Bank Lawyer's Blog

2016: Year Of The Merger

Respected bank analyst Dick Bove told CNBC last week that the United states is in for a tsunami of bank meregers in the coming year.

"In the United States, I think you will see a huge wave of mergers in banking in 2016," Bove, who is the vice-president of equity research at Rafferty Capital, told CNBC.

"The regional banks are going to be buying each other and I would expect to see 2016 being one of the biggest years for bank mergers that we have seen in the last decade," he later added.

If the activity that I have seen thus far in my little corner of the universe is any indication, you can take Bove's prediction to the bank. Community and regional bank M&A lawyers are going to be plenty busy in 2016.

In addition to customary reasons for consolidation that we've talked about over the past few years, including the crushing regulatory environment post-Franken-Dodd, there's another that I haven't heard discussed, but that ought to be thrown in the hopper of any bank owner who has been fantasizing about cashing out and sipping Margaritas in Mazatlan.

Bove was also bloviating last week (this time to CNN) about how problems in the oil patch spell trouble for banks that bank the "Awl Bidness," and that those kinds of problems have, in the not-so-distant past, spread beyond the oil states and caused a wider economic recession. There are differences this time around from the 1980s on Texas, but Bove is still "concerned" that even big banks outside of Houston and Dallas could feel the pinch. Chase's Jamie Dimon disagrees.

Even Wall Street banks are facing questions about the impact of falling oil prices.

While just a small fraction of their total loan portfolio is directly tied to energy lending, Bove estimates around 20% of their investment banking revenue comes from energy.

JPMorgan Chase(JPM) CEO Jamie Dimon, in a call with analysts this week, acknowledged there may be "slight negatives" for the bank related to commercial and real estate trouble in Dallas, Denver and Houston.

Yet the big banks are well diversified. That means they should benefit from the anticipated boost to consumer spending caused by lower oil prices.

The oil price slide is "not going to be a big deal" for JPMorgan, Dimon said.

Dimon did such a good job of calling the last recession in advance that I think that we all can rest easy based solely on his judgment, right? Yeah, that's what I thought, too.

Even if it's unlikely that oil-related industry woes will, alone, take the US economy down another black hole, you have to wonder whether, coupled with the global stock market retreat caused by China's reckless debt-funded economic expansion finally grinding to a halt and sliding backward, and what the ripple effects of that might be, if now might be the time to pull the plug, while the US economy, while not partying like it's 1999, sure as heck isn't slumbering like it's 2009. It's at least worth more than a passing thought.

Class Action Chum

Financial institutions and class action lawyers mix as well as Donald Trump and Carly Fiorina, so the latest news from Ballard Spahr about a new "coalition" of sharks in Sin City is bound to cause bankers everywhere to break out in a nasty rash.

Approximately 50 cases have been filed recently in Nevada state and federal courts against furnishers of information and credit reporting agencies (CRAs) for alleged Fair Credit Reporting Act (FCRA) violations. It appears that consumer rights attorneys have teamed up with consumer bankruptcy firms to monitor credit reports over the course of a debtor’s bankruptcy case and then sue creditors and CRAs after discharge if the debtor’s credit report inaccurately reports debts after the bankruptcy.

As the alert notes, individuals who alleged that they have been harmed by the inaccurate reporting of a debt  that has been discharged in a bankruptcy proceeding have a private cause of action under the FCRA against a creditor that failed to report to the credit bureaus that the debt had been discharged. Of course, the class action attorneys make a nice pile of cash, which has absolutely nothing to do with the matter. It's all about getting "justice" for the debtor.

Banks and credit unions will need to take this trend into account, and ensure that their reporting policies and procedures are hyper-vigilant so that inaccurate reporting to the credit bureaus does not occur. While this has been the case for some time in theory, in practice some institutions appear to have been relying on the theory that if the error is inadvertent, they might get a pass if they correct it as soon as they become aware of it. The "flurry" of new lawsuits makes it clear that the sharks are circling, that reporting inaccuracies are "chum," and that the the plea of "no harm, no foul" will be drowned out by the screams emanating from the bank's dismemberment by a veritable "sharknado" of vicious hammerheads and, perhaps, a few oversize "great whites."

