Bank Lawyer's Blog

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.

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.

 

Big Law Feasts On Subprime

I don't know about my readers, but when I see a headline like this one from a recent issue of the Houston Business Journal ("Law Firms Brace For Subprime Fallout"), I envision  a gaggle of shysters locked in an office, hard hats perched on heads to shield their big brain pans, grasping two-by-fours that brace the ceiling against an onslaught of subprime turkeys plummeting to their doom from a helicopter hovering above, like in that old episode of WKRP in Cincinnati ("Oh, the humanity!" "As God is my witness, I thought turkeys could fly."). But, no, that would be inaccurate. Instead, large law firms, in Houston at least, are merely licking their chops over what's for dinner: litigation, bankruptcy, and various other forms of plague and pestilence.

Fulbright & Jaworski LLP's six-month-old global subprime practice numbers 100 attorneys. Most firms are starting small with units of 10 to 20 litigators, corporate bankruptcy specialists and white-collar crime lawyers.

Andrews Kurth LLP has assigned 13 lawyers on an ad hoc basis to the firm's newly formed subprime and distressed assets group.

"It's something we've been talking about a while," says Tom Perich, Houston managing partner for Andrews Kurth. "Our thought was that we're big in all these areas that were impacted, it seems like we know all aspects of this thing, and we've got the lawyers and finance experts."

[...]

Perich says the group likely could grow to dozens considering all signs indicate there will be plenty of work to go around.

"The front-line action is going to be lawsuits," he says. "People are going to be suing each other, so you've got to have front-line litigators. They need the subject expertise behind them."

The article doesn't note it, but I'm convinced that he punctuated his remarks about these joyful prospects with just the littlest line of drool running down his chin. When so many carcasses are being broiled over an open flame, the smell can drive you wild. You know you're in nirvana when it smells like subprime spirit.

And when it comes to economic disasters involving banks and real estate loans, where better to find your hired guns than The Great Republic?

The transition into subprime practice was not difficult. Many Texas law firms saw significant work in similar areas during the bust years of the 1980s and savings and loan scandals of the 1990s.

"We had probably our greatest growth spurt in the '80s," Perich says, noting the firm grew by 50 percent.

"A lot of those guys are still here," he says.

Ah, the good old days! As for "a lot of those guys" still being here, what he didn't add was the sentiment "and maybe we can squeeze another 3000 billable hours out of them before they flame out."

The article lists the plethora of potential defendants, which offers ample opportunity for "bet-the-firm" litigation, the kind that can suck the life out of paralegals, associates and contract attorneys, leaving them dried husks to be tossed on the fire of the equity partner pyramid, to be replaced by a never-ending supply of young suckers up-and-comers. Investment banks, mortgage companies, title companies, home builders, and investors are all candidates who can look forward to spending quality time with litigation and bankruptcy counsel, after which they can end their existence as biodegradable suicide bombers in a theater of action of their choice, because that's all they'll be fit for.

One of my pet peeves about the entire sales pitch of a "subprime practice group" has been that this isn't anything special. It's the same old skill sets applied to the latest segment of our economy to falter. Craig Weinstock of Locke Lord Bissell & Liddell LLP gets it.

"Nobody was born a subprime lawyer," Weinstock says. "These are folks who have depth of experience representing in the securities fraud area, financial institutions, white-collar crime -- expertise that is now being turned to these current problems."

My favorite line is from Wayne Kitchens of Hughes Watters Askanase LLP.

"Our entire default servicing group and a large part of the litigation group deal with subprime issues, lenders and borrowers on a day-to-day basis and has for years," says Partner Wayne Kitchens.

Hughes Watters is continuously in a subprime mode.

Says Kitchens: "Subprime is already such an intrinsic part of our practice that we felt no need to start any new group or section."

How strange are these times when a firm is described a being "continuously in a subprime mode" and that's a compliment.

Welcome to the Roadkill Cafe, boys and girls. Our steaks are Grade A (sub)Prime. And there's plenty for everyone.

Subprime (Sorta) Mea Culpa

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

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

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

It didn't.   

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

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

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

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

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

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

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

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

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

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

Victims

According to today's The Wall Street Journal, the subprime crisis is sweeping a lot of elderly investors down the drain, many of whom didn't realize that they were investing in the subprime mortgage market. Instead, they thought they'd been sprinkled with fairy dust and entered the magic kingdom where interest rates are always impossibly high and risk never rears its ugly head.

Until a few weeks ago, Sonia Deravedisian had never heard of the subprime-mortgage market. Nevertheless, she lost her life savings because of it.

The $55,000 she saved over 35 years as a self-employed tailor is gone. Ms. Deravedisian, now 74 and disabled, is one of the earliest victims of the mortgage crisis, in a case that has drawn the attention of federal investigators over the role some of the biggest names on Wall Street may have played.

She and 22,000 other people, many elderly, lost about $750 million when a Philadelphia lender called American Business Financial Services Inc. went bankrupt three years ago. ABFS had funded its operation partly by selling notes directly to the public, pitching them in newspaper ads and mass mailings that promised high interest rates. When it went under, these notes, which carried no collateral and weren't insured, became worthless.

Now a bankruptcy trustee is trying to recover money from the investment banks that turned the lender's loans into securities. His claim: They helped keep the lender alive -- and paying them fees -- by enabling it to overstate the value of assets on its books.

