We noted earlier this month that Fannie Mae and Freddie Mac were in "full put-back mode." Apparently, Fannie is feeling a tad defensive about the publicity that it's been receiving over this issue. It wants to assure interested parties that it's not taking an electron microscope to the loan files to uncover grounds to force loan repurchases. That's because, according to an article in The American Banker (paid subscription required), it doesn't have to drill very deeply to find defects in the loan documents and underwriting.
Fannie Mae said Friday that many mortgage lenders are not complying with the most basic underwriting guidelines, such as confirming a
borrower's identity or verifying a Social Security number.
Marianne Sullivan, a senior vice president and Fannie's chief risk
officer, sent a nine-page letter to lenders announcing a "Loan Quality
Initiative" to ensure that loans meet the government-sponsored
enterprise's credit and eligibility guidelines.
Sullivan said Fannie analyzed the primary drivers of loan-repurchase
requests and has launched the initiative to identify ways to improve
compliance with its guidelines. "Many repurchase requests are driven by
the fact that the delivered loan does not meet Fannie Mae's eligibility
requirements," she wrote.
Online publication Mortgage Daily News has a few comments on the "LQI." They rightly note that it appears bank quality control staff are going to have to "spend some time in the classroom." I'm not certain that's necessarily a bad thing. If originators are screwing up the basics, classroom time is something that ought to be happening. Also, MDN suggests that since Fannie Mae is going to begin a process where it tries to weed out the chaff from the wheat before it purchases a loan, originators should have a friendly relationship with a "scratch and dent desk." Again, good advice.
TPG Capital’s David Bonderman isn’t exactly a loquacious guy when it comes to public utterances, so when he drops a hot opinion in a public forum, it tends to be noticed. Today at a University of North Carolina conference, he told his audience that he thinks that the FDIC is blowing it by driving away private equity from acquiring failed banks from the FDIC.
The Federal Deposit Insurance Corp, concerned about equity funds exploiting the depressed assets of troubled banks by quickly selling them off, has limited the percentage of ownership and control by outside investors.
But Bonderman said firms that specialize in turning around failing enterprises are precisely the medicine such banks need.
Bonderman, speaking at a University of North Carolina conference here, pointed particularly to FDIC polices as aggravating the problem.
"The FDIC has taken the view that they are terrified of private equity guys -- or anybody else for that matter -- getting control of a financial institution," he said.
"Well, if you can't do that, you can't fix it. So the reason you are seeing so many announced bank failures and no equity coming in is because of misguided policies by the U.S. government
As many readers may recall, TPG lost over $1.3 billionwhen Washington Mutual failed in 2008. The fact that TPG wants in on FDIC-assisted failed bank transactions after suffering that loss shows you the upside potential in FDIC failed bank transactions. It also shows you one of the reasons that the FDIC is gun-shy of private equity: risk-takers might actually make money and then the FDIC might be criticized by mouth-breathing politicians and private sector pundits who resent the fact that other people make money.
For example, look at all the heat being generated by the recently announced financial results for OneWest Bank, the private equity-funded takeover vehicle for the assets and deposits of IndyMac. That hefty profit caused professional sound bite dispenser Bert Ely to ejaculate the following gem: "It makes you wonder whether the [FDIC] loss is due to the acquirer getting too sweet a deal." Well, if that’s the case, then the FDIC broke the law, which requires the FDIC to select the least-costly alternative, which the FDIC assures us that it did. As everyone knows, government officials never fudge the truth, so you can take the FDIC assurances to the bank.
You begin to comprehend the FDIC’s political dilemma, though, don’t you? They don’t sell to a private investor and they’re criticized by folks like Bonderman (and other private equity heavyweights) for taking a heavier loss than they otherwise would have had to have taken. They bring in a private investor, lower their loss, but—god forbid—the private investor makes money, and guys like Bert Ely opine that the deal might be “too sweet.” The next thing you know, pajama-clad bloggers are nipping at your heels, then all hell breaks loose.
On the bright side (for PE investors, at any rate), Bonderman thinks that the PE freeze-out by the FDIC might be thawing.
Sooner or later the Feds will get the idea that the way you get capital into the system is to attract it, not to repel it, and make rules that reward capital and not the other way around," he said.
Maybe, maybe not. According to “experts” quoted in a Reuters article today, the FDIC private equity guidelines don’t appear to be changing.