Stern: Down But Not Broke

Although, once again, I'm traveling on business this week, I have torn myself away from lesser matters to follow the latest news in the battle of The Sunshine State against "The Foreclosure King," David J. Stern. In April, we discussed the fact that the Florida Bar had filed a complaint against Stern that sought to take away his law license. As we observed at that time, perhaps a former assistant AG was correct when she predicted that Stern had made so much money from his foreclosure "practice" that he wouldn't care if the state took away his license to practice law.

It looks like we'll get a chance to see whether or not that sentiment is correct, because recently, Palm Beach County Circuit Judge Nancy Perez recommended that Stern be disbarred. The judge found that Mr. Stern had visited "massive injury" on the state's foreclosure system. In addition, she appeared to be particularly galled by Mr. Stern's claim that his deteriorating financial condition impaired his ability to withdraw from pending cases, an assertion she called a "misrepresentation."

The linked article lists all the money Stern made from selling his foreclosure-related enterprise before it went belly-up, and the amount of money he paid for real estate in Florida, which, apparently, he still owns. Nothing pays like running a foreclosure mill and bailing out at right time, I guess. The state may be winning its battle, but the only people who seem to care are the folks doing the pursuing. The pursued seems impervious to the financial consequences of the end-game.

In this case, "justice" might not only be exceedingly slow, but exceedingly irrelevant.

The Long-Range Consequences Of Adopting The Mating Habits Of A Praying Mantis

The Boston Business Journal's Matthew L. Brown articulated the thoughts of many banking executives and attorneys when the news broke last week that JPMorgan Chase had agreed to pay the US Government a whopping $13 billion to settle claims arising, principally, if not exclusively, out of the steaming heap of goat custard that lay beneath the surface of Wamu and Bear Stearns. Chase bought those gems at the behest of the US Government in 2008 as part of the efforts of the governemt to prevent a meltdown of the US economy over the subprime mortgage securitization crisis and its consequences. As we discussed a few years ago, in the case of Wamu, Chase and the FDIC have been locked in mortal combat over whether the less-than-clear acquisition agreement and related documents required Chase to assume the liabilities related to that custard or whether it stayed with the FDIC as receiver for the Wamu. That battle continues and may be impeding the finalization of settlement documents.

Brown's point is more general and far-reaching. He claims that by asking Chase to step in and rescue the government from the consequences of those two entities going down in flames, and then beating Chase about the head and shoulders with a hockey stick for sins committed by those two entities prior to Chase's purchase of them, the government is jeopardizing the chances that any major players will ever step into the breach again in such a fashion, at least without a lot of belt-and-suspenders language i the acquisition documents that makes it perfectly clear, particularly to a federal court, exactly what liabilities are being assumed and what liabilities are not.

However, Brown argues that going after Chase for the liabilities of Bearn Stearns and Wamu is also egregious because of the respective responsibility of the two combatants in this aftermath--Chase and the US Government--for the losses.

Big banks’ mortgage securitization and credit derivatives practices in the years before the collapse were reckless, self-serving and parasitic. We’ve also learned — from books like Charles Morris’ "The Trillion Dollar Melt Down," published in March 2008 — that they were decipherable and predictable.

Regulators didn’t bother to decipher or predict the meltdown. And in the case of Bear Stearns and WaMu, they didn’t seem to do much regulating, either.

A $13 billion settlement will only sting JPMorgan Chase a bit. The more fervent feelings appear to be on the government’s side as it hustles for little bits of cash to cover for its own ineptitude.

"Hustles for little bits of cash." He's right, of course. Compared to the total amount of money and asset value lost by the perfect storm of stupidity, incompetence, greed, and venality by so many players in the game, including the executive and legislative branches of the US government, $13.1 billion is a pittance. Still, it's a lot of money to most bankers, and Brown's parting shot sounds prophetic: "It’ll be a long time, indeed, before a big bank answers the federal help line."

