledged to inject up to $100 billion in new capital to keep the firm afloat. The Obama administration has doubled that commitment.

Freddie Mac reported recently that it lost $50 billion in 2008. It so far has tapped $14 billion of the government's guarantee and said it soon will need an additional $30 billion to keep operating.

The Change We Have Been Waiting For. Not.

Take My TARP...Please

TCF CEO Bill Cooper is mad as hell, and he's not going to take it anymore.

The man who recently told the Treasury Department that he's got a bad case of seller's remorse and wants to give back his bank's CPP investment, got everything that's been bugging him about the nation's financial mess off his chest. According to BankThink's Rebecca Sausner, who listened to Cooper rant at yesterday's SourceMedia’s Best Practices in Retail Financial Services Symposium in Florida, it was a rare glimpse into the utter honesty of man who's been around long enough that he's not afraid of anything other than running out of Viagra.

One of my personal favorites was his no-holds-barred take on the federal government's role in the meltdown.

“I believe at least 90 percent of this crisis was government driven, created by the government through bad monetary policy, the wrong kind of regulation, the whole impetus for managing economy, lending to the poor, encouraging what was in effect bad lending. All of this stuff was encouraged by the government, and a lot of honest bankers went along with it and didn’t make good judgments.”

Another two I loved, because I find the filing of Suspicious Activity Reports (SARs) to be, for the most part, an egregious waste of time, were these:

On the value of SARs to national defense in the hands of the BSA regulators:
“What the hell? These guys couldn’t find this loan problem when it sat in front of them; they’re going to find a terrorist?"

“Does anybody think there’s not enough regulation in the banking business?” Cooper asked, to a burst of laughter. But, he argues, the regulation is misfocused on issues like BSA instead of fundamental safety and soundness. “They come in and audit the living crap out of you on BSA. Have you guys lived through this? It’s a life/death experience if you flunk BSA. …The only terrorist the BSA program has caught is Spitzer with his pants down.”

And who could resist a Henny Youngman moment.

"I thought swaps were what guys did with their wives in California."

Read them all. They're priceless.

No Good Deed Goes Unpunished

In thrall to their politically correct masters, those entities formerly known as Freddie Mac and Fannie Mae (now simply referred to as Mary-KateandAshley) have adopted consumer-friendly policies that may be at odds with their interest in not only self-preservation (although the US Government will never let them fail, right?), but in collecting on the loans they buy and securitize. One of those new, improved policies is to allow renters of single-family homes that serve as collateral that Fannie or Freddie forecloses upon to remain in the home following completion of foreclosure. As a recent Wall Street Journal article notes, this is a 180-degree turnaround for the two agencies, which routinely kicked tenants to the curb following foreclosure. Tenant advocacy groups are going ga-ga over the new, improved Fannie and Freddie.

Real estate agents, on the other hand, think that the unintended consequence of Freddie's and Fannie's "I Heart Tenants" attitude is to make those homes harder to sell.

They say renting the homes could slow sales because homes don't sell as well with tenants living in them.

"Fannie Mae is in the business of financing homes and selling them, but now this change is going to result in properties probably remaining on the market," said Brett Barry, an agent with Realty Executives in Phoenix who sells properties that now include tenants eligible for a Fannie Mae lease. "Now," he added, "if someone calls me at 3 a.m. with a toilet malfunction or a roof leak, I'm responsible for handling that."

[...]

"If you've got a house worth $350,000 and rent it for $1,200, no investor is going to buy that," said David Peeples, a Tallahassee, Fla., real-estate agent. Because that monthly rent wouldn't cover the mortgage payments, he said, "The end result is that with a tenant, it's going to be unsellable."

Fannie and Freddie claim that, to the contrary, a house with a good renter in it will make these homes more attractive to investors. You know, the type of investors who defaulted on the loans on which Fannie or Freddie foreclosed. Only solvent investors. Or, at the very least, investors who can qualify for a loan to take the property off Fannie or Freddie's hands, after which Fannie and Freddie don't give a tinker's durn how good a borrower that investor might be. I guess Mary-KateandAshley assume that there must be a legion of investors chomping at the bit to get back into the single-family non-owner occupied investment game, and oodles of financing to bankroll them. If not, I hope the like being landlords. I wonder why they didn't think that when they were in the business of being profitable?