Executives told Reuters that they did not expect the FDIC to make any major changes to the rules.
I don’t expect the rules to be changed either in the near future (although I yearn to be pleasantly surprised). On the other hand, I expect that the days of treating private equity like the plague are over. We’ll see more private equity deals over the next year, as the pressure on the FDIC fund continues to grow.
As a good friend of mine is fond of saying, "Everybody has an opinion and most of them should be left undiscovered."
I thought of that observation today while listening to a teleseminar on distressed commercial real estate loan workouts. One of the speakers, a partner in a large, East Coast-based law firm, was moaning about the recent regulatory guidance that advises banks (and bank examiners) that they should not classify a loan solely because the value of the real estate collateral has fallen. The speaker thought that this was a terrible policy, because there was all this money sitting on the sidelines that would like to come into the real estate market and invest in commercial real estate, but until the banks took massive hits on their CRE loans, they weren't incentivized to sell their loans or the collateral they take from borrowers through foreclosure or deeds-in-lieu of foreclosure at "realistic" prices (in other words, at such substantial mark downs from book value that the investors can make a killing). I sobbed hysterically at the thought that vultures (many of them current or ex-Wall Street investment bankers) aren't able to feed on the carcasses of my clients and their borrowers, but I soon recovered.
The teleseminar was directed at lawyers. If community bankers had been listening, they would have howled in derisive laughter or maybe tracked down the lawyer and hooked up his sensitive parts to a car battery.
A contrary view of the current situation was offered by Edward H. Sibbold, the BB&T executive in residence in banking, College of Business
Administration, Georgia Southern University and director of the
college's Center for Excellence in Financial Services (that title is quite a mouthful), who recently opined in the Savannah Morning News that undue leniency by bank examiners with respect to commercial real estate is not an experience community banks have encountered.
During this period of stress, bank regulators have been increasingly proactive in their reviews, raising the bar in terms of classifying
loans as substandard, as well as increasing capital and liquidity
requirements.
As a result, the Georgia Bankers Association
estimated about 100 banks in Georgia - and that number's growing - are
under some form of administrative action by their regulators.
Some analysts and bankers believe the local regulators are taking their
marching orders from Washington to "thin the herd" under the theory
that the large number of small banks in Georgia and excessive
competition are key contributors to the banks' problems.
Others
believe the market has changed dramatically in the past 18 months and
current regulatory reviews and actions reflect the deterioration in
banks' loan portfolios.
Whatever the motives or reasons,
regulators have taken more aggressive postures with weak banks and
otherwise healthy banks with large real estate loan concentrations.
While most Georgia bankers understand the increased level of scrutiny,
many believe certain regulatory practices need to provide greater
flexibility and time for banks to address current issues.
While
the government is publicly pressuring banks to make more loans, new or
tighter regulatory guidelines are restricting community banks' ability
to lend as well as their deposit activities.
Banks are being
pressured to reduce the amount of real estate loans, which typically
represent 50 percent to 70 percent of a community bank's loan
portfolio. In some cases, new real estate loans with quality borrowers
are being denied as banks seek to comply with regulatory requirements.
Good
customers often are unable to refinance their loans with local banks
due to collateral deficiencies related to depressed real estate prices
or when the loan balance exceeds the lending limit of a bank whose
capital has shrunk due to operating losses.
As usual, your opinion varies depending on whose pockets are being lined (or not lined) and whose ox is being gored. From my admittedly biased view from inside the whirlwind, I'd have to agree with Mr. Sibbold that community banks have stepped through the looking glass.
Community bankers are facing pressures from all directions. The ceiling is descending, and the walls are closing in. There is no single
Mad Hatter in this story - it's a "perfect storm" of economic
conditions, regulatory restrictions and a negative public.
Banks
are faced with contradictory pressures from different government
agencies, accounting rules that artificially magnify losses and
regulatory guidelines that limit the recognition of capital and may
restrict normal prudent lending and deposit activities.
It is a Wonderland world where right is wrong and wrong is right.
Many
people are clamoring for financial regulatory reform and almost
everyone wants to eliminate the concept of "too-big-to-fail" for the
largest banks.
Community bankers, however, are more concerned the
Queen of Hearts and her knaves will appear and scream "off with their
heads," and a new policy of "too-small-to-survive" will become the
operating principle in government and regulatory policy.
