Bank Lawyer's Blog

Increase In Foreclosures=Increase In Crime?

Not long ago, Pravda National Public Radio had a story on its "All Things Considered" afternoon show (to listen, follow this link) that discussed some of the aftershocks suffered by residents of California's "Inland Empire" due to the earthquake caused by the collapse of the subprime lending market. In addition to the negative effects on the financial well-being of residents and local governments caused by the "trauma of foreclosure," the reporter alleged that there was concern about the rise of crime due to all the vacant homes, presumably vacant because their owners are subprime borrowers who have either been kicked out of the houses by foreclosing lenders or have walked away from a loan that they no longer can afford to, or wish to, repay. No statistical evidence was cited by NPR to back up the contention that more vacant homes meant more crime, although the lead incident in the report related the story of a female realtor who was brutally attacked in a vacant home by a renter of room in a nearby single-family home. The family that owned the home was in danger of losing it by foreclosure, and had taken in a boarder to meet the mortgage payments. I thought that this incident could be used to argue that socially responsible human beings, who take extra measures to meet their legal obligations (like renting a room in their home to meet the mortgage payment) are to blame for increased crime, but NPR seemed to believe otherwise. Dallas is one of the real estate markets least affected by the national downturn, and, yet, had its own recent incident of a female realtor murdered in a fully-furnished model home by a man who was gainfully employed but was simply a sociopath who engaged in a crime of opportunity. That tragic incident was not cited by NPR, perhaps out of ignorance, or perhaps because it would have conflicted with the pre-conceived conclusion of the reporter and/or producer of the story.

Yesterday's Housing Wire reminds us of another facet of crime related to the foreclosure crisis: mortgage-related fraud.

The Federal Bureau of Investigation said late Tuesday that mortgage fraud looked to be a rampant problem during 2007, with the number of mortgage fraud Suspicious Activity Reports referred to law enforcement increasing 31 percent last year, to 46,717.

The total dollar loss attributed to mortgage fraud is unknown, the FBI said; however, seven percent of reports filed during 2007 indicated a specific dollar loss, which totaled more than $813 million.

"The $813 million loss denoted in this report is just the tip of the iceberg, reflecting only a small percentage of financial damage suffered by victims of mortgage fraud," said Assistant Director Kenneth W. Kaiser, on the FBI’s Criminal Investigative Division.

[...]

Fraud was a problem on the way up in many housing markets, to be sure, but FBI’s report signals an interesting shift towards the effect of the housing downturn on mortgage fraud activity, which is increasingly centered on suspect "foreclosure assistance" programs.

"The downward trend in the housing market provides an ideal climate for mortgage fraud perpetrators to employ a myriad of schemes," FBI analysts said in a mortgage fraud report, released Tuesday. "Emerging and re-emerging schemes in 2007 included builder-bailouts, seller assistance, short sales, foreclosure rescue, and identity theft exploiting home equity lines of credit."

It's true that crime is rampant in this country, and as hard as it is to believe, it's not all of it is connected to the "trauma of foreclosure," or even to residential real estate. Luke Mullins of US News & World Report's blog "The Collar," writes about a 72 year-old criminal who recently managed to get 330 years in prison. He wasn't traumatized by foreclosure and he didn't attack anyone in a vacant house, much less a female realtor. He did, however, bilk hundreds of investors out of tens of millions of dollars. As Luke wryly notes, "[b]arring a scientific breakthrough in cryogenic technology, Schmidt will spend the rest of his days behind bars...Under the terms of the sentence, Schmidt would be released from prison in 2338." Luke then cites fellow blogger and law professor Douglas Berman, who's a glass-half-full kind of guy (as is Bank Lawyer's Blog's author): "'Then again,' Berman says in his blog post, 'with 15 percent good-time credit, Schmidt may be able to get out as early as the year 2289.'"

For those patriotic citizens who feel all this talk about US crime is a tad disloyal, we'll point out that crime has worldwide appeal, even in corners of the earth where one man's subprime is another man's palace, and where the governing class makes the American Mafia look like a cloister of Carmelite nuns. Two men from former Soviet Socialist republics (and one from Miami, which some Americans allege is a foreign capital masquerading as an American metropolis) were charged with hacking into restaurant chain Dave & Buster's computer system and stealing the credit card information of 5,000 customers, causing at least $600,000 in losses. I suppose $600,000 isn't enough to merit anything close to 330 years; however, one defendant was unlucky enough to be arrested and imprisoned in Turkey since July 2007. If he's subject to some of that good old Turkish "Midnight Express" action, he may want to trade 330 years in a US prison.

