Bank Lawyer's Blog

The Burn/Fiddle Conundrum

The Democrats planned to fiddle while Rome burned. The Republicans were going to burn Rome, then fiddle.
--P.J. O'Rourke, Parliament of Whores.

A friend of mine is an ex-US bank regulator who was heavily involved in the resolution of the thrift crisis of the 1980s and early 1990s, and who currently heads a bank in Eastern Europe (or, will head it once the acquisition closes in a month). He's spent the last 14 years or so in the former Soviet Empire teaching kleptocrats about the wonders of the US banking system, where you steal  money from the masses the old fashioned way: first gain the public's trust, then abuse it. In the land of the gulag, it was all a lot simpler and easier because the government owned the banks. Theft was a way of life and most people had no money to steal, so only the crooks had enough money to put in the banks, and most of the crooks were government officials or related to them in some fashion. The government stole from the rich, which usually meant it was stealing from itself.

The World Bank and assorted other advisers swept into Eastern Europe on the heels of exiting Soviet tanks, to show "the proles" how the First World ran its banking system. From the early 1990s (following the cleanup of the S&L mess) until recently the US had some "street cred" with the ex-Commies as far as its banking system was concerned. Even with the subprime mortgage meltdown and the realization that Europeans had been sold junk bonds as AAA-rated paper, everybody overseas assumed that the most powerful nation on the planet would grapple successfully with this crisis, and show the eager apprentices how it was done by the big boys.

Then came the circus in D.C of the past two weeks, culminating in yesterday's House vote to tank the so-called "bailout" legislation that the White House and leaders of both political parties had agreed to support. My friend had been boiling over at the inept "selling" of the plan to the American public, as well as the politicizing, by both parties, of a process that should have been focused solely on finding the proper solution to a financial crisis that affects not only the US economy, but the world's. Last night my time, early this morning his time, my friend finally boiled over in an e-mail to me. He's given me permission to post it, as long as I don't identify him by name (his employers are notoriously publicity shy). I've also cleaned up a couple of of typographical errors, but the following rant is set forth basically verbatim, and it's enjoyable, if you enjoy seeing a teakettle whistle:

It is unbelievable what has gone on with our financial system and what is going now, as we speak, with our political process.

Not one of our fearless government officials from the Bush Administration has framed this crisis in correct terms...everyone, including the press, has characterized this as a bailout of Wall Street...that is a complete fantasy...everyone talks about bailing out Wall Street Fat Cats ( the fat cats already have their money and are now sailing on their yachts), but this was supposed to be a rescue of the American financial system and for that matter, a rescue of the global financial system...what the hell is going on with our elected officials? In my humble opinion, they are all a bunch of spineless cry-babies who take more satisfaction out of blaming each other rather than making a tough decision...it is like school kids on a playground...they are all afraid of losing their jobs and their perks...but hell, what else are most of them qualified to do? This episode will make their handling of the Katrina incident look good!

Rather than allocating $700 billion of funds, they would rather let the American economy suffer a $1 trillion loss in the markets, which is what happened yesterday...and the $700 billion is not the true cost of this...anyone who lived and worked in the RTC days knows that some of these assets that will be sold and purchased have value... and they will eventually be sold to some savvy investors, and many of them will be sold at a profit to the government...

But everyone who has a 401k, a portfolio of stocks, and who works for a publicly traded company is poorer today than they were yesterday due to our elected officials...I hope someone will have the courage and the insight to see what is really happening here...this deal was never about Wall Street Brokers and all their insanity, but it was about you and me, and other small investors and savers who work their asses off everyday to save a dime and try to get ahead...but then we are left to hang out to dry, as if we do not matter...well we need to show all our elected officials that we matter next month when we go cast our votes.

What a shame and a pity that no one from this "wonderful" administration sees what is really happening here...I guess the only way to end this, is at some point, the suffering will become so painful, that even our elected officials will finally see the light!

