Yesterday, I attended the International Women's Insolvency and Restructuring Confederal (IWIRC) Annual Spring Program. The featured event was entitlted, "A Conversation with Trailblazing Women in the Insolvency Field." Moderated by the Hon. Marjorie Rendell of the 3rd Cir. Court of Appeals, the panel's participants incuded Norma Corio of JPMorgan Chase, Marcia Goldstein of Weil Gotshal & Manges, Hon. Barbara Houser, Chief Bankruptcy Judge, N.D. Texas, Hon. Mary Walrath, Bankruptcy Judge, District of Delaware, and Bettina Whyte of Alvarez and Marsal. The program opened with a parable. A man cuts himself shaving in the shower. He wonders out loud what is wrong with the razor. A woman cuts herself shaving in the shower. She wonders out loud what she did wrong. 

Here's the banks' counterproposal for a servicing fraud settlement. I can sum it up in two words: drop dead.  Or two letters:  F.U. This proposals is so pathetically thin that it's not a good faith counterproposal. This document only deals with servicing standards--nothing in it whatsoever about penalties, modification quotas, etc. But even on servicing standards it is a bunch of empty promises to have internal controls and try harder. 

The first point about this counterproposal is simply to note what's absent from it:

(1) nothing about principal reductions

(2) nothing about second liens and conflicts of interest

(3) nothing about MERS (reserved for later)

(4) nothing about in-sourced vendor fees or force-placed insurance to affiliates. This makes the fees and force-place insurance sections pretty meaningless. 

(5) nothing about pyramiding of fees.

I'm sure I'm missing a bunch of important points that aren't addressed, but these seemed to be the most obvious ones. 

Next, it's worth noting just how little it actually promises and how cagey the promises are.  For many points it does not promise results.  Instead, it promises "processes reasonably designed" or "procedures reasonably designed" to do something or another. Basically a lot of it boils down to promises to implement internal controls, reviews, and procedures to make sure things don't happen again.

Put differently, this is the servicers' saying "trust us." Ummm, that's the whole problem. No one trusts the servicers--not investors, not homeowners. 

Let's look at some specific terms.  Orwell couldn't have drafted these any better:

The news that an Illinois court is halting foreclosures by law firm Fisher and Shapiro LLC will spark another round of frustration about who is responsible for the mess that is the mortgage servicing industry. There is plenty of blame to go around, but I rarely hear mention of the contributions of Fannie Mae and Freddie Mac  to the mortgage servicing industry. 

Fannie and Freddie, whatever one thinks of them in their role as guarantors, are a serious part of the problem in the mortgage servicing world--and they long have been. As an initial matter, consider that Fisher and Shapiro, the Illinois firm that admitted to altering affidavits to add fees, is an approved Fannie Mae firm to foreclose on homeowners in Illinois. You can verify this for yourself on Fannie's publicly available "retained attorney list." Fannie pulled a couple of Florida firms off its list following allegations of misbehavior according to Housing Wire, but this type of "oops, a bad one slid by" reaction from Fannie is exactly part of the problem. It is still treating mortgage servicing as a "bad apple" problem and not a "rotten barrel" problem. Of course, Fannie built the barrel to a large extent through its servicing guidelines, so perhaps Fannie is incapable of rethinking mortgage servicing. 

The latest chapter in the Republicans' Elizabeth Warren witchhunt would be farcical, if it didn't have such potentially serious consequences. Congressional Republicans are now demanding that Elizabeth Warren recant her Congressional testimony about her role in the non-existent mortgage servicing settlement.  The problem?  Professor Warren stated that she "advised" the Treasury Secretary on the settlement, whereas Republicans allege that:

according to the CFPB Settlement Presentation, the CFPB did more than provide advice:  it recommended the goals and provided a detailed framework for the structure of the settlement....rather than merely dispensing advice to those involved in negotiating the settlement, the CFPB was actually its primary architect.

In other words, the Republicans are insinuating that Professor Warren misled Congress in her testimony because she said she "advised" when in fact she "recommended." This charge is truly laughable and shows what a desperate witchhunt the Congressional Republicans are conducting as part of their rear-guard action for the banks. This doesn't even pass the straight face test. I half expect their next letter to demand that Elizabeth Warren show up at the House dunking pond to see if she floats or sinks.