When you hit the Maryland shore this summer, you'll find plenty of yummy soft shell crabs to eat. However, you won't find banks stumbling over each other to get at the latest iteration of TARP. I mean, what's the US government trying to do, turn TARP into a franchise like Harry Potter or The Terminator? Come to think of it, The Terminator might be apt.
“If this proposal walks, talks and smells like TARP, very few banks are going to want to participate in it,” said R. Michael Menzies, CEO of
Easton Bank and Trust Co. and chairman of Independent Community Bankers
of America.
It smells like TARP, alright. TARP that's been left out in the sun for three weeks, then thrown into a vat of rancid yak fat to give it that piquant bouquet that one finds wafting off of only with the finest brands of EPIC FAIL.
For bankers like Richard Oppitz, the program won’t solve what they see as the biggest roadblock to more small-business lending: a dearth
of credit-worthy businesses looking to borrow money for expansion.
“We have plenty of capital and money to lend,” said Oppitz, regional
president for Essex Bank’s Maryland division. “It’s just a matter of
finding qualified borrowers.”
Bankers are also worried about mixed signals from the government.
The Obama administration is encouraging banks to make more
small-business loans while federal and state banking regulators have
been carefully scrutinizing the loans the banks have already made,
Oppitz said.
“For banks, what really counts is what the examiners say, not what
the people back in Washington say,” said Bert Ely, a banking consultant.
Of course, we all know how well the coordination between Washington, D.C. and the examiners in the field is working on commercial real estate loan loss reserves and collateral write downs, don't we? I'm certain that the same Marine Corps Drill Team lockstep coordination will prevail with this program.
While this time around the government is promising there won’t be the same kinds of strings that came with TARP, such as restrictions on
executive compensation, community bankers aren’t convinced. They’re
fearful of signing up for the program, only to find the Treasury
Department changing the rules in mid-stream, as happened before, said
Gerald Blanchard, a partner in the banking group at law firm Bryan Cave
LLP.
“The banks were appreciative of the capital, but they weren’t
appreciative of all the strings that came with it,” Blanchard said.
It's hard to believe that bankers aren't trusting the word of the federal government that it won't trick-screw participants with after-the-fact changes to the deal. After all, they're the government, they're here to help, and they'd never employ The Flounder Defense.
Hanging over everything is the fear that customers and investors may again view banks that choose to participate as financially weak. That
could keep banks from signing up, said Frank Bonaventure, who chairs
the financial institutions group at law firm Ober Kaler.
“TARP was very much misunderstood by the general public,”
Bonaventure said. “It wasn’t a bailout, because it came with some
significant costs that had to be paid back.”
It's not merely a matter of being "misunderstood by the public." As we've noted previously, some banks who didn't take TARP money have waged advertising campaigns against those who did, using the fact that their competitors took TARP as somehow branding them as almost Un-American.
We expect that if Congress ever actually enacts legislation to authorize this latest waste of taxpayer money, there will be a number of banks that will step up and take it. On the other hand, I think that number will be relatively low. Most banks will treat it like toxic waste.
Although it appears on its face to be another fairly mundane breach of contract lawsuit, recent litigation commenced by a Medford, Oregon real estate developer against the FDIC as receiver of a failed Vancouver, Washington bank caught my eye because of a statement by the attorney for the plaintiff. It was a line that echos a similar warning sounded by the bellowing gas bag who writes this blog.
The basics of the transaction are fairly simple. The failed bank had made a loan to a development company, which was secured by unimproved real estate. The loan proceeds were intended to be used to develop the real estate.The loan appears to have been guaranteed by an individual who owned the borrower. The bank failed to fund construction draws, the bank failed and was placed into an FDIC receivership, the borrower couldn't continue the project, and in stepped the plaintiff to save the day. The plaintiff negotiated a deep discount (93.6%) off the unpaid loan balance with the FDIC, and the FDIC and the plaintiff executed a loan sale agreement for that purchase price. Simultaneously, the plaintiff negotiated an agreement with the borrower and guarantor for a deed in lieu of foreclosure in consideration of, we assume, a release of personal liability. After paying off what appear to be $300,000 in mechanics liens, the plaintiff would appear to have paid $550,000 for a piece of real estate that at one time served as collateral for a $3.9 million dollar loan.