When your primary defendant fails, you look for other potential defendants with deep pockets. What else is new? The trustee is doing what so many have done before: try to get the financial institutions with big bucks to cough up a hefty settlement as a cost of doing business. According to The WSJ, the trustee is picking on many of the usual suspects: Bear Stearns, J.P. Morgan Chase, Morgan Stanley and Credit Suisse. Those banks will keep their lawyers busy for the next few years fighting these claims. A number of large Wall Street law firms are, as we speak, casting legions of paralegals and young associates into the billable hour fires to burn in the hell-like torture of document parsing and deposition indexing until their brains fry and the partners' wives can all afford a new pair of new Angelina-Jolie-like bee lips.

There are a couple of interesting twists. The trustee has drawn in the FBI and the SEC. Sounds like a three front war for the investment banks, doesn't it? The enemy of my enemy is my friend, eh? This case also presents us with another class of victims: investors, many, if not most, elderly, who chased a yield that seemed too good to be true because it was, and who failed to read the prospectuses provided to them (one with eighteen pages of risk factors) because they were too long and/or contained too much "mumbo jumbo." Typical is Virgil Magnon, 81 years old and out a cool $761,000.

"Small investors like me are not very savvy," says the retired aerospace contract administrator. "My primary interest in investing was to raise enough money for catastrophic medical problems down the line. You could call that greed, but I don't think it's greed. It's trying to get more for your money."

It might also be called stupidity, venality, gullibility, or a number of other things. Every con man who runs a successful "grift" knows that he can't make it work without appealing to the baser instincts of the "mark," whose desire for "something for nothing" blinds him to the risk.

Here's the kind of yield that victims like Virgil were chasing:

"Found: a 24 month investment opportunity yielding 9.14% annually," said a mass mailing from ABFS dated Nov. 14, 2001. At the time, two-year Treasury notes paid about 3%. ABFS's ads touted interest rates of more than 12%.

The yield is over three times that of a comparable Treasury note. That's not just a red flag, that's a red flag the size of Christo's wrapping of the Reichstag. Yet, people just piled on to devour this garbage.

I'm not defending any of the defendants, certainly not ABFS. If there was wrongdoing, then it will likely come out in the wash, inasmuch as there appears to be a veritable army of eyeballs scoping out every nook and cranny of potential liability. The guilty should pay for their transgressions. I also feel sorry for people who've lost so much, but only up to a point. I feel as sorry for them as I do for borrowers who failed to read the disclosure and loan documents provided to them when they borrowed a subprime loan.  They have some responsibility for their own unwise decisions. They may all be "victims," but I suspect that many are not victims who bear absolutely no fault for their current predicament.

What keeps me awake at night are possible claims by subprime borrowers against the purchasers of these worthless notes that allege that by their negligence in purchasing the notes, they enabled ABFS to stay alive and continue its victimization of more subprime borrowers who borrowed money on terms they thought too good be true.

Speaking of suckers related to the residential real estate market, the following is a faux ad that is as bitter as it is sweet (h/t American Digest).

How Low Can You Go?

**WARNING: A LINKED STORY CONTAINS LANGUAGE SOME READERS MAY FIND OFFENSIVE, ESPECIALLY THOSE CURRENTLY RESIDING IN A MONESTARY. PROCEED AT YOUR OWN RISK**

A reader sent me a link to this story before Easter, but it seemed sacrilegious to post about this too close to Holy Week. The story hasn't mellowed with age, though. It's the heart-warming tale of the CEO of a subprime lender trashing a deposition with foul language; in fact, an "F-Bomb" carpet bombing that laid waste to any sense of decorum. Now, this blog isn't exactly a haven of the prim and proper, and "snark" is a word with which we are well familiar, but even wing nuts like us have our limits.

The judged who sanctioned this low-life $29,000 for his behavior watched the videotaped deposition and counted a total of 73 instances where the crud ball dropped the F-Bomb. Reporter Karen Donovan notes that this pales in comparison with the movie Goodfellas, where the word was used 246 times during the film's 145 minutes. Unlike the characters in Goodfellas, however, the potty mouth in this case is only a wanna-be tough guy. All that posturing and tough guy talk, apparently aimed to convince himself that he's "Baaaaad," and he gets his sorry tukus hauled before a judge, and Hiz Honor  slaps him down like a child, notwithstanding his pleading that he's a poor, weak-minded troll who can't help his ejaculatory crudities because he suffers from "anxiety disorder." In other words, he's not really a hard guy, he just plays one on TV.

This clown would have been perfect as an aide to the late, great Eliot Spitzer, but that career path appears closed now, doesn't it? It's nice to see, however, that the prostitute who serviced the Spitz is now getting more than her 15 minutes of fame. Even The Donald wants to "promote" her, which isn't surprising, is it? Maybe there's a place for her in subprime, too. As an "Executive Assistant" to a subprime CEO, perhaps?

According to the story, the tough guy's attorney was caught on camera snickering at his client's antics. Wonderful. And yet, many lawyers appear to resent the fact that ordinary folks would say that, by describing a person as an attorney, you're ascribing to them a blatant character defect. You roll around in the mud with pigs, you get dirty.   

Calling All Compliance Lawyers

I don't intend to make a practice of posting job available ads, but inasmuch this one appears to fit the potential profile of a typical reader of this blog, and that the bank whose service corporation owns the mortgage company involved is right down the Dallas North Tollway from me, I'll make an exception. This came to me via an e-mail from a member of a listserv group of real estate lawyers and professionals to which I subscribe:

MGC Mortgage, Inc. in Plano, Texas is looking to fill a new position for a compliance attorney in our new residential loan servicing group.  The ideal candidate is familiar with FDCPA, FCRA, RESPA, TILA as well as general consumer protection, collection and privacy laws. Basic litigation experience would be helpful.   We are looking for counsel with at least 7 years experience.

Resumes should be sent directly to Kathryn Vines at kvines@bealservice.com