It would have been nice to have statesmen rise above the daily noise, and put the interest of our great country above their own! That must have been too much to ask in today's partisan environment. Neither McCain nor Obama exhibited any real leadership on this issue...sort of makes you wonder what either of them will do when the next crisis shows up!

Sorry to rant and rave, but I had to get this off my chest...I really feel embarrassed and sad about being an American living and working overseas at this moment!

I told him to tell his Eastern European employees that sooner or later, the CIA would waterboard every Republican and Democrat who voted against the plan yesterday, and the most ardent opponents would "disappear." The next vote will make some cosmetic changes to the bailout bill and then it will pass. They'll understand that explanation and believe it, even if it's a blatant lie. They're likely as used to hearing bald-faced lies as Hillary Clinton hears around the house on a daily basis about where Bubba was last night. Plus, it sounds plausible, doesn't it? I mean, it's better than telling them the truth: gutless wonders let either election year e-mails from a cadre of hard-core Kool-Aid drinkers on the fringes of both political spectra and/or their own tinfoil hat-wearing ideology to get in the way of making really nasty sausage, which legislation often ends up being. It's a process called "compromise." It's what adults do in a world where competing views of what's right and what's wrong have to find a way to meet in a middle ground, if you're going to solve problems.

I didn't want to discourage my friend further by pointing him to blogs written by ivory tower cocooned university professors, unemployed "management consultants," and professional ideologues with way too much time on their hands by reason of either a lack of useful employment or a violation of their employers' acceptable Internet use policies, all of whom have either a better plan or a purer ideology that will brook no deviation from their intellectual construct of how the world must "be." None of them are in the trenches, of course, but they all know better than those who are.

There's only so much Stolichnaya one man can consume safely.

The Eternal Lessons of the Current Credit Crisis

There was an interesting juxtaposition of articles in yesterday's Dallas Morning News. Business columnist
Cheryl Hall worried that the latest bailout might make the same "mistake" that she alleges the RTC made: selling assets at too low a price, and allowing buyers to reap big returns when prices recovered. Her article featured real estate developers and S&L owners in Texas who suffered from (and many would argue, contributed to) taxpayer losses caused by the meltdown of the S&L industry in Texas in the late 1980s and early 1990s. They included developer Henry Billingsley, who lamented that his strapped finances during the last downturn prevented him from making a killing from the RTC, but who is elated that this time around he's got the resources to take advantage of the proposed (albeit currently aborted) bailout.

"It wasn't that you didn't know that it was a once-in-a-lifetime opportunity," says developer Henry Billingsley, who made two RTC deals but was too illiquid to bite off more. "When I saw this situation with [U.S. Treasury Secretary Henry] Paulson, I said, 'There is a God in heaven. I'm going to get a second bite at the apple.' "

Yes, I always regard it as proof of God's existence that opportunity exists to profit financially from the misfortune of other human beings. Doesn't every believer?

Craig Hall (no relation to Cheryl, as far as I know) was an apartment syndicator and owner of a state-chartered savings association during the 1980s. The thrift failed and many of his apartment projects went bankrupt. He, too, is itching to make a killing this time around.

The chairman of Hall Financial Group expects additional financial institutional failures to lead to the creation of an RTC-esque clone.

He and Herb Weitzman, founder of the Weitzman Group, the state's largest retail brokerage company, have joined forces to take advantage of any deals that crop up.

"I was a participant on the wrong side last time," Mr. Hall says. "I want to be on the right side this time."

The last time around, the RTC and the FDIC had a list of people who caused losses to the FDIC (or to the now-merged FSLIC), and those folks were barred from participating as purchasers of assets from the RTC or FDIC (or as contractors with either agency). If this time around, a similar list is used, and the FDIC and Treasury look back far enough, then the dreams of some of these players who were once on the wrong side will not be sweet ones. Some might say that is only fitting.