Obviously, the deal was too good to be true, because the FDIC refused to close, told the plaintiff that it would not honor its agreement, and told the plaintiff that "the loan would be sold through a sealed bid on Feb. 9." Since the FDIC refuses to comment, we don't know what it's legal defenses might be; however, on its face, it appears that somebody at the FDIC didn't like the legally binding deal's sale price and decided to simply break the contract and seek a higher price through an auction process.
This is what we call "The Flounder Defense." We first discussed it four years ago and it bears repeating.
You remember Kent "Flounder" Dorfman, the pledge in the movie "Animal House"
whose brother's new Cadillac was wrecked by his frat brothers on a
famous road trip. As he stood there blubbering while surveying the
wreckage caused by his misplaced trust, you must also recall the
response of Eric "Otter" Stratton:
"Flounder, you can't spend your whole life worrying about your mistakes!
You f***ed up -- you trusted us! Hey, make the best of it!"
The poor plaintiff trusted the FDIC to abide by its written agreement and didn't secure the FDIC's promise by locking a chastity belt on Sheila Bair and then swallowing the key, or by having Jack Bauer keep a laser sight on the receiver's forehead until the deal closed. You live, you learn.
"It’s bewildering to us,” [plaintiff's attorney Steve] Wilker said. “No private party could get away with this conduct."
Welcome to my world, Steve. My advice to you is to start drinking heavily.
*******************************************
UPDATE (2/23/10): A reader associated with the FDIC contacted me to complain about a grievous mistake in this post. The reader was not upset about my sniping at the FDIC, which they dismissed as the picking of low-hanging fruit, but at my heinous error in describing Flounder's brother's car as a Caddy when it was, in fact, a Lincoln Continental. I apologize profusely and offer in my defense the fact that I must be going through the DTs as a result of my having given up Shiner Bock for Lent.
The recent victory of Advanta Bank over the FDIC in federal district court gives some small encouragement to those of us who hope that the Fifth Amendment isn't a dead letter when it comes to the federal banking agencies. According to a recent American Banker article, United States District Court Judge John Facciola put a bit in the mouth of a government agency that was running wild with the notion that "judicial deference" to agency discretion means "total lack of restraint."
"The deference due to the agency in interpreting" its authority "is not limitless and does not allow for the contravention of the law which
gave that agency its authority," Facciola, a magistrate judge in the Washington, D.C., district, said in his order. "Because the agency's issuance of a temporary cease and desist order was outside the bounds of a clear grant of authority from Congress, the plaintiff's motion for an injunction setting aside the temporary cease and desist order … must be granted."
The FDIC had contended that the bankruptcy of the bank's parent, credit card giant Advanta Corp., "was prompting concerns at the Delaware bank, including that the
subsidiary lacked independent board control and had failed to keep
adequate records for examiners."
That, in concert with the deterioration of the ILC, meant there was "substantial threat that the bank has engaged in or will engage in violations of law and/or unsound banking practices," the FDIC said.
The bank strongly disagreed and told the FDIC that it would oppose any attempted Cease and Desist proceeding before an administrative law judge. Flexing its muscles, the FDIC then issued a "temporary cease and desist order" that attempted to impose the same restrictions on the bank until the administrative process could run its course. Unfortunately for the FDIC, applicable law authorizes such a draconian measure only if the alleged unsafe and unsound practices will likely cause the bank's "insolvency or significant dissipation of assets." The need for that factual basis didn't stop the creative minds at the FDIC, which spun the story in what they thought was the proper direction with the allegation that the bank was, in fact, shrinking in size and that, therefore, the shrinkage must be caused by the alleged unsafe and unsound practices.
Staring the judge in the face, however, were facts that could not be ignored, even by a court that normally gives deference to the regulators. The most damning fact (against the FDIC) was that the bank was in the process of voluntary liquidation. Guess what happens in a liquidation? You guessed correctly: the bank divests assets.
"It is not the unsafe banking practices which are causing the dissipation of assets, but rather the process of termination, which the FDIC started, which are 'dissipating' the assets," he said in the order. "Under the statute, the FDIC can only issue a temporary cease and desist order where the possibility of the dissipation of assets is more than a theoretical consequence of the unsafe or unsound practice."
