Our plates filled with year-end deals, Thanksgiving Week is upon us, and with it CrunchedCredit.com’s annual recognition of the stories, events and ideas that struck us as funny, outrageous or both amidst the tsunami of stuff crossing our desks this year.
The Potter Trophy: “Qualified Residential Mortgages”
Potter Stewart famously refused to define obscenity in Jacobellis v. Ohio. “But I know it when I see it”. Perhaps that’s how we’re fated to look at the QRM. It’s eighteen months after the end of the initial comment period, and thousands of comments were made. And we’ve heard? Crickets. But now, we hear we may be close to a pronouncement of the scope of the QRM exemption to the Dodd Frank risk-retention rules. This is important. Securitizing a pool of QRMs is the only way to avoid the notorious and economically inefficient 5% retention requirement imposed upon the capital markets in a misguided effort to improve underwriting. During last month’s ABS East Conference, keynote speaker Lewis Ranieri announced (unexpectedly) that the criteria for QRM’s could be finalized by the end of November. Huh! It’s the end of November. Nothing yet. And by the way, we have heard officials say in various public forums that they hate QRM and would prefer almost nothing to qualify, so let’s hit pause on declaring good news. I’m afraid I really will know it (for what it is) when I see it.
The Lunch Pail Award: REO-to-Rental
This award recognizes really hard ways to make money. Owning bunches of single family rentals for income and eventual appreciation strikes us as particularly hard duty. Nonetheless, the conversion of distressed or foreclosed single family homes into rental properties on a mass scale is one of 2012’s most discussed real estate investment ideas, with the FHFA’s Real Estate Owned Initiative already offering product in bulk sales and major institutions stepping up to finance the buyers. Investors are still trying to determine if securitization will develop into a viable exit, and although many Rating Agencies have offered initial indication of how they view the segment, none have published official criteria. Will REO-to-Rental strategies serve as an important way to stabilize neighborhoods and infuse private capital into the housing market? Maybe. Will it be a hard way to make a buck? For sure.
Rookie of the Year: The Fiscal Cliff
The “Fiscal Cliff” succeeds last year’s “Eurozone Crisis” as the financial catastrophe of the moment. Bernake’s felicitous description of this looming disaster captures what happens when the State increases payroll taxes, raises income taxes (a lot) on businesses and individuals, introduces new Obama-care taxes, ends Bush-era tax cuts, slashes spending on thousands of government programs while fleecing anyone who may have been missed with increases in the AMT. Are we going over the cliff? The stock market says "no" one day and "yes" the next. Perhaps our elected leaders, with the flittering attention span of, well, elected leaders, can’t get their collective brain around the fact that this has to be fixed now and not on December 31 (or February 28th!) because if they delay, the ride up the precipice may be almost as bad as the ride over it. Wanna bet we won’t go over in any event?
Plymouth Rock Award: The Electorate of the Commonwealth of Massachusetts
In a rare Election Day triple witching, Massachusetts voters overwhelmingly supported the re-election of President Obama, replaced centrist Senator Scott Brown with the decidedly left-of-center Elizabeth Warren and defeated a referendum permitting physician-assisted suicide, leaving Bay State republicans demoralized, depressed and devoid of options.
James Madison Constitution Award: California Municipalities’ Condemnation of Underwater Mortgages
In an attempt to stimulate local economies and avoid the inevitable blight of mass foreclosure, Golden State municipalities this year considered a controversial eminent domain plan whereby underwater residential mortgage loans held in private-label securitizations would be seized, refinanced or restructured and sold to third-party investors. As we wrote this summer, the plan promised to garner legal challenge, with even the FHFA expressing “significant concerns about the use of eminent domain to revise existing financial contracts”. We have a social problem, and it’s serious. But there are some things that pesky Constitution just won’t let governments do, and that’s not so bad now, is it?