Big Bank Bizarro Land

Both big banks and big-bank-hating judges have been acting with increasing wackiness lately, as The New York Times' Gretchen Morgenson recently explored. In one case, a Massachusetts judge claimed that he bought the argument of Wells Fargo that a borrower's predatory law claims against the bank were barred by federal preemption principles, but then made the bizarre demand that the bank provide the court with a resolution of the bank's board, signed by a majority of the bank's directors, that stated that the board is not waiving its right to claim federal preemption. The judge believed that the bank's public advertising that it is consumer-friendly raises the issue as to whether or not it has waived its right to claim federal preemption. Naturally, knowledgeable observers, including the counsel for the borrower, had never heard of such a judicial demand. The bank is appealing the requirement, which appeal, unless the judge backs down, the bank will win.

While the judge labels the bank's alleged conduct to be "outrageous," a commenter in an ABA Journal article on the decision made a telling observation.

This judge has gotten too big for his britches and is stepping beyond his constitutional role as a neutral jurist. It makes no difference whether he personally finds Wells Fargo’s conduct to be “outrageous” or out of sync with the company’s public image, conclusions that are legally irrelevant and do not entitle the judge to dictate what the company must do to raise a legitimate defense. Justice is supposed to be blind to personal sympathies such as this; he is displaying prejudicial and unprofessional bias toward a party, and he should be recused or sanctioned.

It's Massachusetts, pal. He'll be neither recused nor sanctioned. He'll be hailed as a lion of the bench.

On the flip side, Gretchen also recounts a case where Bank of America and its assignee hounded a homeowner repeatedly for payment of a debt that had been discharged in bankruptcy. Apparently, repeated contact by collectors continued even after the bank was sued. Determining whether or not a debt has been validly discharged in bankruptcy is not the equivalent of discovering the cure for cancer. The bank that can't shoot straight on the foreclosure trail apparently has no better aim when it comes to general debt collection.

The phone calls and letters continued even after Mr. Schwartz went back to court to ask that Bank of America be sanctioned for illegal attempts to collect the debt. During this time, Bank of America sold the servicing rights on the first mortgage to another company, which soon began sending its own demand letters to the Ramoses.

This month, the matter came before Robert D. Drain, a federal bankruptcy judge in New York. Judge Drain found Bank of America in contempt of the debt discharge order protecting the Ramoses and required the bank to pay Mr. Schwartz’s legal bills in the case. The judge also ordered the bank to pay $10,000 a month in sanctions to the Ramoses until it stopped making the repayment demands.

Judge Drain acknowledged that it wasn’t a lot of money to Bank of America. But, he said, he hoped that its lawyers would get the message. “This is not just a stupid mistake” by the bank, the judge said. “This is a policy.”

A Bank of America spokeswoman said the bank was working to resolve the court’s issues and “researching and investigating what transpired.”

"Researching and investigating" what? Did they call and/or write or didn't they? You need a drug-sniffing dog and an electron microscope for that task, America's Bank?

We all know why the people with pitch forks and torches want to burn down the banks. Now, it appears, the cumulative effect of years of this type of moonbattery by big banks is driving even respected jurists batty.

The borrower's lawyer in the Bank of America case thinks that the bank has a deliberate policy of ignoring the law and is willing to fork over the occasional sanction as the price it pays to squeeze blood out of turnips. Personally, I think that gives them too much credit. I subscribe to the "Too Big To Think" theory. If it's a choice between Professor Moriarty and Alfred E. Neuman, I vote for the "What, Me Worry?" explanation.

The Rocky Mountain Lowdown: Loan Collateral Up In Smoke

I asked Steve Mulligan, a partner in the Denver office of the law firm that suffers my presence in their Texas office, to write a guest post for the blog on an issue of concern to lenders in Colorado (and, perhaps, other states) where, after the most recent state and national elections, lighting up a fat boy in public, or growing smokable hemp in  your basement, no longer puts you on the wrong side of local law enforcement. As Steve points out, that's not the end of the story for lenders whose collateral may be a place where some mellow cats are toking up a Rocky Mountain high.

