Bank Lawyer's Blog

Mele Kalikimaka

So many readers are off this week and next that I've decided that posting will be hit-and-miss until after New Year's Day. I can hear the collective sigh of relief from subscribers who complain about "too many posts." Before I slough off, however, I want to point readers to an excellent white paper by Morrison & Foerster's Charles Horn, which discusses a topic that I recently touched upon: the need for bank directors and senior management to maintain good relations with the bank's regulators. Horn's paper is full of sound common sense, delivered in plain English, which immediately elevates him a cut above the legalese-addicted screed meisters who usually populate these pages.

I wish y'all a Very Merry Christmas, a Happy Hanukkah, and, of course, a Fulsome Festivus.

Oh, yes: Goodnight Santa! Goodnight Mrs. Santa's sister!

Walkaway Joe? Oh, No!

The New Yorker's James Surowiecki advises underwater homeowners who can still afford to pay their home loan to walk away from their homes because commercial businesses do it all the time and those business are considered to be "smart" for doing so. The Atlantic's Megan McArdle disagrees, calling homeowners who keep paying on their underwater loans responsible, and positing that, by not walking away, they are helping to save their neighborhoods.

In most states, if you simply walk away from a home loan and the lender suffers a loss after foreclosing upon and selling the house (which you would expect would be the case with an "underwater" mortgage), the lender may very well pursue you to collect the deficiency. The borrowers can always file bankruptcy, of course, but that has severely adverse consequences to borrowers over the short-term, and has the likely long-term adverse consequence of limiting their ability to obtain credit on "prime" (or any) terms for a number of years.

Even in those states that have anti-deficiency statutes, which prohibit a lender of a first lien residential mortgage loan from pursuing a deficiency against the borrower, there is sentiment that the law needs to be changed. For example, in Arizona, a state lawmaker from Surprise wants to surprise underwater homeowners by removing the current anti-deficiency provision of Arizona law.

Rep. Jack Harper, R-Surprise, says Arizona’s status as one of a handful of “non-recourse’’ states is keeping the real estate market from recovering here. He contends that having people abandon their homes further depresses the value of nearby homes.

The idea is to keep people from being encouraged to just walk away from their house any time they’re a little bit upside-down’’ on their mortgage, he said.

It sounds "a little bit disingenuous" to allege that homeowners are encouraged to walk away from their homes when they are only a "little bit underwater." According to fairly recent reports, half of home loans in Arizona are underwater (second only to Nevada) by an average of $60,000. That's a lot more than "a little bit." It's a deep hole. And to allege that underwater homeowners who are walking away from their homes are "keeping the real estate market in Arizona from recovering" is a whopper that would make Bill Clinton blush.  Moreover, how smart is it to pick this particular time, when so many Americans are suffering and the popularity of banks (and politicians) is at its historical nadir, to promote legislation that favors lenders over consumers, especially when lenders have been living with the anti-deficiency statutes for a long time and should have priced the risk into their mortgages? It takes a tone-deaf oppressor of the proletariat to play that particular tune at this specific moment.

Regardless of all the back-and-forth among politicians and MSM pundits, many underwater borrowers seem to be ignoring Surowiecki's advice. A couple of days ago, "60 Minutes" ran a featured story entitled "There Goes The Neighborhood," about how many underwater borrowers were still paying their mortgages, no matter how much pain it caused them. One homeowner told interviewer Scott Pelley why.

Pelley: You know there are lots of people all over the country. Many thousands of people who are mailing the keys to the bank and walking away. They can't figure out how it makes sense to put more money into a mortgage that's underwater.

Hubbard: Can't speak for them. I can only speak for me. And my reputation that I have to uphold.

Pelley: Your signature means something.

Hubbard: It does. It does.

Huh. Imagine that.

Churning Butter

It doesn't matter which political party is leading the charge, because all the sound and fury signify nada. 

Today, Housing Wire reported that Republican Congressman Darrell Issa has sent a letter to the House Ethics Committee that accuses four house members of receiving what were affectionately called "Friends of Angelo" loans "back in the day."

"Testimony and documents show that Countrywide used the VIP program to build relationships with government officials and others positioned to advance Countrywide's business interests," Issa said in the letter.

Issa said the program lasted from January 1996 to June 2008. It gave loans to federal government employees and others who worked at Fannie Mae and Freddie Mac.

"My staff is also aware of the possibility that loans with VIP-benefits were conferred to other members and serviced by a separate loan processing branch," Issa said.

This is such incredibly old news that it makes you realize why Congress can't get anything useful done, like tax and budget reform: its members are too busy trying to screw with one another over issues that no one outside of the lunatic fringe of both political parties gives a flying wombat about.

