Bank Lawyer's Blog

Tales Of Wells Fargo

Wells Fargo just can't catch a break. Not only has the US Department of Justice told the bank that it might file a fair lending action against it for its allegedly discriminatory practices with respect to maintenance of REO, but the morons at MoveOn.org have decided to stage a public protest against Wells Fargo solely because they can't find Bank of America to kick around.

As for the DOJ claims, they appear to be based upon consumer advocates' claims that the bank takes better care of foreclosed-upon real estate it owns in neighborhoods where white people live than it does in areas where minorities live. I suspect that the bank will assert that (a) any rational real estate owner is only going to invest money in a piece of real estate where the owner has a realistic chance of recouping that investment through a higher sales price, (b) that such recoupment decisions are made on a property-by-property basis based upon objective data like recent comparable sales prices and fair market valuations, (c) that the economic reality-driven facts of life are that many more such properties are located in majority-white neighborhoods than in minority neighborhoods, and (d) there has been no intent to discriminate, merely to minimize losses, will fall on deaf ears. As we've previously noted, the DOJ is on a jihad against lenders based upon "disparate impact" theories that the DOJ knows, in its heart-of-hearts, are highly fragile when exposed to the light of logic, the kind of logic applied by the US Supreme Court. Justice will likely pursue Wells Fargo and try to squeeze some dough out of it before the highest court eventually shuts down this racket.

What's really bad news, though, is that Wells Fargo is having the Occupy fellow-travelers occupying its Denver downtown branch (deliciously ensconced in a high rise known as "The Cash Register Building," a landmark where the author of this blog once labored) as part of a protest against one of Wells Fargo's rivals, Bank of America. That protest is enough to confound even Occupy sympathizers like Denver Business Journal reporter Heather Draper, who's a self-confessed big bank hater.

This member of the media is confused. You want to draw my attention to BofA’s shameless practices by protesting Wells Fargo? No wonder the message of the 99 percent gets muddled.

Don’t get me wrong. It’s not that I’m on the side of the banks. I’m squarely in the “99 percent” and I understand and agree with the need to draw attention to corporate wrongdoing.

But in this case, I’d say a BofA protest at an entirely different bank is confounding, at best.

Why, you may ask with good reason, is MoveOn.org picking on Wells Fargo for the conduct of Bank of America? I'm glad you asked.

In the way of explanation, the MoveOn.org email said: “While Bank of America’s CEO and shareholders meet in Charlotte, N.C., tomorrow, the 99 percent is taking to the streets across the nation to protest BofA. As the economy declined, BofA made millions in profits by dodging taxes and foreclosing on homes, which hit communities of color especially hard. Bad publicity is like kryptonite to big corporations — that’s why thousands of people are protesting, marching, and raising our voices in solidarity to draw the media’s attention to BofA’s shameless practices.”

[...]

“Since there is no BofA branch in Denver, we will rally again at Wells Fargo, the major tax dodging, home-foreclosing, job-outsourcing bank in Denver,” said the email from MoveOn.org.

That explanation caused Ms. Draper to "laugh out loud." It caused me to wonder why MoveOn.org just doesn't move on down the road...into a ditch or, better yet, off a cliff.

There Is No Due Process?

Last night's post on United Western Bank generated a lot of traffic. Apparently, people are attracted by a David-versus-Goliath scenario. However, there's more to it than that.

In response to an earlier post on the attempt to give bankers a right to an "effective" appeal of examination decisions, one of the principal owners of a financial institution that failed during this latest crisis sent me an email that seems appropriate to post at this time. Obviously, this is only this individual's point of view, and the other "players" in the drama would likely disagree. However, his viewpoint is so well expressed, that I've decided to present it. I've changed some information to protect this individual from identification and retaliation (not that a federal regulatory agency would even THINK of EVER doing such a thing, of course). Other community bank owners, directors, and senior officers can share his pain.