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Bankers & Lenders, Your Real Property Collateral May Be At Risk if Your Borrower Violates Federal Drug Laws

By Steven T. Mulligan, Bieging Shapiro & Barber LLP

Bankers and lenders, if your borrower grows marijuana or rents to people who grow marijuana, your real property collateral may be at risk of forfeiture under federal law despite the fact that such activity might be legal under Colorado state law.

Judge Howard A. Tallman, chief judge of the U.S. Bankruptcy Court in Colorado, had recent occasion to considersuch a situation.  In In re Rent-Rite Super Kegs West Ltd., the Chapter 11 debtor owned a warehouse in Denver and some of its tenants were in the business of growing marijuana.  While this may be a legal activity under Colorado law, it is not under the federal Controlled Substance Act (the “CSA”) unless one receives a certificate of registration from the Drug Enforcement Agency (“DEA”). 

Judge Tallman looked to § 856 of the CSA, known as the “crack house statute,” which provides that it is a federal crime to use real property or allow real property to be used for unlawfully manufacturing, storing, distributing, or using a controlled substance.  Marijuana is a Schedule I controlled substance under the CSA. 

The Judge then looked to the criminal penalties for violating the CSA which includes a potential prison term of not more than twenty years.  As a result, the federal forfeiture statute comes into play.  That statute provides that real property used in connection with activities that violate the CSA and are punishable by more than one year’s imprisonment is subject to forfeiture.

Consequently, Judge Tallman found that the debtor’s illegal activity put the lender’s collateral at risk because of the federal forfeiture statute.  Moreover, since the automatic stay provisions of the Bankruptcy Code do not prevent the U.S. from seizing property under the forfeiture statute, the risk continued every day that the debtor remained in bankruptcy.  The matter was before the court on the secured creditor’s motion to dismiss the debtor’s bankruptcy case. 

In re Rent-Rite highlights the need for lenders to gather important information when underwriting and administering a commercial real estate loan.  Such information should include current rent rolls, copies of any leases, and research on any tenant; it may be that the name is a good indication as to what the tenant’s business is.  If possible, you may want to visit the property to see if any potentially illegal activity is taking place.  An affirmative covenant from the borrower that no activity in violation of state or federal law may also be beneficial.

Additionally, consider requiring the borrower to provide periodic updates and immediate notification if it enters into any new leases or changes its own business to include growing marijuana.  Finally, think about reviewing your default provisions; if the borrower engages in activities that are in violation of the CSA or allows such activities to occur, you may be able to declare a default under the loan documents.

The Worst Deal In History

Last year, when I made an aside about Bank of America's decision to purchase Countrywide as having been, for B of A, "a Pandora's Box, filled with horrors and plenty of pain," a reader wrote to tell disagree, asserting that B of A got plenty of value. I thought the guy was daffy then, and ten months later, I still say he's daffy, and I'm not alone. According to a recent Wall Street Journal article, Countrywide has cost B of A a cool "$40 billion in real-estate losses, legal expenses and settlements with state and federal agencies."

"It is the worst deal in the history of American finance," said Tony Plath, a banking and finance professor at the University of North Carolina at Charlotte. "Hands down."

[...]

The total costs from Countrywide to date, according to people close to the bank, include $34.5 billion chewed up by a combination of consumer real-estate losses since mid-2008 and funds set aside to pay back investors who allege Countrywide wasn't honest about the quality of mortgage-backed securities it issued before the crisis. Additional legal costs from various settlements with federal and state agencies and the initial Countrywide purchase amount push total costs over $40 billion, these people said.

But the tally could go higher. Bank of America has said it could face an additional $5 billion in possible losses, and scores of lawsuits seeking to pin Countrywide's liabilities on Bank of America are pending in courtrooms around the U.S.

In the world of bank acquisitions, as in many other endeavors, such as professional golf, some days you eat the bear and some days the bear eats you. What Bank of America thought was Jack Nicklaus (the "Golden Bear") turned out to be a Grizzly named Old Nick. Better luck next time, B of A.

And to my erstwhile correspondent: Do NOT listen to the voices in your head that compel you to write me about Countrywide.