Editorial columnist Rod Dreher was looking for different--and deeper--lessons from the current crisis than the ability to make a pile of money out of it, and whether the "New RTC" would sell assets at too low a price.

Novelist David Foster Wallace, who recently committed suicide at age 46, once told an interviewer that his generation had been morally "gutted" by a pseudo-sophistication that sneered at boring everyday truths. He explained that privilege had caused so many of his contemporaries to forget that plain-spoken wisdom – the sort of truisms that supposedly only children and suckers believe – is actually, you know, valid.    

"The idea that something so simple and, really, so aesthetically uninteresting – which for me meant you pass over it for the interesting, complex stuff – can actually be nourishing in a way that arch, meta, ironic, pomo stuff can't, that seems to me to be important," he said. "That seems to me like something our generation needs to feel."

[...]

Mr. Wallace's observation came to mind the other day as I watched a beleaguered Wall Street executive on MSNBC try to obfuscate his company's key role in helping cause the crisis, the near-apocalypse that has delivered the U.S. financial system to the far end of the valley of the shadow of debt, to the edge of Armageddon. The poor man gassed on for 10 minutes, using every possible verbal maneuver to avoid answering direct questions put to him by journalists.

Who can blame him? We have become used to this sort of thing. We've come to prefer comforting lies to hard truths born of observation and experience, thinking that in our brilliance we had somehow escaped the iron law of necessity. 

[...]

Complex financial instruments come and go, but the hearts of men remain the same. Greed, vanity and hubris we always have with us, as well as a weakness for the soft sophisticated lie over the hard plain truth. About human nature, tradition – the accumulated wisdom of mankind – is never wrong. True conservatives – as opposed to those who confuse mammon-worship with moral and intellectual principle – know that a tolerable order can only exist when most people live by the moral laws articulated in time-worn banalities.    

So, send the tumbrels into the streets to carry off the heads of sophisticates who believed that we had repealed the laws of economics and human nature by our cleverness. The Gods of the Copybook Headings demand propitiation. We shall offer them scapegoats and try to forget our own complicity in the coming catastrophe.    

After all, these scoundrels did not elect themselves, nor was there an outcry heard in the land against Wall Street rapacity and recklessness when our 401(k)s were rising, and all but the lowliest plebeian was moving into his very own McMansion.    

Along those lines, there's one proverb that we will all become painfully acquainted with in the years to come: You reap what you sow.    

Near the end of the Oscar-winning movie "Unforgiven," the young assassin who calls himself "The Schofield Kid" is shaken by his first murder, and lamely tries to justify it with the assertion, "Well, I guess he had it coming." Clint Eastwood's character, William Munny, a man whose life of darkness is finally coming full circle, utters the benediction, "We've all got it coming, kid."

May all of us get everything we have coming to us as a result of this latest crisis, bailout or no bailout.

The Beating Goes On (and on and on and on...)

Unfortunately, it's time to post this again:

I used to have post this only once every six-to-twelve months. Now, it appears I'll have to do it every three-to-four months. Eventually, I'll have to do it weekly. The deluge of requests for free advice are once again proving that there are legions of the illiterate cruising cyberspace looking for a hand out and, rest assured, looking for it in the wrong places. At the risk of repeating myself, let me repeat myself:

Unfortunately, it's time to post another rant for the benefit of those of you who cruise cyberspace asking for free legal advice. Do you understand that what I do for a living is to render legal advice in return for money? That's what the private practice of law is: rendering legal advice to people who pay me to render that advice. It's not dissimilar to a doctor charging you for medical advice, an accountant for tax advice, a real estate broker to represent you in the sale of your home, or Divine Brown to render unto you what she rendered unto Hugh Grant. Let's review: A service provider renders a service in return for which a client agrees to pay him or her money. Moola. Legal tender. Scratch. The root of all evil.

Please, for the umpteenth time, for the love of whomever or whatever you worship or mock: Read My Disclaimer!