As we've said many times before, Eastern Europe is a hotbed of cybercrime, a land where amorality and intellectual prowess merge to create a super breed of cybercriminal. There's no need for the "trauma of foreclosure" to spur these crooks onward and downward. 

The Biggest Losers?

Today's editorial page of The Wall Street Journal, in an editorial entitled "The Biggest Housing Losers," answers the question "Who let the dogs out?" The WSJ points its finger at the Elton John of the House of Representatives, Barney Frank. According to the WSJ, it's the American tax payer whose collective posterior is firmly within the dogs' jaws.

You may not know it, dear reader, but Congress is playing you for a sap. During the housing mania, you didn't lend money at teaser rates to borrowers who couldn't pay, or buy a bigger house than you could afford. You paid your bills on time. As a reward for that good judgment and restraint, Barney Frank is now going to let you bail out the least responsible bankers and borrowers.

The Massachusetts Democrat's housing bill passed the House Thursday, and it makes us wish we had splurged like so many others. In the name of helping strapped home buyers, Mr. Frank is giving lenders a chance to pass their worst paper onto Uncle Sugar. If both borrower and lender agree to participate, lenders can accept 85% of the current appraised mortgage value and in return get to dump up to $300 billion of those loans on the Federal Housing Administration (FHA). Guess which loans they are likely to dump?

Yeah, guess. I dare you.

The WSJ makes much of the fact that the Congressional Budget Office has come down from its initial estimate of the cost to taxpayers of Barney's Big Bailout from $27 billion all the way to $2.7 billion, "in part because it assumed that most people eligible for this assistance will not apply for it." However, the WSJ then warns us to "watch out" if lenders and borrowers do jump on board, which it thinks is more likely since Barney has been threatening lenders with more dire legislation if they don't "get with the program.

I think the lack of enthusiasm of lenders is palpable. As reported by the WSJ itself last Friday, representatives of lenders' trade groups have almost uniformly suggested that this arrow, only one in a quiver of options available to mortgage servicers, will likely never make it to a bow string. Paul Leonard of the Financial Services Roundtable indicated that the Frank Option was not that attractive.

"I don't think our members would say it shouldn't be considered, but the first option would be to continue to do loan modifications."

Mortgage-servicing companies, which collect a small monthly fee for each loan they handle, have little incentive to put borrowers in this program unless they are "95% certain this borrower is going to default," said Thomas Zimmerman, head of asset-backed and mortgage credit research for UBS AG. Many borrowers who took out loans with little or no documentation are likely to be ineligible because their income was overstated, he adds. Others may fall through the cracks because of difficulties in refinancing loans that have both first and second mortgages.

Other mortgage lending representatives were equally cool.

"I don't believe this would be a tool that would be used significantly," said Tom Deutsch, deputy executive director of the American Securitization Forum, which represents mortgage-servicing companies and investors who buy mortgages that have been packaged into securities.

David Kittle, chairman-elect of the Mortgage Bankers Association, said at a conference earlier this week that he sees no rush by mortgage bankers to write down loans.

True, Barney has threatened lenders, but he's been doing that for decades. In light of the fact that the Decider-in-Chief has promised to veto the bill if the Senate also passes a version of it, I'm not sure that I'd lie awake worrying about it as much as the WSJ seems to be. Regardless of what Barney threatens, I think that lenders will do what they decide they ought to do, based upon what's in their own best interest. They buy and sell politicians every day, and I think that Barney's bluff is not going to change that. They'll have to rely on Republicans to stick a fork in this one in the Senate, or rely on the Republican in the White House as a last resort.

Of course, I could be wrong.

The WSJ mentions other provisions of the bill it finds objectionable, but its major beef is the bailout of imprudent lenders and borrowers by the overwhelming number of taxpayers who did not engage in such risky behavior.

We can only imagine what else is buried in this tome, which deserves a Presidential veto. But the worst problem remains its invitation for bankers to dump their biggest losers on taxpayers. The Frank plan appears to take care of everyone in the housing market, except the renters and homeowners who lived within their means.

