Bank Lawyer's Blog

Eric The Zombie Killer

Like the Windy City, the Empire State wants to make sure that when voters complain about run down neighborhoods, abandoned buildings, and general urban malaise, they know who to blame. No, not Teflon-coated pols. Instead, everybody's favorite whipping boys: mortgage lenders.

The State of New York doubling down in its efforts to fight back against the rising tide of zombie properties, which are homes that are vacant or abandoned during the foreclosure process.

New York Attorney General Eric Schneiderman announced on Monday that he plans to resubmit an expanded version of a bill he first introduced in 2014 to the state legislature. Schneiderman’s bill, called the Abandoned Property Neighborhood Relief Act, is designed to reduce the number of zombie homes by informing homeowners of their right to stay in their home until a court orders them to leave.

According to Schneiderman’s office, the bill will also require mortgage lenders and servicers to identify, secure and maintain vacant and abandoned properties shortly after they are abandoned. Under current state law, lenders and servicers aren’t required to secure and maintain vacant properties until the end of the foreclosure process.

The bill would also create a statewide registry of zombie properties, designed to help local governments with the enforcement of property maintenance laws.

Additionally, if Schneiderman’s bill becomes law, any fines levied against banks, lenders or servicers for violations of the state’s abandoned property laws would be directed into a fund, which would be used by local governments to hire additional code enforcement officers.

Making lenders legally responsible for properties that they do not legally own is a scam that's been around, in one form or another, for years. It's generally been considered a bad idea by mortgage lenders, which is an understandable reaction from a business standpoint, since it increases the risk and cost of lending in areas that attempt to impose such liability. Chicago fought the FHFA in court over an ordinance that tried to do the same thing that Schneiderman's bill would try to do. Last year, Chicago settled with the FHFA, after the FHFA won at the district court level and the city recognized that the FHFA was not legally compelled to comply with such a law. While the FHFA agreed to voluntarily register properties with the city, "the city will not require Fannie and Freddie to comply with the city’s vacant and abandoned building ordinances and will not fine the FHFA for ordinance violation."

Expect New York's law, if enacted, to generate a similar reaction from the FHFA.

I just love the smell of litigation in the morning. It smells like...attorneys' fees.

Another interesting aspect of the proposed bill is the following Catch 22.

Schneiderman’s bill requires lenders and mortgage servicers to periodically inspect properties with delinquent mortgages to determine if the property is occupied.

But the bill also makes it unlawful for a lender or servicer, or a person acting on their behalf, to enter a property that is not vacant or abandoned for the purpose of “intimidating, harassing or coercing a lawful occupant” in an attempt to get them to abandon the home.

That high wire walk, as well as the bill's other provisions, ought to discourage lenders and/or make them price the high risk into the cost of loans made in New York. Ultimately, it's the customer who always pays the price.

As if there weren't enough reasons to move to Texas, Eric the Red gives New Yorkers one more.

I Left My Equity In San Francisco

When a government takeover plan is so whacked that even a city official in San Francisco thinks that it's whacked, you know that it's officially jumped the shark.

San Francisco’s controller discouraged city lawmakers from going forward with a proposal to use eminent-domain to help homeowners avoid foreclosure, citing federal limitations and risks to the city’s borrowing costs.

“The city’s participation in an eminent-domain program will likely have broader negative impacts on the city’s participation in financial markets, at least for an initial period,” controller Ben Rosenfield wrote in a report released Thursday.

Rosenfeld had been asked by the city's Board of Supervisors to look into a proposal that the City by the Bay join the quixotic quest of the City by the Backside (Richmond) to seize underwater mortgages through the power of eminent domain, write the principal balances down to current fair market value, and, its proponents hope, benefit homeowners who then can then lower their monthly mortgage payments as ride rising home values upward as the economy continues to recover. The only people who get screwed under that arrangement are lenders, but to hell with those capitalist pigs, goes the reasoning.

Ben noted in his report that mortgage giants Fannie Mae and Freddie Mac have made it clear that cities that use eminent domain for such purposes would threaten the safety and soundness of those two formerly insolvent entities (and Uncle Freddie and Aunt Fannie certainly know unsafe and unsound actions when they engage in them, don't they?). Therefore, "[p]recluding any participation from Fannie Mae and Freddie Mac, the use of eminent domain would seem to be an inviable option." An "inviable option," indeed. Rosenfeld also observed that the eminent domain scheme "hasn’t yet been proven in any jurisdiction in the U.S."

