BIG BANKS ERRED WIDELY ON TROUBLED MORTGAGES, U.S. REGULATOR CONFIRMS
A federal regulator confirmed yesterday that the country's biggest banks committed widespread errors in dealing with homeowners who faced foreclosures at the height of the mortgage crisis, but the findings are unlikely to put to rest questions from lawmakers and others about the extent of the problems, the New York Times DealBook blog reported yesterday. The report, released by the Office of the Comptroller of the Currency, is a post-mortem of the Independent Foreclosure Review, a costly but ultimately limited examination of how banks have mistreated homeowners. The latest analysis found that at least 9 percent of the errors discovered in the review involved banks improperly denying loan modifications that would have prevented foreclosures. The report also found that more than half of the errors were related to administrative flaws and improper fees charged to homeowners during the foreclosures process. Read more.
In related news, distressed mortgage funds are suddenly hot, but it is unclear whether the strategy will live up to the marketing hype, according to an analysis in today's New York Times. Donald R. Mullen Jr., the manager of Goldman Sachs's subprime mortgage trade during the housing bubble, is raising $1 billion for a fund to be managed by his investment firm, Pretium Partners. Deepak Narula's Metacapital Management also reportedly plans to start a fund to invest in delinquent mortgages. The hedge funds Ellington Management Group, One William Street Capital and Angelo, Gordon & Company are either already in the market or planning to start their own funds. Other institutional investors that are active in the so-called nonperforming loan market include The Blackstone Group, Oaktree Capital and Lone Star Funds. Read more.
FOURTH CIRCUIT DETERMINES THAT CHAPTER 7 TRUSTEES MUST BE PAID ON A COMMISSION BASIS
Releasing an opinion on Monday in Gold v. Robbins, the Fourth Circuit reversed a bankruptcy court ruling that had reduced a Chapter 7 trustee's commission-based compensation to what the bankruptcy court believed, instead, was his reasonable hourly services, according to the NCBankruptcyExpert Blog. The Fourth Circuit noted that § 330(a)(7), added by BAPCPA, states that "[i]n determining the amount of reasonable compensation to be awarded to a trustee, the court shall treat such compensation as a commission, based on §326." The use of the word "shall" in § 330(a)(7) is in contrast with the "may" language used elsewhere in § 330(a). Accordingly, the Fourth Circuit determined that absent extraordinary circumstances, a bankruptcy court is required to compensate chapter 7 trustees under a commission basis. The court remanded the case with instructions to the bankruptcy court to determine the proper commission-based fee after an evidentiary hearing. Click here to read the blog post.
Additionally, EOUST Director Cliff White made the following statement about the Fourth Circuit's ruling:
"I am very pleased that the Fourth Circuit has concluded that the U.S. Trustee Program's long-standing position was right as a matter of law: chapter 7 trustees should be granted a presumption in favor of a commission, absent extraordinary circumstances. The decision gives meaning to Congress's change in 2005 and provides needed predictability to trustees who do so much to make the consumer bankruptcy system work."
NONBANK LENDERS STEP INTO A VOID
A crop of investors are expanding rapidly to fill a void left by a banking sector that has grown averse to chancy bets: mortgages on riskier investments such as skyscraper construction, ailing malls and high-vacancy office buildings, the Wall Street Journal reported yesterday. The nontraditional lenders -- including mortgage real estate investment trusts like Blackstone Mortgage Trust Inc. and private equity-style debt funds like Mesa West Capital -- are being lured by yields that generally are one to five percentage points higher than loans on well-occupied buildings. Commercial-property lending in 2013 by mortgage REITs, other REITs and investment funds rose 332 percent over the prior year to $23 billion, according to a Mortgage Bankers Association survey. That surpassed the $17 billion lent in 2007 and included investments such as $350 million in debt from Starwood to build a new Manhattan headquarters for Coach Inc. That loan has an interest rate of 7.5 percentage points above the benchmark London interbank offered rate, or Libor. Banks also increased their lending during the same period, originating $100 billion in loans in 2013, a 76 percent increase over 2012, according to the MBA. Read more. (Subscription required.)