An unemployed management consultant once accused me on their blog of being both anti-renter and an elitist. I'll cop to the latter, but not the former. My main interest is that Mary-KateandAshley, now that they're wards of the American taxpayer, take actions that limit the pain for the overwhelming majority of Americans who paid our loans on time and now have to foot the bill for not only those who didn't, but for this potentially painful exercise in social engineering, as well. I hope it works, I honestly do. However, I doubt that we'll ever have reliable data provided by any responsible party to determine whether or not keeping renters in place makes sense. Not that the absence of such data will stop those with an ideological ax to grind from spinning the story to suit their purposes.

G-Mac Steps Up Its "Regifting" Of Bad Loans

Freddie and Fannie aren't the only big loan investors who have been issuing massive loan "put backs" to their loan sellers. They've recently been joined by GMAC's Residential Funding Co., which, according to the Minneapolis/St. Paul Business Journal, "has nearly tripled the number of lawsuits it’s filing against mortgage lenders that saddle it with undesirable loans."

RFC brought about 20 suits in 2008 against lenders for not buying back so-called nonconforming mortgages they had sold to RFC. The company requires such buybacks when loans fall below a certain level of investment quality. In 2007, RFC brought about a half-dozen such suits, according to federal and Minnesota district court records.

While most of the suits appear to settle, a number have gone to trial. In the latter, RFC has won anywhere from a few thousand to a couple of million dollars. More important than the amount of any individual award, however, is likely the fact that the word is out that RFC is on the warpath, and that you'd better treat any buyback demand seriously. If you don't, RFC will "unleash the hounds."

RFC won't admit that it's altered its policies or procedures concerning buybacks.

RFC representatives would not explicitly acknowledge an increase in the number of cases it has brought against mortgage lenders, saying that the company has always filed such suits when they’re warranted.

“You may observe that [trend],” said Jeannine Bruin, director of mortgage communications at GMAC. “If there were [an increase], it’s not due to a change in the process. There may or may not be a trend, but nothing has changed in our process.”

The Journal observes that until 2007, RFC had not filed more than 6 such lawsuits in any single year. In 2008, the number shot up to 20 from 7 in the previous year. That's what we call a "spike." It may indicate that RFC's uncovered more "put-backable" loans, which is likely. Many of those, perhaps, have been put back to RFC itself by either Fannie or Freddie.

RFC sells some of the securitized mortgages to Fannie Mae and Freddie Mac, which can require RFC to repurchase nonconforming loans as well. Consequently, RFC is not profiting from the judgments it receives, said Don Heeman, RFC’s outside counsel from Minneapolis law firm Felhaber, Larson, Fenlon & Vogt.

“It’s a down-the-stream passing of the money,” Heeman said. “If there’s a [nonconforming loan] in the securitization pool, the obligation flows to RFC.”

The increasing number of nonconforming loans is directly caused by the housing crisis, Heeman said. “Let’s face it, the mortgage market is like every other market. It has its peaks and valleys.”

The valley in which it currently finds itself makes the Grand Canyon appear to be a shallow grave, in comparison. This "down-streaming" effect is further proof that crap does, in fact, flow downstream.

A tripling in the number of lawsuits is good news for trial lawyers. Not so good news for the rest of us.

Hard To Pick A Favorite

Shortly before New Years Day, Housing Wire broke the story that the FDIC's negotiations to sell most of IndyMac to a consortium of Wall Street sharks private equity funds was being held up by mortgage loan buyback demands made by Fannie Mae. While one source stated that Fannie Mae often had a hard time truly sticking it to large loan originators because Fannie didn't want to spank the source of the loans it needed to purchase in order to have a reason to exist, that argument flew in the face of my personal experiences with Fannie Mae. Fannie's generally a hard case when it comes to a breach of warranties, and traditionally gets its way in these matters. I couldn't see that it would back off an opportunity to use the FDIC's desire to unload IndyMac by year end as a wedge to enforce a hefty repurchase.

