DOJ Abuse, Law Suits, and Bank Low Income Lending

 

US Government Slanders

 

Fairholme Capital Management--of Bruce Berkowitz and “third amendment” law suit fame-- announced last week that it has hired Tim Howard, former Fannie CFO, as a consultant to assist their law firm, Coopers and Kirk, to help analyze the thousands of documents which the firm has gathered and will gather during “discovery,” a process approved by the Court (Judge Margaret Sweeney).

 

Most people know that Tim—who before joining Fannie cut his financial services teeth at a major west coast bank--for 20 years held a series of upwardly responsible senior management positions for Fannie, eventually overseeing the company’s debt, credit, and securities operations.

While with Fannie, Tim traveled the world discussing the company and its debt and mortgage backed securities operations with foreign central banks, financial analysts, media, etc. Fannie often employed him to go to the Hill to meet with congressional staff and he was the primary creator of Fannie’s first risk based capital model working with Paul Volcker--following Volcker’s Fed stint when he joined Jim Wolfenson’s NYC firm--who studied it, tore it apart, made some acceptable changes, and then blessed it.

Howard also was the primary lead with all company dealings with the US Treasury during its many challenges to Fannie (and Freddie). 

Bottom line, Tim is very, very financial matters smart.   

They Got You Then and Now We Want to Jump on You, Too…….

 

In 2004, the Bush Administration operatives drove from office Tim, Fannie’s CEO Frank Raines, and Treasurer Leanne Spencer  using spurious charges of “securities violations,” which later got rejected by a federal court, but not before the Bush ideologues succeeded and the Fannie execs were forced to resign. 

Tim wrote a book about that episode, called, “The Mortgage Wars, which was well received and contained a lot of revelations about regulatory incompetence and sleazy political behavior. 

Latest insult, because Tim protested his innocence, wrote a book, and blamed regulators, the Department of Justice last week, formally opposed Howard’s retention to scan the “discovery” files which Coopers and Kirk will generate, because DoJ doesn't trust his integrity and claims he might use whatever information he reviews to trade in GSE securities or blab to somebody about the FHFA’s and Treasury’s tawdry recorded dirty laundry. 

By extension, Howard is subject to Judge Sweeney's  same prohibitive disclosure rules as everyone else from Fairholme or their lawyers who see discovered documents.

Shame on you Uncle Sam, go ahead and balk because Howard is tall and lanky, born in California, likes classical music, is a lousy dancer, or drives a fast car, but don’t spin and perpetuate lies, sully his character, honesty and reputation by suggesting he—alone of the dozens of plaintiffs officials, lawyers and others looking at government materials—can’t be trusted and would use what he reviews for personal or narrow ideological gain.

The institutional antecedent of the Federal Housing Finance Agency, which is the subject of many of the current legal challenges, is the group which started the Howard and Fannie colleagues witch hunt in 2004 (although none of that is part of the Fairholme suit).

This level of government BS and legal obfuscating was predictable but—IMO--not for the reason that you might think or the explanation to which many will leap. 

Come Let’s Stroll…

Today it is Tim Howard, tomorrow it will be something else.

I think this Administration is slow walking all of the procedures, throwing up obstacles, trying to play a four corners defense to run the clock and hope that any decision forthcoming favoring the plaintiffs—which I think is likely—occurs after the Obama Administration is out of Washington.

Yes, that’s two years from now plus a few months, but a lower court’s decision which gets appealed could linger before SCOTUS for years, unless this SCOTUS wants to make a statement on behalf of the investors.

I’ve repeatedly said that I have no idea how broad a decision Judge Sweeney might render, but it is possible that her decision could affect the structure and ownership of the companies and not merely be a large cash award.

I assume Howard’s fate is in the hands of Judge Sweeney. I hope she will see through this transparent government assault. 

Related Thoughts 

A friend and blog reader wrote to me about the above issues, discovery, and the fact that FHFA produced very small independent paper trail, suggesting it did little on its own during the early conservatorship years between 2008 and 2012, but acted merely as a Treasury puppet. 

He observed, “Ten years ago, there was zero evidence to establish any accounting violation by Fannie, which is why OFHEO (FHFA’s predecessor the Office of Financial Enterprise Oversight) persisted in concealing records that showed how the accusers lied.  Today, there is zero evidence to show how FHFA (Federal Housing Finance Agency) acted on behalf of the GSEs, independent of Treasury’s agenda, which is why they desperately want to avoid handing over the documents that they have. And why they (the government) persists in maligning Tim.”

As this same longtime observer noted, “The FHFA –which is very exposed--should be very, very afraid of Tim Howard.”

For a discussion of the Fairholme and related cases, see the article below by Law professor Richard Epstein, who works for the plaintiffs and has written extensively about the “Third Amendment” or “takings” cases. 

http://www.forbes.com/sites/richardepstein/2014/09/10/what-happens-if-the-government-loses-on-the-third-amendment-the-senior-preferred-stock-certificates-spell-nothing-but-trouble-for-the-government/

 

WH/Bank Lenders Meet Next Week
 

Writing in the Wall Street Journal (see link below), John Carney opined that the big banks—fearing federal  requests to take back or compensate for faulty loans-- will be loath to produce loans that met less stringent but still applicable FHFA-imposed F&F housing goals.

Carney, relying on bank sources, said the financial institutions won’t originate loans they which may not meet their internal credit/risk objectives, and which they otherwise wouldn’t hold on their books, but could be securitized with F&F and sold to investors. 

http://online.wsj.com/articles/heard-on-the-street-burned-banks-unlikely-to-embrace-mortgage-fix-1410452397?mod=WSJ_LatestHeadlines
 

A flip retort might be, “If you don’t want your naked pictures showing up on the Internet, don’t pose for them...”  