Comeback Player of the Year: Financial Innovation
2012 saw the successful issuance of several highly structured deals, including the first U.S. liquidating trust vehicle successfully securitized in the United States since the 1990s. As we noted in May, the liquidating vehicle deal – involving a plan to orderly resolve a pool of poorly (or non-) performing loans and REO assets – was successfully closed and sold, while other high-profile transactions merged CMBS and CLO technology to securitize bridge and unstabilized loans while addressing the sponsor’s need for flexibility with the investors’ need for stability. Financial complexity – the scapegoat for the credit failure of the last half of last decade – may finally cease to be a dirty word. That would be good. Hard problems sometimes need complex solutions. If the Luddites had its right, we’d all be knitting sweaters and mucking barns.
The Midnight in Paris Award: The EU
The EU continues to flounder gently but inevitably towards economic ruination. Days, years, months go by without much fundamentally changing. Debt won’t fix debt. Countries and regions in deep depression need to control monetary policy and depreciate their currency. The modern European welfare state is exhausted by the reality that they are running out of other people’s money (Mrs. Thatcher has always been right). It seems the economic political class closes their eyes regularly and wakes up in a world where none of that is true. All is well. Then the markets nudge the politicos to wakefulness, they stare at the crisis, have a moment of panic, hold a summit and back to Midnight in Paris where all is swell and beautiful. Sweet movie. Lousy way to run a continent.
The Alex Haig I’m in Charge Award: The Consumer Financial Protection Bureau
The CPFB concluded that their mandate of protecting consumers confers a right and moral imperative to regulate almost anything and everything. While the financial marketplace worries about capital formation and getting back to business, the CPFB is stomping on the rule making authority of half a dozen other agencies and issuing tracts and rules conflicting with the rule making authority of many other financial sector agencies. At best, we end up with expensive duplicate regulatory regimes. At worst, we get conflicting regulatory regimes. Here again, we see another regulatory agency which conflates what works on the chalkboard with what works in the real world. For example, the CPFB’s efforts to simplify mortgage disclosure is creating a dog’s breakfast of complicated arcane mechanistic rules and procedures which reduces capital flow to the consumers that the CPFB had set out to protect. It’s not hard to see that very little changes.
The Willy Sutton Award for Robbing the Banks Because, as Mr. Sutton Famously Said, that’s Where the Money is: Governmental Entities that Filed Suit Against Major Banks
During the years running up to the credit crisis, there was sloppiness, blindness, indifference to risk and, it turns out, in some cases, truly bad behavior in the residential mortgage lending business. But adding to the tsunami of private suits, from sea to shining sea, governmental entities have decided that the major banks are a piggy bank of money which can be tapped through lawsuits. Typically, the conceit is that the money will be used to right those wrongs and help individual consumers but, oddly enough, it seems that much of the money is flowing into the general coffers of the states and other governmental entities and gets spent like any other tax dollar. Stop. It is wrong, it is disingenuous, and it is hurting the banks at a time when the health of the banking system is critical to the restoration of the markets.
Caligula’s Horse Award: Wells Fargo Bank NA v. Cherryland Mall Limited Partnership
An event completely devoid of the exercise of common sense. Presumably the good people of Rome some 2,000 years ago were a bit put off when Caligula made his horse a senator (one might be tempted to suggest our recent elections may have partially accomplished that goal in several instances). Here, I’m talking about the Cherryland case. It was late last December that the Court of Appeals of Michigan issued a widely-discussed decision in Wells Fargo Bank NA v. Cherryland Mall Limited Partnership – holding a guarantor liable under a non-recourse carve-out for a borrower’s failure to remain solvent. It’s a non-recourse loan, people. The lender knew that, the borrower knew that. Bad drafting allowed a crafty trial lawyer to argue that even though the parties said the loan was non-recourse, it was only non-recourse as long as the borrower could pay. Like in the novel Catch 22, you can only see the Major when he is not there. Do we really need decisions like this? Well, at least it caused the industry to scurry off and tighten the language of guarantees but, come on.
And so another year ends with the full measure of silliness and inanity we expect. Traditions are wonderful.
By: Rick Jones, Matthew Clark & The CrunchedCredit Team