Nevertheless, on January 2, the FDIC announced that it had cut a deal to sell IndyMac, and, according to The American Banker (paid subscription required), the FDIC claimed that Fannie Mae's demand to repurchase as much as $1 billion in loans did not cause a delay in the bidding process. However, the FDIC also said that it continued to negotiate the repurchase issue with Fannie Mae. That leads me to conclude that the FDIC is taking the whack for the Fannie Mae claim and indemnifying the acquirers against liability for the same. That's a pure guess, but a not entirely unreasonable one.

I suppose some might receive some perverse pleasure from seeing two government entities causing one another the kind of aggravation they usually inflict on private market participants.  Being the new, improved version of bank lawyers who toil in the Era of The Change We Have Been Waiting For, we wish nothing but the best for our brethren in the trenches at both Fannie and the FDIC who must slash, thrust and parry until the inevitable settlement is reached. From a banker's perspective, you know that the more money the FDIC loses, the higher your premiums. Therefore, in this particular battle, you have to root for the FDIC.

It's interesting that first JPMorgan Chase slugs it out with Freddie Mac over a buy-back request (in that case due to alleged defaults by Wamu, which JPMorgan chased purchased in an FDIC-assisted deal) and now the FDIC tells Fannie Mae that it won't roll over and play dead when a similar demand is made. This is starting to resemble "The Godfather," when Don Corleone goes "squishy" in his support for drug dealing and the rest of the Mafia godfathers try to off him. In big business and politics, as in organized crime, perceived weakness can prove fatal. Therefore, we'll be interested to see how all of this plays out.

The following is an exclusive video obtained by Bank Lawyer's Blog of the most recent FDIC-Fannie Mae negotiating session. The FDIC negotiators are the guys in black coats. The FDIC's chief negotiator, a man named "Doc," tends to be a hard case, and, as you can tell, the negotiations did not go well, especially for Fannie, which appears to have been spanked rather violently.

Pushback on Freddie Mac Buybacks?

Funny thing about elephant stampedes. A herd of pachyderms might be stomping villages flat, driving the terrified villagers before it, and generally scaring the stuffing out of every mortal man and woman that crosses its path. Suddenly, the rampaging tuskers comes to a screeching halt when a great white hunter levels an elephant gun and starts blasting away.

That may be happening to one of the elephant herds in the mortgage banking business, Freddie Mac, whose irresistible force of  loan buy-back demands appears to be meeting the immovable object of JPMorgan Chase. At least, that the line of an article in today's American Banker (paid subscription required).

To make a long story short,

• the late, great Washington Mutual Savings sold loans to Fredddie Mac and serviced them for Freddie;
•  JPMorgan Chase bought Wamu;
•  Freddie Mac has demanded that JPMorgan Chase, as successor to Wamu's interest in the loans and the loan servicing, buy back the loans for various reasons (which Freddie Mac has a right to demand under its selling and servicing agreements);
•  JPMorgan Chase "may refuse to repurchase" the loans. At least, that's what Freddie Mac alleged in recent public filings.

Industry lawyers familiar with the dispute, speaking on condition of anonymity because they do work for the companies, said that whether it goes to court could depend on the legal language used by regulators in the rushed deal to rescue Wamu.

Theoretically, Freddie could terminate Wamu's servicing rights or seize the portfolio and try to find another servicer. But few companies are willing to accept any portfolio of loans with a high level of repurchase risk, observers said. Freddie also could settle the matter by putting a ceiling on its repurchase demands.

The conflict shows how the GSEs are caught between "a rock and a hard place," as one lawyer put it. Though they want to be repaid for defective-loan sales, they also need financially strong servicers to take over the portfolios of increasingly troubled originators.

