This is a comment from The Institutional Risk Analyst from last summer. Since then the California Bill of Rights has gone into effect and this comment has landed me on the enemies list with consumer advocates and trial lawyers. Thought we should have an evergreen of this comment on ZH. Just remember Kamala Harris when the expected HPA fails to materialize in 2013 and CA starts to behave a lot like NY, CT, NJ. -- Chris
Tail Risk: Kamala Harris Declares War on Lenders, Loan Servicers in CA
The Institutional Risk Analyst
October 9, 2012
"Last month's announcements of central bank liquidity provision (or financial repression, for some of you) have made speculative positioning in sovereign debt look like a one-way, nearly risk-free, bet. I believe it's time for macro traders and investors to step back and reconsider what could go wrong with this picture."
"A good year for macro traders will end soon"
Last week The Institutional Risk Analyst was at HousingWire's REperform Summit, a mortgage servicing conference held in Dallas. There were a number of news items that came out of the conference, but perhaps the most urgent was the assessment of the new CA Homeowner Bill of Rights authored by CA Attorney General Kamala Harris.
The Homeowner Bill of Rights launched in California not only changed hundreds of years of real estate law, it may have turned the West Coast state into a judicial foreclosure state with financial firms on high alert," Kerri Ann Panchuk reports for HousingWire's Plano, TX based team. Our take: The largest US banks - Bank America (BAC), JPMorganChase (JPM), WellsFargo (WFC), Citigroup (C), US Bancorp (USB), and a host of private loan servicers and investors, are now targets for the trial bar in CA. This is called "tail risk."
"In California, they just gave trial lawyers a nuclear weapon to use against the industry," said Bob Jackson, president and attorney at Irvine, Calif.-based Jackson & Associates. Jackson spoke atHousingWire's REperform Summit.
"The Homeowner Bill of Rights is the most massive change in the last 100 years of real estate law," he said. "It used to be servicers were in the business of enforcing simple contract law. What the loan servicer did is they enforced the contract, but that is no longer how the game is played."
"Jackson said the bill created several new areas of concern for servicing shops," Panchuk reports. "The first is the potential to be sued for wrongful denial of a loan modification. Firms also can be sued if a loan modification was denied because of a mistake made in the process."
Larry Platt of the Washington law firm of K&L Gates noted ominously that the state AGs have effected a radical change in the relationship between servicers, investors and borrowers. Platt noted that the charter of the new Consumer Financial Protection Bureau focuses on the needs of consumers, not investors. Platt opined during a panel with Jackson at the HousingWire event that servicers traditionally have worked for the investor, not the borrower.
"That is not the law having the servicer look out for the borrower. The role of the servicer is going through a paradigm shift," Platt warns. "When you look at the bulk of litigation nationwide, it doesn't pertain to any violation of a federal or state consumer credit law." His takeaway: "There is a monkey wrench in every single foreclosure in this country based on what the CFPB has created from its own authority."
But in fact CA AG Harris and other AGs around the country are re-writing centuries of state contract law and creating causes of action by borrowers against servicers and their clients, the owners of mortgage notes. This attack on creditors by CA politicians and their allies in the trial bar builds on the erosion of contract rights during the 1930s under FDR, says Jackson. Indeed, the action by CA AG Harris represents deliberate collusion between trial lawyers, poverty advocates and elected officials in CA, who now have turned mortgage lenders into prey as a matter of public policy.
Jackson told the HousingWire audience that the game has changed for loan servicers operating in CA: "It used to be servicers were in the business of enforcing simple contract law. What loan servicer did is they enforced the contract. But that is no longer how the game is played."
He continues: "Before the Homeowner Bill of Rights, you were in the business of collecting loans and after it you were in the business of defending tort claims. The basic cornerstone of contract law doesn't apply here. Saying just follow the law and you won't have a problem is complete and utter non-sense. They are going to say you violated this and you have to prove that you didn't."