As all of the experts quoted in the article correctly observe, victories like this one are rare. Much more common are the other two cases mentioned, both of which the regulators won. Those types of victories, and the arrogance, even hubris, they spawn in the souls of some regulators, lead to the type of statements as one that a former bank CEO related to me, in which the Chief Examiner of a federal banking agency, when confronted by bank management with fundamental errors in appraisals of assets and loss reserve calculations by examiners, sneered that the agency would simply change the assumptions under which the calculations were made to arrive at the same results.
Therefore, you've got to celebrate the rare little victories where you can find them. Even when they're won by a bank in the process of liquidating, which would have made a "victory" by the FDIC essentially useless, other than to feed a playground bully's apparently limitless need to prove that she's in charge.
Another guest post by John M. Walker, Jr. He risks sounding rude, arrogant and condescending, which, if he does, would put him in good company.
Housing
Wire noted yesterday a report is to be issued by JPMorgan analysts
who have calculated that, “if the full burden of regulatory and
political initiatives to crack down on banks’ risks is implemented, it would
cut the average return on equity from a projected 13.3% to 5.4%.”No fake – why would that result come as a
surprise to anyone – other than politicians, that is?Simple financial math explains why that’s the
case.
Return on equity (ROE) reflects
the link between a business’s income statement and balance sheet and highlights
the interconnected relationship among revenue, net profit, assets, and common
equity.In addition to the simple
equation ROE = Net Profit ¸ Common Equity, ROE also = Margin x Asset Turnover x
Financial Leverage; and, since Margin x Asset Turnover = Return on Assets
(ROA), ROE also = ROA x Financial Leverage.[i]Changes in one or more of the constituent
components will change ROE – and, since one of the political/regulatory
initiatives is to require more Tier 1 capital (which primarily is equity) be
held by banks, financial leverage necessarily will decrease and, if margin
and/or asset turnover somehow also aren’t increased, that is, if ROA also
doesn’t increase to offset the decrease in banks’ financial leverage, ROE
necessarily will decrease.Mathematically, it must.
Let’s look at a simple
illustrative example (all numbers are in $ millions and are taken
from an actual bank’s 2008 financial statements – 2009 isn’t available
yet):a bank with annual revenue of
$41,897, net profit of $2,369, total assets of $1,309,639 at the end of the
year (EOY) and $575,442 at the beginning of the year (BOY) for an average total
assets held during the year of $942,540.5 (to calculate returns for the year,
total assets and common equity typically are averages of the BOY and EOY
balances in order to determine the capital invested in the business during the
course of the year), and common equity of $99,084 at EOY and $47,628 at BOY for
an average common equity of $57,465.These numbers translate to a margin
of 5.65% ($2,369 net profit $41,897 revenue), an asset turnover of .0445 (revenue of $41,897¸ average total assets of $942,540.5), financial leverage of 16.4020 (average total assets of $942,540.5 average common equity of $57,465, a ROA of .25% (margin of 5.65% x asset
turnover of .0445), and a ROE of
4.12%, either by dividing net profit ($2,369) by common equity ($57,465) or by
multiplying margin (5.65%) times asset turnover (.0445) times financial
leverage (16.4020).If the bank’s
capital requirements had been such that it’s financial leverage had been, say,
12.50 (which would be the case if the common equity were 8% of the
institution’s total assets), and margin and asset turnover had not changed
(meaning ROA had stayed at .25%), ROE for the bank would’ve been 3.13% (ROA of
.25% x financial leverage of 12.50).To
maintain its ROE at 4.12% in light of the reduced financial leverage, ROA
would’ve required improvement to .33%; and an ROA of .75% with a 12.50
financial leverage would’ve resulted in an ROE of 9.34%.If the financial leverage had been 10.00 in
my example (common equity at 10% of total assets), then the resulting ROEs
would’ve been 2.50% (if ROA had stayed the same), 4.12% (requiring ROA to
increase to .412%), and 7.50% (if ROA had improved to .75%). Feel free to play with the numbers to your
heart’s content.
