Bank Lawyer's Blog

HUD Stubs Toe On RESPA

Yeah, this is old news, but we've been busy and are just getting around to reading old blog posts and newsletters. We never promised you up-to-date news, just unvarnished snark.

We've been yammering about violations of RESPA's anti-kickback and anti-referral prohibitions since this blog first inflicted itself upon an unsuspecting public. Instead of barking at numbskulls in the private sector, I guess we should have been laughing at HUD, which is the agency charged with enforcing those prohibitions. Somehow, I overlooked this story when it first ran last week (h/t Housing Wire).

Some Michigan mortgage experts want the U.S. Department of Housing and Urban Development (HUD) to admit it erred when it launched an incentive program for real estate brokers that possibly violated its own consumer protection act.

Last week, HUD stopped the 3-month-old program, which offered $500 bonuses to real estate brokers who got HUD home buyers into Federal Housing Administration (FHA) home loans, after Bloomfield Hills attorney Howard Lax contacted HUD and claimed the program was an illegal kickback.

Lax said the program violated the Real Estate Settlement Procedures Act -- a claim HUD officials denied last week. The act, also called RESPA, is a consumer protection statute that is enforced by HUD.

Pava Leyrer, legislative chair for the Lansing-based Michigan Mortgage Brokers Association, also said she believes the program was illegal.

Howard Lax is a heavyweight in the world of mortgage banking law, and if someone put a gun to my head and forced me to choose between Howard and HUD, Howard would win, hands down. By the way, Howard's firm publishes an excellent newsletter on mortgage banking law. You can find it here.

Being a government agency, HUD couldn't merely say "Oops! My Bad!" and move on. No, it had had to get snippy about it.

"What would have been nice is if they would have gone out and made a public apology," Leyrer said.

HUD awarded the $500 bonus to about 200 brokers since November, including 67 in Michigan, said HUD spokesman Brian Sullivan.

Under RESPA, anyone who awards kickbacks for referrals can face fines up to $10,000 and a possible 1-year prison sentence, said Sullivan. Often out-of-court settlement agreements are made, he said.

Sullivan said the initiative was dissolved because it was perceived to be inappropriate, not because it broke the law.

"There is absolutely no admission on our part that there was a violation," he said.

It's always nice when a government agency gets "lawyered up" and starts talking like a mouthpiece for the late Ken Lay, isn't it? I'm sure HUD's been getting plenty of practice since Alphonso ("Curly") Jackson's been in charge.

Although Howard was gracious, mortgage brokers were less forgiving.

Lax said he believes HUD had good intentions but that the department should have sought to pass the bonus onto buyers by taking $250 off FHA loan fees.

Mortgage brokers like Leyrer and Audrey Acquisti, president of the Michigan Mortgage Brokers Association, say HUD should be held accountable for its actions.

"If anyone should know those laws," Acquisti said, "it would be HUD."

No, Audrey, that would be Howard Lax.

Dirty Harry Tells Prez: "Make My Day!"

We all expected a Senate vote yesterday on Little Dickie Durban's Bankruptcy Reform-of-the-Reform Bill, that would allow bankruptcy judges to rewrite residential mortgage loans. Unfortunately, the Senate chose to take up a much less controversial matter: scaling back military operations in Iraq. Pansies!

Nevertheless, there's been much tough talk and posturing in D.C. by both political parties over the cramdown issue. The Decider-in-Chief decided that he'd veto such a bill if it was presented to him. After he threw that glove in the face of the Democrats, Senate Leader "Dirty Harry" Reid told the Prez that if he vetoed it, Harry would make him not only eat his veto, he'd slather the override vote with hot spicy mustard and a plethora of jalapeno peppers.

U.S. Senate Majority Leader Harry Reid said on Wednesday he planned to defy a threatened White House veto and try to win passage of a bill to curb rising home foreclosures by changing bankruptcy law.    

"I have no expectation of reaching any agreement with the White House," said Reid a day after the administration warned the bill would need changes to get President George W. Bush's signature.   

"I have tried for seven years" to reach agreements with Bush on a variety of issues, but have repeatedly failed, said Reid, a Nevada Democrat, at a news conference. [Ed. Note: This must mean that Harry's suffering from a seven-year itch.]   

