Bank Lawyer's Blog

CFPB: Zombie Killer

Just as nature abhors a vacuum, the CFPB abhors any area of the economy where it's not rooting out evildoers and saving innocent consumers from perils they may not realize endanger them. One of the vacuums that the CFPB is rushing to fill is the land of "Zombie Foreclosures." According to National Mortgage News' Kate Berry, the CFPB sees this as the badlands where straight shooters like the CFPB need to "clean house."

Some borrowers are being harmed when a mortgage servicer starts a foreclosure but then fails to complete it, leaving borrowers on the hook for the mortgage debt, taxes and maintenance even though they may have already moved out, said Laurie Maggiano, the CFPB's servicing and secondary markets program manager.

"The CFPB is beginning to look very closely at abandoned properties and zombie foreclosures," Maggiano said Tuesday at a conference sponsored by the Federal Reserve Bank of Cleveland. "There is direct borrower harm if a borrower believes a foreclosure on their property has been conducted and they are no longer responsible, and months or years later find out that they are, that there was never a foreclosure and they have large financial responsibilities that they never knew about."

These loan servicers! They trick the borrowers into moving out of their unpaid-for homes with threats of foreclosure, and even commencement of foreclosure proceedings, then they "go dark" and, behind the non-paying borrowers' backs, let the houses sit vacant. Why do they do this? Apparently, because, like The Joker in "The Dark Knight," they believe in chaos theory, especially when they're the agent of chaos.

Do I really look like a guy with a plan? You know what I am? I’m a dog chasing cars. I wouldn’t know what to do with one if I caught it. You know, I just… do things.

Consumer advocate Peter Skillern thinks this whole gambit by loan servicers is rotten to the core.

Servicers typically flood defaulted homeowners with as many 250 letters and phone calls telling them their home is going into foreclosure, says Peter Skillern, the executive director of Reinvestment Partners, a Raleigh, N.C., nonprofit. But they usually fail to notify the borrower when the foreclosure is stalled.

"They are pushing the borrower out of the home, which results in abandonment," Skillern says. "Servicers need to make sure they are accurately communicating the status of the foreclosure process to the borrower."

Yes, so the borrowers, who haven't been making their mortgage payments, in some cases for years, can remain in, or return to, the houses "rent free" while continuing not to pay their loans. This assumes that with someone living in the house, the occupant will transform it from what the article alleges is a property with respect to which "the cost to repair a home is more than the property is worth" into a credit to the community. Even if they can't make their mortgage payments, they'll repair it. Honest.

For the last several years, we've been discussing the problem of broken cities blaming lenders for their decades of bad decision-making. The areas where homes are being abandoned by lenders are not areas that got to be in the condition they're in because of "Zombie Foreclosures" initiated by lenders who just mess with borrowers because "they just do things." Moreover, while knowingly or even recklessly initiating foreclosure proceedings or otherwise bombarding borrowers with foreclosure notices and then traveling to Neptune, never to be heard from again, would not fly with etiquette experts, the borrowers are not the only, or even the primary, folks being "inconvenienced." Unless the borrowers suddenly resume paying the freight on their mortgage loans, all that wasted effort is likely to results in costs borne by the owners of the loans (or the securities backed by the loans). If this is a problem worthy of CFPB wrath, then the investors ought to be looking into this major "abuse," as well.

A Kerfuffle Fades To Black

The forced placed insurance kerfuffle we last discussed three years ago appears to be winding its way to an unhappy ending for loan servicers in the way many claims against loan servicers, lenders, and big businesses of all kinds end in our over-lawyered land: paying huge sums to class action palintiffs' lawyers to make them go away.

To refresh our collective memories, forced placed insurance is property insurance that loan servicers buy when the borrower fails to keep the property insured. As we discussed previously, the practice has been around for decades, and makes sense in terms of protecting the collateral for home loans when the borrower fails to do so. However, as we said in our last post, government officials and the trial lawyers who follow them like orcas in a tuna boat's wake have been worked up over certain close relationships between force placed insurance companies and loan servicers. Commission splits, referral fees, and other alleged "kickbacks" have raised the ire of the righteous, who claim that the entire arrangement is a rip off of the borrower, who ends up having a very high premium added to the unpaid balance of his debt, a premium that would not be so high if servicers weren't profiting from the misery of the deadbeats downtrodden who don't pay their insurance premiums or, in many cases, their loans.