ANALYSIS: CRIMINAL CHARGES AGAINST BANKS RISK SPARKING ANOTHER CRISIS
As U.S. Justice Department prosecutors angle to bring the first criminal charges against global banks since the financial crisis, they'll have to stare down warnings of uncontainable collateral damage, Bloomberg News reported today. Stung by lawmakers' criticism that multibillion-dollar settlements have done too little to punish Wall Street in the wake of the financial crisis, prosecutors are considering indictments in the probes of Credit Suisse Group AG and BNP Paribas SA. Even after talking with financial regulators about ways to mitigate damage -- such as ensuring that banks keep charters -- prosecutors might not fully understand the consequences for the market, according to industry lawyers and bankers who are following the case. Bank clients -- including trustees, fiduciaries and pension funds -- could be forced to cut ties with a financial institution labeled a criminal enterprise, the lawyers and bankers said. Counterparties also might think twice before entering into billion-dollar transactions with such firms. Damaging a bank's business could lead to broader fallout across the financial industry, just as Lehman Brothers Holdings Inc.'s collapse in 2008 prompted investors to withdraw from other firms on concern that its exit would set off a wave of losses. Read more.
U.S. ECONOMY STALLS DRAMATICALLY IN FIRST QUARTER
The U.S. economy stalled during the first three months of the year, according to government data released Wednesday, failing to meet even modest expectations for growth, which could renew concerns over the sustainability of the recovery, the Washington Post reported today. The nation's gross domestic product expanded at a meager 0.1 percent annual rate in the first quarter -- well below the forecasts for 1.2 percent growth. The slowdown reflected weaker exports, a decline in business investment and cuts in state and local government spending, among other things. The recovery was propped up by strong consumer spending, driven in part by health care spending after the implementation of the Affordable Care Act. The Commerce Department, which releases the data, emphasized that the numbers are preliminary. The government will revise the data twice more as additional information is collected. Economists had already trimmed their expectations for growth during the quarter in the face of this year's brutally cold winter. Many believe the slowdown is only temporary and that the recovery will enjoy a bounceback through the spring. Read more.
EXPERTS DEBATE CHAPTER 14 PROPOSAL FOR LARGE FINANCIAL INSTITUTIONS ON LATEST ABI PODCAST
ABI Resident Scholar Prof. Charles Tabb talks with Profs. David Skeel of the University of Pennsylvania Law School and Stephen Lubben of Seton Hall University School of Law about the orderly liquidation authority of the Dodd-Frank Act for systemically important financial institutions (SIFIs) and proposals for a chapter 14 for SIFIs. Prof. Skeel, who worked with experts at the Hoover Institute on the chapter 14 proposal that is the basis of current legislation before Congress, believes that the Bankruptcy Code needs to be retooled for large financial institutions. Prof. Lubben agrees with the idea of amending chapter 11 for large financial institutions, but disagrees with various parts of the Hoover Institute's chapter 14 proposal. Click here to listen.
For further analysis of potential chapter 11 reforms, stay tuned to the work of ABI's Chapter 11 Reform Commission. The Commission will produce a report by the end of the year.
ABI IN-DEPTH
NEW CASE SUMMARY ON VOLO: HART V. SOUTHERN HERITAGE BANK (IN RE HART; 6TH CIR.)
Summarized by Thomas DeCarlo of White Lake, Mich.
The Sixth Circuit ruled that the bankruptcy court has jurisdiction to enter money judgment in adversary proceedings to except debt from discharge.
There are more than 1,300 appellate opinions summarized on Volo, and summaries typically appear within 24 hours of the ruling. Click here regularly to view the latest case summaries on ABI's Volo website.
NEW ON ABI'S BANKRUPTCY BLOG EXCHANGE: LANDLORD LEASE CLAIMS IN BANKRUPTCY
A recent blog post takes a closer look at landlord lease claims in bankruptcy proceedings.
Be sure to check the site several times each day; any time a contributing blog posts a new story, a link to the story will appear on the top. If you have a blog that deals with bankruptcy, or know of a good blog that should be part of the Bankruptcy Exchange, please contact the ABI Web team.
ABI Quick Poll
Enforcing pari passu clauses in favor of holdout bondholders by injunction against Argentina will undermine sovereign debt restructurings (NML Capital, Ltd. v. Republic of Argentina).
Click here to vote on this week's Quick Poll. Click here to view the results of previous Quick Polls.
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