Here is, verbatim, my most recent post on this topic, from April 3, 2006. It's worth rereading, so please do so:

Apparently, I'm going to have to repeat this post every couple of months until it sinks into the noggin of every reader who suffers from comprehension impairment.

From October 30, 2005:

I thought that my Disclaimer was fairly clear, but l"d like to reiterate something: I don't intend to render legal advice through this blog. If you are not already a client of my firm, please don't ask for legal advice from me by sending me an e-mail or leaving a comment. If you need legal advice, hire an attorney to give it to you and pay them for their services, as you would any other service provider. This blog is intended as my personal commentary on legal issues affecting banks (and certain other issues that might interest me). The content of this blog is not legal advice. If you haven't done so, please read the Disclaimer and my Comment Policy.

As my biography and the posts to this blog should indicate, I represent banks. I'm not interested in answering questions or comments of people who dislike banks or, God forbid, want to sue them. Although I may question some things that individual banks may do from time to time, I like banks. This economy could not function without them. There are many, many litigators who love to sue banks, but I'm not one of them. If you need one of those lawyers, you won't find him or her here.

Thank you.

Here's more, from a post in February:

Attorneys are knowledge sellers. That's what we do. You need legal advice? Don't ask me as the author of this blog to give it to you unless you and my law firm have an attorney-client relationship. If we do, and you're a client, expect me to charge you for it. If you're a reader who's not a client, don't send me an e-mail with a question such as, "Do you know a good free source where I can find the laws of these 23 states on the topic of whether or a not a bank chartered under the laws of Y state needs to be licensed in those states to do Z"? No, I don't. Hire an attorney to render that advice and pay him or her to render it. Also, if you're a bank's employee, I won't give you a "sample form" of an agreement so you don't have to pay your bank's regular attorney to draft it. You'll pay a garage mechanic to fix your car, or a restaurant to cook and serve you a burger, but paying for legal advice somehow sticks in your craw? Amazing.

If you send me an e-mail message that contains a litany of complaints against a bank, contains defamatory statements (and if you're going to accuse a bank of "steeling" at least learn to spell the word correctly), or otherwise talks about a problem you're having with a bank, I will delete it as soon as I get the first inkling of what it concerns. I don't want to know the details. Really, I'm not interested. You must believe me when I tell you that such communications fill me with inertia.

I also won't allow comments along the same lines to be posted. How much more plainly and simply can I state these simple policies?

Finally, why in the ever-loving world would you think an attorney would respond with legal advice to an anonymous e-mail? What planet might such a correspondent be from? One in our galaxy?

Ranting is over for this 24-hour period. Resume your normal activities.

No Mas Hate-for-Sale!

While many of us thumb-suckers have been spewing spittle all over our keyboards about the "nucular" disaster scenario of a constipated financial system bursting a bowel, a far more dangerous economic meltdown has been relegated to the back pages. Thank our good fortune that ONN is focused like a laser beam right where it needs to be.

Economists Warn Anti-Bush Merchandise Market Close To Collapse

The No Longer Preferred Preferred Stock

Lately, there's been whining and sniveling from some corners of the commercial banking sector about the write down of Freddie Mac and Fannie Mae preferred stock as a result of the federal takeover of those political contribution ATMs stalwarts of home mortgage finance. Many of the holders of those shares are banks, and the conservatorship not only has hurt the value of those preferred shares (and, consequently, the earnings and, possibly, capital of the banks that own), but at the same time has provided some support for subordinated debt. As investment banker Jim Gardner notes:

Banks have long been big buyers of preferred securities issued by the troubled sibling mortgage lenders. That’s because the shares paid strong dividends, could be treated as assets on a bank’s books and produced income taxed at a less-than-corporate rate...For years, those shares performed well for bank owners, providing income and asset growth. But following the federal bailout of those institutions, the preferred shares have dwindled in value, while the government’s conservatorship plan actually provides backing for subordinated debt holders and other investors.