Nearly two and one-half years ago, we mused about the fact that Chris Dodd and Pete Conrad were cleared of ethics charges on the same program, in which Countrywide gave influential members of Congress preferential treatment on home loans. At that time, the name of Congressman Adolphus Towns was also mentioned, but absolutely nothing happened to him, either. So, after all this time with absolutely nothing being done to any of our politicians who bathed in this little cesspool, why is this being resurrected now?

Oh, yeah: 2012 is an election year.

Certainly, we expect an ethics committee than ran off the rails trying to investigate Maxine Waters' more obviously questionable activities to wake up and look deeply into whether, six years ago, four House members got their discount points waived or an interest rate that even Warren Buffet couldn't garner. Of course, we also expect Bill Clinton to swear off sex and enter a Franciscan friary next week.

Last Friday in Austin, Federal Reserve of Dallas CEO Richard Fisher told his audience that the reason for our economic malaise lies squarely on the shoulders of the US Congress.

"The brows of economic forecasters and business operators begin to furrow when contemplating the international landscape," Fisher said in his speech. "But the face of both the economist and businessman turn into something akin to Edvard Munch's Scream when contemplating the frightful consequences of indecision and political mischief at both ends of Pennsylvania Avenue in Washington."

Amen! Preach it, Brother Richard!

FHFA vs. Chicago: Everyone Loses

Was anyone surprised by this?

The Federal Housing Finance Agency sued Chicago to prevent the enforcement of a recent ordinance forcing the maintenance of vacant homes before the foreclosure process is completed.

[...]

The FHFA claims in a lawsuit filed with the U.S. District Court for the Northern District of Illinois that the ordinance forces Fannie Mae and Freddie Mac to comply "even when the enterprises have not foreclosed upon a property and therefore do not have ownership of the property."

[...]

The FHFA claims in the suit the ordinance keeps it from "preserving and conserving" the assets of Fannie and Freddie as Congress mandated in 2008. Both firms owe the Treasury Department a combined $151 billion in bailouts as a result of the conservatorship.

Fannie and Freddie are also requiring their loan servicers to track expenses incurred as a result of this ordinance. The not-so-implicit threat is that the mortgage giants are going to make mortgage pricing in The Windy City commensurate with the cost of doing business there (in addition, of course, to the normal bribery costs incurred by businesses in the Blogo-rich environment of Illinois in general and Chicago in particular), and Chicagoans shouldn't be surprised to see higher-than-the-national-average pricing if this kind of idiocy continues.

We mentioned several months ago that some legal experts believe the ordinance clearly runs afoul of the 14th Amendment. Unfortunately, litigating these cases takes a long time and is expensive. In the case of the FHFA v.s Chicago knife fight, those ending up with the biggest wounds will be the taxpayers, with those living in Chicago getting a double slicing. Fannie and Freddie are in conservatorship, so, in essence, you have the US taxpayers and the citizens of Chicago funding the cost of litigation that is likely not to be in anyone's interests except (as always in the most litigious society since Rome) those of trial lawyers. 

In the interim, how many more homes will be cared for because of the ordinance than would have been cared for without it? When the dust finally settles, will there be any hell to pay by anyone over this waste of time and money?  Don't count on it. As I pointed out a couple of years ago, when the Buffalo, New York, sued lenders to try to make them responsible for taking care of properties they didn't own and a judge later told the city, "Nice try, but no cigar," the main stream press trumpeted the initial lawsuit when it was filed, but when the judge dismissed it, "the dismissal garnered hardly a whisper."

'Tis The Season To Be Jolly

The unmentioned back story to the recent scary prospect that The Care Bair might come out of hibernation long enough to plague the nation's largest loan servicers (a rumour that was later quashed by Ms. Bair) was that there was a valid reason for Citigroup being the only large banking organization to oppose Sheila as "Servicing Czar". That reason revolved around Bair's role several years ago in "screwing" Citigroup out of its deal to buy Wamu and instead selling it to Chase. Although in hindsight Citigroup dodged a bullet and Chase thinks that it may have been stuck with a lemon  by Sheila and her gang, at the time it seemed like the FDIC had simply reneged on a commitment to Citigroup and sold Citi down a river.

To compound that offense, Sheila then got into a face-slapping-fest with Citi's senior management, including CEO Vikram Pandit. It got personal and it got nasty and it left a lot of hard feelings, the same thing that apparently occurs every time one of Taylor Swift's boyfriends dumps her for a girl with looser morals. As I said at the time:

Oh, my: intemperate language directed at the FDIC generally and Ms. Bair specifically, followed by lawsuits, then the silent treatment, then a reach out to make it all better again. That sounds like the various steps of the grieving process gone terribly, terribly wrong. No wonder Ms. Bair and her coven are looking to stir up a witches brew of payback and whoop-ass on Pandit and his crew. They were mean to Sheila and then, after a lot of time went by, they begged for forgiveness and asked Sheila to take them back. Anyone who's ever witnessed puppy love gone sour knows that the girl will NEVER take the boy back until she makes him suffer like the gnarly, cruel, hateful, and really, like, SPASTIC bully he is. Or until he apologizes sweetly, buys her a Kobe Bryant-like 6-carat rock for her ring finger, and, like, promises never to do it again, cross his heart and hope to die.