It is my understanding that the processes you describe as set out in the Financial Institutions Examination Fairness & Reform Act have been  available to banks (at least [Bank Regulator] banks) for some time.  However, the ombudsman was more like a retired diplomat (for Monaco not Russia), rather than an informed, empowered decision maker.   And the administrative law judge is difficult to access (& triggers a severe adversarial breach in the relationship with the regulator), & the point at which it can be considered is too late in the process.

All of this discussion about oversight & review of due process presumes that the regulators basically know what they are doing, & exercise their regulatory authority in an appropriate manner.  The Office of Inspector General’s material loss review of the [Bank Regulator]’s handling of [The Bank] looked at the process the regulators went through & reviewed their narratives & calculations, but they never evaluated the validity of their loan evaluations nor whether the assumptions underpinning the subsequent reserve calculations could be substantiated.

So what recourse is there in the event the regulators don’t know what they are doing, or that they exercise malfeasance in their examination process?  At [The Bank] we had a complicated operation with large mortgage banking cash flow swings, complex servicing valuation issues, & large commercial real estate credits.  The field regulators were much more accustomed & qualified to review simple consumer credits.   Perhaps there were people up the chain of command at [The Bank Regulator] that could have weighed in in a more informed way, but they were embroiled in a political life & death struggle for their own survival & couldn’t be bothered to waste their time overseeing the destruction of a community bank.

[The Bank] was well capitalized [(Actual Precentage Omitted)] prior to the [Bank Regultor's] final examination in [Date Omitted].  They forced us to make a massive unsubstantiated addition to the bank’s loan loss reserve that immediately put us into a severely undercapitalized position.  And as you know we were extinguished within [A Short Period Of Time].  Now [A Number Of] years later we can look back & start to assess whether we, or the [Bank Regulator], was “right” in calculating the appropriate reserves.  If the books could ever be opened up & revealed in the bright light of day, the world would see that the [Bank Regulator]’s calculations were in fact totally wrong.  [The Bank]’s original reserve calculations very closely mirrored how the bank’s loans have actually performed (or not performed & subsequently liquidated).  Certainly, in these unprecedented market conditions, we didn’t dispute the need for added capital.  The question is, was it best for the FDIC, the depositors & the bank’s customers for the bank to be shuttered, or for it to work through its problems.  An informed & empowered ombudsman might have looked at the bank’s overall loan quality (delinquency rates: commercial RE0; consumer loans < 1%, etc.); profitability of the bank (earnings before reserves were about $[Substantial Dollar Amount] in [The Year Before The Bank Failed]; & history of operating in our market niche ([Many, Many] years), & decide that there should be an impartial, 3^rd party validation of the field examiner’s loan loss calculations before they pronounce the death sentence.

Instead, the government stole our life’s work, & destroyed an important community bank for the state [Where The Bank Was Located].  [The Acquirer From The FDIC] was able to swoop in & flip the bank in a [Relatively Short Peroid Of] time & walk away with a gain in excess of $[A Boatload].  This outcome is market validation of the error the regulators made.

But there is no due process, & this case will never see the light of day.  However, I don’t think this circumstance is unique to [The Bank].  If you look at the profile of the banks that have been put into receivership by the regulators in this cycle there appears, to me, to be a clear bias against private, closely held community banks.  Do the regulatory bureaucrats, with their mid-tier government pay scales secretly begrudge the entrepreneurs that run many community banks?  It bears closer examination, because the results of their bias will clandestinely define the future of the financial services industry & how communities & consumers are served.

As I said, that's one person's point of view. Each reader can decide for himself or herself where they stand on the primary causes of the community bank failures that have occurred thus far in the current cycle. Nevertheless, the foregoing illustrates why so many community bankers are following the United Western Bank litigation with much more than tepid interest.

Bank of America "Sues Itself." Yawn...

A reader emailed to ask why I wasn't all over last week's HuffPo "expose" about Bank of America "suing itself" in a foreclosure action. Since I've teed off on BofA on occasion for foreclosure missteps, my correspondent wondered why I wasn't picking this low-hanging "snark fruit." The reason is simple: it's a non-story.