[...]

Following the Sept. 7 bailout, large public banks immediately began announcing million-dollar write-offs for the third quarter. The nation’s largest banks have the greatest exposure to the preferred shares of Fannie and Freddie, but as a percentage of capital, regional banks stand to be impacted more greatly.

Three regional bank holding companies in Virginia, Illinois and Washington state are facing write-downs so large that they could fall below bank regulators’ top-graded well-capitalized standard, according to Keefe Bruyette.

Publicly traded institutions have been the first to report their exposure, because of stock disclosure rules, but it’s likely that larger private regional banks also will have to report losses on the values of those shares.

[...]

Private institutions likely will reveal their charges, if they have to take any, this fall when they file their third-quarter data with regulators.

Thus far, it doesn't appear that many Texas institutions will be adversely affected to any serious degree. That may explain why Texas banker Andy Beal, a man who owns a Texas-based bank that doesn't own any Freddie or Fannie preferred stock, is not exactly overflowing with tears over the plight of those banks that are being stiffed by Uncle Freddie and Aunt Fannie.

Financial institutions are encouraged to do many things, said Andy Beal, president of Plano-based Beal Bank.

“They’re also encouraged to go out and make a bunch of low-interest loans to low-income homeowners,” Beal said. “While you’re encouraged to do things that are poor investments, you do some of it, but not a lot of it.”

Investments require risk, so institutions should be held responsible for bad investment decisions. In this instance, that should have extended beyond holders of Fannie Mae and Freddie Mac stock further into the entities’ capital structures.

“The government has to provide that support to the housing market, but they don’t have to provide it to such great expense to the taxpayers,” Beal said. “The fact is, there’s going to be a bunch of pain here, and it should be felt by the people who made the investments, not by the taxpayers.”

A banker who scorns being bailed out by the government? Maybe he ought to team up with that Texas bazillionaire with the East Texas twang that could strip paint from the side of a house, Ross Perot, and take a crack at straightening out this mess. I mean, when people think of safety and soundness, they think "Texas," right? Right?

OK, maybe not.

A Small Distraction

Those who complain of the slow pace of national bank regulators to deal with problem institutions they regulate have been slow to react to the FDIC's seizure of Ameribank, Inc. of Norfolk, West Virginia last Friday. Perhaps they were distracted by more important matters, like the announcement of Paulson's bailout plan. The federal thrift had a grand total of $112.62 million million in assets at the time it was seized, yet is expected to cause the FDIC a loss of $42 million. That appeared to me to be a pretty substantial loss as a percentage of assets (37%).

I was not alone in that view. Yesterday, Housing Wire's Paul Jackson was also asking questions.

You’ll want to do a double-take on that number: consider bank with slightly over $100 million in assets will cost the FDIC $42 million on its failure — and that’s with all branches and deposits (along with the catch-all “other assets”) being bought. It’s pretty clear how many of the bank’s “assets” might have been something other than what their name would seem to suggest.

“The FDIC’s closure of West Virginia’s tiny Ameribank on Friday was not in and of itself terribly important,” said one source, who asked to remain anonymous. “However, it does beg the larger question of what the regulators are waiting for with many of these institutions.”

The OTS' press release on the failure gives us some additional information, but even more concern.

Ameribank’s troubles stemmed from excessive growth in construction rehabilitation loans, which provided financing for the rehabilitation of distressed properties, predominantly in low- to moderate-income housing markets.

The quarter ending June 30, 2008, marked the fourth consecutive quarter of net losses and capital erosion for Ameribank.  The OTS determined that Ameribank was “Critically Undercapitalized” and the institution was unable to develop a viable plan to restore capital to adequate levels.

