Bank Lawyer's Blog

Crystal Ball Gazing With The MBA

Some interesting highlights from the Mortgage Bankers Association's three-year economic forecast disclosed last week:

• Real GDP growth will be at 3.5 percent in 2006, 3.3 percent in 2007 and then increase to the trend rate of about 3.6 percent growth in 2008.
• Fixed mortgage rates will rise moderately to about 6.4 percent by the end of this year and through 2007 and decline to around 6.1 percent by the end of 2008.
• We will continue to see a flat yield curve, as the spread between fixed and adjustable rate mortgages has narrowed significantly over the past year. The share of adjustable rate mortgages has declined over the past year as well and we project the decline in the share will continue through 2008.
• Total existing-home sales will decrease by 4.7 percent in 2006 compared to the record in 2005 and will decline another 4.4 percent in 2007, but should remain flat in 2008. New-home sales for 2006 will decline by 4.3 percent from a record high in 2005, and will slip by another 4.9 percent in 2007; they should remain flat for 2008.
• Existing home price appreciation is expected to moderate significantly in 2006, with median existing home prices increasing 6.6 percent in 2006. Increases in new home prices are projected to be slower, with median new home price gains expected to be 5 percent in 2006. Price gains in 2007 and 2008 are expected to continue to be healthy but at a more sustainable pace of about 4-5 percent for both existing and new homes.
• Total residential mortgage production will decline by 19.5 percent to $2.24 trillion in 2006 (the fifth-highest level ever) from an estimate of $2.79 trillion in 2005 (the third-highest level ever).
• Residential mortgage originations for purchase loans will edge down slightly from an estimated $1.49 trillion in 2005 to $1.46 trillion in 2006. Purchase originations should decline further, to $1.45 trillion in 2007. We expect declining mortgage rates in 2008 to boost purchase originations to $1.54 trillion in 2008.
• Residential refinance loans: will decline by nearly 40 percent from 2005 to $784 billion in 2006 and should declined further to $685 billion in 2007. Lower rates will spur refinance activity, increasing refinance originations to $886 billion in 2008. Refinance activity from 2006 forward will also benefit from a significant number of hybrid adjustable rate mortgages reaching their first rate reset and are refinanced either into another ARM or fixed-rate product.

Of course, mortgage originators emphasize the expected 20% decline in originations this year. However, that's a fall from a record high. The homebuilding level is expected to "fall" to the fifth highest ever level. No doubt, the residential mortgage industry will suffer substantial "staff reductions" as originations continue to fall. Nevertheless, those staffing levels were also at record highs. For someone who once bought a home in the early 1980s using a 30-year, fixed rate loan bearing an annual interest rate just south of 20%, it helps to keep this all in perspective. To some, this may be the worst of times, but to many more (including those of us born in the Pleistocene Epoch), this is still the best of times.

For banks and other financial institutions, the bad news is the continued flat yield curve through 2008. Bank Lawyer's Blog, is no fan of the flat yield curve. Banks must make money to afford bank lawyers. Sorry for the slip from my usual altruistic nature into naked self-interest, but there you have it.

It could be worse. You could be a mortgage securities hedge fund trying to play the spreads. Now, that's got to be a tough business right now.

Curses! Foiled Again!

Bank Lawyer's Blog initiates it's first annual "Cover Story Kiss of Death" award and gives it to Diana Taylor. While this blog's author was buried in meetings and conference calls today, alert reader Peter Freeman was keeping his eye on the news and alerted me to today's article in the American Banker (paid subscription required) that quotes "unnamed sources" (I hate those guys) to the effect that "Diana L. Taylor, the White House's initial pick to head the Federal Deposit Insurance Corp., is no longer expected to be nominated for the post."

Ms. Taylor, the superintendent of the New York State Banking Department since 2003, was in the final stages of the vetting process, and the White House was poised to announce the nomination soon.