A very good discussion over at the Economist about why political (and water cooler) discussions of the USD are so often just wrong.

A consistent theme running through the Consumer Bankruptcy Fee Study focus group discussions is the increased time it takes attorneys, post-BAPCPA, to take a consumer debtor from initial consultation to filing. As one attorney observed,

[BAPCPA has] ... triple[d] ... the time it takes to prep a case. I mean, in lots of cases, where you could have gotten a couple of months of pay stubs, put them in there, seeing the [the debtors]  don't make any money right now and filed a bankruptcy case within a fairly short period of time, now it takes ... a lot more staff time ... to chase down six months of pay stubs, to get them entered into the system, to look at [them, and] if they are over median, that increases the time. So in a case ... they are over median and close to that line, it probably triples or quadruples the time it takes to get them ready to file.

In a preliminary analysis of Fee Study data (and I stress, preliminary) 87% of attorneys "strongly agreed" that it takes more time to represent a Chapter 7 consumer client now, than it did before BAPCPA's enactment. 

The latest housing price index numbers from the S&P/Case-Shiller Index were bad.  But no one has quite recognized that the index is at its lowest point post-bubble.  The S&P/Case-Shiller Index reflects differences in repeat sale prices on the same property. That means it doesn't account for inflation. If one adjusts the S&P/Case-Shiller Index for inflation (I used the CPI for All Urban Consumers, as S&P/C-S is an metro area price index), you'll see that the January 2011 numbers (there's a 3-month lag) were slightly lower than the previous post-bubble low in June 2009.  On an inflation-adjusted basis, we're back to where prices were in January 2002. 

Now while it might make sense to look at housing prices on an inflation-adjusted basis for examining trends over time, inflation does have a major impact on debt burdens and ultimately on whether homes are underwater. Inflation--the debtor's friend and the creditor's foe. 

As Principal Investigator of the Consumer Bankruptcy Fee Study, I've been gathering "qualitative data" from attorneys, trustees and judges about how the consumer bankruptcy system is working. I have conducted over a dozen focus groups, many, many one-on-one interviews, and have been privy to myriad list-serve threads discussing the costs of BAPCPA generally and more specifically, consumer bankruptcy attorney fees.

Here is one preliminary observation: there is a huge disparity with respect to how and how much attorneys are paid, depending upon where in the country they practice. This is not a shocking revelation on its face, given the disparities in the cost of living from city to city. The data reveal, however, variations that go beyond big city=expensive, small town=cheap.

Yet more servicing snafus. 

You gotta love the American Bankers Association. These guys just don't stop trying. They're the Hamburgler of the lobbying world. The ABA now has a little piece out now entitled "Merchant Interchange Rates are Steady—Transaction Volumes Are Rising". This piece is incredibly dishonest; they couldn't even get any academic or even hired-gun econosultant to sign on to it. All that's missing is a claim about death panels or al-Qaeda.  

There's an interesting piece in the news section of the Wall Street Journal about bank the extent of principal reduction loan mods banks are doing. I think the take-away from the piece is supposed to be that banks are actually doing a fair amount of principal reduction already. I'm not sure what way that cuts in terms of the AG settlement negotiations. On the one hand it would seem to imply that there's no need to goad the banks into doing principal redution mods, while on the other it would seem to take the wind out of the sails of arguments that it's unfair to do principal reduction mods. (Is Brian Moynihan admitting that Bank of America is engaged in unfair acts and practices by engaging in principal reduction mods?) 

The news story omitted two significant points that make it very difficult to judge the extent of bank principal reduction mods and make it likely that the number of meaningful principal forgiveness mods is much lower than that cited in the story.  

Thanks to Katie and my friends at Credit Slips for the guest blogging gig.  I appreciate the invitation and the opportunity.