"So we are going to do what we think is best for the country," Reid said. "If we get 67 votes (in the 100-member Senate to override a possible Bush veto), that's great."

And if you get only 66? Well, as my parish priest used to joke, that would be like a convert to Christianity on his way to his baptism ceremony, who gets run over by a bus, and arrives at the pearly gates, and St. Peter puts his thumb and forefinger together and sadly informs him, "You were THIS CLOSE!!"

The next thing you know, they'll start screaming "Yo Mama!" at one another and all hell will break loose. I love it when the boys in the band on Capitol Hill "go all macho-like." It makes me want to crank up the "Scissor Sisters," take your mama out all night, get her jacked up on cheap champagne, and show her what it's all about. How about you?

The first hurdle for Harry is to get a cloture vote and cut off any filibustering by those blowhard Republicans. I mean, the prospect of Arlen Specter droning on into the wee hours makes my nether regions shrink to a size detectable only with an electron microscope and my inner child start to whimper for his mommy. Harry swears that he can get the 60 votes to do it, but I think that if he plans to accomplish this critical first step, he'll need to run down to Texas and pry Hillary Clinton off Barack Obama's face, where she's rammed her tentacles down his throat and is trying to implant in him the alien seed that Sigourney Weaver can tell you will grow up to be one nasty piece of work, a piece of work that only The Governator will be able to terminate. Personally, I'm hoping something draws Barack and Hill away from Texas, because we've had all the love we can take down here for the last month and the March 4 primary is still nearly a week away. Oh, and take Bill with you, while you're at it, Hill. That gadfly hit seven different venues in the Dallas-Fort Worth Metroplex yesterday, and the supply of intern-virgins is limited, even in a Red State as big as this one.

The Wall Street Journal has mocked the bill by giving it the title "Son of Stimulus," as well as by noting the unseemly haste with which Dirty Harry is trying to squeeze it through the Senate pipeline.

For this bill Mr. Reid decided to ignore the normal vetting of committee hearings and markups, and it shows. Democrats laud the $200 million in the bill for credit counseling, but the actual language of the bill directs $200 billion to something called the Neighborhood Reinvestment Corporation. We trust this error will be eliminated before Mr. Reid achieves Guinness fame for creating the world's most expensive typo.

The WSJ also questions the popularity of the "cramdown" even within the party that Harry leads.

Allowing judges to rewrite the terms of mortgages is a tough sale even within Mr. Reid's own party. The Congressional Budget Office, whose leadership is appointed by Democrats, warned in January that such a change could result in higher interest rates for homeowners and bigger caseloads in bankruptcy courts. Other nonlibertarians in opposition include 16 House Democrats who sent a letter to Mr. Conyers last fall. They tried to talk him down from the ledge before he forced a December committee vote. And then there's Supreme Court Justice John Paul Stevens, who noted in a 1993 case that the special treatment of mortgages was specifically intended to encourage lending to prospective homeowners.

I think all the breath wasted on bloviating about bankruptcy would be better spent singing up a storm about a time when men were men and women were women and you could actually tell the difference. You know, a time before boy bands became popular.

In honor of The Decider, Dirty Harry, and posturing hard guys everywhere, let's sing along with the macho man anthem for the ages:

Scissor Sisters, Take Your Mama Out

VISA's IPO Benefits Banks

When we discussed the potential positive effects of Visa's announced intention to engage in a public stock offering fourteen months ago, we didn't list one that since that time has become its biggest apparent benefit: boosting Visa member banks' capital.

At least $10 billion of it, and perhaps more than $12 billion, will be used to buy back their own Class B and Class C shares from major shareholders — the banks. “It’s a great way for the banks to raise money,” says Francis Gaskins, CEO of IPOdesktop.com. “It’s pretty transparent.”

The biggest holder of Class B shares is J.P. Morgan Chase, one of the underwriters; it currently has 93.1 million in Class B shares, but will own 64.5 million in Class B shares after the offering. Other major stakeholders include U.S. Bancorp, Citigroup and National City, and it’s not a stretch to say the banks won’t look askance at a big infusion of capital right around now.