It's doing great on Planet Bizarro, however.

A proponent of the plan was "disappointed" (i.e., threw a hissy fit).

“I’m disappointed that they seem to have bought into Wall Street’s scare tactics about eminent domain,” Avalos said in a statement. He said he plans to call a hearing soon to review the report.

I wonder if, at that hearing, he'll threaten to "socialize" mortgages? That would be the cherry on the top of this fruitcake.

FHFA Takes A Baby Step

Even though she managed to lose the governor's race in heavily-Democratic Massachusetts to a Republican (thereby earning the disdain of Democratic strategist David Axelrod), and even though a federal district court last month dismissed her lawsuit against the FHFA and its wards, Fannie Mae and Freddie Mac, on the basis that the court system doesn't have the right to "second guess" the FHFA's business judgement (isn't that a novel concept!), Massachusetts AG Martha Coakley still had the gall to issue a public statement about the FHFA's recent decision to back off its policy of refusing to consent to the write-down of loan principal where a foreclosed house is sold back to the defaulting owners.

“The reversal by FHFA of Fannie and Freddie’s policies, which we have long advocated for and brought suit over in part, alters some of their rigid policies to help keep people in their homes,” she said in a statement Tuesday.

To help keep people in their homes who didn't pay their loans as they agreed to pay them and who are getting a better deal than they originally bargained for, at the expense of Uncle Freddie and Aunt Fannie, both of which have been de facto nationalized. I guess that would be a Progressive's orgasmic night dream were it not for the fact that Coakley had absolutely nothing to do with the policy reversal and, more telling, the "reversal" will not help that many homeowners remain in their homes.

However, the impact of the change could be limited. It will only apply to the 121,000 homes that Fannie and Freddie have already foreclosed on and own, a provision that’s intended to curtail any incentive for borrowers in good standing to default. That narrow scope is unlikely to quiet the drumbeat for the FHFA to make bigger changes intended to help a larger number of borrowers who owe more than their homes are worth.

Foreclosed-upon borrowers will also still need to find the cash or financing to buy the old home back at market value, a tall order for those with tarnished credit histories.

“This is a ‘feel-good’ type of policy. It’s directionally helpful to a small number of homeowners that ran into trouble, but at the end of the day, I don’t look to this to have a major policy impact,” said Clifford Rossi, a finance professor at the University of Maryland.

[...]

The new policy in effect reduces mortgage principal, albeit for a small number of foreclosed-upon borrowers. Some nonprofit groups said that Fannie and Freddie would be better served to reduce the borrower’s principal before a foreclosure.

Fannie and Freddie wouldn't be "better served" by such a policy, although delinquent borrowers, Nanny-State lovers, and the fake Native American politicians they so love to lionize would definitely be "better served."

Speaking of which, the fact that 1/32 Cherokee Princess Fauxcahontas went all "jihad" on Mel Watt last week obviously had more to do with this latest publicity stunt than any dismissed lawsuit by a pol who couldn't beat Abu bakr al-Baghdadi in a race for Prime Minister of Israel. You could see the flop sweat flying off of Watt's brow at that Senate hearing like angel dust in the aftermath of a Lindsey Lohan sneezing fit. It's not pretty when a cougar eats her young.

The FHFA's position has long been that it does not want to engage in any process which encourages borrowers to default in order to gain what are, in effect, write downs of underwater mortgages. This is, in theory, especially important in light of the fact that Fannie and Freddie are in conservatorship and, ultimately, it's the American taxpayer on the hook (leaving aside the fact that both entities have become cash cows pouring their profits into the US Treasury). This is only a baby step toward fulfilling the call for widespread write-downs for political ideological humanitarian reasons, but then, every long journey begins with the first step, no matter how tiny. Between now and 2017, it would not be at all surprising to see the pace quicken and the stride lengthen.

Coakley's Special Friend

Massachusetts Attorney General and wanna-be governator, Martha Coakley, has tried to make political capital out of her lawsuit against the FHFA and its wards, Fannie Mae and Freddie Mac, over their policy of refusing to permit the sale of houses to non-profit organizations who intend to resell the home to the borrowers who have defaulted on the loan secured by a loan that is owned by Aunt Fannie or Uncle Freddie. We last discussed the lawsuit in June.