In my next couple of posts, I am going to report on the Consumer Bankruptcy Fee Study (see Katie's post below).  Today, I'm making a pitch to the consumer debtor's attorneys who have received (or will receive) an invitation to participate in a survey about their consumer bankruptcy practices.  To date, the Consumer Debtor Attorney Fee Survey has been distributed to ~400 lawyers who represent consumer debtors.  I expect to send out a couple of additional "waves" in the next weeks.  As I said in my cover note,

When Americans have fewer dollars, creditors need to position themselves at the top of the pile to get paid each month. This is called payment hierarchy, and traditionally mortgage creditors have been at the top and unsecured creditors, and perhaps ubiquitous credit card creditors, near the bottom. At the Consumer Financial Protection Bureau conference on the anniversary of the CARD Act, I learned that the payment hierarchy has been upended. In 2010, consumers are paying their credit cards ahead of their mortgages. (Click on CFPB conference link above, then click on "Credit Card Profitability" by Credit Suisse and go to slide 7 to see the full data). Two key explanations for this change: 1) people may be more willing to risk losing their home when its value is plummeting and they are not certain they can hang onto it, and 2) credit card companies reduced the amount of credit lines and closed old accounts, making people more concerned about "preserving" their good standing with their credit card company. Another way to think about this is that homes used to be families' piggy banks, tapped when it is time to send a child off to college or do a home renovation. With no equity, Americans need to rely more on the credit card as their safety net. Unemployment rates are high, the economy remains fragile, medical costs are uncertain. In this economy, it seems entirely rational and reasonable to me for families to highly prize access to unsecured credit from cards.

When there are too many unsecured creditors to go around, however, how do consumers chose who gets their scarce dollars? A new research paper, Winning the Battle but Losing the War: The Psychology of Debt Management, uses a series of experiments to explore this question. The authors find that consumers focus on making payments that reduce the number of open accounts, which the researchers call "debt account aversion," rather than solely on paying off the debt with the highest cost interest rate. The latter would ultimately reduce the total cost of credit, an approach that the researchers term "perfectly rational."  In a series of stylized debt games played by students, not even one student consistently repaid in multiple rounds of the game all of their available cash to the open debt account with the highest interest rate. The pattern of debt account aversion--using some cash to pay off small accounts--held across a variety of conditions, although the researchers find some interventions that reduce the practice, such as prominently highlighting the amount of interest accumulated on each debt between rounds. But is debt account aversion really a "mistake"? Should policymakers be discouraging this behavioral trait?

Europe has fixed its debt and bank problems --  again.  Last week's EU summit produced a term sheet charting the path to a permanent, treaty-based crisis resolution regime, the European Stability Mechanism (term sheet embedded here starting p. 21).  You may recall it all started with revelations about Greece's government debt crisis in late 2009, and proceeded to reverberate around the Euro-periphery, with banking and government debt troubles bubbling up in Ireland, Portugal, Spain ... Italy ... Belgium ...   About a year ago, after much dithering, a one-off program for Greece, and a couple of false starts, Europe came up with an arrangement to finance countries in trouble, effective 2010-2013.  Soon thereafter, the European Financial Stabilization Mechanism and the European Financial Stability Facility deployed in Ireland, in conjunction with the IMF.   This is a fine overview.  Last week's deal establishes a standing successor to this model.   The term sheet is a fascinating study in EU governance (note the respective roles of the member states, the Commission, and the European Central Bank) and potentially an important step on the path to a fiscal union.  I will limit my comments to the legal and legal-sounding tidbits.

Bring out the Vice Squad--we've got a Moral Hazard.  Yup, some of the reluctant AGs have now expressed concerns over principal write-downs in a servicing fraud settlement because it might create....moral hazard. Some bank CEOs and other predictable voices jumped on the moral hazard bandwagon.

Yes, there's some moral hazard in doing principal reduction mods if you only offer them to defaulted borrowers and the borrowers no that. That's hardly surprising. But so what? Just because something creates a moral hazard doesn't mean it's the wrong thing to do. There's more to that equation. 

The Wall Street Journal editorial page has its fourth hit job in two weeks attacking Elizabeth Warren. It's hard to think of the last time the WSJ editorial page assaulted any individual government official for such extended and personalized animus. (Maybe President Clinton or Elliot Spitzer?) And as I've noted before (here and here), the WSJ keeps stretching the facts in these percussive pieces.

The WSJ's attacks are also way out of line with the mainstream media. You might say they're tone-deaf. Here's a litany of recent pieces supporting the CFPB: SFChronicle, Californian, Las Vegas Sun, Philadelphia Inquirer (and again here), Bangor Daily News, Miami Herald. It would seem that everyone except Wall Street understands the need for the CFPB and that Elizabeth Warren is the person for the directorship. 

