States Growing Hair On Their Pair

It's about damn time:

Frustrated by the banks’ inability or unwillingness to stop an avalanche of foreclosures, the states are considering lawsuits over the creation and marketing of millions of bad loans as well as the dismal pace of mortgage modifications.

Good.

As I have repeatedly opined, there is more than enough fertile ground here for lots of lawsuits to spring up and take root.  Indeed, let's go down the list of what I believe are the grounds for such suits:

• Most of the "exotic" loans being made during the housing boom were never intended to, on balance, be "paid as agreed" leading to a clean "fee simple" title on the property.  An "Option ARM" or "Subprime" loan that qualified the buyer at the teaser rate (or anything similar), where the forward view three or five years later would result in a payment of two or three times the original amount implied a per-year compound annualized growth in income of 15-20% for the buyer.  This was not disclosed, of course, yet it is what was being "discounted" in those notes, and without that capacity these notes were entirely reliant on "return business" to avoid default.
  
  
• That "return business" turned the contemplated transaction into nothing more than a churning operation.  Indeed, many borrowers were even given some variant on the theme: "come back before the reset and simply refinance!"  The problem here is not simply that this cycle depends on ever-ascending asset prices - it is that this is not a mortgage in the legal sense at all, but rather is a sophisticated capital market bet that happens to involve most people's largest asset - their house.  The percentage of buyers who understood what they were doing in this instance was vanishingly small, and the percentage of Realtors and Mortgage Brokers who explained what they were really doing was close enough to zero that we might as well just put a goose egg in that column.
  
  
• Both mortgage brokers and Realtors have (successfully, thus far) hidden behind the "no fiduciary responsibility" banner.  We need to fix that in the law, so that fiduciary responsibility attaches to these individuals who hold themselves out as "experts" in their respective fields of finance and real estate.  But even without that formal definition under the law the generalized fraud statutes do not permit you to make a knowing misrepresentation, and it sure looks to me like everyone involved in this party did, from the big banks on down the line to the lowly "local real estate agent." 

The general view of the states appears to turn on the same principle:

While statutes vary, those of every state prohibit fraud in consumer lending. The attorneys general are considering the theory that the banks essentially perpetrated a vast fraud on consumers by marketing exotic loans that would prove impossible to pay back.

And of course, now that the states are considering going after the alleged scammers en-masse, The Mortgage Bankers Association is pulling out the usual "threaten people with our big guns" game:

The Mortgage Bankers Association, a trade group, declined to comment on the possibility of state fraud lawsuits. A spokesman, John Mechem, warned that consumers would end up paying for any campaign of stepped-up legal activity.

As opposed to the paying they've already done?

Has it not dawned on these clowns that a few million Americans dispossessed of their homes as a consequence of the banking industry running what amounts to a complex capital market bet on the back of the American Consumer, without disclosing to him or her that they're all part of the machine and will bear the loss, along with those who bought this trash, WHEN, not if, mean reversion occurs, has already brought the "paying" part to America and dumped it squarely in the common man's lap?

The Clearing House ruling rolled back an expansion of federal authority that began more than five years ago. In January 2004, the Comptroller of the Currency, the agency responsible for regulating national banks, issued two rule changes that had a far-reaching effect on the ability of state banking regulators and law enforcement to pursue violations of state law by large banks and their subsidiaries.

The rule changes broadened the protections afforded to national banks against prosecution for violations of state civil rights and predatory lending laws and other banking statutes. In a statement announcing the regulations, then-comptroller John D. Hawke Jr. said that his agency would take the lead on preventing lending abuses by the banks.

OCC then did exactly nothing while the subprime, liar loan and OptionARM lending boom expanded by leaps and bounds, more than doubling the price of homes in bubble markets while incomes remained flat. 

The Federal Government willfully and intentionally looked the other way while the citizens were looted, and when the game wound down all the banksters that had profited once from the "puppy mill" churn game came back to the government and looted the citizens again via the myriad bailouts - an endeavor that is still ongoing today!

Oh, and lest you believe that President Obama, with his "hope and change" mantra, has actually changed anything, you might want to consider that he continues to "kneel before Zod" as does Barney Frank and Chris Dodd:

Two weeks ago, the House Financial Services Committee voted to give the federal government the power to block states from regulating large national banks in some circumstances.

That's right - they're still at it.

Two words to the States: 10th Amendment