According to Visa's S-1, the remainder of the estimated $15.6 billion to $17.1 billion raised will be used to settle litigation (including the litigation we discussed here and here), and deposited in a $3 billion escrow fund. Obviously, Visa has heard class action attorneys screaming "Show me the money!" and has chosen to respond.

As to the banks, they can use every billion or so they can get their hands on these days. Thankfully, none of the money will be spent on growing existing business operations, investing in new ventures, improving technology, or other mundane purposes. No, it's going to fulfill the greater good: lining the pockets of big banks and trial lawyers.

I ask again: Is this a great country, or what? Excuse me while I grab a hankie and wipe away a little tear of pride and joy.

Sheila Bair: CDO Lawyer

Sheila Bair continues to say anything...ANYTHING...to satisfy her consumer advocacy fetish. Her latest exercise in self-pleasuring came last Friday, in a speech in San Jose (I guess she knew the way). She was hell-bent on continuing to give legal advice to servicers of collateralized subprime mortgage debt obligations as to how to best serve the interests of various classes of bond holders without getting themselves sued by an unhappy class...or two...or more... of disgruntled investors. She's obviously irked that too many servicers simply refuse to take her advice to modify loans across the board for at least five years (preferably, for the balance of the initial 30 year loan term) at existing teaser rates.

Some servicers have told us that they are afraid to systematically modify loans for fear that investors will sue them. But the smarter question that loan servicers ought to be asking is whether there's a bigger risk of a lawsuit if they don't do modifications. Given today's market conditions, foreclosure will likely cost investors a lot more money than the lower returns they would get from modified loans.

Actually, the "smarter question" is what the heck does this have to do with Bair's job as head of the FDIC?  Of course, that horse ran out of the barn long ago. No matter how many times I see her on a cable news show, taking this issue up with a loan servicing executive or knowledgeable banker who tells her that she simply doesn't get it, she keeps singing this same tune. She always asserts that loan modifications are always better for the bondholders "as a group" (different classes of bondholders be damned) and loan servicers are bloody morons if they disagree with her contention that they have little-to-no risk of being sued if they do as she advises. Sheila's of the school that if a statement is asserted often enough, it becomes incontrovertible fact. And yet, certain damned fools keep resisting her air-tight legal advice as to the complete lack of legal exposure that servicers have for modifying loans as she wants them to be modified, post haste.

It appears that she's become so frustrated that she's now willing to promote a "solution" (as unnecessary as she thinks it must be) in which Congress enacts a law that gives loan servicers blanket immunity from civil lawsuits by those bondholders who might have a facially valid claim that "doing it Sheila's way" is a breach of the servicers' obligations to bondholders.

If need be, Congress could step in to protect loan servicers from investor lawsuits by clarifying that systematic loan modifications are consistent with, if not required by, their fiduciary obligations to investors. My hope is that investors wake up to what's going on and push hard for loan modifications, not fight them.

That would be an interesting piece of litigation to both write and litigate over the coming years. Make no mistake: if Congress passes such a law, it will be litigated and that litigation will likely take years to play out. A recent Housing Wire post explains the problem succinctly.

At issue here is the differing objectives between where a bondholder sits. Junior bondholders want to see the freezes put into effect, protecting at least some of their cashflow; more senior bondholders tend to see the rate freeze program as detrimental at worst, and risky at best, to their overall position, said one source that spoke with HW.

This is just the kind of boneheaded interference with private contractual rights that someone who's spent her entire career as only a professional bureaucrat, politico, or college professor would advocate. I suppose that she expects that injured classes of bondholders, especially those holding the tranches with the highest ratings (the "first-out crowd"), will sit on their fat behinds and just take it like slugs.

I wonder if any such bonds were purchased by (and if so, still held by) state and local public employee retirement systems? It would be especially ironic if clown princes like Ohio Attorney General Mark Dann, Eliot Mess Light Andrew Cuomo of New York, or the Lone Star State's own man-on-the-make, Greg Abbott, were to sue servicers and successfully allege that the law was either unconstitutional or a compensatory taking under the Fifth Amendment and demand compensation.