What else is new? Sure, we're disgusted with the prospect of having to spend that massive "rebate" check that will show up any day now paying for such a bailout. On the other hand, there's so much waste and pork pumped out of Washington, D.C. that this is hardly the worst of it. We often feel like Al Pacino's character in the movie "Scent of a Woman."

"If I were the man I was 5 years ago, I'd take a flamethrower to this place!"

I'll be as worked up about Barney's Big Bailout if it looks more likely that it will ever see the light of day. Right now, I'd say that's not a sure bet.

NAR President-Elect Brays About Banks

The National Association of Realtors has long been a favorite target of this blog, primarily because we love to bag game that's easy to hunt, and NAR is so easy that it really ought to be considered roadkill. Last year, NAR President Pat Vredevoogd Combs boldly predicted that Congress would enact a permanent ban on national banks entering real estate brokerage by the end of 2007.  Didn't happen. Then there was the long -standing battle to prevent Wal-Mart from getting a bank charter, which NAR looped into the national bank/real estate debate. NAR also made a helpful suggestion last year that FHA step into the breach to solve the subprime lending crisis by refinancing subprime loans of delinquent borrowers after the subprime mortgage holder agreed to write-offs of principal balances (which is the same idea Barney Frank has been pushing with his legislation, which was recently passed by the House and which the White House has promised that the President will veto). Again, bankers said "Thanks but no thanks."

Last week, the president-elect of NAR, Charles McMillan, carried on NAR's fine tradition of bank bashing by blaming the entire state of the depressed real market nationally on conservative lenders who impose prudent underwriting guidelines on residential loans.

A rebound in the housing market is being held back by stingy lending standards, the president-elect of the National Association of Realtors said Thursday.

Irving real estate agent Charles McMillan – who takes over as head of the 1.3 million-member Realtors association later this year – faults mortgage companies for keeping some potential homebuyers out of the market.

"All of the relief that's been given to the banks in the marketplace has not trickled down to the consumer," Mr. McMillan said at the annual meeting of the National Association of Real Estate Editors in Dallas.      

"What they have done is raise fees and make qualifications almost impossible for people to get loans," he said.

In particular, Mr. McMillan criticized the high costs of so-called jumbo loans – mortgages of $417,000 and more – that are chilling buyer demand in many markets. Interest rates on such mortgages now are much higher than those on smaller loans.

And Mr. McMillan said that in some depressed housing markets lenders are raising costs even higher to homebuyers and making it tougher for them to qualify for loans. "That stigmatizes properties unfairly," he said.

You knew this was coming, didn't you bankers? Politicians are lambasting you and your regulators for lax lending standards, for making "liar loans," for tricking unsuspecting borrowers into loans that they couldn't afford to repay. The regulators are looking up your nether regions with electron proctoscopes, yammering at you to tighten up lending standards, increase loan loss reserves, and beef up capital. Right on cue, here comes this idiot from Irving (Texas, unfortunately) complaining that not only are you too darn conservative, you're taking "all the relief that's been given to you" and keeping it for yourself. You're not letting it "trickle down" to the little guy: the realtor.

What's "all that relief" you ask? Don't bother confusing Mr. McMillan with his lack of facts, bankers. He's got to blame somebody that the residential real estate market sucks, and he certainly wouldn't want to acknowledge the fact that realtors have been putting people into homes they can't afford for years, finding them mortgage brokers who will make a loan to a corpse as long as there's a yield spread premium and an origination fee in it, and that's fine by them as long as they get their real estate commissions paid.

Put simply, lenders haven't been given relief except with respect to access to liquidity, which they need to survive in the face of sustained losses from operations. Many lenders don't have the capital to fund growth, and if they did, they wouldn't pump it into assets like residential mortgage loans, for which the market's shrunk dramatically. As to underwriting standards being "too tight," tougher underwriting standards are long overdue, are required by all mortgage market participants and their regulators, and for the foreseeable future will be a fact of life. Get used to it, Chuck. Whining makes it appear, perhaps accurately, that you don't understand the new paradigm.

NAR also is concerned about homeowner anger management.

"We have consumers angry that they can't sell their homes," Mr. McMillan said. "America is hurting now."

