Bank Lawyer's Blog

CFPB: Zombie Killer

Just as nature abhors a vacuum, the CFPB abhors any area of the economy where it's not rooting out evildoers and saving innocent consumers from perils they may not realize endanger them. One of the vacuums that the CFPB is rushing to fill is the land of "Zombie Foreclosures." According to National Mortgage News' Kate Berry, the CFPB sees this as the badlands where straight shooters like the CFPB need to "clean house."

Some borrowers are being harmed when a mortgage servicer starts a foreclosure but then fails to complete it, leaving borrowers on the hook for the mortgage debt, taxes and maintenance even though they may have already moved out, said Laurie Maggiano, the CFPB's servicing and secondary markets program manager.

"The CFPB is beginning to look very closely at abandoned properties and zombie foreclosures," Maggiano said Tuesday at a conference sponsored by the Federal Reserve Bank of Cleveland. "There is direct borrower harm if a borrower believes a foreclosure on their property has been conducted and they are no longer responsible, and months or years later find out that they are, that there was never a foreclosure and they have large financial responsibilities that they never knew about."

These loan servicers! They trick the borrowers into moving out of their unpaid-for homes with threats of foreclosure, and even commencement of foreclosure proceedings, then they "go dark" and, behind the non-paying borrowers' backs, let the houses sit vacant. Why do they do this? Apparently, because, like The Joker in "The Dark Knight," they believe in chaos theory, especially when they're the agent of chaos.

Do I really look like a guy with a plan? You know what I am? I’m a dog chasing cars. I wouldn’t know what to do with one if I caught it. You know, I just… do things.

Consumer advocate Peter Skillern thinks this whole gambit by loan servicers is rotten to the core.

Servicers typically flood defaulted homeowners with as many 250 letters and phone calls telling them their home is going into foreclosure, says Peter Skillern, the executive director of Reinvestment Partners, a Raleigh, N.C., nonprofit. But they usually fail to notify the borrower when the foreclosure is stalled.

"They are pushing the borrower out of the home, which results in abandonment," Skillern says. "Servicers need to make sure they are accurately communicating the status of the foreclosure process to the borrower."

Yes, so the borrowers, who haven't been making their mortgage payments, in some cases for years, can remain in, or return to, the houses "rent free" while continuing not to pay their loans. This assumes that with someone living in the house, the occupant will transform it from what the article alleges is a property with respect to which "the cost to repair a home is more than the property is worth" into a credit to the community. Even if they can't make their mortgage payments, they'll repair it. Honest.

For the last several years, we've been discussing the problem of broken cities blaming lenders for their decades of bad decision-making. The areas where homes are being abandoned by lenders are not areas that got to be in the condition they're in because of "Zombie Foreclosures" initiated by lenders who just mess with borrowers because "they just do things." Moreover, while knowingly or even recklessly initiating foreclosure proceedings or otherwise bombarding borrowers with foreclosure notices and then traveling to Neptune, never to be heard from again, would not fly with etiquette experts, the borrowers are not the only, or even the primary, folks being "inconvenienced." Unless the borrowers suddenly resume paying the freight on their mortgage loans, all that wasted effort is likely to results in costs borne by the owners of the loans (or the securities backed by the loans). If this is a problem worthy of CFPB wrath, then the investors ought to be looking into this major "abuse," as well.

"Nothing But Attorneys" Not A Good Thing For Cuban

Mark Cuban, "Shark Tank" reality show star, failed reality show dance contestant, owner of the NBA's Dallas Mavericks, and bazillionaire, is not known for his small ego or a reticence to speak his mind. Still, it's amazing how much smack he has been talking about the SEC and its attorneys since he won his trial on insider trading charges. Not long ago, I heard an interview with him on a Dallas sports-talk radio station in which he called out SEC lawyers by name and mocked and blistered them in terms that even this blog's owner might have found a bit too "tart." On the other hand, he's stinking rich and he believes that the bureaucrats tried to ruin him without justification, so I get it.

USA Today recently published an interview of Cuban by the original "News Babe," Maria Bartiromo, in which Cuban showed that his ire against the SEC and its lawyers is not fading with the passing of the time. Excerpts:

Q: The SEC initially said you used a private tip to avoid a loss on the sale of your 600,000 shares of Internet company Mamma.com shares back in 2004. How did they get this so wrong?

A: Confirmation bias. They ignored fact after fact. Even those written by SEC agents. Instead of dealing with facts, they misrepresented and mislabeled testimony and documentation and ignored the obvious.