Traditionally, both Freddie Mac and its big sister, Fannie Mae, have been the biggest gorillas in the jungle. If you want to sell loans to and/or service loans for either of them, then you'd better jump when they say jump. In most cases, regardless of legitimate legal defenses, most lenders who intend to stay in the mortgage lending and/or servicing business decide to accommodate the buyback demands of a GSE. Given the crisis in the mortgage markets, it's no surprise that, according to the American Banker, Freddie has tripled the amount of its repurchase demands in the past year. Unfortunately for Freddie, it's finding that many of the sellers are no longer willing to be pushovers or, even worse, the sellers may have already "rolled over" and played dead, i.e., they expired. It's tough getting a dead man to take your threats seriously.

"Historically, it's been hard to argue with Fannie and Freddie on repurchase demands because if you didn't do what they said, they could yank the servicing portfolios," said one industry lawyer. "Fannie and Freddie are experiencing what happened to the private investment banks last year, which made hundreds of millions of repurchase demands on subprime companies that they were never able to realize."

From what little is disclosed in the article about the facts, Freddie Mac's legal position appears to be strong. The Purchase and Assumption Agreement with the FDIC as Receiver for Wamu provides that JPMorgan Chase specifically assumed all mortgage servicing obligations of Wamu.

"Fannie and Freddie forever have had in their guidelines that, as a condition to accepting the transfer of servicing, the purchaser must assume the original reps and warranties," said a lawyer who represents both JPMorgan Chase and Freddie. "Chase, as an active buyer and seller of Fannie and Freddie servicing, is well aware of that. What they're saying here is that, because it's coming out of the functional equivalent of bankruptcy, they should be relieved of the repurchase liabilities."

That argument didn't work following the savings and loan debacle of the 1980s and 1990s. Why should it work any better this time around?

While an unnamed attorney is quoted as stating that JPMorgan Chase inserted language in the P&A Agreement to protect itself from buyback liabilities, I couldn't find it. Not that I looked that hard, inasmuch as I'm not being paid to do so. Perhaps a more observant reader (or a less inebriated one) will pick up the saving passage.

Regardless of the legal positions, it's interesting to finally see a case where the financial strength of an opponent of a GSE is impressive enough, and the need for its servicing support sufficiently important to the GSEs, that a GSE can't run roughshod over a bank and force-feed it loan buybacks.

We'll be watching this little tussle with interest.

Countrywide Condemned For Blacklisting...Again

The hits just keep on comin' for Countrywide, don't they?

A group of appraisers in Idaho filed a class-action lawsuit Thursday against Countrywide Financial Corp. – Now, Bank of America Corp..., after its recent acquisition – claiming the company used “strong-arming tactics to intimidate appraisers to generate reports in line with Countrywide’s business objectives.”

[...]

The suit alleged Countrywide used improper appraisal techniques that benefited the lender and punished those who did not participate by blacklisting individuals and companies; in turn, causing “substantial damage to thousands of appraisers,” in addition to distorting real estate prices.

“The integrity of real estate appraisals is more important than ever and time and time again Countrywide is showing its customers and partners that it only cares about profits and market control,” said Steve Berman, managing partner at Hagens Berman Sobol Shapiro, the firm representing the appraisers.  “The bottom line is our nation’s at a breaking point where we can’t take anymore corporate dishonesty in the home market…”

According to Berman, if appraisers don’t “play ball” with Countrywide by producing a report affirming the appraisal value Countrywide expects, they’re blacklisted.  The suit alleged, as of Aug. 28, 2008, more than 2,000 appraisers appeared on “the list.”

The claim stated that any appraisal submitted to Countrywide from a blacklisted appraiser was automatically sent to LandSafe, who can render an appraisal “unusable” if it doesn’t fall within Countrywide’s guidelines. The claim called LandSafe a “captive puppet” of Countrywide, enabling their unethical business practices.

And according to the complaint, Countrywide has been using the blacklist practice for more than four years.

The complaint states the plaintiff, Capitol West Appraisers, refused to succumb to Countrywide’s alleged pressure — as a result, the company was placed on the list.