Let’s move away from the math
for a moment and look at an important element involved in the investment of
capital and its possible impact on bank performance and bank ability to raise
capital: the greater the risk, the
greater the reward potential; the lower the risk, the lower the return likely
is to be. Investment capital flows to returns; that is, it moves toward higher
returns and away from lower returns if the risk is perceived acceptable in both
cases to the investor. Tying this back
to the math: assuming that there are new
costs for banks related to new regulatory compliance and assuming further that
reduced risk-taking that may be imposed on the banks results in less “reward”
to the banks for those permitted activities, it’s entirely possible that ROA
also will decrease, as opposed to remaining constant or improving. If that happens – a new banking business
model that incorporates a reduced ROA and a reduced financial leverage – banks
likely will earn less ROE than historical performance has led the investing
public to expect.I guess that’s what
the JPMorgan analysts' report will show.If that is in fact what banks do experience, they will have a difficult
time attracting equity capital, as investors will seek alternative investments
providing higher returns; and, that inability to attract equity capital well
may reduce further banks’ ability to engage in banking activities such as
making loans at desired levels.
Bet that’s not a consequence
intended by the Administration, Congress, or the regulators – unless they’re
trying to chase private equity capital away from the banking industry.But, that’s what happens when solutions to
business problems are made for political – and not business or economic –
reasons.As I said in a
recent guest posting on this site, politicians focus on positions, not
interests, when trying to solve problems.And, we end up paying the price for the unintended consequences – again
and again.
[i]At the risk of sounding
rude, arrogant, and/or condescending (all of which I’ve been called), for those
of you who may be mathematically challenged or whose memory is failing them,
here are the component equations related to these terms, the key to which is to
remember that like denominators and numerators cancel out each other: ROE = Margin (Net Profit ¸ Revenue) x Asset Turnover (Revenue ÷ Total Assets) x Financial Leverage (Total Assets ÷ Common Equity). Return
on Assets (ROA) = Margin (Net
Profit ÷ Revenue) x Asset Turnover (Revenue ÷ Total Assets).
Rick Martin at Housing Wire is a man after my own heart. Like me, he's tired of all of us looking for scapegoats to sacrifice and always finding that someone else is the goat. Like me, he's got nothing but disdain for "what millions of other un- or under-educated Americans around the country are doing and blame it all on the government." Or on another group of "others." On anyone but themsleves.
However, he sees a bright side to all the angst and anger.
On the other hand, maybe it wouldn’t be so bad if Americans got mad.
I mean really fired up about the sorry state of affairs they see around
them. Maybe some of them would get so angry that they actually crack a
book and learn something. Or write one and put forward a real solution.
That’s a future I’d like to see. Americans getting better educated on
what makes our system work so they can stand up intelligently and work
for solutions instead of just huddling up with their friends on
Facebook and chanting, “Burn it down!”
But then, I’m not in the business of selling ideas that would only
work for someone who believed in the concept of personal
responsibility, not when there are reportedly only 545 people in the
prospect universe. I think I’d rather be a mortgage broker, or an
appraiser even.
Rick, no matter what my situation, I'd NEVER rather be a mortgage broker.
Then again, what do I know? According to a recent e-mail from a satisfied reader, not a damn thing. Here's one from the mail bag to give you an idea of the high esteem in which I'm held and the thoughtful dissent that I'm offered on a regular basis (redacted to protect the refined):
Your blog is so full
of s**t it's coming out of your a**. So when you burn in hell over it maybe you
will get it. If you have to ask get what you are clueless and part of the real
problem with America.
Sifting through the garbled syntax, I must conclude that it is not only anatomically correct but axiomatic that s**t comes out of your a**, so I'm not certain how that allegation is insulting to this blog in terms of the level of s**t that might be issuing forth from it at any given moment. Nevertheless, it's clear that many people who read blogs also look longingly for "the real problem with America" and think that they've found part of it right here. As one of my business partners marveled,"You
have to wonder how people like that go through life. They are the kind of
folks that are on the edge of going 'postal' at any time."
Bank Lawyer's Blog: Where going postal is the national pastime.
At some point, you'd think the folks who seize foreclosed homes for Bank of America might want to employ a GPS device or, at the very least, consult a street map. Taking those simple precautions might save the bank from the seemingly incomprehensible brain damage inflicted by boneheads who seize control of the wrong house. Last month, we reported on a whole load of frozen fish that went funky when Bank of America took control of the wrong house in Galveston, Texas, and turned off the power. It turns out that Texas wasn't the only state where BofA was employing Stevie Wonder Wannabe's to foreclose on delinquent homeowners. Via Jr. Deputy Accountant comes another sad tale, this one from Florida.