While Martha has publicly trotted out one of the nonprofits involved in this scheme as a paragon of virtue and the Plantonic ideal form of nonprofit rectitude compared to which all other nonprofits are merely a pale reflection, some investigative reporting has uncovered the fact that the CEO of said nonprofit is a campaign contributoer to Ms. Coakley.

Massachusetts Attorney General Martha Coakley stands accused of failing to disclose close ties between her gubernatorial campaign and a nonprofit that’s at the center of the State of Massachusetts’ lawsuit against the Federal Housing Finance Agency, Fannie Mae and Freddie Mac over buyback programs.

According to a new report in The Boston Globe, Elyse Cherry, the CEO of Boston Community Capital, is the co-chair of Coakley’s campaign finance committee.

Cherry’s Boston Community Capital is also the focus of a lawsuit filed by Coakley against the FHFA, Fannie and Freddie, which alleges that Fannie and Freddie, currently under FHFA conservatorship, are refusing to comply with the Massachusetts law called “An Act to Prevent Unnecessary and Unreasonable Foreclosures.”

One of the provisions of the law, which was passed in August 2012, prohibits creditors from blocking home sales to non-profits simply because the non-profit intends to resell the property back to the former homeowner.

In the lawsuit, filed in June, Coakley said that these foreclosure buybacks are exactly what the GSEs are preventing by refusing to engage in the buyback program.

When Coakley filed the lawsuit in June on behalf of the State of Massachusetts, she specifically cited Boston Community Capital’s Stabilizing Urban Neighborhoods Initiative as an example of how the Massachusetts buyback program can work.

[...]

But according to the Globe report, Cherry hosted a Coakley fund-raiser mere days before the lawsuit was filed.

From the Globe report:

Though Cherry’s work has drawn high-profile supporters, Coakley’s lawsuit is drawing criticism from a prominent affordable housing advocate who opposes Cherry’s approach and a government ethics champion who says Coakley should have disclosed her ties to Cherry to avoid the appearance she’s doing favors for insiders.

“It’s important that the public knows about private dealings that could potentially affect government action,” said Pam Wilmot, executive director of Common Cause, a nonprofit group that promotes transparency in government.

Coakley said there was no need to file a public disclosure with the State Ethics Commission since Cherry’s $3,250 in state donations to Coakley since 2005, the $1,500 she gave to Coakley’s failed US Senate bid in 2010, and the $5,000 she donated to the Democratic State Committee in September are already matters of public record.

One of the interesting aspects of the criticism of the Cherry-Coak(ley) connection is that much of it is coming not from the Titans of Wall Street, The Top 1%, or Darth Vader, but from folks who you would think would be rising to Coakley's defense. Among these critics is a guy who usually considers no bar is too low to limbo under, as long as the result of dancing under it is the infliction of pain on a lending institution.

Bruce Marks, a longtime housing advocate and chief executive of the Neighborhood Assistance Corporation for America in Jamaica Plain, saidthat Cherry’s buyback program is flawed because Boston Community Capital buys foreclosed-upon homes at a discount from lenders, but doesn’t pass along all the savings to families that were foreclosed upon. Instead, her group typically boosts the resale price by at least 25 percent, Boston-area property records show.

Marks cites Coakley’s yearly salary, $590,000 in 2013, as evidence that she “paints herself as this advocate for the consumer, and it’s the opposite.”

Marks also said that BCC makes money on each home refinance it conducts because BCC marks up the home by 25% above the price it paid to the lender when BCC resells it to the homeowner. According to Marks, borrowers must also bring approximately $5,000 in fees to the closing.

Marks said that BCC charges an interest rate 6.375% for the loans it gives to the previously distressed borrower, which is two percentage points more than what BCC pays for the money it borrows to make the loans.

“If a bank was doing that, you’d charge them with predatory lending,” said Marks, who said his group collects a small fee from banks to help homeowners negotiate a reduced mortgage payment with their lenders.

A two percent spread is predatory lending? C'mon Bruce! Even your running buddies in Havana wouldn't drink that vat of Kool-Aid.

While I doubt that in the Peoples Commonwealth of Massachusetts this particular kerfuffle, standing alone, will cost Martha the governor's crown, the race against Charlie Baker is currently neck-and-neck. When your opponents and a good portion of your supporters gang up to publicly question your conduct on ethical grounds shortly before early voting starts, you're not doing yourself, or the lawsuit that you're waging as much through press releases as through motions and briefs, any favors.