Whoever the plaintiffs might be, and no matter what clever arguments are mustered to support such legislation, perhaps the more gun-shy servicers will desire that the bill also provide that the US Treasury will pick up their lawyers' tabs. What are the odds of that happening? Since Ms. Bair believes that it's within her duties to advance the interests of the FDIC by pushing this position, perhaps it's also in the interests of the FDIC to put its money where Ms. Bair's mouth is. The FDIC can indemnify the loan servicers. How about it? Get your legal beagles on the case, pronto, Sheila.

Not that anyone currently expects that subprime mortgage securities will ever make a major comeback on Wall Street, but it would be nice if someone other than the befuddled Ms. Bair, who will be long gone when the next shoe drops, consider what might be the long term consequences to mortgage securities of all stripes (not just subprime) if the U.S. Congress starts rewriting legal documents that govern the relationships between the private parties to the securities. If I could accurately predict such matters, I'd be rich, instead of of a lawyer. Nevertheless, I suspect that such a process might have the same effect on mortgage securities that FIRREA and its aftermath had on those wonderful "negative capital notes" that the old FSLIC issued to fill the hole of insolvent thrifts back in the 1980s, and on the "yield maintenance agreements" and regulatory forbearances it and the FHLBB agreed to that were cut back or "yanked" by new regulators. In other words, what's the appropriate "risk premium" that an investor ought to request to adequately compensate it for the risk of the advent of a future Sheila Bair?

I'm not a fan of government bailouts, but I'm much less of a fan of half-baked legislative interference in private contractual rights and in the structure of financial products. I'm almost to the point where I agree with Alan Greenspan's warning that if Congress believes that it simply must "do something," then it should spend money to directly assist people in need, but it should not mess with the structure of the market or of the products of the market, because Congress almost always screws that up with a host of unintended consequences.

Then again, no matter what "solution" Congress comes up with to ease the agony caused by the markets working through this painful correction process that is upon us, I suspect that it will screw it up.

Subprime? Not Here, Hoss.

This article pretty much confirms my recent experience, limited though it may be.

Small, local banks like Cardinal have largely avoided the problems larger banks face from the subprime meltdown.

Most community banks in the Washington region generally don't rely just on residential real estate mortgages for profits. They are not writing off nearly as many loans as their bigger counterparts who bet big on the housing market.

[...]

Community banks -- unlike large banks that often hold loans on their books -- typically sell the loans they underwrite to other banks and investors, which makes them less vulnerable to economic downturns.

Well, "makes them less vulnerable" unless they've done a poor job of underwriting and are forced to buy back the loans by "other banks and investors" who bought what they sold. Apparently, no such community banks were discovered by the writers of this this article.

There's an interesting twist in the story on the old adage "timing is everything."

New banks that opened in the midst of the housing industry collapse have been able to avoid the mistakes that others made. "We were able to learn" from seeing other banks plunge deep into subprime and get burned by that decision, said John Brough, president and CEO of McLean-based Chain Bridge Bank, which opened in August and doesn't deal in subprime.

As a young nephew always advises me, "Dude! It's way better to be lucky than smart."

You Can Sue, But Can You Collect?

It's easy to see the chickens coming home to roost when you live inside the coop. That's why those of us coop-dwellers who represent banks and thrifts who engage in mortgage banking have been warning for the last several years (for example, here and here) about the threat to not only the bottom line, but to capital, posed by "buy-back" obligations. A recent lawsuit by one institutional mortgage banker against an originator over allegedly fraudulent underwriting practices is a sign of the times.

Reeling from losses on mortgage loans, First Mariner Bank has filed a $15 million lawsuit against Virginia mortgage broker East West Mortgage Co., claiming the firm falsified mortgage loan documents sent to the bank.

The Baltimore bank alleges in a Jan. 25 lawsuit that in 2004, East West agreed to submit mortgage loan applications to First Mariner, which would review and fund the loans.

But First Mariner claims that to get the loans financed, East West created false credit references for borrowers, faked documents related to borrowers' employment and income and obtained home appraisals for more than the properties were worth. On one $310,000 loan made in June 2006, East West allegedly gave First Mariner two faked credit references and a false document verifying the income in the borrower's account, the lawsuit says.