Charlie and Maria Cardoso are among the millions of Americans who have experienced the misery and embarrassment that come with home
foreclosure.
Just one problem: The Massachusetts couple paid for their
future retirement home in Spring Hill with cash in 2005, five years
before agents for Bank of America seized the house, removed belongings
and changed the locks on the doors, according to a lawsuit the couple
have filed in federal court.
[...]
The bank had an incorrect address on foreclosure documents — the
house it meant to seize is across the street and about 10 doors down —
but the Cardosos and a Realtor employed by Bank of America were unable to convince the company that it had the wrong house, the suit states.
"Their own real estate agent told them, and nevertheless Bank
of America steamrolled right ahead," said Joseph deMello, an attorney
in Taunton, Mass., who is representing the couple. "This is a nightmare
for anyone, and it affected my hard-working clients a lot."
Naturally, the Cardosos have sued Bank of America. Just as naturally, the bank lawyered up and clammed up.
The bank declined to comment to the Times beyond an e-mailed statement.
"We have reached out to the Cardosos' representatives and hope
to have the opportunity to work with them to properly assess and
address their allegations," the statement said. "We are reviewing the
allegations in the lawsuit, the actual events that led to them and the
causes of those events, and will consider any hardship that resulted."
I hate to break the news to the bank, but the proper time to "reach out to the Cardosos" was when its own real estate agent told the bank that it HAD...THE...WRONG...HOUSE! By the time wronged homeowners get to the point where they've hired an attorney and have filed a lawsuit, the "reach out" better be by a fist holding a fat wad of cash.
Perhaps we shouldn't single out Bank of America for these brain hiccups, since it apparently isn't a lone ranger riding this particular prairie.
At least one bank has acknowledged the record number of
foreclosures from the mortgage meltdown has increased the likelihood of
such mistakes.
Citi-Residential started the foreclosure process on a home in
Kissimmee in 2008 — changing the locks and emptying the pool — even
though the owner, who lives in London, didn't have a mortgage with the
company, according to a report by Orlando TV station WFTV. Company
officials said the high number of foreclosures they were dealing with
in Central Florida contributed to the error.
In fairness to the bank, when one of your main lines of business is foreclosing pell-mell on homeowners in the midst of the Great Recession, things can get a bit hectic, and as we all know, "stuff happens." Nevertheless, before you drain a swimming pool, make sure you're not simultaneously walking off a short diving board positioned over the middle of its deep end.
As a cautionary note to homeowners everywhere, I'd suggest that they seriously consider getting their next home loan from a smaller community bank which, when it gets to the point where it might have to foreclose on your home, at least won't be so overburdened with brazillions of simultaneous foreclosures that it will get you in dutch with the neighbors by trashing their homes first before it finally gets around to seizing yours.
Readers have asked me if I had seen the now infamous video put out last week by a couple of a snark-meisters with a video camera and a ton of attitude, who hammered the FDIC's loss-sharing agreement with OneWest that covered the "owned" residential loan portfolio that OneWest purchased from the FDIC as part of the resolution of failed savings bank IndyMac. I'd seen it, and so had the FDIC, which issued a press release last Friday, along with a "supplemental fact sheet," that dealt with the viral video by basically calling the video's producers a bunch of nitwits and dung-eating liars. For a number of reasons, including the fact that I'm representing folks who have bid and will continue to bid on failed bank deals with the FDIC that involve loss sharing agreements, I don't intend to get into the substance of the erroneous conclusions made by the video's authors with respect to loss sharing agreements.What I don't say can't be held against me.
However, I do I wish that the FDIC had either ignored the video entirely or done a more thorough job of rebutting it. Listing bullet points and expecting folks who don't deal with these issues regularly to connect the dots is unrealistic. While the Calculated Risks of the world immediately "get it," they are vastly outnumbered. You need to take the rest of the world by the hand and lead it through the error of its ways step-by-agonizing-step. I realize that the FDIC folks were as exasperated as they are when I make Sheila Bair my personal piñata, and I'm certain that they wanted to treat them like they treat me: as a pimple on the backside of humanity that ought to be lanced, cauterized, and banished from view. Nevertheless, as I frequently tell my friends in the regulatory agencies, you've got to be better than I am.