The WSJ raises three criticisms of Warren and the CFPB: (1) lack of accountability on rulemaking, (2) lack of control over funding, and (3) disingenuousness about the CFPB's role in servicing fraud settlement negotiations. The WSJ's real issue, however, isn't the level of the CFPB's accountability or funding or even its role in the servicing settlement. It's the CFPB's very existence.

Congress ought to put Ms. Warren's unaccountable bureau under Treasury with an annual budget—or, better, put it entirely out of business.

Complaints about accountability or funding are just cover for the banks' WSJ's real agenda--letting the banks go back to business as usual. How well did that work out for the country in 2008? Heckuva job, Brownie!

The WSJ editorial page has never managed to articulate an argument for why there should not be a CFPB, however. I think there's a reason for that--there isn't one that can be made with a straight face. The WSJ's motivation is it is afraid that the CFPB will result in greater fairness, transparency, and efficiency in consumer finance markets--and hence less profit for Wall Street. But even the WSJ knows that's not an argument it can make in public. So instead, the WSJ editorial page harps on accountability and legality. Let's see how well these strawmen stand up to the fire of reason.

This week Credit Slips will feature posts from  Professor Lois Lupica. She is the Maine Law Foundation Professor of Law at the University of Maine Law School and counsel at Thompson & Knight LLP. Lupica's published works include writings about both business and consumer credit issues, including an early and important work on asset securitization and a piece on the effects of revised Article 9. My own personal favorite is the empirical study she authored with Jay Zagorsky on how debtors fare after bankruptcy. The study is sobering, suggesting that debtors may lag for a decade or more after filing behind similarly situated people who avoided bankruptcy. 

Professor Lupica is currently working on a large scale study of attorneys' fees in consumer bankruptcy cases. Funded by a grant from the ABI Endowment Fund, the study has already resulted in one piece, The Costs of BAPCPA: Report of the Pilot Study of Consumer Bankruptcy Case. I hope she will share more of her findings with Credit Slips. The increase in attorneys fees remains on the most enduring changes wrought by BAPCPA on the bankruptcy system. 

Welcome, Lois Lupica! 

Joe Nocera's Talking Business column today relates a very disturbing government prosecution of mortgage fraud. Read it. It's a very troubling story.

I have not looked at any of the documents from the case and am forming my opinions solely from Nocera's reporting.  As described, however, the convicted Mr. Engle is hardly a saint, whatever one believes about the disputed facts--he clearly knew that he was benefiting from a liar loan, whether or not he actually lied. But the entrapment by the IRS that Nocera describes is deeply disturbing, especially given the lack of prosecutions of financial executives and when paired with this other NYT article about GE not paying any taxes. Then again we've got a Treasury Secretary who wasn't paying his taxes. Hmmm. No prosecution there. I continue to be puzzled why the National Mall isn't turning into Tahrir Square and why there aren't riots in Phoenix and Las Vegas and other foreclosure hotbeds. 

I'm also puzzled how what Nocera describes could have been fraud, even assuming that Mr. Engle did state his income at $32,500/month. Common law fraud requires not just the intentional making of a material misrepresentation with the aim that the other party rely on it, but reasonable reliance by the other party. (Maybe the prosecution was under some special mortgage fraud statute with different elements.)

Did Countrywide actually rely on the stated income? Weren't they just lending against his FICO and property value? Do we really think that Countrywide wouldn't have made Mr. Engle a loan if he had lower income? Given that he could have lost his job the next day, etc. I think there's a good chance they would have done so regardless. Certainly during the housing bubble everybody knew what was going on and no one was really relying on stated income. Countrywide was as much part of the fraud as any of the borrowers--the patsies were the MBS investors.

Even if Countrywide did rely on the stated income, was such reliance reasonable? Is it ever reasonable for a lender to rely on a stated income loan? Congress doesn't think so. The Credit CARD Act seemed to require verification of ability to repay. The Fed gutted this requirement in its rulemaking by permitting lenders to underwrite via models, among other things. And section 1411 the Dodd-Frank Act requires income verification for mortgage loans (with an important safe-harbor in section 1412 for still-to-be-defined "qualified mortgages"--we'll see what magic the Fed works there...). I remained perplexed by this prosecution, but there might be more to this case than we know. 

You probably know that title lenders and payday lenders are not just looking for customers who are faced with an emergency.  According to the lenders’ ads, there are many great reasons to take out such a 300% loan.  This ad, however, takes the cake.