So,the elephant-like institutional memory at Citigroup simply refuses to let bygones be bygones, at least where Sheila Bair is concerned. I guess this means she won't be receiving one of those prized Citibank Festivus fruitcakes next week.

UPDATE: 12.16.11: Alert readers are correct: The FDIC backed out of its deal to sell Citigroup Wachovia, not Wamu, and sold it instead to Wells Fargo. My bad! Regardless, no Festivus fruitcake for Sheila.

UPDATE #2 12.16.11: TO ANSWER OTHER READERS' CRITICISMS OF THIS POST: (1) No, I didn't start in on the Shiner Bock until after I finished the post. The errors were due to a brain freeze unaided by alcohol, hops, or barley. (2) You may think that Chase's purchase of Wamu was a home run for Chase, but Jamie Dimon thinks it was "a bad experience."

California Court Says BJR Does Not Apply To Officers

Kevin LaCroix's always excellent blog "The D&O Diary" today discussed yesterday's decision by Federal District Court Judge Otis T. Wright, II, that held that in California, the business judgment rule does not extend to corporate officers. The judge denied a motion by the former CEO of IndyMac to dismiss a complaint filed against him by the FDIC as receiver for IndyMac, that alleged simple negligence by the former CEO. As summarized by LaCroix:

[The judge] concluded that the relevant legal authority does not support a conclusion that common law business judgment rule encompassing the general judicial policy of deference to business decisions should apply to officers. He also found that California’s statutory business judgment rule does not extend its protection to corporate officers. After reviewing the statute, applicable legislative history and relevant case law, he concluded that when the California legislature codified the business judgment rule, “it purposely excluded its application to corporate officers.”

As LaCroix also notes that while the decision is based on the court's analysis of California law, "his conclusion nevertheless highlights the interesting question whether as a matter of public policy the decisions and actions of corporate officers should enjoy the same protection under the business judgment rule as directors."

K&L Gates attorney Ronald Stevens, a veteran of the last banking meltdown of the late 1980s, feels strongly that the FDIC's tactic of arguing that a simple negligence standard of liability should apply to former officers of IndyMac (as opposed to FIRREA's default standard of gross negligence) and that the protections of the business judgment rule should not extend to them, is not wise. In the second part of an excellent two-part series on FDIC lawsuits against former officers and directors of failed financial institutions (the first part of which can be found here), Stevens argues that this position is not only "extreme," but if sustained, "would produce a result that in the long term might well reduce the pool of qualified individuals willing to serve as bank directors and officers."

If judge Wright's opinion is upheld on appeal, the effect may very well be to discourage such individuals from serving, at least in California and other states that take a similar stance.

A Word To The Unwise

For all the snark slung about on the pages of this blog, it might be difficult to comprehend that my approach to life is something other than "scorched earth". However, I recently had an opportunity to discuss the very real downside of bank management and directors taking a personally hostile stance toward banking regulators who criticize them. In this case, it involved some folks with strong business and banking track records, high IQs, and healthy egos, who bristled when bank examiners and supervisory personnel do what they do: criticized management performance and board supervision. It's called "regulating." The offended senior officers and directors fired back consistently with adversarial barrages and plenty of attitude. As a result, the regulators have been, shall we say, less than charitable.

The banking business does not afford banks an opportunity to file a Chapter 11 petition and "reorganize" when the business model is transformed by an economic recession from brilliant to stupid. Instead, federal law requires that as a bank's financial condition deteriorates, the regulators must place restrictions on the bank's activities that almost ensure that it will never emerge from the death spiral and will, rather, augur into the ground from 40,000 feet up at 32 feet-per-second squared. While that unpleasant result is unfolding, the regulators will be focusing on the prospect that if the bank fails, the FDIC's Inspector General's post mortem will inevitably conclude that a primary cause of the failure was the limp-wristed, somnolent, borderline incompetent supervision of the bank in the years leading up to its demise. The IG will opine, with the perfect 20/20 hindsight usually displayed only by field examiners (sorry, snark suppression is only good for one or two paragraphs), that if only the bank examination and supervisory staff had, much earlier in the game when only Nostradamus could have foreseen the outcome, lowered the boom on the miscreants running the bank, all this unpleasantness could have been avoided or, if not completely avoided, mitigated to a large extent. Therefore, the management and directors of banks in financial distress are going to be criticized by the bank's regulators, who want to show that they're as tough as Mike Tyson on a bad acid trip. It goes with the territory.

