Sunday Night Scattershooting

I'm blogging on the fly while dodging arrows shot by Nouri lovers over last Thursday night's post. So, here are a few disconnected links to items that might be of interest to readers. If not, have a Supercalifragilisticexpialidocious start to your week.

First up is an article from Venable LLP partner Joe Lynyak entitled "The Failing Bank Scenario: An Explanation and Suggested Analysis for a Bank's Board of Directors and Management." It's a reprint of an article in The Banking Law Journal that's a must-read for management and directors of too-small-to-save community and regional banks that may be in danger of imitating The Titanic. In light of the FDIC's new additions to its troubled bank list, I assume that there's an audience out there for this information and that the audience is growing. The latest article by Joe is a companion piece to two other related articles, one on responding to enforcement actions and the other on liability considerations for directors and officers of FDIC-insured institutions (and "institution affiliated parties"). Earlier versions of the latter two articles have been previously discussed on this blog (here and here).

I realize that if there's one thing bankers hate to do, it's to pay a lawyer to do anything. On the other hand, I've seen so many bankers frozen in the glare of the headlights until the nanosecond prior to the collision, at which point they cry "Help!" Too late, Chicken Little, because by that time the lawyer is nothing more than a hospice caregiver. If you're at risk, read the linked articles and hire a knowledgeable counsel of your choice before the Eleventh Hour and Fifty-Ninth Minute.

On a completely unrelated matter, we noted in February that Fannie Mae and Freddie Mac were "in full put-back mode." According to Housing Wire, in the first quarter of 2010, the two broke mortgage giants "forced lenders to repurchase $3.1bn of mortgages out of their securities and off their books in Q110, up 64% from nearly $1.9bn one year earlier." They would have pushed back even more, but according to public filings, some lenders simply didn't have the financial ability to fund the buybacks. In other cases, one of the wards-of-the-state decided that future business considerations outweighed the need for immediate cash.

"Enforcing repurchase obligations with lender customers who have the financial capacity to perform those obligations could also negatively impact our relationships with such customers and ability to retain market share," Freddie said.

There's something odd about a company that is so insolvent, and whose business model is so broken, that its corporate motto ought to be "Epic Fail," worrying about "future market share." The resolution of Fannie and Freddie should have been part of the recent financial reform legislation. Of course, that might have forced the federal government to come even cleaner about its scheme to nationalize the nation's residential mortgage lending business, and goosed the American public out its eyes-glazed-over ennui with respect to the whole "bank bail out thing."

According to Paul Muolo of National Mortgage News, the repurchase "hit" taken during the first quarter by the "Big Four" commercial banks that dominate residential mortgage production in this country was much larger than a paltry $3.1 billion.

...[A]ccording to the latest figures, the "Big Four," combined, were forced to repurchase $8.7 billion of residential loans during the first quarter.

[...]

The buyback issue is now so white hot that the Mortgage Bankers Association is planning a series of seminars around the nation to educate lenders about their rights as seller/servicers. "Our seminars focus on different things," said MBA chief economist Jay Brinkmann. "One key thing we talk about is what type of buybacks are worth fighting for and which ones aren't. There's some lenders out there that have three different repurchase requests on the same loan-all for different reasons."

What's bad news for banks can be great news for lawyers, however (and what else is new).

Law firms are now getting into the buyback game as well. The key question for seller/servicers is how often can they win their buyback battles. One mortgage banker close to the buyback situation said he knows of a lender that recently won 52 out of 55 repurchase disputes. "He had to resubmit documents and it took a lot of time but he won," said the official, requesting his name not be used.

He noted, however, that at some point seller/servicers have to cut their losses. "Rep and warranties can be fought to a degree," he said. "But fraud lives forever. If it's discovered that fraud was involved there's nothing the originator can do."

Yeah, "fraud lives forever." However, some people suffer the consequences and some people don't. For example, how many directors and officers of too-big-to-fail banks will be pursued by the FDIC (or any other federal banking agency) for bad business decisions that have morphed into breaches of fiduciary duty, as opposed to directors and officers of many, if not most, of the too-small-to-save community banks that have failed and will fail? What's your guess?