Whether she withdrew or the White House pulled the nomination was unclear Friday. Ms. Taylor and White House officials would not discuss the matter.

No sooner do I rant about the delay in the announcement of her appointment than it's yanked, either by her or by the White House. Nobody's talking at this point, at least not to the press. Certainly not to me, other than those nasty cease and desist letters I received from Ms. Taylor's attorneys, demanding that I stop stalking her.

I guess this means Ms. Taylor gets to spend more time with Mike (Bloomberg, Mayor of New York, and her current boyfriend, unless my mention of that fact has already caused them to split). Albany is a lot closer to New York City than Washington, D.C., so this might work out for all concerned.

OK, who's next? The American Banker speculates on the possibility of Jo Ann Barefoot, well known banking consultant from Ohio, and currently the principal of Jo Ann Barefoot and Company. So as not to put a curse on Jo Ann similar to the one I inflicted on Ms. Taylor, and to lessen any potential civil and criminal liability on my part, I'll refrain from pushing for her nomination or mentioning any connection between her and a killer black dress.

Would it be politically incorrect to mention that she has a great head of hair? If so, forget I said anything about it.

In order to avoid any further controversy on the issue, I'm personally recommending another Jo Ann, actress and native Texan Jo Ann Pflug. Inasmuch as (to my knowledge) she knows absolutely nothing about banks, the curse of Bank Lawyer's Blog adversely affecting her chances for a White House appointment to head the FDIC should cause no pain to her or anyone else.

Although how cool would it be to have as the head of a government agency a woman who once played a character named Lieutenant Maria "Dish" Schneider?

Choice Factoids About ChoicePoint

The FTC's imposition of $15 million in fines and "consumer redress" against ChoicePoint last Thursday was big news, as it should have been.

ChoicePoint's $10 million fine is the largest civil fine in the FTC's history, the FTC said. Under a settlement with the FTC, the Georgia company will also set up a $5 million fund to aid victims of identity theft that resulted from the data breach, and the company has agreed to implement new security measures and have an independent auditor review its security every other year until 2026, said FTC chair Deborah Platt Majoras.

"This is an important victory for consumers and an equally important opportunity for ChoicePoint to get data security right," Majoras said. "Companies like ChoicePoint are realizing now that it is a bad business practice to ignore the security of customer data."

Ya think?

ChoicePoint's failure wasn't a case of hacking, having an employee's laptop "lifted," or having an employee "go bad" and sell personal information. As a consumer reporting agency, ChoicePoint is required by the Fair Credit Reporting Act to have in place procedures to ensure that those who order a "consumer report" have a legitimate business purpose for using the report and will use it for that purpose. ChoicePoint's procedures, as outlined in the linked story, apparently were deficient. Frankly, I'd guess that today, ChoicePoint is well on its way to being one of the strictest CRAs in verifying the legitimacy of its customers and their intended use of consumer reports obtained from ChoicePoint. There's nothing like a hefty fine and bad press to focus the attention. They're the next best motivators to prison time and death.

There were some sidelights to the matter that generated some interesting press, as well. The Associated Press, through a FOIA request, learned the "startling fact" that the FTC had hired ChoicePoint to provide services to it last year, and had paid ChoicePoint $23,000(US) for those services. Apparently, I'm not the only one who had to suppress a yawn at that news. The FTC's Lee Peeler dryly observed, "We have Dell computers on our desks, and that doesn't mean we can't do investigations of Dell." While noting that there's an "inherent conflict of interest" in such situations, "It certainly didn't lower the fine." No, it didn't, did it?

Next thing you know, the main stream media will be squawking about the fact that ChoicePoint paid income taxes to the very federal government that fined it. The horror, the horror!