The allegations are reminiscent of those made by appraiser Jennifer Wertz settled against Wamu not long ago, which also alleged blacklisting by another major mortgage lender when an outside appraiser (Wertz) refused to "play ball" with the lender's (Wamu's) desire for whatever appraised value supported the loan it wanted to make, "fair market value" be damned. With what happened subsequently to Wamu, I'd say Jennifer settled her lawsuit at a prime time, notwithstanding snide remarks by some appraisers that she "took the money and ran." If she did, "good on her." We also discussed a lawsuit filed last January in Houston by a former employee of a Countrywide unit, who alleged that he'd been fired for blowing the whistle on Countrywide's alleged practice of pressuring outside appraisers to inflate appraised values. None of this was news to outside appraisers.

New York  Attorney General Andrew Cuomo negotiated a Home Valuation Protection Program and Cooperation Agreement with OFHEO, Fannie Mae and Freddie Mac, in accordance with which a Valuation Code of Conduct was to take effect January 1, 2009. According to Appraisal Scoop.com, that adoption date has been pushed off one to three months. The HVCC was supposed to stop these types of abuses. Insiders have their doubts. Others predict it may spell the end of the independent real estate appraiser.

We're the government. We're here to help you.

Creative Coercion

One of the principal lessons of our tragic century, which has seen so many innocent lives sacrificed in schemes to improve the lot of humanity, is -- beware intellectuals.
---Paul Johnson, Intellectuals

An attorney in the Buffalo, New York City Attorney's office is trying to put half-baked ideas concocted for her doctoral dissertation into practice. In the process, she's making a mockery of the law and of her public office. But, golly, she sure is clever, isn't she?

On Dec. 17 in a windowless Buffalo courtroom, Cindy T. Cooper, a prosecutor for the city, buzzes among a dozen men in suits, cutting deals. "You've got to unboard [the house], go in, and clean it out," she tells one. "If all the repairs are done quickly, I wouldn't ask for any fines." To another, she says, "the gutters weren't done right," and asks to see receipts for the work. It's "Bank Day" in Judge Henry J. Nowak's housing courtroom, more typically a venue where landlords and tenants duke it out over evictions and back rent. Instead, Cooper is asking lawyers for CitiFinancial, JPMorgan Chase, and Countrywide Financial to fix problems like peeling paint, broken masonry, and overgrown or trash-filled yards at houses the city says the banks are responsible for maintaining. It may be surprising to find these financial-services giants hauled before this obscure local tribunal. In fact, Cooper and Nowak are at the forefront of a pioneering effort to deal with a vexing problem: the surging number of vacant and abandoned homes resulting from the mortgage market meltdown. The vacancies occur when lenders bring foreclosure suits against delinquent borrowers. Mere notice that such an action might be filed often sends residents packing. In Buffalo and other Rust Belt cities, the problem has been particularly acute, because in many cases banks are abandoning the houses, too, after determining that their value is so low that it's not worth laying claim to them. When city officials try to hold someone responsible for dilapidated properties, they often find the homeowner and bank pointing fingers at each other. Indeed, the houses fall into a kind of legal limbo that Cleveland housing attorney Kermit J. Lind calls "toxic title". While formal ownership remains with a borrower who has fled, the bank retains its lien on the property. That opens up a dispute over who is responsible for taxes and maintenance. Even when lenders do complete the foreclosure, they may walk away from the property, leaving it to be taken by a city for unpaid taxes, a process that can take years. Orphaned properties quickly fall into disrepair, the deterioration sometimes hastened by vandals who trash the interiors, lighting fires and ripping out wiring and pipes to sell for scrap. Squatters or drug dealers may move in.

[...]

In Buffalo, prosecutor Cooper is bringing lenders before Judge Nowak to hold them accountable. Wielding the threat of liens, which can hold up the lenders' other real estate transactions, she aims to make banks keep foreclosed homes in good condition until a buyer can be found. As an alternative, Cooper or Nowak may try to get lenders to donate properties to community groups or to pay for demolition when houses are beyond repair. "At least in Buffalo," says Cooper, "the days are gone when you can do a foreclosure and walk away without taking care of the property."

Some of that sounds reasonable on the surface. If a lender completes the foreclosure process and takes title to the property, then, as the "owner," it seems to the average reader that the lender ought to be responsible for maintaining the property. However, Ms. Cooper is stretching the definition of "owner" beyond the pale.