Bank of America, as the servicer of a first loan owned by a third party, commenced a foreclosure action on a first mortgage loan. The bank, in its individual capacity, had a second lien loan on the same property. Since the foreclosing servicer must name all junior lien holders in the foreclosure proceeding if it wants to extinguish the junior liens, it named the bank. The bank is agent for the owner of the first lien loan and is also the owner, in its individual capacity, of the second lien loan. It has to name itself. This is "Foreclosure 101."

The allegations of Professor Alan White are absurd. It strikes the professor that this set of facts is "classic robo foreclosure." He further mocks the attorneys and paralegals who worked for the bank of this matter.

"It is a little bit mindless on the part of the lawyer," White said. "They don't need to sue themselves."

The only thing relatively "mindless" is a law professor who touts himself as a predatory lending expert and who either doesn't understand basic foreclosure law or, if he understands it, mischaracterizes what "must" be involved.

A commenter identified as "InkMiser" sums up the problem with the article quite well.

The bank is perfectly correct in naming itself in the case because of its second mortgage interest. Professor White obviously knows nothing about foreclosures, land titles, and the ABSOLUTE statutorily mandated need to name as defendants all persons with an interest in the property. Although there may be robo-signing involved in the case, it has nothing to do with the requirement for BOA to sue itself. What the article misses is WHY BOA had a second mortgage. It had a second mortgage because (and although I'm guessing, it is an educated guess) the when the property was purchased, the buyer did not put down sufficient money to avoid paying private mortgage insurance. The first mortgage is for (usually) 80% of the purchase price and the second mortgage is for the balance of the price. The other thing this story missed is the nuance in paragraph 5. BOA is filing suit, but it admits it doesn't own the loan. It is only servicing the loan for its "investor." There are many things very wrong with the mortgage industry in America. A bank naming itself as a defendant in a foreclosure case in which it has an interest in the property is not one of them.

Other knowledgeable commenters make similar points, and also discuss various reasons why the bank as junior lender may be "hanging in there" as opposed to merely releasing the junior lien. One of those potential reasons may have to do with the adverse tax effect on the borrower of debt forgiveness. Admitting that there may be a method to the madness doesn't fit the ideological agenda of either HuffPo or Professor White, who blogs at Credit Slips. That blog is known as the former hangout of Liz Warren and a purveyor of fevered screeds that bash banks with arguments that don't pass the smell test. Obviously, he's the kind of "go to" talking head HuffPo loves.

So, dear correspondent, I've now offered a post about the story. How do you like it so far?

Messing With The Market...Again

Bank of America's announcement the week before last that it was "experimenting" with an alternative to traditional foreclosure, that being taking a deed in lieu of foreclosure and renting the house back to the borrower, was greeted in some quarters as a bold new "pilot program." While that might be true for Bank of America, Fannie Mae rolled out a similar program three years ago and it has never generated much interest among homeowners. According to Fortune's Nin-Hai Tseng, that might be because Fannie Mae's servicers never put much effort into marketing this alternative or it might be because it's too difficult to qualify for Fannie Mae's program.

To qualify, borrowers must prove that they can take on monthly rent payments, which would be offered at the market rate. What's more, the balance can't exceed 31% of their gross income. In regular times, that might not be such a biggie – except the program targets homeowners in distress, who have either been tardy on mortgage payments or have stopped making payments altogether.

[...]

If the bank's initiative is going to expand, it might have to be extra forgiving. Compared with Fannie's program, BofA's is somewhat more flexible in that it's open to offering leases at or below the market rate. A program overwhelmingly based on rentals at a discount may or may not work for the bank financially. And it remains to be seen if that will keep the program from expanding much beyond the three test areas.

There's another problem that Tseng notes: the number of markets where single family homes make attractive rental units is limited.

Aside from Las Vegas and parts of California, there aren't very many other places with high foreclosure rates and a robust rental market, says Jed Kolko, chief economist at Trulia, an online real estate site. Much of the overbuilding during the housing boom generally took place in suburbs and further out in rural areas, Kolko adds. However, the demand for rentals is occurring mostly within cities and urban areas.