At any rate, after wading through the sludge of civil litigation for a while, servicers are starting to settle. Wells Fargo is the latest. Not that they think that they did anything they should have been sued for, mind you.

"While we believe the lender-placed insurance purchased on behalf of these borrowers was issued in accordance with the terms of the mortgages and applicable laws, we have decided to settle these cases to avoid protracted litigation,” Tom Goyda, a spokesman for Wells Fargo, told HousingWire. “We continue to support our lender-placed insurance services, which provide continuous insurance protection for real property customers when their voluntary insurance lapses.”

They continue to believe in it, but according to Housing Wire, they and the insurance companies are paying homeowners back about 11% of the amount of premiums. That is not chicken feed. Well, for the late John Candy's chicken, it might have been, but for a normal-sized chicken it's a big bag of cornmeal. The linked article also mentions that Chase paid $300 million in a settlement, and Citigroup another $110 million. How much of that actually made it into the pockets of affected homeowners is not related. You can bet your bottom dollar that the plaintiffs' lawyers made out like bandits very well.

My sentiments on this issue haven't changed much in the past three years. As I said in my previous post:

As I've indicated in other posts, I'm no fan of many of the practices of the loan servicers. However, as is the case with loan modifications, the root cause of this particular problem becoming a problem in the first place is the fact that borrowers don't comply with the loan terms they've negotiated. They are in default of the covenant in their mortgages to keep in place homeowners insurance that protects not only themselves, but the lender. The failure to keep such insurance in place gives the lender the contractual right to obtain the force-placed insurance or, for that matter, to declare the loan in default and foreclose. You don't want the servicer ordering expensive force-placed insurance? Pay your insurance premiums.

As I also said at the time, I am more sympathetic to loan investors, since the higher costs for insurance are ultimately borne by them, especially with respect to loans that borrowers don't repay. I thought that aspect of the problem could be better handled by changes to the servicing agreements.

I realize that my sentiments appears to be that of a small minority. The majority sentiment in this country appears to be that loan servicers are all public utilities that exist not to provide a valuable service to loan owners, but to provide low-cost public services to home owners. Any attempt to make money from the process is inherently suspicious and indicates an unreformed reactionary attitude out of line with the the concepts of liberty, equality, and fraternity that ought to motivate all of the citizens of the republic as they work together for "the common good," as determined by Elizabeth Warren and her running buddies.

Under the prevailing view, these servicers are getting just what they deserve. As are the class action lawyers who sue them.

HUD Defends The Middle Ground

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

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

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

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

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

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

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

Community Banks Bagging Non-QRM Mortgage Loans

While it's only anecdotal, the evidence is accumulating that the law of unintended consequences in the land that the man-made beast known as "Franken-Dodd" roams, is working its inexorable way through the community banking businesses, and especially that portion of the business that relates to residential mortgage lending.

One local community banker is saying his bank will no longer offer certain home loans because of new mortgage lending regulations.

Hunt Campbell, president and CEO of $117 million First Alliance Bank in Cordova, said his bank will no longer make mortgage loans to borrowers who don’t meet the standards for new qualified mortgages that went in to effect Jan. 10.

Campbell said that the bank can't generate enough non-QRM loans to make taking on the additional risk worthwhile.

According to the Federal Reserve, Campbell is not an outlier.

According to the Federal Reserve Bank of Atlanta’s latest Beige Book for the Sixth District, which includes the lower half of Mississippi and central and east Tennessee over to the Georgia-South Carolina border, some mortgage lenders have exited the mortgage lending business altogether or changed their business models because of the added risks.

 Some lenders indicated they were shifting their focus from residential mortgages to small business and commercial real estate loans, the report said.