The industry denies responsibility for properties to which it has not taken title. "The notion that a mortgage company has an obligation to make repairs on a property that it doesn't even own is very hard to comprehend," says Marco Cercone, a Buffalo attorney who represents a range of lenders before Nowak in the courtroom. Cooper says that banks and other financial firms once extolled houses as the best possible collateral for a loan. Now they're stuck with that collateral, and they don't like it.

[...]

Lenders may rue the day the State University of New York at Buffalo admitted Cooper to pursue a PhD in sociology and a law degree. The subject of her doctoral thesis, submitted in December, 2006: the role of banks in residential abandonment and why they should be accountable for property-code violations. The fourth-generation Californian says she quickly became attached to Buffalo for its history and architecture. Now 33, Cooper and her husband are rehabilitating a house that she bought after getting an IRS tax lien removed from the property. "My passion for this work is because I love this town," she says.

While researching her thesis, Cooper interned for Judge Nowak. Tall, soft-spoken, and unfailingly courteous, the judge, 39, began holding Bank Day earlier this year and schedules it once a month. The civility of the proceedings and the large number of bank lawyers in attendance belie a noteworthy fact: They are there under coercion. A few years ago, Nowak says, "the city became increasingly frustrated with the banks' role" in contributing to Buffalo's abandoned-property problem. (Estimates put the number of abandoned homes in the city at between 5,000 and 10,000.) In 2004, New York State amended the definition of "owner" in its property maintenance code to include not just titleholders but others who had "control" over a premises.

While the statute makes no reference to lenders, Nowak contends that the letters banks send to defaulting homeowners threatening to boot them from their houses show that they have begun to "assert some measure of control." On this premise, Nowak says, Buffalo began contacting banks "en masse" about foreclosed properties, but "a lot of times we'd just be rebuffed and ignored."

Cooper, as an intern, suggested a tactic that the judge adopted. When banks ignored summonses for code violations, Nowak began entering default judgments against them and imposing the maximum fine, which can reach $10,000 to $15,000. For a big bank, that's not much. The real pain comes because the fines give the city a lien that impedes the banks' ability to buy or sell other properties in the area. In addition, when lenders come to his court to get residents evicted from a particular property, Nowak refuses to grant the request until the bank addresses violations outstanding on other properties. Judge Pianka employs similar tactics in Cleveland. On Dec. 10, for example, he assessed a $50,000 fine against an absentee defendant, Mortgage Lenders Network USA, for 21 code violations at a home.

The article doesn't do justice to the mind-bending mental gymnastics of Ms. Cooper and her cohorts. In February, the City of Buffalo filed a complaint against a plethora of lenders in New York State Supreme Court, alleging that they were "owners" of various properties due to the fact that they had obtained judgments of foreclosure on (but had not applied for or obtained title to) those properties, and that the lenders were not only liable for common law nuisance and city code violations for the specific properties on which they had foreclosed, but jointly and severally liable for creating a public nuisance. Even bank-haters might think that the last claim might be a stretch too far, even for the Gumby-like Ms. Cooper and her pals. If that's what you thought, you'd be wrong. A source close to the litigation, who requested anonymity, told me that at a meeting with lawyers for the lenders, a "giddy" female attorney for the City of Buffalo (I'm not certain whether or not it was Ms. Cooper) offered to let each lender off the hook for a mere $30,000 to $40,000 each. I assume her giddiness was caused by her being drunk with power.

The lenders are having none of it. A number of them have banded together, brought in some big guns who aren't worried about their future relationship with people like Ms. Cooper and her ilk, and are preparing to unload on this over-reaching abuser of the legal process. According to the Joint Memorandum in Support of a Motion to Dismiss the Complaint, it's not merely that the City of Buffalo doesn't have law in support of its contention that the lenders are liable, it's that binding precedent is clearly against the city on all counts. Under New York law, a lender is not a "mortgage in possession," and does not have "control," by virtue of the fact that it obtains a judgment of foreclosure. Moreover, the "joint and several liability" allegation would be laughable if it hadn't been made with a straight face. Each lender is liable for every other other lender's actions and/or omissions. Uh-huh.