A few years ago, an economist tried to drag me into an argument on this blog that also involved a leftarded, bank-hating blogger who accused of me of being an "elitist" because I thought the economist's idea of giving bankruptcy judges the power to force lenders to take a deed in lieu of foreclosure and rent the home back to the owner was dumber than a stump. The ensuing brawl in my comments box between opponents and proponents led me to first selectively ban certain antagonists and, finally, to shut down commenting permanently. This blog's a past-time, not a priority. I don't have the time to constantly police the comment moderation function. I've got a day job.

I admit that I'm an elitist, but when you're going up against ideologues and "committed" academics, it's difficult to maintain the proper degree of humility, because they consistently demonstrate that when it comes to factual impediments to their pet theories, they prefer to live in Cloud Cukoo Land, where all scenarios support their foregone conclusions. Keeping a sneer off your face is as formidable a task as not lusting after Catherine Zeta-Jones. It's possible, but not probable.

As Tseng's article illustrates, all of the alternatives to letting the marketplace work through the foreclosure backlog have limitations, not all of them work for every borrower or piece of collateral, and one size does not fit all. I wonder where we would be today if we had dispensed the search for the single magic bullet and quit jacking around with residential real estate. That's too much to ask in a world where so many have opinions and access to the internet is so readily available, and it's an impossible question to answer, but since so many public policy initiatives turn out to be misguided, I might as well engage in more idle speculation myself.

"Heavy-Handed" Regulation Impeding Progress

Another slap-happy bank CEO ventured into no-man's land last Friday and fired off a burst at the federal banking regulators and everyone's favorite punching bag, Dodd-Frank.

Kelly King, CEO of Winston-Salem-based BB&T, has a simple answer for questions about problems in the banking industry: government regulations.

Speaking at a luncheon in Charlotte on Friday, King said heavy-handed regulation and oversight from federal rule-makers has crippled the nation's commercial banking industry ability to extend credit and help the economy recover.

His remarks were the keynote address for Johnson C. Smith University's    fifth annual Free Enterprise and Capitalism Luncheon, sponsored by BB&T.

"The banking system is really gummed up," King said to a crowd at the Charlotte Center City Hilton. He said lawmakers rushed to fix the financial industry after the 2008 crisis and acted out of emotion instead of reasoned thinking. He said the Dodd-Frank legislation includes 2,400 pages of regulations that are to blame for 95% of borrowers' complaints about not being able to access credit.

"Maybe one page was good," he said of the law. "The rest is just a mess."

I need to write Kelly a letter and find out which page was the one good page. I read the whole thing and it all looked like a steaming heap of seagull guano to me. In fact, it still does, other than entertainment value provided by the CFPB.

I think Kelly might be oversimplifying when he blames the entire economic meltdown on the "shadow financial system." It's true to say that relatively unregulated entities aligned themselves with Wall Street investment bankers and rating agencies to form an unholy perfect storm from the depths of Hades, but commercial banks and thrifts, particularly large ones, were in the mix, too. So were cynical politicians and somnolent regulators. In addition, Kelly's view leaves out of the daisy chain of bad actors all those homeowners who thought they'd hit the home equity jackpot and borrowed way more than they could hope to repay without real estate prices continuing to spiral up into the stratosphere.

In other words, there are more culpable parties than there are fingers and toes on the average humanoid.

However, his condemnation of Congress rings a clear tone.

...[V]oters must elect lawmakers committed to American ideals of free enterprise, fairness and equal opportunity. King, who identifies himself as a "Blue Dog Democrat," said the current Congress is too divisive to make progress.

"They have absolutely failed to lead," he said. "And I don't mind throwing the whole bunch into the same bucket."

The bucket should be lined with concrete and tossed overboard directly over The Mariana Trench. Also, throw into the bucket the friends and family leaches those politicians pay to "work" for them. If the bucket slams into James Cameron's sub on the way down, you'd have yourself a heck of a trifecta.