Another fact that came to light (at least, it was news to me), is that The Privacy Rights Clearing House has been tracking the number of "security breaches" since February 15, 2005, the date ChoicePoint announced its security failures. The PRC considers that a "watershed event" in terms of the disclosure of security breaches. According to the PRC, since that date, "more than 52 million Americans have had their personal information jeopardized by data breaches." Now, "jeopardized" and actually "misused" are two entirely different matters, but the total is sufficiently disturbing to serve as an additional impetus for federal legislation this year. As I've said before, better a single federal standard for data security and breach notification standards than the "23 states and growing" patchwork noted in the linked article.

On A Slow Boat To D.C.

I wish the White House would hurry up and formally nominate Diana Taylor to be Chairman of the FDIC. We could then stop the breathless "scoops" by news outlets like the Daily News, which speculate on the nomination a month too late.

The Daily News does get the "brainy and elegant" part right, at least. Dartmouth graduate. Investment banker. Looks regal in a killer black dress. What's not to love?

More important, however: what's the delay? Look at the picture and tell me how much more vetting do you need to do?

Greenspan to Leach: Be Wary of ILCs

In what is likely one of his last official communications prior to retiring, Alan Greenspan has made one thing very clear: he's not counting on part-time retirement income as a Wal-Mart greeter.

Federal Reserve Chairman Alan Greenspan is urging Congress to close a regulatory loophole that lets companies own a certain breed of banks, which includes a bank Wal-Mart Stores Inc. wants to operate in Utah.

The Fed chief's remarks take direct aim at an exemption in federal law that allows any type of company commercial firm, foreign bank or other to own so-called industrial loan companies in a handful of states, principally Utah, California and Nevada.

Greenspan's remarks were contained in a January 20 letter to House Financial Services Committee member Jim Leach, an Iowa Republican, one of the authors of the Gramm-Leach-Bliley Act, and an opponent of the ILC "loophole." Greenspan's letter was released to the press today. Industrial banks or loan companies in question are those institutions that are chartered under the laws of five states whose laws were specifically exempted from coverage of the Bank Holding Company Act (and regulatory supervision by the Federal Reserve Board) when that law was amended in 1987 (see 12 U.S.C. Section 1841(c)(2)(H)).

Greenspan noted that General Motors, General Electric, Pitney Bowes and BMW are among the companies that now own industrial loan companies under the exemption. Wal-Mart, the nation's largest retailer, has filed an application to operate an industrial loan company in Utah, he said.

Greenspan's comments didn't make a specific attack on Wal-Mart's efforts but rather were a broader shot at the exemption itself.

The exemption allows the corporate owners of these industrial loan companies to avoid the regulatory requirements that apply to corporate owners of other types of insured banks overseen by the Federal Reserve, said Greenspan. He found this troubling.

"The character, powers and ownership of ILCs have changed materially since Congress first enacted the ILC exemption. These changes are undermining the prudential framework that Congress has carefully crafted and developed for the corporate owners of other full-service banks," Greenspan wrote.

"Importantly, these changes also threaten to remove Congress' ability to determine the direction of our nation's financial system with regard to the mixing of banking and commerce and the appropriate framework of prudential supervision," he added.

These crucial decisions should be made after careful deliberations in Congress, Greenspan said. "They should not be made through the expansion and exploitation of a loophole that is available to only one type of institution chartered in a handful of states," he wrote.

A link to the full letter is here (Wall Street Journal subscription required).

As Greenspan notes, the formerly popular "nonbank bank" and "unitary thrift holding company" loopholes have been eliminated, leaving commercial concerns with one way into the world of banking: ILCs. Greenspan's parting salvo is likely to be an opening shot by the FRB in a legislative battle brewing over ILCs. Greenspan's final paragraph praises Leach's H.R. 3882 as the best approach to "address the Board's concerns and ensure a fair and level competitive playing field for all banking organizations."

Plain speaking from a man who usually sounds Delphic.

The Horror, The Horror!

It's not just a war against terrorists that's "a long, hard slog," it's a war to "raise the consciousness" of bankers. They're an unreconstructed lot, it appears.