Yves Smith at Naked Capitalism has a fascinating post about the GSEs and private mortgage insurance. The short of it is that the GSEs don't seem to be making claims on PMI policies despite being the loss payees. The reason why is that if the GSEs made claims on the PMIs, it would quickly render all of the PMIs not just insolvent, but illiquid (which is the real kiss of death). And if the PMIs went under, then the GSEs would have to take huge write-downs on all of the still performing loans with PMI insurance. Chris Whalen estiamtes that in order to avoid perhaps $100B plus in write-downs, the GSEs are forgoing several billion in PMI claims. If this is the case, it shows what a farce GSE regulation by FHFA is.

There's a further twist, however, that Yves post didn't capture. A lot of PMI is reinsured. And guess who does about half of PMI reinsurance? The captive reinsurance affiliates of the large banks.

My thoughts on the latest effort to restrict chapter 11 cases filing in the jurisdiction of incorporation, up on Dealbook.

The National Education Association, the largest teachers' union, has come out in opposition to the Durbin Interchange Amendment.

It's unusual to see labor siding with financial institutions, but the lines are often blurrier than one might recognize. There are no less than 151 credit unions with "teacher" in their name (see it for yourself here). In addition, some of the myriad municipal and county employee credit unions are in part teachers' credit unions. I am left wondering if this is the NEA representing teachers or representing teachers' credit unions.

If you don’t personally go to war, you might not think about what being deployed does to your pocketbook. Of course, American civilians regularly take on debt, like mortgages, student loans, credit card debt and so on. Active duty troops, particularly reservists, live in both worlds, sometimes as civilians, sometimes in active duty. This on again off again relationship with credit can wreak havoc on finances, a lesson some are learning the hard way.  Yet service persons in active duty get special rights in foreclosure, as well as in bankruptcy after they return. 

First, only a judge can authorize a foreclosure on a protected service member’s home, even in states where court orders are not required for civilian foreclosures. Moreover, a judge can act only after a hearing where the military homeowner is represented. The law also caps a protected service member’s mortgage rate, as well as rates on all other credit,  at 6 percent.

You're working late, trying to complete the documentation on a secured loan. You're sleepy as visions of security agreements and financing statements dance in your head. What is the perfect pick-me-up: UCC Coffee (now with milk)!

It's smooth, refreshing, and there is none of that bitter aftertaste you get from the common law.

OK, I'll grant that the real origin of this wonderfully named product is the Ueshima Coffee Co. from Kobe, Japan. Nonetheless, it should find its way into law school hypotheticals and exams dealing with the Uniform Commercial Code. After all, it is not only good, but it is also goods.

Hat tip to my student, Matt Lees, for bringing this can to class the other day.

Credit Slips' Very Own Robert M. Lawless was inducted into the American College of Bankruptcy last night at a ceremony at the Supreme Court of the United States. I'm hopeful that we can soon post a picture of the tuxedo-clad inductee. Congratulations Bob on a well-deserved honor!

The Congressional Oversight Panel released its final report this week, and as of April 1, the Panel will exist no more.  The Panel had a remarkable record of achievement and performed a huge service to the country. Between December 2008 and March 2011, the Panel held numerous hearings, countless interviews and meetings, and published 30 reports on the financial crisis and the government's response. These were lengthy (100+ page), detailed, and erudite reports, meticulously footnoted. No one has questioned the factual strength of the Oversight Panel's reports and simply forming that record was a tremendous public service.  The Oversight Panel's reports form the true official record of the crisis and response.  

The Oversight Panel did not merely set forth a litany of facts, however. It also provided an interpretation of the crisis and the government response. And it was unusually effective at communicating its findings to a public struggling to understand the crisis. Typically government oversight panels' reports are consigned to the dustbin from the get go. At best they engender a Congressional subcommittee hearing attended by a couple of Congressmen. But the Oversight Panel's reports were consistently newsworthy and played a critical role in informing the public about what the government was (and was not) doing to respond to the financial crisis. The Panel ultimately shaped the debate and the agenda with its critical oversight. It forced much better reporting and transparency from Treasury, and probably saved taxpayers billions of dollars. The Panel more than paid for itself, and shows that an ounce of oversight is priceless. The end of the Panel plus the transition in the SIGTARP office makes me very nervous about the lack of oversight for the remaining TARP programs (such as HAMP). Treasury hates oversight, and that should tell us just how much it's needed.  