Here's a helpful suggestion for alleviating the anger and the pain. NAR should fund a financing vehicle to buy all these great loans they want banks to originate with looser underwriting standards. In fact, NAR ought to set up a program in which realtors invest half of their commission in such loans, since they're obviously a great investment and, in doing so, they would help everyone concerned, including, especially, those hurt and angry home sellers. In addition, realtors should personally guarantee these loans, which (assuming the realtors have sufficient net worth and/or income streams) would make these loans a lot more attractive to lenders who might be a bit gun shy. Or, perhaps, NAR and/or its members could fund private mortgage insurance for such loans. That way, realtors will be performing a public service and simultaneously making themselves rich by taking advantage of the fact that banks and other mortgage lenders have overestimated the risk inherent in residential mortgage loans. They'll also provide the grease that will get this residential real estate wheel rolling again, just like in the good old days before the crash.

On the other hand, NAR might start treating its members like the adults they are, realize that real estate's a cyclical business, and that we're going through a down cycle, which will take time to work itself out, and stop making such a public ass out of itself.

I have a feeling that NAR represents the views of its rank and file members as well as the American Bar Association represents its members. In other words, not well. I know too many savvy realtors who understand reality as well as realty to believe that hysterics like those put out by Mr. MacMillan represent their considered views.

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.

Not So Astonishing

Law professors Elizabeth Warren and Adam Levitin over at Credit Slips have got themselves worked up about "a new idea," an "astonishing" one (according to Professor Levitin), concocted by those dastardly  national banks and federal thrifts: "They  shouldn't have to obey state law when they foreclose on someone's home." That would exercise me, too, if it were true. I'd even agree with Professor Levitin that it demonstrates plenty of chutzpah and with Professor Warren that "the scope of this argument is stunning," except I don't see that national banks and federal thrifts are making that argument, at least not based upon the source cited by the professors.

The article, written by the American Banker's Cheyenne Hopkins, states that national banks are considering a challenge to changes to state foreclosure laws that would, in fact, severely impair the lenders' contractual rights under the loan documents. Foreclosure moratorium laws, for example, would likely not generate a  challenge unless the moratorium period was excessive (an eye-of-the-beholder judgment, I acknowledge). However, some states are going well beyond traditional foreclosure matters.

Some of these measures would go further than delaying foreclosures and include changes to a loan's terms or underwriting standards — provisions that are more easily preempted by federal regulators.

The state measure causing the industry the most angst is a Minnesota one that, in addition to allowing a year delay in foreclosure proceedings, would allow a struggling borrower to make monthly payments equal to the minimum monthly payment when the loan was originated or 65% of the monthly payment at the time of the default, whichever is smaller.

Many industry representatives say that would be going too far, since it would affect how a bank can do business — a criteria that more clearly falls under preemption power.

"There comes a point where states and localities are using foreclosure laws as a pretext or to impair the enforceability of lawful loans, and that's the point where preemption may come back into the picture," said Laurence Platt, a lawyer at Kirkpatrick & Lockhart Preston Gates Ellis LLP. "A little bit of breathing room for the borrower is not going to trigger preemption, but if they in fact choke the lender to death by effectively declaring the loan unenforceable with its terms, that will trigger constitutional and preemption issues."

That hardly seems like an "astonishing" position to take, nor does it demonstrate much chutzpah, unless refusing to stand by, drooling, while your contractual rights are abrogated by a change of state law, when settled federal preemption principles would prevent that from occurring, now constitutes chutzpah. It seems more like sechel to me, but then my Yiddish is a bit rusty. 

My friend and former partner Joe Lynyak also correctly notes in the article the practical risks of national banks taking an aggressive position vis-a-vis state foreclosure laws.

"If someone is going to take an aggressive stance regarding preemption, the concerns are reputational risk in front of the public for taking the legal position, and the the legal risk that ultimately the claimed preemption is either not found to be valid or the validity of the foreclosures are then called into question," said Joe Lynyak, a partner at Buckley Kolar LLP. "This is really right at the edge of the battle on preemption and is a very, very complicated analysis."

Joe's now with Venable LLP, by the way, but I doubt that change would change his position on the issues. By "very, very complicated analysis" I think he means "very, very expensive." At least, that's what I meant when I used the term back when I was an equity partner in "Big Law."

Perhaps the professors have access to other articles or court cases where these "astonishing" threats of federal preemption of local foreclosure laws have been made by national banks or federal thrifts. If so, they should cite them, because based upon the lone article they do cite as the basis for their concern, I'd say they're exercised about a non-existent threat.