The Rule of Lawlessness

Former FDIC Chairman Bill Isaac's recent rant opinion piece in The Wall Street Journal (paid subscription required) was a masterful smackdown of the current administration's handling of the conservatorships of Fannie Mae and Freddie Mac. Basically, Isaac accuses the executive branch of acting illegally.

The FHFA as conservator is a fiduciary—or trustee—for the shareholders of Fannie and Freddie. Its job is to, as the law says, "conserve [the enterprises'] assets and property" for shareholders while Fannie and Freddie rebuild their capital base and eventually exit the conservatorship.

That's not what has happened. When presented with the once-unthinkable reality of Fannie and Freddie making enough money to retire the Treasury's senior preferred stock and build enough capital to meet their financial obligations without government assistance, the Obama administration moved in 2012 to confiscate all Fannie's and Freddie's profits and wind down the two mortgage giants. Investors in Fannie and Freddie have responded by suing in federal court.

The government is trying to deny the plaintiffs the right to discovery (sound familiar?) because, according to Isaac, it's afraid of what might be revealed.

This information could include emails and other documents demonstrating that the government's true intent was to seize current and future Fannie and Freddie profits for itself and leave shareholders with nothing. To justify its position against granting discovery to plaintiffs, the government argues that disclosure of current and future plans for the conservatorship could be "disruptive to the housing market and to the nation's economy." Almost laughably, the government also argues against disclosure because that could "create market perception that the Enterprises are not financially viable," and that "this would have a negative impact on sales of debt and mortgage-backed securities." Putting aside the circularity of these arguments, the real absurdity is that the government's own activities have deprived Fannie and Freddie of capital and kept them too weak to emerge from conservatorship. By taking all of the enterprises' profits, the government has left them undercapitalized and permanently unable to rebuild their capital.

Isaac asks an obvious, important question: what's does this hijacking mean for the future? His answer is sobering.

Given the government's dereliction in its duty to conserve value in Fannie and Freddie, an obvious question arises pertaining to any "reform" of housing lending proposed by the administration and enacted by Congress. If the administration plans to wind down Fannie and Freddie with no recourse for investors, or to nationalize them in creating a new federal housing entity, as a Senate housing reform bill would do, where will the capital come from to finance the new system? What investor would put capital into something so uncertain and so unprotected by law as Fannie and Freddie have proved to be?

There can be varied opinions over which reform is best for our country or what, if any, role Fannie and Freddie will have in a future housing market. But there should be no disagreement about the law. Capital follows the rule of law, and if investors can't count on that in the U.S. and in the housing markets, they will put their money elsewhere.

"Capital follows the rule of law" applies beyond Aunt Fannie and Uncle Freddie, as important as they may be to the housing market and the economy as a whole. It also applies to the entire banking business.

Those of us who've been representing banks for a number of years (October will mark my 40th year of wandering in that desert) can't recall a time, outside of the relatively brief episode surrounding the collapse of the savings and loan business in certain parts of the country, when the federal government has treated adherence to the rule of law with such elasticity. From the envelope-pushing "disparate impact" doctrine's foray into fair lending (and the use of every artifice to prevent the SCOTUS from having an opportunity to strike it down), to Operation Choke Point and its "informal" enforcement through "informal" regulatory examinations and supervisory pressure, to cases like those of Patrick Adams, whose David-vs.-Goliath struggle seems to serve no purpose other than sending a message that due process is a pipe dream if you fail to knuckle under to a brow beating, to the avalanche of regulations following the enactment of Franken-Dodd, I cannot recall a previous time when community bankers and credit union boards and management have had such a sense of anxiety that borders, in many cases, on despair.

I understand why capital would flow to the Too Big Too Fail. They get hit with a few hundred million here, a few billion there, and rarely miss a beat. They take a licking and keep on ticking. The Too Small To Save don't have that status, and they know it.

Perhaps it's cognitive dissonance. Perhaps its the blind hope that "this, too, shall pass." Perhaps it's simply the fact that "this is what I know how to do and it's all I know how to do, so I'm gonna keep on doin' it until they force me to stop." However, if you have options as to where your capital will flow, how long before you cash in your chips on the banking business and take it to a business where the regulators who can shut you down and/or sue you don't have to take remedial educational courses to learn the basics?

I'm not advocating a course of action, I'm merely asking a question.