The gloves have really come off between the Wall Street Journal Editorial Page and the CFPB and its defenders. Zach Carter blogged on HuffPo about how the WSJ's attacks on Elizabeth Warren and the CFPB were authored by Mary Kissel, who worked for a few years at Goldman Sachs before joining the WSJ. The implication here was that Kissel is carrying water for Goldman's regulatory agenda because of her past association. (Full disclosure: I was vaguely acquainted with Kissel in college, but the only thing I recall about her was that she played the marimba quite well.) The WSJ spluttered back at this "ad hominem attack," calling it a smear job because it was anonymously sourced. 

Clearly this struck a nerve with the WSJ; I guess their editorial writers aren't used to being called to account. Ultimately, Kissel and her background are at best irrelevant to the story.  It doesn't really matter what motivates Kissel; the WSJ would have found another soldier to carry out the hit. At worst, though the Kissel Kerfuffle is a distraction from the real issue--that the WSJ's editorial page coverage of Elizabeth Warren and the CFPB have been substantively misleading. 

How's this for contrasting interpretations:  the AGs' proposed mortgage servicing settlement is being termed both a "shakedown" (WSJ editorial page) and a "bailout." (Jesse Eisinger at ProPublica--ok, he uses the word "gift", but still).  

Wow.  That's some divergence in characterization of an incomplete term sheet.

I think both of these interpretations miss the mark, as neither really gets what a settlement is.  A settlement is a voluntary contract and represents compromises by both sides in order to avoid uncertain litigation outcome.  The WSJ's interpretation is just nuts--the cheerleaders for freedom of contract are complaining about the price of a contract offer.  Addressing Eisinger's bailout charge is more complex.  Details below the break.    

So Lehman has commenced yet another adversary proceeding, this time to recover a preference. The alleged preference is for $206,000.

The complaint has three attorneys on it:  two partners and an associate. The associate bills out at $630 per hour. 

If the defendant can spend more than 325 hours on discovery -- about four weeks (using the standard 80 hour workweek in NYC) -- who is going to try the case?

(And that's assuming the partners never look at the adversary again -- and ignoring time already spent on the case).

The banking industry is making a full court press to get the Durbin Interchange Amendent implementation delayed. Given that a year of delay is worth about $15-16 billion in swipe fees, the banks are quite motivated, and they've managed to get legislation introduced to delay the rule-making so the Fed can study the issue further.  

A potent force in attempts to delay the Durbin Amendment's implementation are community banks and credit unions. While most debit swipe fees go to a handful of very large banks, small banks have been quite concerned about the impact of the Durbin Amendment. And community banks and credit unions carry outsized political influence because of their presence and standing in every community. The local Chambers of Commerce and Rotary Clubs, etc. are filled with the CEOs of community banks and credit unions, not the local branch managers of Bank of America or Citibank.  

But are the small banks right to be so worried about the Durbin Amendment? It's not so clear, and a recent American Banker reader poll indicated that a majority of readers thought that small banks would actually benefit from the Durbin Amendment (I've made a similar argument about credit unions benefitting from the CARD Act.) The Machiavelli of the card industry himself, Andrew Kahr, even opined in the American Banker that small banks would benefit from Durbin. In his words, the claim that Durbin hurts small issuers is "Poppycock." It's pretty hard to argue with Kahr's math, when it observes that it can only help small banks if they get 100bps vs. 30bps for the big banks. So what gives?

Up now on Dealbook.

Today, I am visiting my parents' home and went for a walk that included a stroll down the commercial strip on the busy street near their house. Along this commercial strip in a solid middle-class neighborhood in Peoria, Illinois, is a small red brick building that thirty years ago I remember housing an insurance agency. What is there today? A payday lender.

My stroll turned into my own personal metaphor for the change in the middle class over the past generation. In place of an institution that cushioned against risk, the neighborhood now has an institution that creates it.The local bowling alley is shuttered as well -- everyone now just can  "bowl alone."

The payday lender that inspired this post does not even really stand out. In that one-quarter mile stretch of that commercial strip, there are are now five payday or auto title lenders.