Following last month's strip club dust up involving Morgan Stanley, last week came reports that a London analyst at JPMorgan Cazanove (not "Casanova") was told to "go home" after an email he sent out "boasting of his sexual adventures and promising more to come" was apparently forwarded by "friends" to a large number of people, eventually ending up with Reuters, which, being Reuters, just had to tell the world. "Immi the Pimp Daddy" compounded his error by allegedly telling a dirty joke about a blind man and contraceptives. He should have known that the deadly combination of objectifying women and dissing the physically challenged will "pimp your ride" on a one-way road to nowheresville.

Some might say that we're getting just a bit "hypersensitive" to politically incorrect speech. Regardless, given the current climate, it's simply unwise to express such sentiments in an email. Perhaps a trip home might be just the thing to cure a case of temporary boneheadedness.

Credit Cards: No Mas!

Last Thursday night, ABC's "Nightline" ran a short piece about a Rochester, New York Bankruptcy Judge John Ninfo (nicknamed Judge "Gung-Ho"),  who's a crusader against credit card debt.

Last year set a record: More than 2 million Americans went bankrupt. And who they are might surprise you.

"Doctors, lawyers, accountants, engineers, teachers by the dozens," Ninfo said, describing bankruptcy filers in his court. "And I always use that as the basis for telling people that it is not about your academic IQ, it's about your financial IQ. And the two are not the same.

"The rule that I like to use is if it's $10 or $20, pay cash for it," Ninfo said. "If you can eat it or drink it, pay cash for it. And the best example of that is reported in the Wall Street Journal. When McDonald's started to allow people to use credit cards instead of paying cash, the average sale went from $4.75 to $7. Need I say more?"

His point was that it wasn't painful to spend the extra money because it didn't really hit the McDonald's customers in their wallet right away.

However, Ninfo notes, some people wind up paying "probably double" for that $7 credit card purchase once they incur finance charges and possibly even late fees.

Because minimum payments were so low in some cases that consumers were not paying anything on their principal, the government now requires that the banking industry raise the minimum monthly credit card payment. Credit card companies are now requiring cardholders to pay at least one percent of their balance off each month, in addition to interest, so consumers pay off their debt faster.

"They will pay less interest and they will pay off their debt quickly," said Nessa Feddis of the American Bankers Association, "which helps them, but it also helps banks because they're less likely to default and walk away from the loan.

Some card holder payments could double, which could drive up the cases in Judge Ninfo's courtroom.

"There will be some people who will undoubtedly end up filing bankruptcy, possibly as a result of it, earlier than they might otherwise have," he said. "But my view is that anyone who would have to file bankruptcy because the minimum payments on their credit facilities have doubled was destined to be in bankruptcy anyway. So it was a question of when, not a question of whether."

What's Judge Ninfo's solution? Is it for the consumer to become more financially literate? To use credit cards more wisely? To budget and plan in a prudent manner? Nope.

"I tell all my family and friends, 'Don't have a credit card.' I use cash now. I don't use credit cards."

Of course, if everyone followed that advice, there'd be even more bankruptcies as the economy ground to a sputtering halt, and those former credit card users would be more concerned about having no income than having too much credit card debt. On the other hand, Judge Gung-Ho would be plenty busy.

Lending At The Margins

A long, interesting article in the Sioux Falls, South Dakota newspaper Argus Leader examines the down side of South Dakota's decision decades ago to make itself a safe haven for banks that wanted to charge (and export) high interest rates. Credit card banks flocked to the state, and other types of lenders followed.

At last count there were 297 licensed money-lending businesses in South Dakota taking advantage of the state's loosely regulated lending industry...South Dakota has the highest number of banks per capita in the U.S., and ranked second in payday lenders per capita out of 20 states surveyed, according to a recent study by Peterson titled, "Predatory Lending and the Military: The Law and Geography of Payday Loans in Military Towns."

[...]