[...]

Many of the borrowers had no idea East West was forging documents related to their loans, the suit says. Many defaulted on the loans shortly after closing, and First Mariner, which had sold the loans to investors, had to buy them back, the bank claims. First Mariner says it has lost more than $5 million because of East West forging loan documents.

Since the upheaval in the mortgage market began, many mortgage lenders that have found that loans were based on inaccurate data have demanded that the broker or loan originator buy the loans back, said J. Steven Lovejoy, of law firm Shumaker Williams, who is not involved in the First Mariner case.

If the facts turn out to be as alleged, outright fraud was involved. That's an easy basis on which to support a claim for breach of representation and warranty claim and/or a tort action. Yet, the extensive representations and warranties contained in most standard residential mortgage secondary market agreements make even less egregious "glitches" in the loan origination process fodder for investors to demand loan repurchases and to recoup damages from loan sellers. Obviously, investors have had people parsing the nuances, looking for loopholes, and hoping to put back every bad loan they can. It's not a recent phenomenon, but the First Mariner case highlights the problem.

A crucial issue for a mortgage banker such as First Mariner Bank is the financial capability of the originator to perform its buy-back obligations. Even if First Mariner wins the suit, if East West doesn't have "the scratch," it might be a hollow victory. There's nothing in the article to suggest that East West doesn't have that ability, but the time to worry about it is when the relationship was originated, not when it turned sour. It's the same issue with any contract that contains risk allocation provisions. If the other isn't financially capable of honoring its obligations, you've got a pretty package but an ugly core. It's your earnings and capital that will take the hit.

Obviously, hindsight is a wonderful capability. On the other hand, when mortgage originations were "blowing and going," I represented some smart bankers who anticipated the risks and required security to back the buy-back responsibilities, such as the funding a reserve account or otherwise pledging of readily marketable collateral. Others will learn the hard way, and will be better prepared in the future. If they stay in the game, that is.

The Biggest Winners

When Housing Wire observed last month that the biggest winners of the current mess in the mortgage markets would be lawyers, he wasn't whistling "Dixie."

Navigant Consulting, Inc., a global provider of business, regulatory and financial advisory services, released a study today that shows the number of subprime-related cases filed in federal courts dramatically outpacing the savings-and-loan (S&L) litigation of the early 1990s.

According to the Navigant study, the number of subprime-related cases filed in 2007 already equals half of the total 559 S&L cases handled by the Resolution Trust Corporation (RTC) over a multiple-year period. The subprime numbers represent only federal court filings.

"The S&L crisis has been a high water mark in terms of the litigation fallout of a major financial crisis. The subprime-related cases appear on their way to eclipsing that benchmark," said Jeff Nielsen, managing director of Navigant Consulting.

The number of subprime-related cases filed doubled during the second half of 2007, from 97 to 181 (for a total number of 278) cases. These cases included borrower class actions (43 percent), securities cases (22 percent), and commercial contract disputes (22 percent), along with bankruptcy, employment, and other cases.

Mr. Nielsen also opined that "this is only the beginning." It makes you wish you were a litigator instead of a regulatory and transactional attorney, doesn't it? No? I agree. The worst part of being a trial attorney is that you're always being distracted by passing ambulances. On the plus side, it's easy to get those billable hours in when all you have to write down is "worked on trial preparation" or "conferred re: case."

This news is especially welcome for both Pacific and Atlantic coasters.

Geographically, around half of all cases filed are in California and New York courts.

The best part? To paraphrase the late, great Carpenters, "we've only just begun."

"The course of regulatory investigations, the prospect of government intervention and marketplace variables may affect the volume of filings, but the explosion of cases in 2007 suggests a daunting forecast of what is still to come."

The study found that virtually every participant in the subprime collapse is being sued. Fortune 1000 companies were named in 56 percent of cases. Mortgage Bankers and Loan Correspondents represent the highest percentage of defendants (32 percent) but defendants also include mortgage brokers, lenders, appraisers, title companies, homebuilders, servicers, issuers, underwriting firms, bond insurers, money managers, public accounting firms and company directors and officers, among others.