Not Cancelable? Not Really

A recent story from Longmont, Colorado, contained some disturbing news about the consequences arising from last year's failure of Longmont-based (and ironically-named) First Tier Bank. No, it's not the fact that the bank's failure resulted in a developer losing the right to additional funding draws under his acquisition and development loan with the bank and the letter of credit that backed his obligation to the city to put in the top 1-1/2 inches of pavement on a residential development's streets (a condition for the City of Longmont to accept their dedication as public rights-of-way). Rather, it's the implications of this statement by the developer's CFO when the city tried to draw on the letter of credit of credit after the bank's failure and the FDIC told the city to take a hike.

"I didn't think you could cancel a letter of credit," Knirk said. "It says it's not cancelable. But they did. And we had no way of doing anything about it."

Dude, seriously? You had no idea that if a bank fails, the FDIC can reject contingent obligations such as those under a standby letter of credit?

John Podvin and Erin Burrows of Haynes & Boone wrote an article for the The Banking Law Journal a couple of years ago entitled "Revisiting The FDIC's 'Superpowers'." Reading that article could have saved the developer and the city a lot of surprise and (perhaps) frustration. As Burrows and Podvin note:

Virtually any type of contract to which the bank is a party can be repudiated, including financial instruments issued by the bank (such as loan agreements, bonds, certificates of deposits and certain letters of credit), leases, employment contracts, and employee benefits, to name just a few.

The subject matter is more complicated than that (lawyers are involved, after all), but that's a good basic starting point for any borrower or letter of credit beneficiary that is dealing with a bank that is in a potential death spiral. It's a good idea to involve knowledgeable counsel at an early stage and start looking for means to protect yourself, including securing alternative lenders. In the case of the development in Longmont, I'm guessing (because the article doesn't enlighten us) that the developer didn't have an alternative lender to which it could turn to take over the unfunded loan (and the letter of credit) obligations.

On the other hand, the city is willing to step in and finish the streets. The developer will have to find another source to fund the cost of the improvements and pay back the city or the city will slap a tax lien on the property and, eventually, foreclose on that lien, if necessary. The developer says that this alternative does have a silver lining.

[Developer Kiki] Wallace said there is one consolation. The city got better prices on the finishing work than he could have.

"Accidentally, I came out better, because the city has more purchasing power than I do," he said. "I couldn't have planned it. It's not like they go out planning to save developers money. The circumstances just dictated the situation here."

The developer assures the reporter that the last thing the developer wants to do is to "stiff the city," and that it plans to pay the city back. I hope that happens. It's always refreshing in times like these to read about a rare "lemons-to-lemonade" outcome.

I'm sure that whatever happens from hereon, both the developer and the city are going to treat letters of credit that state they are not "cancelable" with a healthy does of caution.

Community Organized Breaking and Entering

An irate reader sent me this article last week, which, he asserted, showed evidence of "open criminal activity" that Chicago city officials were tacitly permitting. To make the long human-interest story short, non-profit groups allied with the Occupy Wall Street movement have been looking for abandoned homes that may or may not be in the process of a bank foreclosure and helping homeless people move in and treat the property as if they owned it.

The Occupy Wall Street movement turned its attention to the housing crisis last fall, and groups around the country have worked to keep people in their homes, place the needy in properties that are seemingly abandoned and rid neighborhoods of blight. The size of the movement isn't clear because most go unpublicized.

Mortgage servicers, reeling with hundreds of thousands of foreclosed homes, aren't necessarily giving in. But they have to tread carefully in their dealings with consumers and activists, lest they risk more national media attention and another black eye resulting from news accounts of bankers putting families out on the street, regardless of whether they have a legal right to the home.

The individual instance that Chicago Tribune reporter Mary Ellen Podmolik chose to focus upon demonstrates the public relations risk of trespassing, breaking and entering, and, depending what the squatters do once they're inside the home, committing what could arguably be considered burgary. In this case, it turned out the home was not owned by Bank of America, as the "facilitators" of this illegal occupation supposed, but by a homeowner who is trying to save his home from foreclosure.