Q: Do you think it's that the SEC doesn't have the right resources and people overseeing business and the securities industry or are they just trying to make examples of high profile people?

A: I think they exemplify what type of organization you should expect when you have nothing but attorneys and in particular former prosecutors running the show. From every dealing and observation I have had of the SEC, it is obvious that lawyers run the show. There is a culture of trying to win, not trying to find justice. There is a culture of looking to find their next job. I always say that SEC equals "Swiftly Enhanced Careers." There is no business sense that I can find. That has, in my humble opinion, led to a bloated entity that has no idea what resources it needs, no concept of what its true goals should be or how to get there. They don't know how to make markets fairer or better at creating capital for business. They just know how to use the courts to litigate matters. (The SEC declined comment.)

Q: You refused to settle and went to trial. You had to spend more money on lawyers than on the potential fines you would have had to pay. Why was this so important to take this to the mat.

A: Because I hate to be bullied. I love this country. The idea that the people who over the first six years of my case ran the SEC could just ignore facts and care only about winning and losing and have no interest in justice, turned my stomach. I have the resources to fight. I felt compelled to take up that fight.

One of the lessons here is that when taking on the federal government in bet-your-life-and/or-fortune litigation, it helps to have a billion or more in assets to fund the defense. I guess when Marc bashes lawyers, he means "government lawyers." He obviously doesn't hate all lawyers since he and his brother, a lawyer, seem to get along.

There aren't many community bankers with Cuban's resources. They have to fight their battles against their federal regulators, when a dispute leads to civil enforcement actions, as best they can. Even when the government repeatedly loses and still keeps on trucking, regardless of the facts, it can always hope that it can bleed the defendant into a settlement. That's not a reasonable prospect when you're facing a Cubanesque opponent.

Therefore, whether or not you like the guy, you can cheer him on. You might even live vicariously through him.

A Not-So-Modest Proposal

Oakland, California's city government appears to be as dysfunctional as a group of politicians can be, meaning they're ability to govern is akin to the battlefield brainpower of George Armstrong Custer. In considering what the reporter never specifically describes as anything other than Richmond, California's "out of the box anti-foreclosure proposal," one councilman's declaration that he needed more time to consider "the intricacies" of the proposal prompted another council woman to assert that such a declaration was "disingenuous." That's a fancy word for "lying." That, in turn, prompted a heated denial by the accused and an accusation by the Council president that the accuser was a trickster who was trying to promote the proposal by circumventing the committee process. Apparently, parliamentary rules were, once again, getting in the way of ideological goals, and as we all know, the ends justify the means.

At no point in the article (which described itself as "analysis") is it mentioned that the "proposal" is the use of eminent domain by Richmond to seize underwater mortgage loans from investors. We've been warning about not only the questionable constitutionality of the proposal (and others like it), but the detrimental effects the adoption of such a plan might have on homeowners and prospective homeowners in Richmond who ever want to be able to obtain a residential mortgage loan in the future. According to the article, our warnings are valid.

Kevin Stein, an associate director of the California Reinvestment Coalition, which has worked closely with the Richmond City Council on its plan to help struggling mortgage holders said, “We’re here because too many people are losing their homes.” He added, as soon as Richmond broached the subject earlier this year, banks and their surrogates moved to punish the city’s treasury by effectively redlining the community. The pressure dissuaded Wall Street from purchasing some of Richmond’s municipal bonds.

What did you expect, Kevin? Did you think that bankers and mortgage loan investors were going to roll over with their paws in the air and accept their beating without fighting back? If you think Wall Street's reluctance to buy Richmond's bonds is pronounced now, just wait until Oakland passes an eminent domain plan and starts seizing mortgage loans. Not only will the city be buried by an avalanche of well-funded litigation, but trying to get a mortgage loan in the city will be a difficult and, if available, very expensive task. Just ask Richmond about "litigation risk."

It's been suggested that these pols are merely playing political theater, catering to a voter base that is somewhere left of the late, great Mao, and that they actually know that the plan will never fly. I'm not convinced that is true. I think many of these folks have consumed the Kool-Aid and will do much damage before, like San Bernardino's city council, the voters throw the bums out. Before they do so, however, much mischief may occur.

Where's Snowden When You Really Need Him?

In a performance worthy of Dean Wormer's Double Secret Probation, the US Treasury Department gave a classic runaround to St. Louis Business Journal reporter Greg Edwards when he had the temerity to ask Treasury why it is keeping the names of bidders in its auction sales of "TARP stock" a big fat secret.

Originally the Treasury spokesman, who identified himself as Adam, said he would get the answer from the department’s lawyers. Having received no response by Thursday, we called again. The inquiry was duly noted, I was told.