Buy-here, pay-here used car dealerships, rent-to-own shops, car-title loan companies and pawnshops are other examples of this growing fringe-lending industry. And Sioux Falls has more than its share of each.

[...]

Their proliferation has created a collision of values for a state that promotes a free-market economy while trying to protect its residents from harm.

The article doesn't offer solutions. In fact, the author takes the position that because of South Dakota's traditional free market mentality and its reliance on the lending industry for economic survival, changes aren't likely. Nevertheless, it does raise the issue of the human cost when lenders loan money to people who have a difficult time paying back the principal, much less fees and interest that can average an annual percentage rate of 300 to 400 per cent.

Obviously, the issue extends beyond South Dakota.

There are 22,000 payday loan centers alone in the U.S. with a growth rate of 30 percent since 2000. In fact, there are more payday loan and check cashing stores nationwide than there are McDonald's, Burger King, Sears, J.C. Penney and Target stores combined, according to Karger's book.

[...]

The industry is so profitable that many mainstream banking institutions are getting in on it, including Wells Fargo and JP Morgan Chase Bank. Whether it's HSBC, formerly Household, which offers subprime credit card options, or First Premier Bank, it's difficult to find a company that doesn't offer nonprime rates.

The state's usury laws also have affected other states. A handful of community banks in South Dakota, such as First Fidelity Bank in Burke and BankWest in Pierre, act as lending agents for payday lenders so they can operate in states with lower interest caps.

The system is called "rent-a-bank" and allows companies such as Advance America to avert usury laws elsewhere.

Whether you're pure libertarian or believe that government must, in certain circumstances, protect people from their poor judgment, this is an issue that most financial institutions, large and small, are going to have to face. The starting point will be whether you can face yourself in the mirror in the morning if you're in this business. After that, it gets complicated.

More On Mortgage Fraud In North Texas

Following up on last month's article, The Dallas Morning News (free registration required)  continues to sound the alarm about mortgage fraud in North Texas.

Recent efforts to rein in home mortgage scams in North Texas have hit snags, and experts say the epidemic of fraud is only getting worse.

Real estate industry representatives and a state legislator calling for reform say quick profits from the illegal schemes are proving to be irresistible for white-collar criminals.

"This is a continuing problem that's reached epidemic proportions in Texas," said state Rep. Linda Harper-Brown, R-Irving. "In my area alone, we know of at least two separate mortgage fraud groups who have walked off with millions."

Ms. Harper-Brown sponsored two bills aimed at bolstering state regulators' role in combating mortgage fraud, but the bills died quietly in a House committee last year, she said.

Real estate industry experts say laws to fight the schemes are already on the books, but state regulatory agencies lack the manpower to enforce them.

"Whether it's the feds, the state or even local ordinances, if we would just enforce the current laws on the books, this would slow down drastically," said Craig Jarrell, president of the Dallas Mortgage Bankers Association, who's worked in mortgage banking for 30 years.

"It will call for more people in law enforcement to do that, though," he said.

Of course, "for more people in law enforcement to do that" will require "more people in law enforcement," which, in turn, will call for "more money," which, in turn, will call for "increased tax revenues" (or reallocated tax revenues). Taxes. There's the rub.

I agree with Craig Jarrell, that the answer does not lie in more legislation. That may be a way for legislators to appear to be "doing something," but the fraud laws on the books today are adequate deterrents. Moreover, I'm not convinced that more police and/or prosecutors devoted to mortgage fraud is the answer, either. It's a tricky crime to detect from the outside looking in.

To me, mortgage broker Charles Sisk hits the ball out of the park.

"So the state is now aware of it," Mr. Sisk said. "Realtors, title companies, appraisers, brokers and lenders can take a closer look at their deals – and so should consumers.

"People don't like to talk about that, but they need to come out and admit the public is going to have to take some responsibility, too. If it's a two-way street, there would be a lot more protection for everybody."