And that is worrying to well-established groups like the Chicago Anti-Eviction Campaign, which plans to significantly ramp up the visibility of its "live-ins" prior to May's NATO summit.

The anti-eviction campaign, which trains groups like Liberate the South Side in home takeovers and has participated in seven since June, calls the situation a public relations "nightmare."

A spokeswoman for Liberate calls it a "calculated risk."

In Texas, if you break into a person's home, the "calculated risk" you'd be taking would be of suffering consequences much more deadly than "a public relations nightmare." It would be more like "A Nightmare On Elm Street," only with a lot more double-ought buckshot flying around.

A spokesperson for the "liberators" believes that when it comes to law breaking, it's all relative.

She sees the work as a move toward economic justice and away from the neighborhood blight that has, she said, unfairly affected communities of color. "We don't feel like we're breaking the law compared to what (banks) are doing to everyday families."

I get emails from folks, including attorneys, who have consumed gallons of the Kool-Aide this relativist educational system has been pouring down their ethically-parched throats for decades. The argument generally takes the line that because banks do X, it's proper for homeowners to do X. If your personal code of conduct is based upon what what a bank does, you're doomed for eternity. "I'm not as bad as a bank" is setting the bar awfully low, whether your personal system is based on divine revelation, reason unaided by first principles, or what you had for breakfast this morning.

In this case, the occupiers notified the Chicago alderman who represents the neighborhood where the home is located in advance of the takeover. That paragon of probity wasn't available for comment, nor were any member of her staff. I can't imagine why.

The realtor for the property, who's working with the owner and the bank to try to sell the property, has urged the owner to call the cops and have the occupants "removed." The owner refused to do so, apparently out of compassion, but has finally gone to court to have the family evicted, because the bank has started foreclosure proceedings and thinks that offers of one-half the already depressed listing price (due to the presence of the squatters) isn't in the borrower's or the lender's best interests.

Legally, the issue of Smith's occupancy sends attorneys to their law books.

She isn't the legal occupant of the home, but it's a different situation than, say, a homeowner who returns home to find someone in their house and calls the police. In this case, community members know she's been there for some time. The owner would have to try to evict Smith under the state's Forcible Entry and Detainer Act, designed to protect tenants from quick, forcible evictions, said Mark Swartz, legal director of the Lawyers' Committee for Better Housing.

"They're doing (the occupation ) in the light of day," Swartz said. "It's a very clever strategy."

It's also powerful advocacy, Swartz said, but added, "There's a great risk here. We need to be concerned about the people. We need to be concerned about the laws being followed. Organizers have a whole different toolbox than attorneys. I think these people believe they are advocating for a more humane way."

Timothy Hufman, an attorney with the Legal Assistance Foundation of Metropolitan Chicago, isn't so sure a tenancy has been established, because it could boil down to a case of he said/she said between Dodd and Smith.

"If the owner says, 'I never told them they could stay there,' they're screwed," Hufman said.

As well they should be. I don't know why you'd have to "run to your law books" over this issue, unless you're using your Black's Law Dictionary to press cocoa leaves and you need a quick hit.

Also, I don't see the daylight occupation of a house in full view of the neighbors as being "clever" at all. We have criminals in North Texas who break into homes in broad daylight all the time, thinking they can make a quick in-and-out before the neighbors can react and call the cops and/or the cops can react and make it to the house. If someone is unexpectedly home, sunlight makes it easier to draw a true bead on the miscreants as you yell "Freeze!" in the nanosecond before you pull the trigger...repeatedly. In the land of The Castle Law and concealed carry, I'd suggest that strategy is something less than "clever."

On the other hand, Texas and Chicago might as well be on different planets, so perhaps open lawlessness plays a lot better in The Windy City than it would in The Big D. From everything I've read and heard, corruption runs wide and deep in Blogoland, so perhaps citizens of that region have become anesthetized to its occurrence. We've got a proud tradition of incidents of a similar nature in some parts of Texas, of course. It simply hasn't become so widespread or brazen.