The Wall Street Journal's Law Blog confirmed this happy news, and identified some of the overjoyed recipients of this litigation largess.

Leading the list of plaintiffs firms that have filed borrower-driven putative class-actions: Law Offices of Jeffrey K. Berns in Tarzana, Calif., and Beverly Hills, Calif.-based Kiesel, Boucher & Larson, LLP. The firms told the Law Blog they’ve jointly filed more than 50 suits, including many alleging violations of disclosure requirements during the sale of certain adjustable-rate mortgages, called “option ARMs,” that ensnared even borrowers with good credit.

[...]

Wannabe securities class-actions brought by investors of mortgage-backed securities and others made up about one-fifth of the filings, or more than 60 suits, and it’s perhaps no surprise to learn that San Diego-based plaintiffs powerhouse Coughlin Stoia Geller Rudman & Robbins LLP filed the most–more than a dozen–followed by Keller Rohrback in Seattle, according to Navigant.

I'm uncertain what the blogger is trying to convey with the term "wannabe securities class-actions," but whatever he means, I'm sure that there will be plenty of sharks all over that chum.

Fifth Third Sued Over Vendor's Error

When we first discussed a vendor's error that led to negative effects on borrowers' credit scores, which in turn led to a massive headache for Fifth Third Bank, we noted a consumer law expert's opinion that injured consumers would have little recourse, at least under federal law. One "consumer," who also happened to also be a real estate developer, decided that a state law claim of slander would work just fine, and sued the lender in state court for damages to his business.

Central Florida developer Mark Blythe has sued Fifth Third for slander in Orange County (Orlando) court, alleging that the mistake prevented him from closing loans for the acquisition of properties he intended to rehab, ruining his business. He is claiming more than $80,000 in damages.

The vendor erroneously failed to suppress data on paid-off mortgages, with the result that they were considered active--and delinquent--mortgages by the credit bureaus. That, in turn, lowered the consumers' credit scores, and, in some cases, prevented them from obtaining credit.

While initially Fifth Third said that it was taking the high road by notifying all affected consumers, since that time it apparently decided to "lawyer up."

Fifth Third found out about the data error in late November and said it was notifying those affected. But some people have only recently discovered the error - still on their credit records - when they applied for new or refinanced loans. The Courier first reported on the errors in December.

Fifth Third reiterated this week that it believes it has fixed the problem, although it declined to discuss what steps it has taken. And contrary to what it said in December, rather than notify everyone whose credit records were affected, many of whom might never know it happened at all once the error was corrected, Fifth Third decided the better way was to wait for people to contact the bank if they still had a problem, said spokeswoman Debra DeCourcy.

The problem's been corrected, so why notify people and just stir up a hornets nest? In addition, all the while you lay low and hold your breath, a statute of limitations period is slowly expiring. It's a decision that makes sense, legally. From a reputation standpoint, however, the decision is debatable. How much more angry will customers be when they discover the error themselves, or read about it in articles in the newspaper, and realize that the bank knew about it and never told them, than they would be if the bank notifies them, tells them that it thinks that it has done everything it can to correct the error, and gives them the telephone number of the person at the bank to contact if they experience any problems?

It's also a nice touch that the telephone number that the bank gave the newspaper is not a toll-free number. I assume that the bank decided that all affected consumers are within a local calling area of the 513 area code. Either that, or these folks are a penny wise and a pound foolish.

There's still no mention in the press of whether or not the bank has contractual recourse against the vendor for the damages it has suffered due to the error by the vendor, including indemnification for claims made by disgruntled customers. If not, I wonder if anyone involved in negotiating the agreement with the vendor is being asked, why not?

The Real Meaning of "Special Interest"

While Democrats in Congress (and in various state houses) have been kicking banks to the curb over their alleged role in the foreclosure "tsunami" washing over this great land we like to call "the land of the free and the home of the knave," Republicans are proving that they're good politicians: those who, when they're bought, stay bought.

Sen. Jeff Sessions (R-Ala.) has sponsored an unusual provision at the urging of the nation's banks granting them immunity against an active patent lawsuit, potentially saving them billions of dollars.