The new CA law pretends to protect home owners, but in fact this effort is merely the latest effort by an ambitious Democrat to win higher office by enriching members of the trial bar. There is a direct connection and symbiosis between the politicians, trial lawyers and public policy advocates in the CA HBR that is truly frightening - but hardly surprising.
"California adopted the robosigning [settlement] on steroids," warns Jackson. "Under this law you cannot file a notice of default or sale (or other action) unless a servicer has reviewed them and has made certain the filings are fine. Without that process you have a violation of HBR."
The bottom line is that under the brave new world created by CA AG Kamala Harris and her pals in the trial bar, loan servicers can face civil and even criminal charges for relatively minor errors. Debtor plaintiffs can sue servicers to block foreclosure at the expense of the servicer and expect awards in six figures.
Within a year, lawyers in shopping malls across CA will have a template for filing these claims, a template provided by state and national trial lawyers associations. Think asbestos and the Ford Explorer litigation and you got the general idea. By next year, the American Association for Justice, also known as the Association of Trial Lawyers of America (ATLA®), and like organizations probably will be delivering "how to" kits to trial lawyers all over CA.
Plaintiffs can also sue servicers and their clients for up to three years after a non-judicial foreclosure. Just as in the state AG settlement, the banks and investors in RMBS pick up the tab. And Kamala Harris is leading the parade of state AGs seeking to enrich themselves at the expense of servicers and creditors.
But the more profound point to be made is that the debtors are firmly in control in the US as well as in the EU. Since the US Civil War and especially since WWI, debtors have arguably been in charge in the US. Progressive elements use the power of the state to subordinate the financial interests of savers and investors to the popular desire for nominal growth. And in Europe the same dynamic prevails, this despite talk and more talk in Germany about hard money.
In Spain, for example, borrowers are receiving debt relief en masse via rescission of investments, begging the question as to whether the banks have any remaining rights. Thus we include the quote above from John Dizard of the FT about the duration of the macro trade. The debt of those Spanish banks is held by investors in Germany and France. Will these investors escape sanction as well?
The WSJ reports that in Spain, "Arbitrators have annulled sales contracts and ordered banks to fully repay money invested by customers, minus interest payments already made." The continuing outflow of fund to make speculators whole on their real estate dabbling almost ensure that Spain's banks cannot be recapitalized by the ESM, notes our friend Achim Duebel in Berlin. The plain fact is that there is no political will to impose losses on investors in speculative Spanish real estate investments.
Meanwhile in Washington, the federal housing bureaucracy proceeds heedless of the storm raging outside the beltway in states like CA. Charles Gabriel of Capital Alpha Partners notes that the Federal Housing Finance Administration is seeking comment on a Unified Securitization Platform to replace Fannie Mae and Freddie Mac.
"Continuing to fill the void re Fannie-Freddie reform, the FHFA released an October 4 white paper on a proposed new framework for both a standardized/common securitization platform and model Pooling and Servicing Agreement (PSA)," writes Gabriel. "The FHFA paper seeks comment by early December on seven, largely technical questions relating to its plans to "replace the outmoded proprietary infrastructures of [Fannie and Freddie] with a common, more efficient model" that will allow for "greater participation of private capital in assuming credit risk."
It's nice to talk about the return of private capital to the US housing market, but there are a couple of problems. First, so long as the Fed continues with ZIRP, private investors will not finance non-conforming loans. Need to see the yield curve widen another 100bp to see a real market for private label RMBS return.
Second, non-sense like the CA HBR will discourage private investors and even the US government from financing mortgages in CA. The FHFA already distinguishes between judicial and non-judicial states in setting servicing fees for Fannie and Freddie. The CA experiment concocted by AG Harris in "rule by trial lawyer" may eventually cause the federal government to stop guaranteeing mortgages in CA entirely. Imagine how the CA housing market would perform with no loan guarantees from FHA or the GSEs. More on this unfolding disaster in future issues ofThe Institutional Risk Analyst.
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