Today I made another effort, aware of the three-day weekend’s approach. The line rang and rang before I got a voicemail recording that told me public affairs was “not available.” Perhaps the weekend already has begun for taxpayer-funded government workers.

Edwards relates an email from a reader (I assume a banker) who was also being stonewalled.

“I have called and emailed the U.S. Treasury several times to try to find out when certain auctions would occur and who had won auctions I read about after they took place. I have never heard back from anyone.”

As one outraged St. Louis banker reminds us, this is taxpayer money we're talking about.

Yes, well, so it is. As if that ever meant a thing to the people who play with it. File a FOIA request, Greg. Then pull out a pillow, a blanket, and a quart of Ripple, and settle in for a long and peaceful slumber while you wait for denials, the redaction of all critical information, and a Westminster Abbey-sized load of smoke to be blown up your nether regions. After all, this is your federal government at work, and accountability to the taxpayer is definitely NOT its long suit.

Eminent Domain In The Mortgage Arena Gets A Court Test

I promise that this will be the last of the Richmond, California posts for awhile or until there's another development in the court case, but the example of political hubris merits at least some passing snark.

After writing my last post on the subject, the city was sued (paid subscription required) by some of the largest banks in the country as trustees of mortgage-backed securities trusts owned by the likes of Black Rock, Fannie Mae and Freddie Mac. In other words, entities with the financial resources to burn your house down with legal fees and costs.

The lawsuit alleges that the proposed use of eminent domain is unconstitutional because it benefits a small group of Richmond citizens at the expense of out-of-state investors, violating the law on interstate commerce. The lawsuit also argues that loans aren't being seized for a valid public purpose—a key criterion for a city that invokes eminent domain.

"Mortgage Resolution Partners has led the city of Richmond into an unprecedented use of eminent domain seizure that is unconstitutional, harmful to homeowners and taxpayers, and unfair to millions of individual savers and investors," said John Ertman, a partner at Ropes & Gray in New York.

The concoctors of the scheme, an Ivy League (albeit, the back door to the bargain basement of the Ivy League) university professor and MRP, the gang of ex-Clinton administration sharks who stand to profit well from this scheme, pooh-poohed the lawsuit.

An MRP representative said it was confident its proposal is "entirely within the law." "No investor in any trust will be made worse off by the sale of any loan," said a company spokesman.

[...]

Legal advocates of the eminent-domain plan have said that constitutional challenges aren't likely to hold up in court. The loan strategy wouldn't burden interstate commerce "because it doesn't prevent credit from flowing in any particular way," said Robert Hockett, a Cornell University law professor who advocates for using eminent domain to seize underwater mortgages.

"This is a bluff," said Mr. Hockett. "It's meant to scare city officials into saying, 'Oh, who are we to argue with the big guns.' "

Mr. Hockett isn't footing the legal bills of the city, so his bloviating from the ivory tower might ring hollow to some. Then again, a crackpot Ivy League professor-cum-Cherokee-princess concocted out of whole cloth the idea for another mammoth federal government bureaucracy designed to ensure that consumers too stupid to make their own decisions about financial products were wet-nursed from cradle to grave, and that hare-brained bureau is now "The Law of the Land" (as its creator so inaccurately put it recently). Therefore, never underestimate the damage an intellectual with no business sense can inflict on this country, especially when aided by "liberal" bureaucrats and pols who've sold out to the dark side.

The mayor of Richmond also ejaculated a breath-taking font of bravado.

Gayle McLaughlin, the mayor of Richmond, Calif., says she’s not deterred from moving ahead with the city’s plan to forcibly purchase mortgages from bondholders using the city’s power of eminent domain despite a court challenge and the possibility of additional action by a federal regulator.

“We feel strongly that we’re on legal ground,” she said in an interview with Developments. “We’re not afraid of going into the courtroom. We believe our legal reasoning will prevail.”

As any combat veteran will tell you, only the abysmally stupid or certifiably insane are not afraid of firepower on the other side of the line. One of the commenters to the linked article responded appropriately.

Note to stupid leftist mayor McLaughlin: Your hubris is not a winning legal strategy.

The lack of so many Democrats supporting you should tell you something, but if you want to self-immolate for the sake of ‘making a statement’, I will enjoy the show. Pass the popcorn!

As long as we continue in the smack-talking stage, we'll pass on giving the matter further attention. On the other hand, it will be interesting to see how this plays out. If Richmond wins in court, the next battle is going to be seeing how the federal government forces lenders to loan in Richmond without imposing a risk premium on the loans. I'm sure we can all think of many social engineering solutions to that conundrum, can't we?