It's been a while since I've blogged about interchange.  But I've been meaning to share a personal story about how weak signature debit fraud protection is.  Recently Mallory Duncan, the General Counsel at the National Retail Federation was kind enough to speak to my Consumer Finance class about interchange regulation. I took Mallory out for coffee at Starbuck's afterward. I treated. But I asked Mallory if he would do the transaction, with my Visa signature debit card. I stood off to the side while Mallory purchased the coffee with my card.  

It turned out to be a signatureless transaction, so Mallory didn't sign anything. And my card has my photograph on the front. You be the judge of whether anyone is likely to confuse me and Mallory based on physical appearance. Pictures after the break. 

It's not surprising to see the banks and their supporters on the Hill pushing back on the proposed Foreclosure Fraud settlement term sheet. (See here and here and here).  There seem to be three major lines coming out of the banks:

 (1) It's "backdoor cramdown," and the agencies shouldn't be pursuing a policy rejected by Congress.  

Thus, House Republicans wrote to Treasury Secretary Geithner that "The settlement agreement not only legislates new standards and practices for the servicing industry, it also resuscitates programs and policies [namely bankruptcy cramdown] that have not worked or that Congress has explicitly rejected."  These House Republicans want to know:  "What specific legal authority grants federal and state regulators and agencies the power to require mortgage principal reductions when the House and Senate have voted down such proposals?"  .  Similarly a coterie of bank-friendly pundits chimed in calling this sub rosa cramdown.  

(2) CFPB has no business being involved given that it doesn't have a director.  

This has to be read between the lines as a thinly veiled Elizabeth Warren witch hunt.  At least one commentator was upfront about that in the American Banker.   

(3) The settlement could negatively affect the safety and soundness of the banks.  

Let me address all of these points.  There's a lot of willful confusion about this term sheet and what it is.  

On behalf of the Credit Slips regulars, I wanted to thank Sarah Woo for joining us as a guest blogger. Her posts on Lehman, DIP financing, and the transmission of risk from financial sectors to the real sectors of the economy all had one underlying theme: those of us working in the credit and bankruptcy areas need to pay more attention to financial regulation. Well, yeah, we all should pay more attention to lots of things, but Woo's work makes very important and valuable points about how financial regulation can affect debt and bankruptcy outcomes in very specific and sometimes very surprising ways. She is a new face in the academy working on issue of debt, financial regulation, and bankruptcy, and I am sure we will hear a lot more from her in the years to come. Thank you, Sarah, for joining us, and please come back soon!

Critics of HAMP and other efforts to increase mortgage workouts often assert that there are too many homeowners in mortgages they simply cannot afford; due to unemployment and other causes, there is just not enough income to work with.  The data realeased by Treasury on more than one million applicants for HAMP assistance provide some insight into the question: how many foreclosures could actually be prevented? 

As a starting point, we can look at the incomes reported by HAMP applicants, the amount of their mortgage debt, and the value of their homes.  The median income of applicants is around $4,000 monthly, i.e. not much below the national median annual income of $50,000.   Only 11% of applicants have incomes below $2,000 per month, in poverty-level range.

The irony of the CEO of Bank of America kvetching that it would be unfair to responsible homeowners for the bank to give principal reductions to homeowners in default is really too much. Does he recall that he's the CEO of a bank that is only still in business by grace of a federal bailout?

But where is Moynihan getting that he'll be required to help only deadbeats, when he feels morally bound to share the love with current borrowers?  I sure didn't see anything in the AG/CFPB term sheet that requires that.  Instead, it leaves the question of who will live and who will die up to the banks, precisely so they can't bellyache that federal regulation is restricting their ability to do loan mods, as they have about HAMP.  

Here's the relevant language from the term sheet.  As far as I can see, the basic principle for mods is NPV maximization (i.e., investor protection).  Default status surely plays a role in that calculus, but it's the servicer's decision how to account for that: 

• "Servicers employees shall not advise, instruct, or recommend that borrowers go into default in order to qualify for loss mitigation relief."  (p. 17)
• "Servicer shall consider and apply principal reductions in appropriate circumstances for sustainable modifications." (p. 18) 
• There is a particular requirement that servicers evaluate all defaulted loans with an LTV>100% or CLTV>115% for principal mods in a particular manner, but that's not saying only defaulted loans are eligible for principal mods. (p. 18)

My read here is that Moynihan's real complaint is that BoA might have to dish out $4-5B (relative to earnings of $35-40B, it's not so huge, even if it is is the largest bank fine ever by an order of magnitude) and leave the AGs and CFPB with the ability to hammer it for noncompliance.  (And again, I emphasize that the AGs and CFPB do not currently have authority over things like noncompliance with HAMP or PSAs, but would under the term sheet, meaning there would be a real cop on the beat).  