There are a number of ways of responding to such criticism, but I never advocate the spit-in-your-face, kick-you-in-the-groin, question-your-mother's-lineage approach. Setting aside the issues of basic human dignity, manners, and civility (in an era in which Fox News versus MSNBC spit-spewing typifies much of our "civil discourse"), regulators are human beings (contrary to popular opinion), but human beings who wield a tremendous amount of power, power that is entitled, in most cases, to judicial deference as long as the regualtors can make a case that their actions were not arbitrary and capricious without collapsing in hysterical laughter. You might as well walk up to a sleeping Bengal tiger and poke it in the eye with a stick. You can disagree with them, even sue them, in so many different ways that don't involve provoking bitter personal animosity. There is simply no upside in that approach and so much downside.

I always advise taking the high road, even in those cases where what you want to take is a baseball bat, a running start, and a swing for the fences.

Gumming Up The Mortgage Market

The partisan gridlock currently paralyzing the US Congress is apparently loosening only enough to promote especially bad ideas that appeal to both sides of the aisle. One of the latest of those bad ideas is the one that would fund loss tax revenues due to an extension of payroll tax cuts by increasing "guarantee fees" charged by Freddie Mac and Fannie Mae to lenders who sell them mortgage loans, and redirecting the increased income the US Treasury. That would raise the cost of most conventional residential mortgage loans at a time when the residential real estate market doesn't need another impediment thrown in its path.

The Mortgage Bankers Association, the National Association of Realtors, and the National Association of Homebuilders told lawmakers that redirecting revenue from Fannie and Freddie for purposes unrelated to the health of the housing finance system is counterproductive.

Reacting to the proposal, MBA CEO David Stevens Saturday tweeted, "payroll tax should not be paid for with GSE fees. That is a slippery slope."

That's "slippery" as in one foot in the grave and the other on a banana peel.

Is there some evil savant who sits up all night thinking of ways that the national legislature can screw the economy even worse than it is already screwed? Or is this just the case of one more bad idea seeming like a good one to clowns without a clue? Either way, it deserves to be fed to the shredder.

Spinning Cordray

The spin on today's filibustering blockage of Richard Cordray's elevation to Consumer Czar was predictable. The New Yawk Times was disgusted, the Wapo was wacko, and conservative Republican Texas Senators Cornyn and Hutchison claimed they'd saved democracy from the Evil Empire. In other words, business as usual.

Meanwhile, back at the ranch, "The One" is threatening a recess appointement. That might make sense, but if "The Change" resorts to that tactic (which his predecessor loved to employ, by the way), we'd have to wonder why in the heck he didn't use it to appoint Lizzie Borden Warren. I mean, if you're going to ram someone or something radical down the throats of your opponents, as you did the health care and financial reform laws, why not be consistent and go all-in? Instead, you waste the populist Mother Earth on a Massachusetts senate seat death match with a Playgirl playboy and spend your recess mojo on a Jeopardy whiz kid who was not your first choice to make the world safe for everyone-but-bankers. Odd.

Which leads the cynical observer to conclude that all decisions in D.C. these days are motivated primarily by considerations of electioneering rather than governing. And that applies to both sides of the aisle.

November 2012 can't come soon enough for me.

Smoke And Mirrors

Ignoring my warnings that they were barking up the wrong tree, the Las Vegas City Council adopted the ordinance we feared they would adopt, which makes lenders responsible for the upkeep of real estate the lenders do not own.The ordinance passed unanimously, which means the entire council's dumber than doorknobs, not merely a majority.

The measure, which passed unanimously, would require lenders to inspect properties in pending or actual default and, if vacant, register them with the city for $200.

The bank then must pick a property manager, who would perform any required upkeep that includes landscaping, watering and mowing. The name and phone number of the lender or manager must be posted on the property.

Each violation carries a maximum $1,000 fine or six months in jail, though the ordinance includes a provision to enforce it through civil action.

One mental giant among the council members said he was "bummed" that Chicago enacted an equally idiotic ordinance before Las Vegas could get its dysfunctional act together. You mean the Chicago ordinance that violated the 14th Amendment? Yeah, I can see why a politician would be "bummed" about that.

Helpfully, the ordinance was altered at the last minute to clarify that its unconstitutional provisions will screw only first mortgage lenders.

An amendment added to the ordinance Wednesday clarified that it includes only holders of a first mortgage or "other first-priority security interest" in real property.

Of course, first mortgage lenders, having the most to lose, are also most likely to push back. I can't wait until Sin City tries to throw a lender's employee in jail for not repairing a property that a borrower still owns.

Smoke and mirrors, folks.