Adopted with little fanfare, the amendment would prevent a small  Texas company called DataTreasury from collecting damages from banks for infringing on its patented method for digitally scanning, sending and archiving checks. The patents were upheld last summer by the U.S. Patent and Trademark Office after they were challenged.

The provision, passed without dissent by the Senate Judiciary Committee in July and inserted into legislation scheduled for a vote by the full Senate this month, is a rare attempt by Congress to intervene in ongoing litigation, congressional experts say.

Although the amendment would not invalidate DataTreasury's patents, it would spare the banks from paying for infringing them should courts decide that's warranted. If DataTreasury collected a royalty of just a couple pennies per check, the cost would run into billions of dollars.

The federal government would have to pay $1 billion to DataTreasury over 10 years as compensation for taking its property under the amendment, according to estimates by the Congressional Budget Office.

At least Congress recognized the existence of the Fifth Amendment in this instance. When it passed the Financial Institutions Reform, Recovery and Enforcement Act of 1989, which revoked various supervisory forbearances granted by the savings and loan regulators in the 1980s, including regulatory capital and supervisory goodwill forbearances, aggrieved thrifts and/or their owners had to take cases all the way to the U.S. Supreme Court and to spend years pursuing their claims against the U.S. Government, which has waged a scorched earth policy of resistance to making things right with those who were damaged by that legislation. In other words, the U.S. Government acted like the mafia because, you know, they could. They're not accountable to anyone but the voters, and the voters are too busy with Lindsay Lohan's latest sexcapades to worry about "fat cat" bankers and entrepreneurs being screwed by Uncle Samuel.

In this latest instance, however, the Senate has come to the aid of bankers, albeit on the down low. Leading the charge is Jeff Sessions (his motto: "A penny for your thoughts, but a cool million for my vote"), who, I'm sure coincidentally, receives his largest share of political donations from the political action committees of financial institutions. Sessions denies that those contributions have anything to do with his sponsorship of this legislation. Instead, he attributes his support purely to the fact he hates trial lawyers. Well who doesn't?

Stephen Boyd, a spokesman for Sessions, said the provision "is designed to protect banking institutions complying with post-9/11 security requirements from the abusive practices of patent trolling trial lawyers seeking personal enrichment, which ultimately will be paid for by checking account customers across America."

Banks, too, claim that they are only fighting for what is good and true against the forces of opportunistic, bottom-feeding carp in Chilean-Sea-Bass' clothing.

The banks allege that DataTreasury bought up patents for the system that underlies electronic transfers and is trying to shake down companies for licensing fees. But DataTreasury asserts that Ballard is the inventor of the system and built a company to sell it before being squashed by banks that stole his idea. Court battles have raged between the two sides for six years.

The banks are emphatic about the need for the protection. "This is a glaring example of the abuse of the system," said former congressman Steve Bartlett (R-Tex.), president of the Financial Services Roundtable. "It's an example of what's wrong with patent law."

On the other hand, the U.S. Commerce Department thinks that special interest legislation of this sort is a bad idea.

The Commerce Department has objected to the amendment, including in a letter last week to Sen. Patrick J. Leahy (D-Vt.), the Judiciary Committee chairman. "Limiting patent holders' rights and remedies in this instance could reduce innovation in this technology area," wrote Assistant Secretary Nathaniel F. Wienecke. "The Administration does not support exceptions to patent protection based on a particular technology."

That's what happens when a president isn't running for re-election. He gets an attack of principle.

On this issue, I have to bite the hand that feeds me. DataTreasury has a valid patent, upheld in the face  of legal challenges. Certain big banks chose to play ball and license the patent rights from DataTreasury, while other, even bigger, banks decided to slug it out in court and try to wear down the little patent holder. When that tactic appeared to be a loser, the banks decided to change the rules by buying a special interest law of their very own. Don't you wish we all had that kind of "access" to Congress?

Many of us can't stand bullies in the public sector, and we have no greater love for bullies in the private sector. Special interest legislation designed to prevent the system from working exactly as existing law intends it to work seems to me to be a bad idea. Of course, that seems to be the way that the world operates these days, whether Democrats are courting consumers or Republicans are courting businesses, including banks. Congress is a playground where the rules of a free market economy are held hostage to the whims, and the need for votes, of the venal and the cynical.