A Distinct Lack of Interest

In a think piece in yesterday's American Banker, attorney Michael Reyen discusses that fact the City of Richmond, California's "Seize The Mortgage" plan through the use of eminent domain has been stymied by the failure of the plan's supporters to obtain the supermajority approval necessary to obtain City Council approval to move forward with the half-baked scheme. As a result, its supporters are trying Plan B: partnering "with another community to form a joint powers authority and carry out the plan."

To date, it has not had any takers.

Why not? According to Reyen, because other municipalities fear (rightly, in my opinion) the costs and risks of litigation, and because the FHFA has threatened to pull Uncle Freddie and Aunt Fannie out of any municipality that starts seizing mortgages through such a means. As to litigation, although a federal court dismissed a lawsuit filed by mortgage loan securities trustees, the court did so "without prejudice." In other words, the issue was not yet "ripe," but if Richmond proceeds to actually implement the plan, "ripeness" will permeate the air like the scent of a thousand dead armadillos in the middle of an Amarillo blacktop in mid-August.

The negative reaction of the FHFA and mortgage securities investors would be even more consequential over the long haul.

The FHFA has stated that it may initiate legal challenges against any local or state government that sanctions the use of eminent domain to restructure mortgage loan contracts in a way that affects FHFA’s regulated entities, Fannie Mae and Freddie Mac. It has also said that it may act by order or regulation to “direct the regulated entities to limit, restrict or cease business activities within the jurisdiction of any state or local authority employing eminent domain to restructure mortgage loan contracts.” This amounts to a death sentence for residential mortgage lending in any municipality in which the FHFA limits, restricts or ceases business activities.

Notwithstanding these "strong headwinds," Reyen thinks that the idea is not yet dead, and cites the interest of Irvington, New Jersey, in pursuing the scheme. In my view, the headwinds will only become stronger if these plans move forward. In addition, as the economy continues to improve and real estate values eventually recover, the "need" for such "creative" measures to assist underwater borrowers will be harder to justify. That won't stop true believers from believing in it, but it may finally crater any practical chance of any such plan being seriously pursued to the point of "ripeness."

Martha Makes Good On Her Threat

Well, Martha Coakley gave Mel Watt only a couple of weeks to fold, and when he didn't, she made good on her threat to sue the FHFA.

Coakley followed up on her threat of litigation and filed a lawsuit against the FHFA and the GSEs in Suffolk Superior Court. The complaint alleges that Fannie and Freddie, currently under FHFA conservatorship, are refusing to comply with the Massachusetts law called “An Act to Prevent Unnecessary and Unreasonable Foreclosures.”

[...]

One of the provisions of the law, which was passed in August 2012, prohibits creditors from blocking home sales to non-profits simply because the non-profit intends to resell the property back to the former homeowner. Coakley says these foreclosure buybacks are exactly what the GSEs are preventing.

[...]

In the complaint, Coakley alleges that two of the FHFA’s policies violate state law. The suit alleges that Fannie and Freddie’s “arm’s-length transaction” policy prohibits property sales to non-profits who resell to the original homeowner.

The suit also alleges that the GSEs “make whole” policy has the same effect, as it prevents Fannie and Freddie from accepting anything less than the outstanding loan amount from the former homeowner or anyone seeking to resell or rent to the former homeowner.

Fannie and Freddie are in conservatorship because too many borrowers haven't repaid mortgage loans that Fannie and Freddie bought and packaged into mortgage backed securities that they then sold to investors, including, among other types of entities, pension funds that thought they were buying a safe, "government-backed" investment. The FHFA, which regulates those two entities, has a duty to the investors (and to Fannie Mae's shareholders, who've been shafted by the government's refusal to stop sucking up all of Fannie's profits, even though all of the government bailout money spent on Fannie and Freddie has been repaid in full) to try to recoup the maximum amount possible from the mortgages that it holds. Not letting defaulting homeowners benefit from a less-than-full-repayment liquidation of a loan makes sense from that policy standpoint.

Coakley believes that state legislation that pushes local economic recovery goals (or homeowner relief social policy goals, depending on your perspective) should be able to trump the policies of the a federal regulator regarding two wards of the federal government. This will be an interesting piece of litigation from the perspective of whether or not the FHFA must amend its policies to comply with such a state law. I don't see any upside for Watt to compromise on the current policies until a court tells him he has to back off and comply with Masschusetts law. At that point, he can tell the investors and shareholders that he had no choice: the judge made him do it.