Gimme A Break! Nobody Actually Believed Us!

To answer a reader's question, yes, I did get a kick out of the argument by S&P's lawyers (paid subscription required) that statements by S&P "about independence and objectivity are 'puffery' and were never meant to be taken at face value by investors."

Standard & Poor's responded formally on Monday to the civil lawsuit that the Justice Department filed against the company on Feb. 4 in U.S. District Court in Los Angeles.

The federal government says that the rating firm committed fraud when it allegedly misrepresented its ratings as independent and objective.

In its formal defense filed Monday, S&P pointed to two earlier court decisions where judges ruled that such statements by the firm were puffery and therefore can't form the basis for a fraud claim.

[...]

"Even if it's a viable legal argument, it's a pretty unattractive argument for S&P to be putting forward since they're basically in the business of charging clients for their reputation," said Samuel Buell, a law professor at Duke University and a former federal prosecutor. "What they're saying here is, 'When we're talking to investors about our own reputation, we're engaging in meaningless puffery.' "

"That's the whole point of the rating agencies, their seal of approval," Mr. Buell said.

It's hard to argue with Professor Buell about that.

Predictably, this all drove Larry Doyle over the edge.

In conclusion, the statement made by S&P’s lawyer is the equivalent of throwing another log on the fire that is incinerating any sense of meaningful integrity within the Wall Street-Washington conspiracy.

Puff . . . puff . . . up in smoke!

You may want to do the same with any credit ratings that cross your desk from S&P and its industry brethren at Moody’s and Fitch.

As hard as this is to believe, I'm going to say that the provision of Dodd-Frank that requires the regulators to figure out an alternative to the rating agencies is justified, not merely by the facts, but by the damning words flowing from the rating agencies and their mouthpieces. The problem is, thus far, no one has figured out what that alternative might be.

One option on the table is a proposal by Sen. Al Franken (D., Minn.) to create a board that would assign rating firms to rate deals. "As this lawsuit unfolds, it only becomes more clear that the credit rating industry is in need of serious reform, and that the American people and our economy are still at risk as a result of the conflict of interest in the industry," Mr. Franken said in a statement.

Wait a minute: I just agreed with Al Franken. Don't tell anyone. This moment may pass.

Uh, oh. I think Hell just froze over.

M&A; Litigation's Logical Consequences

Last week, we discussed a recent study that had shown that nearly every merger or acquisition transaction involving a publicly traded company last year had resulted in a lawsuit by class action attorneys aggrieved shareholders. Yesterday, the American Banker (paid subscription required) ran a story about one of the consequences of this litigation-by-the-numbers: increased underwriting scrutiny from D&O insurance carriers.

"With a pickup in M&A activity, it is the one thing that we are asking about in every meeting," Heather Hill, a regional underwriting officer in Zurich North America's Chicago office, said during a panel discussion in Greensboro, N.C., hosted by the North Carolina Bankers Association last week.

"We'd want to know about the types of banks they want to buy, the condition of those banks and the loan portfolios" that would be acquired, Hill said in an interview following the discussion. "A one-off situation is different from [acquisitions becoming] a strategic way for a client. Transparency is the overarching theme."

For instance, banks owned by private-equity firms can expect "significantly higher requirements" for liability coverage, Eric Marshall, the managing director for financial institutions at Travelers, said during the panel discussion.

Other consequences include higher deductibles and higher premiums.

This increased scrutiny and expense comes on top of increases caused by FDIC claims against former shareholders and directors of failed banks.

Bankers have endured several years of increased premiums to insure directors and officers because of the financial crisis and a high rate of bank failures in 2009 and 2010. A heightened risk of litigation from the Federal Deposit Insurance Corp., which has a three-year window to pursue claims against managers of failed institutions, has continued to drive rates higher, panelists said.

I suppose this is looked at as simply another cost of doing business by those banks that are aggressive acquirers. For more conservative potential acquirers, it’s another potential downside to doing a deal.

TARP Paybacks Continue To Roll In

Although I’ve beaten this drum for the last four years, I’m going to continue to rip flamadiddles on the same theme until my hinged wrists get tired. TARP, when it stuck to its intended purpose (before it became a slush fund to bail out the auto unions), not only saved many deserving community banks, it has ended up making a net profit for the US government. One more example is a recent auction of TARP preferred stock of a "saved" Texas community bank.

The U.S. Treasury said Friday it expects to recoup $19.8 million in proceeds from the public auction of FC Holdings Inc.’s Troubled Asset Relief Program debt.