In May 2007, OTS issued a Supervisory Directive enforcement letter and began a continuous on-site presence at the institution.  The enforcement letter restricted the bank’s rehabilitation lending activities and identified Ameribank as a troubled institution.  In October 2007, OTS issued a Cease and Desist Order, a formal enforcement action, because Ameribank was not in full compliance with the Supervisory Directive.

It took sixteen months after the OTS issued its first formal enforcement directive and started monitoring the thrift on-site, and nearly a year after it issued a Cease and Desist Order (because the institution was not complying with the directive), to stop the bleeding by shutting this institution down. Perhaps the thrift's owners had a third party that was exploring an acquisition or recapitalization of the thrift, and negotiations dragged on before they ultimately fell apart. When you're representing the thrift, you appreciate the forbearance in such circumstances. On the other hand, in a year when the entire financial system appears to in danger of a meltdown, and Treasury Secretary Paulson's proposal to terminate the OTS with extreme prejudice is part of his regulatory reorganization and modernization plan, I'm not certain that it's in the interests of the OTS (and certainly not of the FDIC) to let these basket cases linger for such a length of time. I wonder if there will be a "leak" to the press (as there was in the case of the recently seized Silver State in Nevada) that the FDIC was pressuring the OTS to pull the plug on Ameribank down much sooner than it did.

You have to hand it to the regulators, however. They picked a weekend when this type of news was certain to be buried on the back pages. With luck, the OTS may dodge this bullet completely.

The Best And The Brightest

The night before I left to cover the Iraq war I got drunk with another friend, who works in TV news. We were talking about how--as an approach to national security--invading Iraq was...different. I'd moved my family from Washington to New Hampshire. My friend was considering getting his family out of New York. "Don't you hope," my friend said, "that all this has been thought through by someone who is smarter than we are?" It is, however, a universal tenet of democracy that no one is.
--P.J. O'Rourke, Peace Kills.

I have the same hope and the same fear when I consider the financial system rescue plan currently being hammered out by all those big-brained individuals in our nation's capital this week.

If it's true that there are no atheists in foxholes, then pray for guidance to whatever god floats your boat. Guidance for them, not for you.

Glass-Steagall: Buh-Bye!

My initial reaction to the news that Goldman Sachs and Morgan Stanley are becoming bank holding companies mirrors the initial thoughts of The New York Times (perish the thought!).

• the leverage ratios of both investment banks will be drastically reduced, consequently reducing the severity of any mischief that the holding companies could achieve. The maximum leverage ratio that can be achieved and still be considered "well capitalized" under FRB Prompt Corrective Action regulations is 15:1 (Citicorp's current leverage ratio). Morgan Stanley's leverage ratio is currently 30:1 and Goldman's 22:1, so they will be shrinking their balance sheets.
• "[T]he move signals the final end to the Glass-Steagall Act, the epochal legislation of 1933 that signaled a split between investment banks and retail banks." Yep. Who knows what dreams may come from this final breakdown of 70+ year-old barriers?
• Nouriel Roubini was right (again) in asserting that the old investment bank model was "broken" and that investment banks of the future could not exist outside the commercial banking business model, with its access to insured deposits and other stable sources of liquidity.
• "Now, Goldman and Morgan Stanley, which have been the subject of merger speculation in recent weeks, can become direct competitors to larger firms like Citigroup, JPMorgan Chase and Bank of America. Those firms combine investment-banking operations with the larger capital cushions that come with retail deposits, giving them a stability that pure investment banks lack." Not only that, but with bank holding company status already approved by the Fed, Goldman and Morgan Stanley can become "playahs" in resolving future bank meltdowns, which leads us to the final preliminary point.
• "Given the expected bank failures this year, it is possible Goldman and Morgan Stanley could seek to buy them cheaply in a 'roll-up' strategy." From merger bait to predators in just a few days.

I've not seen a week quite like this one in 34 years of practice, not even in the 1980s. Perhaps it's the effect of the "Internet Age," but once-in-a-half-century changes in the structure of financial institutions used to take just a tad bit more time than they do in the 21st century.