Cambell's parting words are ironic.

“The place where a bank can wind up if they’re deemed to be out of compliance in certain areas — you can get a DOJ referral and wind up fighting Eric Holder and Co.,” Campbell said. “It’s just not worth it.”

The reference to Holder is ironic because, notwithstanding lip service paid by the CFPB and other regulators that a QRM-only bank would not, by that factor alone, be deemed to be running afoul of CRA or Fair Lending laws, Holder and his crew have been champions of pushing the "disparate impact" theory to its logical limits, and beyond.

No community banker can sleep well at night knowing that there is a Catch-22 waiting to make his or her life miserable. Make non-QRM loans and make them on less favorable terms (to the borrower, at any rate) than QRM loans, to compensate you for the higher risk? Not only do you not have the benefit of the Dodd-Frank "safe harbor," you might end up with a fair lending "referral" based upon a disparate impact argument. Make only QRM loans? Disparate impact-based Fair Lending or CRA violations are not out of the picture, due to "other factors" that the regulators throw into their analysis.

In these times, given the nature of the crew manning the bridge of the good ship USA, there is no true "safe harbor" in residential lending.

Ben Knows Best

When you read news like the recent reports that Benjamin Lawsky, superintendent of the New York Department of Financial Services, asserts that "[n]onbank mortgage servicers are growing too fast and regulators need to protect homeowners by making sure these companies can handle the volume of business they are taking on," you assume that Lawsky must have a great grasp of the mortgage servicing business, information technology systems, staffing, business growth, mergers and acquisitions, personnel management, and, in a business environment, how to do it right and, most important, how to avoid doing it wrong. You'd think that. Of course, if you did, you'd be sucking wind.

According to his official biography, Lawsky is a lawyer. As anyone who reads this blog knows, that qualifies you for...the practice of law...maybe. It also likely means that you're adept at opening your pie hole and emitting various loud intonations about a myriad of subjects about which you have little, if any specific knowledge. All that goes with the job description.

Lawsky's bio also touts the following mortgage servicing specific job experience:

• Governor Andrew Cuomo's Chief of Staff.
• Deputy Counselor and Special Assistant to then-Attorney General Cuomo.
• Assistant United States Attorney in the Southern District of New York, "where he prosecuted white collar crime, organized crime, and terrorism cases."
• Chief Counsel to Senator Charles Schumer on the Senate Judiciary Committe.
• Trial Attorney in the Civil Division of the Department of Justice.

So, when Lawsky shoots down Ocwen's purchase of Wells Fargo's servicing rights on the grounds that he's concerned about Ocwen's ability to handle the increased volume, you can see how his background has made him uniquely qualified to second-guess Ocwen on that matter. After all, when it comes to private business acquisition decisions, Lawsky's job experience has provided him valuable insight's into such matters as which way Andy Coumo's wind is blowing on Tuesday morning, does Chuck Schumer take his grande chai latte with one lump or two, and which upstate village mayor needs to be kneecapped for not supporting the boss in the last general election.

Ocwen may or may not be able to adequately handle the Wells Fargo servicing business. Homeowners may, in fact, need protection in this or some other similar instance. However, why would we believe Lawsky on this specific issue? Why, instead, does he appear to be the second coming of The Spitz (absent, we hope, the "crossing-state-lines-to-visit-Ashley" issue)?

We'll see how all this shakes out. Perhaps it's not merely one more political grandstanding stunt by a New York pol on the make, and is based upon hard evidence. If it's based upon industry-specific expertise, we assume someone other Lawsky is supplying it.

Bad Banking!

My friend and occasional guest blogger Pat Dalrymple, a former community banker, felt the need to blow off steam again, so I'm indulging him. Actually, he's a lot more optimistic than I am, but that doesn't take much.

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The smart money today is emphatic in advising not to get into banking as a buyer of, or  controlling investor in, a financial institution, especially in a smaller, so-called “community bank”..

The reasons cited are many and cogent:

·         Regulatory restrictions are choking off profitability.