To be fair, however, I have to admit that the OCC's quest for power is insatiable. I've previously warned that the OCC's need for lebensraum will eventually compel it to make a bid for universal domination. Therefore, I can appreciate why the professors, both apparent consumer champions, might assume the worst. Eventually, they'll be correct. On the other hand, I plan on joining the OCC stormtroopers right before the final blitzkrieg that will be launched to wipe out the National Association of Realtors and bring all consumers everywhere (even on that frozen rock, the former "planet" Pluto) under the jackbooted heel of the OCC. I'm superficial enough to always back the winner, but cautious enough not to jump on board while the outcome's still in doubt. I'll know the time is right to start sucking up to the OCC when we finally repeal that pesky Tenth Amendment.

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.

FDIC Solves Subprime Crisis

Last night, a reader alerted me to Damian Paletta's breaking news in The Wall Street Journal that the FDIC's Sheila Bair had assisted the Treasury Department by proposing a dandy little scheme to spend $50 billion in taxpayer funds to bail out one million subprime borrowers with low-interest loans. Obviously, the plan has a lot more to it than that, but why waste any more breath on it than Treasury Secretary Paulson did today.

Paulson said he will "look carefully" at the FDIC plan, while emphasizing his confidence in the Hope Now Alliance of lenders spearheading a private effort to modify home loans.      

"It's only fair to point out our priority is doing the things we're already doing administratively, doing the things we're already doing working with the private sector," he said. "That's where we are, that hasn't changed, despite my high regard for Sheila."

A blatant brushoff if I've ever read one, complete with a not-so-coded "despite my high regard for Sheila." That reminds me of a parenthetical in a recent post by Yves Smith at Naked Capitalism in which he asserted that female regulators might be better suited to cracking down on the good-old-boy business of banking: "(the horrific example of Sheila Bair notwithstanding)."

A financial advisor for a private equity fund e-mailed me today with this question regarding Bair's proposal: "What the **** has this got to do with the business of the FDIC?"

Not a damn thing. It's got everything to do with Sheila Bair's personal agenda, however. In a lame duck administration, there's apparently no one making her do the job she was hired to do.

The preliminary puzzled reactions are nicely summarized by Paul Jackson at Housing Wire, if you're interested. A more "spirited critique" is contained in this post at Market Ticker (the answer to his question is "yes.") I'm consigning this to the same dust bin where I filed the OTS' proposal on negative capital certificates (although I have much more respect for the OTS and John Reich). Wake me up when someone with power starts taking an interest and pushing it forward.

Shooting down Sheila is like bringing down the Goodyear Blimp "Snoopy 2" with a surface-to-air missile. There's not much sport left in it.

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?

Lending Tree A Little Late In Cutting Off Network Access?

Luke Mullins, associate editor at US News & World Report and author of the blog "The Collar," had a post Thursday about a disturbing letter that former Lending Tree mortgage customers received this week. According to Lending Tree, "several former employees may have helped a handful of mortgage lenders gain access to Lending Tree's customer information by sharing confidential passwords with the lenders." Those lenders used that information to gain access to the customers' loan request forms and to use the information from those forms to make their own loan solicitations to the customers.

The letter helpfully suggests that the customers get a free copy of their own credit report and, if they see any suspicious activity, to contact the credit bureau themselves and to consider filing a fraud alert with all of the credit bureaus. Lending Tree states that "we don't believe any identity theft or fraudulent financial activity resulted from this situation," although, of course, it can't be certain, can it? It may very well be that the former employees and miscreant lenders are willing to engage in such nefarious activities simply to solicit mortgage loans, but it's not beyond the pale to imagine that they're capable of worse.

Nowhere in the letter does Lending Tree offer to pay for any peace of mind, such as a year's worth of credit report monitoring. From a cost/benefit standpoint, that may make sense unless there's some evidence of identity theft or other fraudulent use of the information obtained. From a public relations standpoint ("reputational risk"), however, that's not exactly going the extra mile. Then again, it's not my money.

Luke quotes security expert Brian Cleary, who points out an obvious chink in Lending Tree's information security armor.

These are former employees—how can those user accounts to critical customer data still be active? Those should be shut down. So, their access to all of the information and resources should be revoked on the day of their termination.

Yep.

Cleary also emphasizes a point that I tell banks and other businesses all the time: "you can have policies, but if the policies live in a three-ring binder, and they are not put into practice as daily operating procedures—through some degree of automation—the chances of things like this occurring are pretty high." In other words, policies work only if you have procedures in place to ensure that they're enforced consistently.