At least, not yet.

The Servicers Settlement Disconnect

The recent announcement that Bank of America cut a "side deal" to earn extra brownie points (and lower penalties) in the robo-signing settlement with state attorneys general touched off a round of criticism. As reported in The Wall Street Journal, investors are squawking about making them pay for the errors of the loan servicers by threatening bond principal repayments through mortgage principal reductions. In response, The White House claimed that the settlement terms would not require mortgage principal reductions in each case.

The Obama administration official said that principal reductions will be done only when there is a benefit to investors, meaning that the cost of the principal reduction will be less over time than taking the loan through foreclosure, and the principal reduction is done in accordance with investor contracts. "The misunderstanding somehow that the investors will be paying the banks' share is just false," Secretary of Housing and Urban Development Shaun Donovan said when the deal was announced last month.

Wait a minute: isn't that analysis supposed to be happening anyway? Isn't that what savvy servicers like Ocwen were being praised by the "main stream media" for three years ago? If they're already doing it, what does the settlement accomplish?

We suspect that what it accomplishes is "encouraging" (wink-wink, nudge-nudge) servicers to write down the principal balances of the loans they hold in portfolio. Investor-owned loans will be handled according to a net-present value analysis outside of this "settlement process," which is what the Wall Street Journal's article's quotations from other servicers, such Ally, suggest. In turn, by "taking one for the team," the loan servicers will give the Obama administration and the attorneys general political talking points in an election year.

Interestingly, the government owned "conserved" GSEs aren't jumping on the principal write-down bandwagon. In fact, they've driven that wagon into the ditch.

[FHFA chief Edward DeMarco} firmly holds his position on principal writedowns:

There is no question that underwater borrowers in California would benefit from other taxpayers across the United States paying off the underwater portion of their mortgage debt. My obligation to those taxpayers, including those living in California, is to ensure that the assistance offered to borrowers facing difficulty in making their mortgage payments maximizes the opportunity to assist those borrowers at minimum cost to taxpayers.

The numerous foreclosure avoidance options offered to borrowers whose loans are owned by Fannie Mae or Freddie Mac, including multiple loan modification options, do just that. We will continue to consider alternatives as they are proposed, but I will not further delay foreclosures provided those borrowers have been given a meaningful opportunity to avail themselves of a loan modification or some other suitable foreclosure avoidance alternative.

So, the state and federal governments stick it to the banks' shareholders but won't stick it to the taxpayers, at least not so openly, in an election year. We get it.

What we don't get is how mandating principal write-downs on underwater mortgages is a logical penalty, or appropriate remedy, for false attestations in foreclosure documents. We understand--and support--fining the lenders and individuals involved, and prosecuting those offenders who've committed perjury or other criminal violations. Those are punishments appropriate to the offense. As for the "injured parties," why not require that either their foreclosures be halted or set aside (if possible) or that they be identified and directly compensated monetarily by the offending servicers on a case-by-case basis? Aren't those more logical, equitable remedies that fit the offense?

Giving people who don't pay their mortgages a benefit that people who pay their mortgages do not receive may serve a larger economic policy agenda, but shouldn't that policy be implemented openly through legislation, either at the state or federal level? Oh, yeah: that would involve spending tax dollars and no one has the political will to do that in an election year, likely because (A) supporters couldn't get the votes to pass such legislation in the first place and (B) even if they did pass it, it would be unpopular with the majority of taxpayers who don't want to fund such relief, as Ed DeMarco correctly observes. Therefore, it's a backdoor means of creating popular "buzz" in 2012.

The icing on the cake is that, according to a Brookings Institution economist, only 5% of the nation's 11.1 million underwater homeowners would get a write-down under the terms of the settlement. That may or may not be an understatement, but it's my guess the final number is not going to be substantially higher once the dust settles. Then again, none of this is about anything other than smoke and mirrors, is it?