·         There’s a dearth of acceptable assets for investment to soak up the deluge of cash deposits flowing into banks.

·         The Dodd-Frank Act has triggered regulations that make compliance difficult, complex, expensive, and virtually impossible to accomplish.

·         Appreciation in a bank’s market value is minuscule, compared to the windfalls that investors experienced over the past 40 years.

·         Big bank competition makes it impossible for a small bank to thrive

·         The quality of small bank loan portfolios is suspect.

·         Banking isn’t fun anymore.

There are others, but you get the picture.

In fact, every one of the above is true.

Yet, if we’ve learned anything in the last 5,000 years or so of recorded history about war and commerce, when the experts say “do”, don’t.  When the word is “don’t”, seriously consider doing the opposite.

Airplanes could never sink a battleship, submarines were nothing more than toys.  Why would anyone invest in a flying machine, a horseless carriage, or a device that lets people talk on wires?’’

In this instance, we’re not talking about buying stock in a mega-bank.  That’s probably a pretty good bet over the long haul, because the big banks almost can’t help but make money, positioned as they are at the crossroads of global industry and commerce.  The opportunity, if there is one, lies with little banks in relatively small markets: the institutions under, say, $200 million.

Big banking and little banking are two almost completely different businesses that, paradoxically, are governed by the same set of regulations.  Inevitably, these regs are applied differently to the two industries.  Our focus here is on the smaller of the two, but, in terms of the number of individual institutions, and thus in opportunity, much the larger.

So, let’s take a quick look at all of the good reasons not to buy a bank:

Regulatory stifling of profitability:

This  maybe should be first on the list of considerations, and it has to be recognized as a challenge at the outset.  It’s absolutely a fact of modern commercial life that the regs make it difficult to make money the old fashioned way.  Most community bank business models are using pre-crisis blueprints, which may not work in a post meltdown environment.

We’re all products of our training, and bank management teams certainly weren’t conditioned to adust when the basic rules of the game changed.

So, the plan for a purchaser may have to run contrary to a lot of conventional wisdom to thrive in the current economic ecosystem. Fore example,  if the bank isn’t already doing so, become the go to residential mortgage lender for your customers.  When the bank can’t make a loan which could ultimately result in a profitable long term relationship, (which will be often these days) find ways to assist that customer to find alternative financing.  And above all, don’t forget to make money doing it.

Also, carefully look at the cost/benefit equation of paring expenses. All banks, big and little, have been cutting costs for the past several years.  Most community bankers are convinced they’ve cut to the bone, but they’re wrong; they’re running the business that they built and were trained to run, and that model just doesn’t exist in the old format.

For example, small banks that have branches probably shouldn’t.  The deposits accumulated simply  don’t justify the cost. Paradoxically,  management has kept the branches open to “preserve the institution’s franchise value” for potential purchaser.  Ignored is the strong likelihood that, should that buyer come along, the branches will be shuttered soon after the sale closes.

Finally, in viewing a troubled bank, the income statement can tell an interesting story: when all of the expenses attendant to regulatory restrictions and undercapitalization are erased, one often finds that, even with last century’s business model, the bank can be adequately profitable.

Scarcity of good assets:

This phrase merits some redefinition:  There are a lot of quality loan assets around; they just don’t fit the regulators’ discriminatory definition of what’s good.  Of course the result doesn’t change.  If  the regulators classify the loans as second class citizens in the general population of paper, then that’s what they are.

Conventional wisdom says that a lot of bank dollars are chasing few assets, so the big fish will force the little ones out in the feeding frenzy.  But CW, as usual, may have it wrong.  Money center institutions have managed to cinch up  the regulatory bonds past even what the examiners have done to them.  This is because, in response to the post Dodd-Frank regs, they’ve instituted multiple layered internal policies that have destroyed their flexibility.  Good loans often go to big banks to die, especially if they have to move up the approval ladder.  Savvy community banks with good CAMEL ratings are using their huge edge in flexibility and processing time to take high quality business away from the bullies in the high rise offices.