As outlined in a previous post, a successful mortgage fraud scheme customarily takes the cooperation of a number of corrupt or inattentive parties throughout the process. Rather than pretend the problem doesn't exist, or that "it's not my job," everyone involved, including the often unwitting and uneducated consumer, has to step up, be attentive, and be willing to "do the right thing" when the situation requires it.

The previous post contains an FBI checklist of warning signs for consumers. I think that the first one may be the most important: check out the real estate professionals. If they're reputable and doing their jobs properly, then it's going to be difficult to pull off a fraud scheme. You can't be too careful in choosing your advisers.

"National" Banks: The Competitive Edge

The Wall Street Journal's Law Blog yesterday included a short post about the Wachovia decision, and the first commenter seemed to take the Journal to task for using the term "national banks." Apparently, the lawyer/commenter felt a need to clarify that while the decision applied to "nationally-chartered banks," it was misleading to call them "national banks" because "nationally-chartered banks" are, in the commenters words, "a minority," and also, I assume, because the more numerous state-chartered banks can also operate branches in other states, the decision does not apply to them.

First, I've been practicing banking law for 30 years and have always understood the term "national banks" to mean "nationally chartered banks." The Journal's use of the term was entirely appropriate.

As for stating that state-chartered banks are more numerous than nationally-chartered banks, that's true, but misleading. According to reported figures,

The number of commercial banks with national charters fell by more than 50 percent -- to 1,906 institutions -- between 1985 and 2004, but the assets they held more than tripled to $5.6 trillion, according to FDIC statistics.

In the same period, the number of state-chartered banks slipped by 40 percent -- to 5,724 facilities -- while the assets in those banks reached $2.8 trillion. That is slightly more than double what it was 19 years earlier but only half of the total in the national system in 2004.

In other words, there are three times as many state banks as there are national banks, but the national banks control twice the assets of state banks. Therefore, the national banks are much bigger, on average, than state banks, and more likely to be branching on an interstate basis, the decision is a major advantage for national banks.

As former FDIC Chairman Don Powell pointed out in a speech in June of last year (discussed here), the trends are in favor of national charters.

The un-level playing field facing state banks that operate across state lines is affecting the proportion of assets in the state system. Until recently, the relative share of state bank assets remained somewhat stable between 40 and 45 percent of commercial bank assets, with little change during both good times and bad. Through recent consolidation, the assets of the system are becoming increasingly concentrated in national banks, and at the end of last quarter, the share of assets held by state banks fell to 33 percent. At the end of March, only one of the ten largest insured commercial banks had a state charter. That bank was the ninth-largest. Twenty years earlier, four of the ten largest banks were state-chartered, including the fourth-, fifth-, sixth- and seventh-largest insured commercial banks.

The trends on the number of state chartered banks are markedly different. In the 1980's, state chartered banks were about two-thirds of all commercial banks and from the early 1990's this has risen steadily to 75 percent. In short, what we seem to be seeing is a state banking system that is increasing in relative numbers and decreasing in relative size.

Going forward, there is every indication the relative decline in the assets of state banks will continue. I am sure many of you are aware of large state-chartered banks that are seriously considering life under a national charter. In my view, there is little doubt what the current competitive imbalance, if not addressed, means for the future. The state system is headed for being a network of small banks. These small state institutions will be important within their own communities, but make no mistake. They will conduct less and less of the nation's banking business—and they will be in the ranks of the acquisition targets, not the acquirers.

The major cause of the "un-level playing field" for state-chartered banks that operate on an interstate basis, according to Powell, is federal preemption of state law. That was the principal reason given by Powell for his FDIC preemption proposal, about which I've posted frequently.

The Wachovia decision is another advantage for national banks operating on an interstate basis. In many cases, national banks will be able to claim "diversity" status and remove litigation to federal courts in situations where a state chartered bank could not. Therefore, I think that it is another reason that state banks that want to operate across state lines will consider switching to a national charter.