[Updated 3.8.11]

Some bloggers on the left (e.g. here) and on the fringe right (see here)  are upset with the servicing standard term sheet that got leaked because they think it just prohibits things that are already illegal.  This is an incorrect reading of the term sheet.  Let me give three examples.

What appears to be part of a Foreclosure-gate settlement has been leaked.  There's a lot in this 27-page document, but here are some initial thoughts.

There were a total of 109,178 bankruptcy filings in the month of February for a rate of 5,750 new cases per day. The February figure represents a 12.6% increase from January March. Although bankruptcy filings seem to be up sharply in February, looks are deceiving. In reality, the 12.6% increase in February supports the idea that, on an annual basis, bankruptcy filings actually will decline in 2011. As always, the data for this analysis is courtesy of Epiq Systems.

Credit Slips is well-represented on the New York Times Room for Debate website. Susan Wachter (Wharton School) and I have a short opinion piece on housing finance reform on the site. Our main point:  housing finance risk is inevitably socialized, so we'd best come up with a system that keeps risk in check.  

And Alan White also has a piece on the site. Alan's take: we need to avoid the upside-down nature of the pre-crisis system where the most marginal borrowers were the ones who ended up in the totally private part of the market; they should be the ones receiving government support.

I can remember when the Card Act first came out. Many professionals, including some of my colleagues, bemoaned the loss of perks for the well-heeled. They were all sure that from now on, since the card companies could no longer boost rates on existing balances or in the first year of a card relationship, or charge more than $25 in late fees, annual fees for all were going up and points and other perks were going down. Did it happen? Nope. At least not for the good credit risks. Quite the contrary.

An AP story  that ran in many papers across the country today confirms a trend toward very beneficial credit deals for the rich. The story reports that while people with excellent credit used to get 44% of all offers mailed, they now get 64% of those offers. The offers are also better than ever for this demographic. One premium card offers five times the typical rewards and waives the annual fee for people with $50,0000 in the bank. Some of the balance transfer cards offer 18 months without interest! Some cards even eliminate those irritating foreign transaction fees. No doubt, the lenders plan to make their money on merchant fees on these cards, since many in this demographics don’t pay late and don’t carry balances. 

Offers to the well-off but less fastidious in credit cleanliness are worse than before. These B-listers are getting card offers at higher interest rates and higher annual fees than before. This is the demographic from which card compares will make up for lost fees resulting from the Card Act. As for the ones with poor credit habits and little funds? They are getting fewer offers, period.

Over on Housing Wire, Paul Jackson is crowing that chain-of-title issues in mortgage securitization are overblown because an Alabama state trial court rejected such arguments in a case ironically captioned U.S. Bank v. Congress.

But let’s actually consider whether the opinion matters, what the court actually did and did not say, and whether it was right.

So I'm reading the FT this morning on the train to work, and I read about how Basel III will hurt European banks, and how most of these banks did quite well in the financial crisis. I arch an eyebrow.

Then I read "[w]ith the exception of certain institutions in Switzerland, Germany, the Netherlands and the UK  . . . "

Right. So we are talking about what part of European banking industry now?

We don't actually know the terms of a foreclosure fraud settlement.  All that we're really hearing now is a proposed $20B figure.  There could well be other substantive terms in a settlement, but it's worth considering some of the arguments made by the banks in objection to a large dollar settlement.  

Basically, the banks' argument is no harm, no foul.  Yes, they did some robosigning, but it was all fun and games, and no one got hurt.  Moreover, using any settlement dollars to help homeowners would reward undeserving profligates and encourage strategic defaulting, which would be bad morally and for the housing market.  

There are a lot of problems with this line of argumentation.   

The inter-regulator fight over the proper parameters of a foreclosure fraud settlement are really highlighting the changes in the financial regulatory world.  What we're told is that the OCC and Fed are urging a weak settlement, while FDIC, the state AGs, and the Consumer Financial Protection Bureau (CFPB) are pushing for a serious settlement.  

Parts of this line up look quite familiar, but parts are new and exciting.