In this case, the access termination procedures were deficient. I recently went through the development of a statement of work and negotiation of an services agreement with a vendor on behalf of a commercial bank client, to automate the process by which authorization (and termination of authorization) of access to the bank's network is effected. There are solutions in the marketplace to accomplish this, and their implementation increases the chances that a human being, asleep at the switch, fails to terminate the access of former employees. If you're going to rely primarily on human beings to implement the policies, then you'd better make sure that those human beings are either themselves subject to checks and reviews to make certain that they're following the policies.

Otherwise, you might find your bank the subject of "The Collar."

Cynicism or Stupidity? You Be The Judge

At the end of a long day, I tried to catch up with my "professional reading" (The Economist, The Wall Street Journal, a trade paper that doesn't list this blog in its roundup and, therefore, is dead to me, Sports Illustrated's Swimsuit Issue, etc.), and what did I read right out of the gate but this cynical nonsense.  I was about ready to start fisking the report when I decided to check with a few of my favorite bloggers first and, sure enough, Tanta and PJ had already taken care of business.

Paul Jackson at Housing Wire pummeled this sorry report today like Jake LaMotta pounded Sugar Ray when he was really, really cranky. As I read his piece, I couldn't get Robert De Niro in "Raging Bull" out of my mind ("I'm the boss-boss-boss-boss-boss-boss-boss-boss-boss!"). Just a sampling, then read the rest.

There isn’t an effective loss mitigation strategy I know of that can solve for fraud. Extending foreclosure timelines, or introducing more uniform standards for loss mitigation — both “solutions” proferred by the state AGs in their report — will actually serve to make fraud even more costly for everyone involved. And that’s the last thing anyone who wants to see housing recover should be rooting for.

[...]

In no small part, fixing the current mess is tied to fixing fraud; and that means fraud at all levels, from borrower to broker to lender. It’s both as simple and as complex as that.

Which means that it’s time borrowers, consumer groups and erstwhile working groups stop floating a revisionist history of the “hapless borrower” — you know, the one where greedy, mean lenders duped those innocent and pure borrowers? — as a substitute for what’s really going on in the real world.

Yeah, it's time, Paul, but what are the odds?

Although Tanta claims that she's merely "piling on," she actually dissects the report like a scalpel-wielding Hannibal Lechter looking for a liver to go with her fava beans ("When I opened the cranium, I found little grey matter but much fecal matter."). Her always spot-on dissection is, of course, greatly aided by the fact that she (as does Paul) has an unfair advantage over the report's authors: she actually understands the mortgage business. Her carefully considered conclusion coincides with my initial gut reaction.

The lesson of the "stated" disaster--stated income, stated assets, stated appraised values, oral "promises" of loan originators rather than clear written disclosures, the whole cluster of practices that removed the "barrier" of "paperwork"--is apparently still lost on the Working Group. We started this by being "efficient" about the documentation and casual about the borrower's own statements; we aren't going to get out of it that way. This report just reeks of political grandstanding. I'm sure I know at least one journalist who will love it.

"Political grandstanding"? You betcha.

I was talking today with an attorney who represents a financial institutions trade association, and is intimately involved in legislative efforts at the state level to "solve the subrime mortgage mess." I was commiserating with him over the apparently limitless supply of clueless legislators (my phrase, not his) who insist on doing precisely the wrong thing at exactly the wrong time. I know it's an election year, which means political cynicism is elevated above its normally high levels, but I told him that it's got to be especially tiring this legislative session trying to beat back wave after wave of ill-advised legislative interventions in the mortgage markets that even quarter-wits like yours truly can see will not only not address the intended problems, but will likely make the problems worse and, simultaneously, create a whole batch of new ones. He agreed wholeheartedly, and ruefully observed that we've still got a long way to go until November.

I asked him whether the legislators who were so eager to "do something" were amenable to listening to reasoned explanations as to how their legislation might be useless or much, much worse. His reply is that they don't want to listen because they simply don't care. They don't care about the facts and they don't care about the actual effect of the legislation. All they care about is being able to go back to their constituents, who understand  the mortgage market even less than they do, and tell them that they "did something." Adverse results likely will surface down the line, and a reasonably competent politician can always spin the story so that someone else is to blame.

This may be a long, hot, tiresome summer.