The Treasury priced 21,042 TARP shares of the Sugar Land-based bank holding company’s TARP at $897 per share, which would ring up at $18.8 million. Another 1,052 TARP shares are expected to be sold for $955 per share, totaling $1 million, according to the Treasury.

FC Holdings, the bank holding company for Sugar Land-based First Community Bank, originally received $21 million in TARP in 2009. The Treasury said it has gotten back about $268 billion from its TARP investment in the U.S. banking industry, which was $245 billion.

Unfortunately, the hard-core critics of TARP will never admit that there might have been some good done for some banks, along with all the evil visited upon pure free market principles. The facts keep rolling in like waves onto the shore, and many refuse to acknowledge the error of their ideological ways. It's tough to prove a negative, namely, the proposition that if TARP had not been created, the economy would have tanked a lot worse than it did in 2008-2009.

It's a question of judgment. On this matter, I choose to trust my own. Of course, I'm leaving AIG out of the calculations. That organization wasn't among the "banks" TARP was originally designed to bail out. Nor, for that matter, was Chrysler.

TARP Profits Continue To Grow

Back in February, I noted that TARP had yielded a profit for the US Treasury of $20 billion. Notwithstanding the fact that the program is now down to the "harder-to-exit" smaller banks that might not be as attractive to potential purchasers of the preferred stock that the Treasury still holds, the profit figure is now up to $23 billion. While that's a drop in an ocean of federal debt, it's nothing to sneeze at. What I said earlier, I'll say again:

Opponents of the original TARP will never admit that they might have been wrong about the need for the program to save the economy from ruin. The fact that the Treasury has already made a profit on its original TARP investments ($20 billion so far, according to the linked article) is meaningless to them. I guess they wanted to let the "creative destructive" forces of a "pure market system" work their magic on all of us, and if we ended up standing in bread lines, they'd say that was a hard lesson learned and that we're all the better for it. I don't have the energy to tell them that not only is God dead, but so is Ayn Rand.

Even if the remaining $8 billion is written off (it won't be), the program still ends up in the black. Not bad for a much-maligned "bailout."

Of course, the Treasury may have a problem getting potential investors to pay as much as they might have in future TARP stock auctions now that one bank has stiffed an investor on TARP stock dividends (paid subscription required). The fact that those dividends are noncumulative makes it risky when small banks decide that, while it was their patriotic to pay the US Treasury, it's perfectly fine not to pay investors who bought their TARP stock from the Treasury Department.

"This is a good lesson as to what risks buyers need to be aware of with small banks," said Doug Faucette, a lawyer at Locke Lord. "That's why they call it stock."

I think that's an astute observation. However, I wish that bank the best of luck if it ever finds itself in need of capital from private equity investors in the future. PE hates it when Main Street starts acting just like Wall Street.

Justice

ICBA's Cam Fine is shocked ("Shocked, I tell you!") to discover that another giant bank (in this case, the bank America hates less than all the rest) is getting off the hook when it comes to the imposition of regulatory sanctions. Cam is referring to a recent New York Times article that discussed Citigroup's settlement with the SEC over securities fraud allegations, in which the SEC extracted a promise by Citigroup that it would never again violate securities laws. Citi also promised that it would never again visit a strip joint, drink hard liquor, or call another banker "gay" just because he went to the opening night of the Broadway revival of "Oklahoma." Unfortunately, Citigroup's a repeat offender, and, according to the Times, so are a scad of other large financial institutions. In no case in the last ten years has the SEC sanctioned one of the big boys for violating a C&D imposed by the SEC. Talk about a wimpy deterrent effect.

Any community banker or director reading the article should be outraged. There are no consequences for senior officers and boards of these systemically dangerous financial firms. However, community bankers and directors who, in good faith, sat on the boards of failed community banks are routinely pursued individually and collectively by bank regulators both civilly and, in some cases, criminally.

Cam shouts that this isn't "equal application of the laws." Of course, he's right. But the cold, hard fact is, nobody gives a rip. They're too busy being pepper-spayed in the face while rioting over the "disrespectful" manner in which the beloved Joe Paterno has been dismissed at Penn State for the minor infraction of not calling the cops when his valued defensive coordinator was caught "coordinating" with a ten year-old boy in a shower. We have to get our priorities straight, and if the dissing of "Joe Pa" trumps pedophile rape, it's sure as shooting going to trump the unequal treatment of little banks versus big banks by federal regulators.

We'll get back to you, Cam, as soon as the bowl season's over.