Cost and complexity of compliance:

Nothing causes more angst and molar grinding among bankers than complying with the plethora of consumer laws and regs enacted and promulgated in the wake of the Great Meltdown.  But most of the wailing is done by old duffers like me that have been around banking since way back in the last century.  Fortunately for everybody, we’ll die off, to be replaced by bright young people who will grow up in an over-regulated environment and will opine, “Gee, what’s so hard about that”.  And no matter what us old cowboys tell you, it doesn’t really cost an arm and a leg to accomplish the task.

Minimal appreciation in the bank as a salable asset:

True; you can’t buy a bank and sell it three years later at 3.5 times book.  Putting equity money into a financial institution today is a longer term investment.  But the cash on cash return can be very impressive, which will very nicely enhance book and market value.

Forget about owning a little bank.  Big banks have all of the business:

No businesses are better positioned in their marketplace than community banks.  Few businesses do a worse job of exploiting that advantage.  (See the flexibility factor noted above)  Imitation is the sincerest form of flattery:  the big banks know the advantage of looking little to the home town folks, and often they’re more successful at it than their smaller brethren.

A prospective purchaser of a bank must understand the marketing plum to be acquired that very likely has been woefully underutilized.

Small bank loans are second class paper: 

True for some; at least from the new regulatory perspective.  And almost certainly so for institutions that are the prime targets for investors.  These are the troubled banks that sometimes had to be satisfied with the skim after the cream was scraped off by competitors.

However, any of these loans that are currently performing in a post-nuclear financial landscape are survivors, and have a very good chance of continuing to be.  One of the dichotomies of negotiation for a bank involves the owners touting the net interest margin of the portfolio, while the shopper counters with, “Yeah, but look at the loan quality”. Actually, the quality may be pretty good. The deals have   been through the fire and they’re still anteing up that high interest rate, which can be pretty neat for an investor.

And then there are the non-accrual loans, those gems that you can’t book income from until they go away, one way or another.

What’s weird, is that a lot of these really rotten deals are performing.

My pilot friends tell me that any landing you walk away from is a good one.  My wisest banking friends say that, in the final analysis, a good loan is one that gets paid back.  This bottom line criterion doesn’t necessarily meet 21^st century regulatory discrimination, but, in some instances, it can set up a nice little windfall for an investor, because all of that deferred interest on the loans that continue to perform will ultimately find its way to the bottom line.

That’s about it, so……….

What?  Oh yeah….having fun.  Well, if you’ve been a bank exec for more than ten years, it probably isn’t much fun.  In, say, 2004, the 3-3-3 banking rule didn’t actually prevail (you know, pay 3% for your deposits, mark your loans up 3%, and be on the golf course by 3) but it was a day on the beach compared to 2014.

On the other hand, if you can buy a clean bank, or make sure that the existing owners clean it up before handing over the keys, then you might have a pretty good time, given the potential profit margin.

Go Together Like A Fish And A Bicycle

I have received unconfirmed reports this weekend that HUD has requested certain large mortgage loan servicers to send marketing materials to HUD borrowers reminding them to sign up for health insurance under the Affordable Care Act, aka "ObamaCare." As one unidentified commenter put it, considering the Claymation Death Match struggles between those large servicers and the federal government on a number of fronts, asking them to carry the Feds water on such a cluster-FUBAR is either a "ballsy move" or a demonstration of fatal hubris. I vote for the latter.

If this report is correct, it's the kind of strong-arm tactic typical of a crowd suckled on the mother's milk of South Side Chicago bare-knuckled local politics. After all, the large servicers have what the federal government can only dream about: an efficient information distribution system.They're also susceptible to arm-twisting, as evidenced by the billions recently coughed up for robo-signing, enforcing their investors' legal rights under loan documents by foreclosing when borrowers failed to make payments, and otherwise performing the job they are contractually obligated to do. You can understand why the ACA Gang That Couldn't Shoot Straight, led by Queen Kathleen and the Web Masters of Oz, would want to enlist the services of for-profit entities who, when their customers visit their web sites, are presented with a message other than The Blue Screen of Death.