Congress Craves Cramdowns

Cramdowns in Chapter 13 bankruptcy proceedings is an idea that appears to be on the fast track. Congressional Democrats aren't going to let the matter drop and they've got a new angle. They're arguing that it's "foreclosure relief" for innocent borrowers who are about to lose their homes due to the evil machinations of greedy, heartless lenders who tricked them into borrowing money on terms they couldn't afford in order to steal their family homesteads.

Sounds good to me.

As discussed in Friday's American Banker, the Dems stuck the provision on cramdowns into the latest economic stimulus package that Senate Democrats disclosed last Thursday, called the Foreclosure Prevention Act of 2008.  The Democrats are going to try to ram the bill through the Senate as soon as next week.

Democrats said the package would bypass the normal committee process, taking a fast track instead for full Senate consideration after Feb. 25, when Congress returns from recess.

That was bad news for the banking industry, which has fought tooth and nail against the bankruptcy provision, arguing it would wreak havoc on the value of their mortgage portfolios. Analysts said the provision's inclusion in a broader, and possibly politically popular, bill could raise its chances of enactment.

"If you're a financial services company that wants to derail this bill, you need to be very nervous," said Jaret Seiberg, an analyst with Stanford Group Co. "This has a lot of provisions that play very well to voters, and you have a lot of members up for re-election, and in such a situation, bills that should be dead on arrival find themselves enacted into law."

The article did note that the financial services industry was "violently opposed" to the bankruptcy cramdown provision, but that other provisions of the bill seem to be so popular in an election year that opposing the bill poses risk to any member, especially those up for re-election in 2008. Consumer advocates are confident that the bill will sail though. Senate Democrats leave no doubt that they're pressing this forward as part of populist agenda that plays well in times of economic uncertainty, especially in the face of the foreclosure upswing that is featured daily in the main stream media and in the blogosphere.

Despite industry complaints that the bankruptcy provision would give judges free rein to rewrite mortgages, Sen. Durbin said it was necessary to stop a wave of foreclosures. "We are trying to slow down this march to foreclosure that will bring down property values across America, including those who are dutifully making their monthly payments," the Illinois Democrat said.

Senator Charles Schumer, D-NY, who chairs the Joint Economic Committee, said the bill also was necessary because steps taken by the Bush administration were not enough. "This administration has refused to address" the housing crisis, he said. "They have ideological agendas that basically say, 'We don't want the government to get involved.' … If we don't deal with the housing problems, things are going to continue to get worse."

While some commentators, including the very liberal Tanta at Calculated Risk, a woman whose political views I don't necessarily share but whose insights on mortgage banking make me quiver with ecstasy, don't fear the right of bankruptcy judges in Chapter 13 proceedings to modify mortgage terms--including writing down the principal balance of a loan to the current market value of the property securing the loan, my current and former clients who are engaged in residential mortgage lending do fear it, especially if such a power will apply to existing loans. All agree that it should increase the risk of mortgage lending and, therefore, the cost to the consumer. However, since bankers issue that warning with respect to every new piece of proposed consumer protection legislation, I doubt that the argument will have much impact on members of Congress. Moreover, Senators and members of Congress don't care if it raises the cost of borrowing to consumers. They can always blame the rise on the greed of lenders, and they'll always be able to sell that argument to a public that wants to believe it.

I remember sitting at a bar having a brew with the president of a large mortgage banking concern in the late 1990s. He was discussing the economics of the mortgage banking business at that time, how thin were the margins, and how tough it was to make a buck in the business, unless you were very large and very efficient. I can't imagine how tough it must be in the current market, nor do I see how it will be any easier in the future.  As I've said for the last couple of years, by the time Congress gets through screwing with the private markets, instead of letting them work out their own necessarily painful solutions without the gentle ministrations of mortgage banking geniuses like Barney Frank and Dick Durbin, many consumers will be priced out of the residential mortgage market. That may be fine with many folks who believe that a large portion of "the subprime masses" don't need to have access to cheap credit to buy homes, but no one should complain that those same people are being "redlined" or otherwise discriminated against because "affordable" credit  is not available to them.