What this appears to be is an attempt by a government bully to strong-arm lenders into coughing up cash without a firm legal basis for doing so, merely by creating causes of action that have little or no merit, dragging the lenders into court, forcing them to hire defense counsel (shudder), and assuming that they'll settle as a result of a cost/benefit analysis. To some of the more sensitive noses, these tactics might contain the whiff of extortion (for example, as defined by 18 U.S.C. Sec. 1951(b)(2): "the obtaining of property from another, with his consent, induced by wrongful use of actual or threatened force, violence, or fear, or under color of official right."). For government punks with the power of the public purse and no real accountability (no voter sheds tears for big, bad banks), it's called "Going All Spitzer On You." That's a time-honored tactic not only on The Sopranos, but in New York government circles, as well.

The foreclosure crisis in Rust Belt cities like Buffalo and Cleveland is unfortunate. It's bad for any community to have an increasing number of run-down and/or abandoned homes in communities that were into a terminal downhill slide well before anyone heard of subprime loans. Lenders share in some portion of the "blame" for the situation, the extent of that blame being arguable and depending upon where your self-interest is situated. However, the use of hallucinogenic drugs and a trip through the looking glass in order to make an owner out of a lien holder, simply by adopting the Humpty Dumpty line of "when I use a word, it means what I say it means," is perhaps not the best way to "make things right."  The use of such tactics evidences a disdain for the law, not a respect for it, no matter how much "public good" you think you're achieving. To paraphrase Thomas More in Robert Bolt's play "A Man For All Seasons," once you've flattened all the laws in pursuit of the devil, to what will you turn for protection when the devil turns round on you? From a practical standpoint, unless the bullying works and the lenders cave without a fight, then unless you're in the jurisdiction of the US Ninth Circuit Court of Appeals, you'll eventually hit an appeals court without a political ax to grind, which will then spank your little bottom for being a bad, bad girl (and it won't be the kind of spanking that "bad girls" sometimes enjoy).

This is an area where the legislature might want to intervene and pass some more incredibly useful legislation like the recent expansive subprime lending law signed into law by New York's Governor Patterson, which has already prodded Fannie Mae and Freddie Mac to announce that they'll cease purchasing any such loans made in New York. You know, more useful legislation like that. At any rate, the political arena seems a more appropriate one than the courtroom.

A more viable solution might be to have cities like Buffalo and Cleveland admit that they're irreparably broken, shut down, and encourage their inhabitants to move to Texas. All except the Ms. Cooper and her crusading buddies. They can resettle in South Ossetia. They won't like it much in Texas, although they might find safe haven in certain sections of Austin.

I'm not aware of what sanctions might be available to the lenders in this case. A private party would have to carefully consider a frivolous and groundless counterclaim before filing a complaint that held such little merit. Apparently, that prospect didn't deter legal counsel for the City of Buffalo. Then again, the fun's just beginning, so we'll see where this all shakes out.

Next up: Cindy Cooper creates, and the City of Buffalo files, a complaint in The International Court of Justice, that accuses all major US banks of ethnic cleansing.

A Glass Half Full Kind of Guy

John Stewart riffed last week on IndyMac, Bernie Mac, Freddie Mac, Fannie Flag, Fannie Mae, Igor Stravinsky, and a ham sandwich. And even more.

An Accord Of Skepticism

It may be time to pull out the figure skates and do a "Hamill camel" in Hell: the editorial boards of The Washington Post and The Wall Street Journal agree on legislative policy. Well, not really, but at least they both agree that one piece of legislation is a piece of trash.

A couple of months ago, The Wall Street Journal ran an editorial (discussed here) that flayed Barney Frank's mortgagor/mortgagee bailout proposal. A couple of weeks ago a hole was rent in the fabric of the universe when the Wapo  ran its own smack-down of the same legislation in the form of an editorial entitled "Holes in the Roof."