Stop Me If You've Heard This One Before

It's not merely the fact that former Wells Fargo CEO Dick Kovacevich complained publicly and loudly in 2008 that Hank Paulsen made him a TARP offer he didn't want but couldn't refuse, it's that, nearly four years later, he..won't...stop...ranting...about...it, that leaves some listeners amazed, others stupified, and still others screaming for someone to stick a knife in their neck in order to end the pain. Moreover, he's gone from "I didn't want it or need it but they threatened me" line to "TARP is likely to cause the end of life on Earth, at least as we know it."

Former Wells Fargo Chairman and CEO Dick Kovacevich says the federal government's bank bailout during the depths of the financial crisis was an "unmitigated disaster" and laid much of the blame for the financial crisis on "ineffective regulators."

"The decision by the U.S. Treasury and the Federal Reserve in October 2008 to make banks take TARP money even if they didn't want it or need it was one of the worst economic decisions in the history of the United States," Kovacevich told about 100 people attending a Stanford Institute for Economic Policy Research event Tuesday evening.

Kovacevich then offered a roster of reasons fueling his criticism of the government's Troubled Asset Relief Program, including "spooking the financial markets," damaging the reputation of financial institutions who did nothing wrong, and institutionalizing the concept that some institutions are too big to fail.

Kovacevich also cites TARP as the genesis of Dodd-Frank, the Ebola and AIDS viruses, as well as the horror now known as "Charlie Sheen."

Dick claims that any pundit who argues that TARP saved the financial system from a China Syndrome-like meltdown is a mere government apologist and spinmeister. In fact, Dick declares that TARP caused the financial meltdown and stock market collapse by stampeding the markets, as if the pre-TARP failure of Lehman Brothers was nothing more than a minor blip on the radar screen. He didn't say this exactly, but I think Dick also suspects that TARP is the reason that supermodel Linda Evangelista has repeatedly spurned his offers of concubinage. As a parting shot, he also blames most of the failed banks on "poor regulation."

This is what we call the "Dick-Cheney-Scattergun-To-The-Face" approach to criticism. If you load up on Double-O buckshot and blast away at close range, you're bound to hit something. If you're really lucky, like the other Dick, you'll bag a lawyer.

Callousness Looms Large

The ICBA's CEO, Cam Fine, isn't happy about the most recent Bank Fail Friday Bloodbath. He calls it a sad day for main street. He also discloses a portion of an email he received from someone with inside knowledge of the way the FDIC takeover team treated the employees of the Bank of Eastern Shore, the only one of the five "too-small-to-save" community banks for which the FDIC did not find a buyer. Cam thinks that the email "speaks volumes about the kind of unequal justice under law and lack of respect that ICBA speaks out against when comparing the treatment of Main Street institutions and their management and staffs with Wall Street, too-big-to-fail institutions and their managements and staffs." I'll let readers draw their own conclusions on that point.

I wish I could share Cam's sense of outrage. After 37 years of witnessing the truth of P.J. O'Rourke's maxim that "giving money and power to government is like giving whiskey and car keys to teenage boys," I'd be shocked if bureaucrats didn't act like what many (but not all) of them are: the folks the jocks in high school stuffed in their lockers and the cool crowd wouldn't talk to, finally getting their payback by using the power of a governmental position to treat others the way they'd been treated during their Wonder Years. Frankly, the only sane inmates seem to be those that escape the asylum. Many of those who become "careerists" support the astuteness of one of Dennis Prager's observations:

The larger the state, the more callous it becomes... the colder its heart. It is also true that the bigger the corporation, the more callous its heart. But unlike the state, corporations have competition and have no police powers.

On the other hand, Prager's assertion regarding corporations always being subject to competition is becoming uncomfortably questionable with respect to the big banks that the Occupy movements love to vilify. In today's Housing Wire, Christopher Whalen criticizes the Obama administration's proposed Homeowner Bill of Rights, and in the course of his critique, has some sobering words about what has become of "competition" among banks, at least with respect to the residential mortgage lending business.

The mortgage industry is comprised of a cartel of the four largest banks, which happen to be the largest loan servicers, as well as the owners of most second liens. Federal bank regulations reinforce the cartel structure of the secondary market for loans by allowing large banks to treat servicer and tax balances as core deposits.