It's also interesting from the standpoint that Watt and Coakley appear to be on the same side of the fence when it comes to social policy. Watt was a liberal Democrat when he was in the House of Representatives. Moreover, he recently gave a speech that indicated that Fannie and Freddie were going to expand their efforts to provide financing to borrowers with less-than-pristine credit. That was a move that caused a blinding flash of "deja vu all over again" to appear before the eyes of critics of the federal government's housing finance policies that many allege led to the subprime housing bubble and the resulting 2008 economic collapse. However, it was also an indication that rather than winding down Fannie and Freddie and creating a different sort of national residential finance market (which was where we seemed to be heading under Watts predecessor, Ed DeMarco), we may be back on the road to officially re-establishing the two mortgage finance giants as the only game in town, something they've unofficially been since the collapse occurred (and prior to that time, to be honest).

Regardless of the way Coakley's lawsuit plays out, we have the sneaking suspicion that the brave new world of residential mortgage finance may look like the brave old world.

Martha Tries A Carrot And A Stick On Mel

I'm not sure what Massachusetts Attorney General Martha Coakley thinks she's going to accomplish by simultaneously sweet-talking and threatening Mel Watt, but I doubt she's doing much more than engaging in political theater. Maybe she's setting herself up for a run for higher office and wants to make sure that the next time around, she doesn't get a butt-kicking like Scott Brown unleashed on her four years ago.

Massachusetts Attorney General Martha Coakley reiterated calls Wednesday for the Federal Housing Finance Agency to allow Fannie Mae and Freddie Mac to offer principal reductions to distressed borrowers and to participate in nonprofit home buyback programs.

Coakley sent a three-page letter to FHFA Director Mel Watt trying to persuade him that principal reductions could be crafted in such a way to prevent abuses, including what she called "the abstract fear of waves of strategic defaulters."

"Abstract fear"? You'd think that folks like Coakley, adherents to utopian progessivism that denies the reality of human nature and proposes that through the exercise of centralized state power, human beings can be perfected and justice achieved, here on Earth, would know all about "abstract fears," as well as "abstract joys," "abstract hope," and "abstract abstractions."

Nevertheless, in case the risk of strategic defaults might actually be grounded in reality, Coakley had an answer for Watt.

Coakley said one way to reduce strategic defaults would be to adopt clear modification underwriting standards, require a showing of hardship by the borrower and allow lenders to share in the home price appreciation.

Watts' predecessor, Ed DeMarco, adamantly opposed principal reductions. He felt that whole-sale principal write-downs would hurt mortgage bond investors which, in turn, would hurt Fannie Mae and Freddie Mac, which, in turn, would hurt the mortgage market. Coakley apparently thinks Mel is more sympathetic to a state chief law enforcement officer's sojourn into social policy, especially in the area of mortgage markets, where everyone knows a state attorney general is uniquely qualified to offer business-savvy solutions to thorny problems.

In case Mel is inclined to turn a DeMarco-like deaf ear to her entreaties to do the right thing, Martha whipped a big stick out from behind her back and threatened Mel with a beating if he didn't fall in line.

In the letter, Coakley even threatened to take legal action because the FHFA has refused to take part in buyback programs that allow nonprofits to purchase distressed homes at current market value and immediately resell them to the former homeowner.

"Our office also is considering all available legal avenues—including litigation—to ensure compliance with Massachusetts law, should FHFA fail to promptly amend its policies to allow the GSEs to participate in credible buyback programs," Coakley wrote.

Coakley is using as the basis of her threats the alleged violation by Aunt Fannie and Uncle Freddie of a 2012 Massachusetts law that forbids lenders from refusing to consider buyback offers at "fair market value" solely because the home will eventually be returned to the defaulting homeowner. I assume that DeMarco and Watt believe that a law that vague is likely to be held to be unenforceable against Fannie Mae and Freddie Mac, or perhaps they've just decided to become renegades and ignore the law because they take some perverse pleasure in lawlessness. I'm betting on the former, but I might be wrong.

At any rate, Watt hasn't publicly responded to Coakley (or if he has, the main stream press hasn't reported it). I wouldn't hold my breath waiting for the FHFA to cave on this one, although Watt is relatively new in the saddle, and you can't be sure which way he might ride. My guess is that Coakley will have to push her social engineering agenda in court. Pursuing it against a cash cow like the FHFA, which, with its charges in federal conservatorship, is not likely to be scared by the prospect to spending money on trial lawyers.