The WSJ objected strenuously that the risk of further housing price declines is being shifted to the American taxpayer and that borrowers who are in many cases hardly "victims" of anything other than their own greed and/or poor judgment are being bailed out instead of being permitted to suffer the natural consequences of their acts and omissions (the "moral hazard" argument). The Wapo agrees with the "moral hazard" argument, but apparently believes that the "systemic risk" to the larger economy posed by further housing price declines has to be balanced against that hazard.

HOUSE FINANCIAL Services Committee Chairman Barney Frank (D-Mass.) has acutely summarized both the "systemic risk" posed by the housing market's decline and the "moral hazard" posed by a government fix: "The economy has been taken hostage by people that took some very bad decisions," Mr. Frank said. "The answer is to pay as little ransom as possible to the least ill-deserving people we can find."

But can he get that calculation right?

[...]

...[W]e agree that preventing further damage to the economy is a valid reason to consider a bailout.

Still, we have our doubts. Economists forecast about 1.4 million foreclosures this year. The CBO estimates that Mr. Frank's bill would help about 100,000 borrowers a year over five years -- some of whom would eventually default again. Even if Mr. Frank has selected "the least ill-deserving" homeowners, some of their neighbors who did not live beyond their means are bound to ask, reasonably, why their taxes should help out the less provident and their lenders. Or they might demand the same deal. It won't be easy for Congress to tell them no.

In terms of systemic risk avoided, the bill may be oversold. Mr. Frank's program is voluntary, and, while banks might find it an attractive way to shift their worst credit risks to the government, owners of mortgage-backed securities are hardly clamoring to take him up on it. There's almost nothing in it for the holders of securities backed by second liens, a common feature of subprime loans. To be sure, the more home prices drop, the more lenders would participate, but that would leave the U.S. government on the hook for shakier loans, thus driving up the program's eventual cost.

The Dodd-Shelby compromise in the Senate that uses FNMA and FHLMC to bail out both borrowers and lenders also gets a cold shoulder from the Wapo.

The compromise they are discussing -- paying for the homeowner bailout by taking Fannie Mae and Freddie Mac funds set aside for low-income housing -- raises a serious fairness problem, too. No doubt the sprawling, subsidy-riddled housing market is in a lot of trouble. So far, it's less certain that Congress can figure out a way to fine-tune it.

That's a different concern than any expressed by the WSJ, which isn't surprising. After all, the Wapo is as much a  left-wing rag as the WSJ is a right-wing rag. Of course the Wapo is going to worry about the possible impact of any bailout on those poor people who need federal housing funds and who did not participate in the subprime mess, and of course the WSJ is going to worry more about the impact of the bailout on those people who pay most of the taxes (in other words, the people who read the WSJ). The Wapo has a legitimate concern; however, we all know that Congress always makes sure to take care of the pork barrel and the special interests before the poor, so you can expect that if it isn't Barney's bailout that diverts the funds from low-income housing, it will be something else.

Unlike the Wapo, the WSJ editorial doesn't even mention "systemic risk," but perhaps it believes that if 42 million mortgage borrowers out of the 46 million tracked by the Mortgage Bankers Association are paying their mortgages on time, then the risk of a general economic meltdown and, therefore, a need to bail out the delinquent, is not substantial. Moreover, the WSJ may believe that whatever pain is suffered by the economy generally is something that ought to be suffered as part of the natural order of things, and that the markets will correct themselves without the deft fine tuning of Congress. I don't know.

As a practical matter, neither newspaper believes that the legislation will have enough impact on enough borrowers and lenders to accomplish its purported goals. That alone ought to derail it eventually, or at least give the president some election year spine and permit him to hold to his vow to veto such legislation if the Senate and House manage to pass a compromise version acceptable to both and send it to him for his signature. Unfortunately, the White House has been making slight mewling noises about possibly "looking at" some version of a bailout, and if the political calculation is that the Republicans will harm themselves by a presidential veto, "The Decider" might decide to back down.

Regardless of the outcome, however, it's nice to see people of such divergent political opinions reach out across the great cultural divide and come together in peaceful harmony of compromise and agreement in principle, even if it's for the purpose of mercilessly beating the crap out of Barney Frank's pet puppy.