Get ready for a whole new world, dawning in the blink of an eye.

Beneath The Bloviation

While the blogosphere bloviates breathlessly about the U.S. Treasury Department's blatant grab for unbridled power, the likes of which has not seen since Julius Caesar crossed the Rubicon, some bank law nerds have been diverted by more mundane aspects of the ever-expanding reach of federal preemption of state banking laws as they apply to the operations of national banks and federally-chartered thrifts. Hard on the heels of the US Sixth Circuit Court of Appeals decision that supported the OTS extending federal preemption of state licensing laws to a federal thrift's "exclusive agents," the US Second Circuit Court of Appeals has ruled that a Connecticut law that attempts to restrict the operations of "facilitators" who "facilitate" (e.g., take and forward to a lender loan applications for) "tax refund anticipation loans" made by third party lenders, does not apply to such "facilitators" when their "facilitation" is undertaken on behalf of loans made by national banks. Specifically, provisions of the Connecticut law that would limit locations where such loans could be made, or would restrict the annual percentage rate of such loans, do not apply when the facilitators are facilitating loans made by national banks. According to the trial court and the Sixth Circuit Court of Appeals, such state law provisions are preempted by the National Bank Act. With respect to annual percentage rates, the National Bank Act allows national banks to "export" the rate allowed by the state where they are "located" (i.e., where their main office or a branch office is located, or the state named in their certificate of organization). The Connecticut law attempted to restrict the annual percentage rate to a rate (or rates) lower than that that would be allowed by the state where the national bank in question was located.

We'll see how much power Congress eventually gives the Treasury Department, although if appearances on the Sunday morning talking-head shows are any indication, Democrats and Republicans in Congress actually appear to be cooperating with one another to give the new "Garbage Debt Czar" the power he needs to collect the waste generated by "just a few bad loans too many" and dispose of them to God-knows-who for God-knows-what-price at a time some time in the future (as long as the Czar hustles up and buys or commits to buy the garbage within the next two years). The details are still being worked out (not that has lessened the blather from all sides as to how this is the beginning of the end of life on this planet and, perhaps, the universe). We'll also be interested to see how and when the Democrats will exact their ton of flesh from the hides of the "fat cats" they claim are completely responsible for this present pickle, and how much largess for their core constituencies (non-profit consumer groups, trial lawyers, and those "common men and women" who had "a lot of junk done to them" by the fat cats). With the blogs in full bloom, rest assured that no thought about the matter, no matter how trivial or inane, will be left unuttered.

In the meantime, under the radar scope, the federal court system will continue its slow but inexorable work of consigning the Tenth Amendment to the dustbin of history.

H/t CSBS

Any Hope for Hope for Homeowners?

There are only two weeks to go until the event we've all been waiting for hits the mortgage world like Ike (the hurricane, not the dead president): The Hope for Homeowners Program.

At yesterday's hearing before the House Financial Services Committee, representatives of the nation's largest mortgage loan servicers were giggling like school girls and making goo-goo eyes at cute young male interns as a hormonal rush of pure ecstasy consumed them when they contemplated the impact of this once-in-an-epoch solution to all that ails the mortgage market. Oh, sorry, that was Barney Frank eye-balling the interns, not the mortgage servicing reps.

According to Housing Wire, the mortgage services were filled with inertia and not unbridled hope at the prospects of Hope for Homeowners.

The emerging consensus among those in the servicing trenches that spoke with HW, however, has been that the program will have less impact than legislators might hope. And that was clearly the undercurrent in committee testimony Wednesday from servicing executives, evident as much in what was said as it was in what wasn’t.

Steven Hemperly, senior vice president of real estate default servicing at CitiMortgage, Inc., went so far as to only mention the Hope for Homeowners program in his closing remarks to committee chairman Barney Frank (D-MA) and other House members. His only mention of the program: “We look forward to the initiation of the Hope for Homeowners program and view it as a useful lending and servicing tool for struggling borrowers.”