Also, focusing on relatively unimportant errors (as far as the central theme of the video was concerned), such as the incorrect allegation that the FDIC was getting ready to borrow from the US Treasury, and making a big deal out of such a side issue, makes it appear that the FDIC can't deal with the main point of the video and is trying to distract its critics by picking low hanging fruit and dangling it in front of our eyes. Not only did the dismissive tone of the FDIC's press release sound like it was uttered by a pissed off seventh grader ("and, like, these guys were just acting, like, you know, so STOOOOOPID!"), but it merely cranked up the video's hosts' adrenaline levels the point that they added another three minutes of rebuttal to their video and posted various supportive blogger links (including a link to one guy who appears to claim that OneWest may not actually exist because he couldn't find it listed in the SEC's database. Dude: OneWest is a federal savings bank. Try the FDIC's database). They were just as sarcastic and in-your-face today as they were last week, and now they've got all that additional site traffic and reams of comments from enraged realtors and borrowers who can't get loan modifications or short sales approved. Most of them are pointing their fingers at the FDIC. If a smackdown was intended to be administered by the FDIC, it didn't work, because the opponent bounced back up with renewed vigor and his fans are bellowing their renewed support.
The video appears to have been based upon a blog post from last September by Robert Hertzog of Arizona, who related the tale of a short sale from hell that was repeated by the video's hosts. The example used in the video is identical to the one set forth in the Hertzog's post, and Hetzog utters the line "Wait, it gets better...The FDIC just announced that they are
'considering' borrowing money from the U.S. Treasury in order to
replenish it's deposit insurance fund (the same fund being used to pay
all of these banks in the Loss Share Agreements)." That's very similar to a line used in the video that enraged the FDIC. What was true in September 2009 (that the FDIC was considering tapping a Treasury line) was not true when the video was made last week. A little research by the video's makers, instead of simply parroting Hertzog's outdated statement, would have eliminated that false statement. Of course, a little research by the FDIC would have uncovered the source for this misunderstanding and made for a more measured response than "liar, liar, pants on fire." I mean, if a quarter-wit like the author of this blog can track down this evidence, the giant brains at the FDIC would certainly be expected to do the same.
Hertzog isn't backing down in the face of the FDIC's latest blast, either. He came out swinging today by reciting the entire history of the incident, restating "the math" and his analysis of the loss sharing agreement, and alleging that not only his client, but three more realtors in Arizona, got OneWest to back off a deficiency note on a short sale by writing to both US Senators from Arizona and OneWest's CEO with "the math" on their individual cases. He concludes with the equivalent of asking the FDIC when it's going to stop beating its wife: "So, my question to the FDIC and
OneWest is, if this story is so 'blatantly false' as you claim it to
be, why does OneWest change its tune when they are reminded of their
greed?"
The FDIC doesn't want my advice and certainly assumes I'm not worthy to give it any (and I can't argue with it on that point). Nevertheless, they're going to get it. My advice would be to tackle "the math" head on. Take people through it like you were dealing with a "challenged" class, and not condescending to them, but trying to make them understand your point because you honestly want them to comprehend it. Connect all the dots for us. Bury us in analysis, at least enough that the only people left to carry on the fight will be the wing nuts and the tin foil hat wearers, who shall always be among us and for whom we shall always have to make allowances, and then ignore.
While you're at it, explain again why loss sharing makes sense, and what the alternatives to loss sharing are, and why none of them are preferable to the FDIC. Assume we're idiots, but well intentioned idiots. Because it's not just two guys and a video camera who are waging war against loss sharing. It's one of those aspects of the resolution process that more informed critics are starting to pick apart.
If you're not up to all this work, then the next time a half-baked video gets fired up, ignore it. Because some times, you need to swat a fly with a sledgehammer or it will never stop buzzing.
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We noted earlier this month that Fannie Mae and Freddie Mac were in "full put-back mode." Apparently, Fannie is feeling a tad defensive about the publicity that it's been receiving over this issue. It wants to assure interested parties that it's not taking an electron microscope to the loan files to uncover grounds to force loan repurchases. That's because, according to an article in The American Banker (paid subscription required), it doesn't have to drill very deeply to find defects in the loan documents and underwriting.
Rick Martin at Housing Wire