The fact that mortgage loan servicers soliciting their borrowers to sign up for health insurance in order to save the ACA's (and the Democrats') bacon inspires "WTF!!??" reactions on so many levels should not impede the continued pursuit of this scheme, if it in fact exists. After all, the "Perpetual Speechifier" is a lame duck, so his attitude, and those of the minions at his beck and call, has to be "What are you gonna do about it, huh? Not vote for me the next time I don't run?"

I wonder if and when the main stream media will pick up on this thread to see if there is any meat on the bones?

 

Don't Bother Me, I’m a Banker

Another guest blog post from former community banker and mortgage banker, Pat Dalrymple, this one on the folly of the fear of increased compliance risk causing community bankers to forgo the revenue generated by a sensible residential mortgage banking line of business.

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Community bankers are quick to bemoan the touted demise of the home town financial institution, but seem unable to do anything about it. In fact, the majority of small bank CEO’s will probably tell you that, over the next five years or so, the CB side of the business will be acquired and merged out of existence.

Bought by whom?  Merged with what?

Very few big banks are expanding; in fact, they’re shrinking as fast as they can, throwing everything but the cannon overboard to lighten the ship.  Private capital is extremely wary of getting into banking with a small vehicle.  Community bankers may find, possibly to their chagrin, that they’re going to be around for some time.

The smaller banks have generally done a good  job of marketing in their trade areas.  Indeed, their success in embedding themselves in their communities should be the envy of every marketing professional.  This is a significant competitive advantage that, for some reason, they’ve failed to exploit.

Many banks have been strangely, remiss in serving their customers in their major borrowing need : residential mortgages.  The traditional community bank attitude, which still clings like a barnacle to the hull of small banking, is that “we don’t do that, we don’t know how to do it, and we don’t really want to do it.  Go across the street to the S&L or mortgage company”. 

When the Great Meltdown hit in 2008, thousands of mortgage brokers left the business, because the alternative and sub-prime products were no more.  A second exodus came with the new restrictive consumer protection and documentation regs; for a lot of practitioners, robust regulation  simply wasn’t fun. This did, however create a vacuum that was one of those business opportunities that come along every generation  or two.  Unaccountably, community banks, even those with mortgage departments, failed to take advantage of it.  They were probably too mesmerized by watching the train wreck to think.

Those brokers that remain, unfortunately for bankers, are the cream of the crop.  They’re competent, professional and ethical.  The robust residential loan business being fed to the conduits by mortgage brokers is a major factor in big banking’s return to profitability.

Yet small banks, especially those in smaller communities or market areas, can beat the brokers hands down, if they choose to do so.  Because of its market preeminence, a bank can, almost without trying, quickly become a mortgage broker on steroids.

In addition to “Don’t want to”, and “Don’t know how to”, write down “Afraid to”.   Compliance regs, as promulgated by the Consumer Financial Protection Bureau are scaring little banks out of their pants.  On one hand, a somewhat puzzling reaction, since compliance has become the business of banking.  Still, adding any more rules can be daunting.  And, if you’re not afraid of the CFPB, you don’t understand the situation.

A good friend is the CEO of a community bank that’s profitable, growing, actively lending and with virtually no problem loans.  It also brokers residential mortgages for its bank customers, so I thought it might be a good  example of how to do it..

He addresses the compliance issue by not doing most of it.  His bank brokers only to wholesalers that do all of the disclosures. 

Are his customers nonplussed when their bank passes their mortgage app along to a wholesaler for funding?  That question elicited a polite dumb question answer: “Why would they go across the street when they can get their money through their own bank?”

Is it worth the effort to get into the business?  Well, there’s a simple way to find out.  Just take the last 12 months of mortgage recordings in your market area and see how many loans your customers got from others.  The results could be surprising, even shocking.  Figure that you should be able to get a fairly high percentage of those deals.  Multiply that number by the lender paid compensation offered by the wholesalers, and you know what may have been left on the table over the past year.