HUD Defends The Middle Ground

HUD, which took a proactive stance on the controversial doctrine of "disparate impact," issuing regulations that codified the criticized doctrine in order to attempt to require the federal courts that construe it to give HUD's interpretation judicial deference, has decided that when it comes to the equally controversial scheme of a number of municipalities to "condemn" underwater residential mortgage loans, HUD must remain "neutral."

Housing and Urban Development Secretary Shaun Donovan kept his carefully neutral stance this week on the potential use of eminent domain to restructure underwater mortgages.

Mortgage and housing industry groups have asked HUD to rule that Federal Housing Administration-insured loans will not be used to refinance mortgages on properties that are condemned and seized by local government under eminent domain.

But Donovan said that the use of eminent domain to force the sale of private-label mortgages out of securitized trusts must be decided by the courts.

There are very specific rules about the use of eminent domain, Donovan said at a Politico event Wednesday, and “it needs to be decided by the courts.”

The application of the doctrine of disparate impact to fair lending laws must also be decided by the courts. That fact hasn't stopped HUD from issuing regulations on the subject. The least the agency could do is to take a stand on the potentially detrimental impact on the residential mortgage lending business, including FHA mortgages, caused by the use of eminent domain to sieze mortgage loans from lenders. The FHFA has weighed in to protect its interests, which happen to be aligned with the lenders from who FNMA and FHLMC buy loans. Why can't HUD?

Perhaps the fact that the expansion of the conflating the disparate impact doctrine into the fair lending arena and a creating a crackpot scheme like condemning mortgage loans are both anti-lender, pro-populist theories dreamed up by Leftist activists might have something to do with it. In HUD's case, as in the FHFA's, hurting lenders harms the agency, so the laws of self-interest would seem to dictate that HUD oppose both of them. Ultimately, however, the losses of HUD are back-stopped by the US taxpayer, and as we all know, neither side of the political spectrum has been overly concerned with taxpayers when it comes to serving a "higher cause."

Is There Something Wrong With Aunt Fannie?

While the US Department of Justice is busy trying to squeeze perfectly legitimate businesses out of business, and working feverishly to avoid enforcing federal drug laws in order to accommodate the voters of a swing state, it appears to be mysteriously absent from recent allegations that Fannie Mae may have more than one rotten apple in its bottomless barrel.

A metro Denver real estate broker has sued the Federal National Mortgage Association (Fannie Mae), claiming that her contract work with the federally-sponsored company dried up after she tried to report fraud.

In her federal complaint, Karen Frisone alleges that the fraud involved kickbacks, attempted bribes and a fake office scheme by other Denver brokers.

Frisone, at one time a top broker of FNMA REO properties in Denver, claims that a Fannie Mae official tried to solicit a bribe from her and when she not only didn't play ball, but reported that another brokerage was getting more than its fair share of listings due, she alleged, to fraud, Fannie Mae terminated her contract. Litigation has ensued, and Aunt Fannie has issued the typical response: Frisone's claims are "without merit."

I suppose that response might have more of an impact if it weren't for the fact that Frisone is not the only one singing the same sad song about how they've got The Fannie Mae Fraudster Blues.

The case mirrors a case in Irvine, Calif., where a former employee of Fannie Mae was indicted in 2013 on charges that he solicited illegal payments from a broker, as reported by the Los Angeles Times. That office’s supervisor was fired in June.

The nefarious doings in Tinsel Town may be an isolated case. Frisone's allegations may be unsupported. Fannie Mae may be as pure as the driven snow.

Pigs may fly.

Whether or not the allegations ultimately turn out to have a basis, you would hope that the DOJ would be in the thick of an investigation as to whether or not Frisone's allegations are true. After all, Fannie Mae, and its red-haired step-cousin twice removed, Freddie Mac, are wards of the state, having been in conservatorship since before The One became The One. If there are kickbacks and bribes being paid, that would speak ill of the ability of the Feds to manage their affairs. I know, that's a harsh allegation, but there you have it.

Let's hope AG Holder can resist his illicit love for disparate impact and his gut-wrenching aversion to payday lending long enough to cast a piercing glance at Fannie Mae's minions in the Mile High City before they're covered in a thick haze of (perfectly legal) cannabis smoke. If there's something wicked there, it might be nice to actually stop it before it spreads to a Red State, where sober people might be harmed.