Ooops, wrong subject.

Mortgage buybacks. “If you don’t want Fannie and Freddie—and their regulator—to ask you to buyback bad loans,  underwrite the loans properly in the first place and don’t place ourselves at risk, after signing a contract not to scam, and then try passing off garbage loans for inclusion in F&F mortgage backed securities (MBS).”

That’s the only time lenders run afoul of the F&F (and FHFA) rules.

Next Wednesday, unless it gets cancelled, the White House (likely not Mr. Obama) will meet with represents of the nation largest banks to discuss how they might expand their lending to lower income American families who have not been well service in recent environment, which seems to serve only superior credits (high FICO scores, plenty of cash for down payments, as well no character or legal “dings”).

Now what will do at this meeting to incent the banks, except to ask the banks to step up and while offering them continued Administration support for CorkerWarnerJohnsonCrapo and whatever legislative iterations come from same? 

What will the bank lenders seek from the Obama Admin? 

Ooh, Ooh, We Have a List 

A few weeks ago the Financial Services Roundtable had a list of 16 pages worth of things on the regulatory and legislative fronts it wanted. The Mortgage Bankers Association, a few days ago, had a similar inventory which, surprise, surprise, was the MBA’s legislative wish list.

But, tell me why do the banks need more incentives and bribes to do what they are supposed to do, by virtue of our laws and their existing charters?

Today, the banks are financially fat, reasonably happy, and still enjoy record profits, possibly with less money than they’ve made in the past from mortgage lending with F&F (although it varies with institution), but still doing quite well with their total revenue pursuits.

Instead of mortgaging the ranch (pun intended), the White House should lean on the banks just to do more.

“Fear” of Buybacks?

 

Banks claim they are worried about F&F forcing them to “buy back” too many loans and the costs of that GSE option.

But those buyback demands, which have shrunk rapidly over the past several months, were for loans the banks underwrote improperly and on which the lenders made mistakes.

So, once again, I expect the banks will respond with non-reciprocal “asks” and seek additional federal guarantees, new federal “bennies,” regulatory “look the other ways,” and then, maybe, just maybe, consider some non-substantive loosening of their internal credit and income standards a bit.

I heard this same story in 1992 when F&F first were given housing goals because the bank, mortgage bank, and S&L lenders—then, far more numerous and far less concentrated—didn’t want or like to do business with poor people, minorities color, or those with flawed credit histories. 

The government was impotent in forcing banks to do the right thing and used Fannie Mae and Freddie Mac to do Uncle’s job.

What goes around comes around.

The banks haven’t changed, just their excuses.

Knowing the banks true agenda--give us Mo, Mo--I’m surprised, for next week’s meeting, the banks aren’t arguing over the shape of the table (for those of you old enough to remember the Vietnam “Paris peace negotiations.”)

One last thought—for this week—on the WH meeting and its goals.

Do you think anyone downtown ever makes the connection between the WH’s ongoing campaign against Fannie and Freddie and the issues over which you are ringing your hands, crawling to the banks, and asking to parlay?

“You betchum, Red Ryder!” (Sorry another historical allusion, meaning “Yes Sir.”)

If the Obama White House just could “Come to Jesus” on the GSE issues and quit poking F&F, insisting on their demise, maybe the housing social, political, and financial concerns--over which some in the Admin fondle their worry beads and hold meetings with avaricious bankers--could ameliorate sooner than otherwise.

 

Mike Stegman and Senator Corker (R-Tenn.)

Both the WH (Stegman) and Sen. Bob Corker, this past week, cited the CBO study, which I mentioned in the last blog, as justifying passage of the CWJC legislation.

Let me repeat, it was a crap study, which relied on disparate accounting standard applied to the GSEs and then separately to the new FMIC, the proposed insurance corporation created in the legislation.

CBO had no real analysis of possible (and likely) dramatic market changes, cost increases—which most everyone predicts— further lender concentration, implementation delays, and unanswered question about what if the needed private capital ($500 Billion) doesn’t show up. Those reviews likely would foul up their cute analysis and news story.

It was a cheap headline for the CWJ advocates and nothing more. 
 

Syria and IS/ISIL/ISIS? 

Mr. President, pinpoint is nice. But, shouldn’t it at least be a bit easier to carpet bomb those former Syrian Air Force bases—possibly blowing up some valuable assets still on them, thereby denying them to the ISIS--now that you’ve decided to destroy those terrorists?

Thank you for following this blog's “Middle East Game Plan,” speaking and acting tough and rounding up regional sovereign support to pursue your military objectives.

But, can you expedite things a bit?  What do your and your commanders think ISIS is doing while you are holding press conferences to announce your intentions?

You still have time to polish your legacy. (Just don’t trust the Russians.)

 

What Others Are Saying?

 

Were Sarah Palin and husband Todd at the party, with Todd getting his nose bloodied in a punchout, as some sources have reported? Those gosh darn GOP VP candidates!

“No” you say and stop treating them like trailer trash. OK, but if they don’t want their naked pictures on the Internet……

“Do you know who I am?” (Sarah supposedly screamed at party goers.)

http://www.cnn.com/video/data/2.0/video/bestoftv/2014/09/12/exp-malveaux-palin-reported-to-be-involved-in-brawl.cnn.html

 

Maloni, 9-15-2014