Moral Compass Spinning Wildly

While I'm not the most lenient critic of Bank of America's loan servicing practices, it's hard to feel anything other than incredulity, followed by contempt, for the attitude of the mayor of North Miami, Andre Pierre. Andre, a lawyer, is mystified as to why BofA might have the audacity to commence foreclosure proceedings on his home simply because Andre and his wife stopped paying their home loan.

They didn't stop making payments because they couldn't afford the payments any longer. In fact, they negotiated a loan modification last year that lowered their payments by lowering the interest rate and by extending the loan term to 40 years. That's right, 40 years. As South Florida Business Journal reporter Brian Bendell points out, that's a lot longer than most of us (including yours truly) get.

That 40-year maturity schedule is longer than the typical 30-year residential loan term. The longer period allows for lower monthly payments.

So did dropping the interest rate to 4.375%.

None of that was good enough for Mr. and Mrs. Pierre, though. They wanted to renegotiate the modification and get a lower loan amount.

“We were in the process of negotiating and getting into some kind of loan modification,” said Pierre, an attorney in private practice. “We have been sending documents back and forth.”

So what happened? Did the Pierre's suffer a financial set back that dramatically lowered their income or dramatically increased their expenses?

Nah.

When asked why he wasn’t paying his mortgage, Pierre said that the house is underwater.

The Pierres bought the house for $353,000 in 2003. The Miami-Dade County Property Appraiser's Office valued it at $233,552 in 2011. It is their homestead property.

Pierre said he was hoping for a loan modification so he could keep his house.

"So he could keep his house"? How about making the monthly payments? Bandell points out that it's not a matter of "can't," but a matter of "won't."

The fact that a house is underwater doesn’t excuse a homeowner from owing on a mortgage, but it does create a financial conundrum over whether or not it’s a good use of money to pay the loan.

It would also be quite a moral conundrum for a person who had a sense of personal integrity. For a politician, it's an easy call.

Our political leaders: they set the beat to which the rest of us should march. Therefore, I'm going to have to go out and get me one of those juicy underwater loan mods for myself, real soon. Otherwise, I just might decide that I "can't" keep my house any longer.

"The whole idea of our government is this: If enough people get together and act in concert, they can take something and not pay for it." -- P.J. O'Rourke

I Can See Stupid People From My Back Porch

While many snark-meisters on both sides of the political spectrum claim Sarah Palin is the biggest airhead from America's biggest (in terms of land mass) state, my vote goes to Republican Senator Lisa Murkowski. She recently introduced legislation that would require loan servicers who are presented with a short sale offer by a borrower to respond to the offer in 75 days...or else.

The servicer would have to answer with an approval, denial or request to extend the response period up to 21 days. The companies could also approve the short sale subject to certain changes.

Homeowners would receive $1,000 each time the lender or servicer fails to respond, along with other "appropriate relief," according to the requirements of the bill.

"What we have here is a failure to communicate," Murkowski said in a statement. "Why don't we make it easier for Americans trying to participate in the housing market, regardless of whether the answer is 'yes,' 'no' or 'maybe?'"

Murkowski's inclusion of "maybe" was either an inept interpretation of the bill's alternative of a counteroffer on different terms than those proposed by the borrower, or she's enamored of actress Rebecca DeMornay, who, as a call girl named "Lana" in the 1983 movie "Risky Business," uttered the famous line "Yes. No. Maybe." in reply to a question with which both prostitutes and politicians should be well familiar. Either way, "yes" and "maybe" aren't what borrowers are most likely to hear from a servicer who's having a hard time finding his or her own posterior in the disorganized maze of confusion that constitutes many large mortgage servicing operations, much less someone in authority who's going to make a quick decision to take a loss.

Faced with a fine for not answering within 75 days, I predict the default answer will be "NO."

So many critically important issues face this nation and our leaders focus on useless twaddle like this. Not surprisingly, one of the co-sponsors of the bill is Massachusetts's favorite RINO, Scott Brown, who's apparent strongest attribute for re-election is the fact he's not Liz Warren.