November 9, 2007

Ted Strickland and Marc Dann Unleash the Subpoenas on the Subprime Mortgage Lending Industry

Marc Dann has let the subpoenas fly. Reuters reports:

Ohio Attorney General Marc Dann said Thursday that more than a dozen civil investigative demand subpoenas will be sent shortly to companies in the subprime mortgage industry.

He said information from the subpoenas will be used to explore possible anti-trust and civil rights law violations, as well as violations of Ohio’s consumer sales practices act. He did not identify the recipients of the subpoenas.

The action followed the lack of support by loan servicers in the state for Gov. Ted Strickland’s compact, which would require them to step up their efforts to help borrowers avoid foreclosure. Dann said no servicer agreed to sign the compact, which was unveiled last month.

Imagine that. Party A creates a legal document for Party B, expecting that Party B will accept it with absolutely no changes. Party B balks. At this point, you’d expect people of good faith to begin negotiating something mutually agreeable.

“Somehow,” Reuters fails to mention, as the Cleveland Plain Dealer did, that the mortgage lenders actually responded with a plan of their own. Although I don’t know what that plan is, the Ohio Mortgage Bankers Association’s (OMBA’s) web site has a fairly constructive statement, apparently issued shortly before the subpoenas began flying, on its home page, acknowledging progress and hoping that a “summit” can help “towards our mutual goal of helping Ohioans preserve homeownership.”

It’s too bad for the OMBA, and Ohio, that Strickland and Dann, in demanding all or nothing, have shown that they aren’t interested in negotiation. What they appear to want instead is intimidation, humiliation, and, ultimately, capitulation.

The governor’s 24-point Compact to Help Ohioans Preserve Homeownership” begins about 25% of the way through this gubernatorial press release. Let’s take a look at some of what Strickland and Dann demanded (bolds are mine):

1.1 Servicers pledge to prepare the requisite staffing and resources necessary and to engage foreclosure counsel as necessary to perform large-scale modifications of residential, owner-occupant subprime loans …..

2.1.2 For loans entered into with no or low documentation of a borrower’s annual income, assets and liabilities, Servicers agree to make reasonable efforts to obtain appropriate documentation verifying the same and utilize that information in attempting loan modification or other workout in accordance with Section 4.1.2 below.

3.1 Servicers pledge to modify loan terms to the greatest extent possible so as to provide permanent, affordable relief to Ohio borrowers, doing so in accordance with their fiduciary, legal and contractual obligations and in accordance with prudent mortgage lending and servicing practices.

3.1.2 For subprime “no-documentation” or “low-documentation” and stated income loans, Servicers agree to modify the borrower’s loan so as to make regular monthly payments economically feasible, including but not limited to converting the loan’s interest rate into an affordable fixed rate.

3.1.4 For loans consummated as described in Sections 3.1.1, .3.1.2, and 3.1.3 above, Servicers agree to use their best efforts in removing any negative reports on the borrower’s credit report related to default of such loans and to assist borrowers in improving their credit scores in appropriate cases where loan modification has resulted in changing a delinquent loan to a performing loan.

Section IV, among other things, requires servicers “to document all interaction with borrowers and efforts made to workout mortgage loans,” and then to certify the accuracy of the details of those interactions.

Section V imposes very detailed and clearly onerous reporting requirements.

The compact was broad-brush harassment at the highest level. Lenders were “asked” to redo their deals on a massive scale, regardless of whether or not the original deals were done on a good-faith basis totally by the book, and to pay for the costs of redoing them.

Let’s be clear: The Strickland-Dann Compact was, and still is, an attempt to legislate, under threat of fishing-expedition subpoenas paired with frivolous antitrust and other actions, from the Executive Branch. It has been clear that the foreclosure situation has been worsening in many parts of Ohio for some time. If all of the Compact provisions are such great ideas, the governor should have gone to the General Assembly to get appropriate laws passed, either as emergency or temporary legislation. They were in session for quite a while earlier this year, if I recall correctly.

If you think Marc Dann is done, you could not be more wrong. He apparently has visions dancing in his head of former New York Attorney General Eliot Spitzer’s march to the governor’s mansion in the Empire State on his shakedown of the mutual fund business. Dann’s Eliot-like encore appears to be tearing apart the mortgage industry from top to bottom:

In the anti-trust area, Dann said he planned to take his probe beyond frontline lenders to parties that funded or profited from subprime mortgage schemes.

“We’re taking steps to determine whether the groups of either warehouse lenders or the investment banks that securitized many of these subprime mortgages were involved in any kind of concerted action,” Dann said.

….. Dann said the number of Ohio subpoenas could mushroom to the hundreds over the next several years.

In July, the attorney general said he would be looking at lenders, investment banks, lawyers, accountants and Wall Street rating agencies as the state attempts to root out problems that resulted in a slew of mortgage foreclosures in Ohio.

This post from almost a year ago should make it very clear that I have little patience with predatory lending, and that I’m more than a little upset with the damage it has done in Cleveland and other part of Northeast Ohio. Problem is, the governor and attorney general seem to think that all subprime lending is predatory, and vice versa. Nothing could be further from the truth.

It would also help if more borrowers had a modicum of financial sense. That they don’t can be mostly blamed on lousy public schools Strickland isn’t interested in fixing until, oh, 2009 or so.

Instead of harassing every subprime lender, the attorney general should be finding and criminally prosecuting the companies and loan officers who knowingly did genuinely predatory deals.

But noooooo. Acting in concert with New York Attorney General Cuomo, who has been deservedly ripped into by Jim Cramer during the past few days, Strickland and Dann may succeed in restricting the availability of credit throughout the country to the point where the slowed-down housing market will stay slow, and consumers in general will have less to spend. This has the potential to put the brakes on the currently pretty-good economy, and could even trigger a recession.

Someone should ask Ted Strickland and Marc Dann if that’s what they want.

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