Finally, it’s ridiculously easy to crank up the activity.  Many, if not most, small banks are under-utilizing staff right now, and the wholesale lenders love banks.  They’ll kiss the proverbial ring for the community bank’s business.

Simply stated, banking is the business of making a profit on the movement of money.  Why let somebody else make a profit on that movement, off of your customers, at your expense?

A New Game Plan

Long-time mortgage lender and banker (and old friend) Pat Dalrymple, whose guest posts have occasionally graced this blog, wrote a gem recently for his regular column in a Colorado newspaper. Pat provided a real-life example of the consequences of heightened regulatory scrutiny of commercial lending at community banks across the country. As Pat puts it, the scenario is so common that he doesn't even need to worry about the regulators figuring out which bank he might be discussing. I assume that many community bankers (and, unfortunately, many borrowers) recognize themselves.

The worst bank examiner rating for a loan is “probable loss,” which means that the bank has to write off the entire loan, taking the balance out of capital and current income. The next worst is “nonaccrual,” which means that the bank, rather than booking interest income on the loan, must apply the money received to the loan balance on the bank’s books, and realize a profit or (loss) only when the loan is paid off, or the foreclosed property is sold.

But a funny thing may have happened on the way to “nonaccrual”: the loan didn’t turn into a bad loan, it was just called bad by the regulators because, well, the rules changed between exams.

Nonaccrual loans, along with foreclosed collateral, are held to be an indication of a bank’s health. A large percentage of these problem assets in relation to an institution’s capital can mean that the bank is in trouble. However, if one digs into the makeup of these nonaccrual loans, in many cases, a surprising, even shocking, number of them are paying like clockwork. 

[...]

A business owner has been a premier customer of the a bank for, say, 15 years on both sides of the ledger, as depositor and borrower. He comes to the bank president for a relatively small increase in his business operating capital loan; a request that’s been routinely granted for years. The CEO says, “Sorry, we can’t do that. As a matter of fact, we’d like you to move your loan to another lender.”

Of course the guy is ticked off and marches out of the bank vowing never to do business with it again, while figuring that he’s the cream of the crop of bank customers; after all, hasn’t he been told that for 15 years?

Turns out, the rules have changed for everybody. The three banks he subsequently calls on tell him he and his business can’t be accommodated. He then goes back to his old banking partner and announces, “It’s just you and me kid. Looks like we’re stuck with each other.”

And so it goes. Community banks provide the lion's share of the lending to small businesses in this country and small businesses drive job creation. People wonder why the economic recovery has been so prolonged and weak. While there are many culprits, regulators making sure the last war never again breaks out is one of them.

In the meantime, the big boys are doing just fine, thanks for asking.

US Senate Gets Interested In Emminent Domain

While a great deal of chatter today centered around the American Banker article by Kate Berry and Jeff Horwitz about the unholy alliance of HUD, George Soros, and an advocacy group that makes its money by suing banks on trumped-up grounds of racial discrimination, that article is only the first of a series. I want to read the rest of the series to see if the butter is as rancid as it appears to be from the first installment.

My immediate attention was drawn today to the news that a bi-partisan group of Senators is taking on the eminent domain madness that has swept up municipalities like Richmond, California into the vortex of unintended consequences. The straw that apparently broke the solons' backs were letters sent by Richmond to some mortgage loan investors that threaten to us the power of eminent domain if the loan owners don't sell their loans to the city. That prompted four senators to write a "strongly worded" letter to HUD demanding that HUD step in and tell Richmond that if it pursues this course, it can kiss FHA loans in that city goodbye. That's what the FHFA did regarding Fannie Mae And Freddie Mac financing.

To the surprise of no one (including, I strongly suspect, Kate Berry and Jeff Horwitz), HUD's response was tepid. HUD is "monitoring the situation." The senators are demanding more than that from HUD.

Good luck with that, senators. HUD's apparently too busy concocting "disparate impact" regulations and working hand-in-glove with professional "non-profit fair lending advocacy groups" to squeeze settlement money out of reputation-risk-averse big banks to actually help to save mortgage lending in Richmond, California. With this crowd, ideology trumps the market place.