This expanded balance sheet enables the large banks to hold equally big portfolios of mortgage servicing rights and also gives the top four banks — JPMorganChase, Bank America, Wells Fargo and Citigroup — a competitive advantage in dealing with the various federal housing agencies in the creation of mortgage-backed securities.

Thus, when a small bank wants to sell a loan into a securitization with a wrap from Fannie Mae or Freddie Mac, it typically sells the loan for as much as half the origination spread or more to one of the large banks.

The big bank then structures the RMBS that issues bonds to investors and retains the mortgage servicing rights. The large banks control the entire process, yet the Homeowner Bill of Rights does nothing to change this situation. Now you know why large banks seem to be more profitable than smaller banks.

Big government is callous, but so is big business. I think we've plenty to fear from both. Concentrating most of the mortgage business in the mitts of the Gang of Four cannot be a good thing for consumers over the long haul. Beyond the mortgage lending arena, in the banking business generally, the trend seems to be toward concentration in fewer, larger entities. To lovers of big government and big business, that's all fine and dandy, I suppose. To the rest of us, however, that trend is troubling.

Messing With The Market...Again

Bank of America's announcement the week before last that it was "experimenting" with an alternative to traditional foreclosure, that being taking a deed in lieu of foreclosure and renting the house back to the borrower, was greeted in some quarters as a bold new "pilot program." While that might be true for Bank of America, Fannie Mae rolled out a similar program three years ago and it has never generated much interest among homeowners. According to Fortune's Nin-Hai Tseng, that might be because Fannie Mae's servicers never put much effort into marketing this alternative or it might be because it's too difficult to qualify for Fannie Mae's program.

To qualify, borrowers must prove that they can take on monthly rent payments, which would be offered at the market rate. What's more, the balance can't exceed 31% of their gross income. In regular times, that might not be such a biggie – except the program targets homeowners in distress, who have either been tardy on mortgage payments or have stopped making payments altogether.

[...]

If the bank's initiative is going to expand, it might have to be extra forgiving. Compared with Fannie's program, BofA's is somewhat more flexible in that it's open to offering leases at or below the market rate. A program overwhelmingly based on rentals at a discount may or may not work for the bank financially. And it remains to be seen if that will keep the program from expanding much beyond the three test areas.

There's another problem that Tseng notes: the number of markets where single family homes make attractive rental units is limited.

Aside from Las Vegas and parts of California, there aren't very many other places with high foreclosure rates and a robust rental market, says Jed Kolko, chief economist at Trulia, an online real estate site. Much of the overbuilding during the housing boom generally took place in suburbs and further out in rural areas, Kolko adds. However, the demand for rentals is occurring mostly within cities and urban areas.

A few years ago, an economist tried to drag me into an argument on this blog that also involved a leftarded, bank-hating blogger who accused of me of being an "elitist" because I thought the economist's idea of giving bankruptcy judges the power to force lenders to take a deed in lieu of foreclosure and rent the home back to the owner was dumber than a stump. The ensuing brawl in my comments box between opponents and proponents led me to first selectively ban certain antagonists and, finally, to shut down commenting permanently. This blog's a past-time, not a priority. I don't have the time to constantly police the comment moderation function. I've got a day job.

I admit that I'm an elitist, but when you're going up against ideologues and "committed" academics, it's difficult to maintain the proper degree of humility, because they consistently demonstrate that when it comes to factual impediments to their pet theories, they prefer to live in Cloud Cukoo Land, where all scenarios support their foregone conclusions. Keeping a sneer off your face is as formidable a task as not lusting after Catherine Zeta-Jones. It's possible, but not probable.

As Tseng's article illustrates, all of the alternatives to letting the marketplace work through the foreclosure backlog have limitations, not all of them work for every borrower or piece of collateral, and one size does not fit all. I wonder where we would be today if we had dispensed the search for the single magic bullet and quit jacking around with residential real estate. That's too much to ask in a world where so many have opinions and access to the internet is so readily available, and it's an impossible question to answer, but since so many public policy initiatives turn out to be misguided, I might as well engage in more idle speculation myself.