While affirming Wells Fargo’s commitment to loss mitigation, execitive vice president Mary Coffin estimated that 30,000 to 40,000 borrowers might qualify for the Hope for Homeowners program. “We will use this program where it is needed,” she told House members.

Other servicers provided similar estimates, but said the total number of loans pushed to the program would likely end up being lower. “We do believe, based on our experience of the last year and a half, that the numbers of borrowers who ultimately take advantage of the program could be lower than the number that preliminarily qualify, as there may be several crucial barriers to the program’s widespread use,” said Molly Sheehan, a senior vice president at Chase Home Lending.

Bank of America loss mitigation head Michael Gross was the only servicer that noted that the company — which now owns mammoth Countrywide Financial’s mortgage servicing portfolio, and is the largest servicer in the nation — had actively engaged in forbearances thus far for borrowers the company believes will qualify under the program.

“We are proactively contacting these customers to confirm their eligibility for, and interest in, participating in the program,” Gross said. “Subject to investor consent and state procedural considerations, we will avoid completing foreclosure sales for the customers identified while the implementing regulations are being drafted.”

It figures that Bank of America would be blowing air kisses to the Committee. It's strapped on a Hazmat suit and is trying to clean up Countrywide's toxic waste. Even a program as weak as Hope for Homeowners is appreciated, even if all it does is waft a whiff of "eau du rose-colored-glasses" over a field of rotting beached whale carcasses. After all, when it comes to federal legislation, it's the thought that counts, right?

As noted by Housing Wire's Paul Jackson, a big damper on the servicers' sense of enthusiasm might be the fact that with only of a couple of weeks to go, HUD hasn't released the details about how the program will work. Knowledgeable readers will recall that HUD initially announced that it would take until next October to get the rules issued, and only backed down when folks like Barney Frank and Chris Dodd threatened to sever HUD's body parts with a rusty razor; and not in a nice way, either. It's not surprising that if in August you think it will take a year to implement the program, only 30 days later you might still be scrambling like John Edwards after a passing ambulance to get the rules in place. Perversely, I hope that HUD's not up and running on October 1, because I simply like to watch cage fighting, especially when it involves politician versus bureaucrat in a grudge match to the death. There's always the hope that both will be maimed.

A major fly in Hope for Homeowners' mortgage burn ointment is the problem of junior lienholders who ask, quite correctly, "What's in it for me?"

HUD’s [Brian] Montgomery also alluded to perhaps the program’s largest sticking point: second liens. “One of the greatest challenges to successful loan modifications is obtaining the consent of all existing lien holders, including the holders of junior mortgages,” he said. He suggested HUD was close to proposing rules under the HFH program that would have second lien holders share in the government’s interest in the property.

That is clearly something that doesn’t sit well with first lien holders, particularly on portfolioed loans. Chase’s Sheehan said that “it seems counter intuitive that the second lien holder moves into a favored position in sharing future appreciation.”

“We believe it would enhance the success of the program were a similar incentive provided to the first lien holders,” she suggested. First lien holders must write-off significant principal on a troubled loan — down to 90 percent of current LTV — and must contribute the borrower’s initial 3 percent FHA mortgage insurance premium.

Montgomery also warned that loans under FHA’s Hope for Homeowners program would have a higher interest rate than other comparable loan programs — which would certainly seem to undermine the program’s intent to make mortgages more affordable for troubled borrowers.

“Given the distressed nature of the borrowers likely to participate in the program, as well as the 1.5 percent annual mortgage insurance premium mandated for HOPE for Homeowner loans, early indications are that HOPE for Homeowner loans likely will have a higher interest rate than other FHA-insured products, including FHASecure, because they will cost more than standard FHA loans,” he said.

This program looks like it's going to storm out of the gate like Secretariat on steroids, doesn't it?

We'll see, soon enough.