Banking Law

Private enterprise keeps trying to make a free market system work and the federal government continues to thwart such efforts through the operation of the law of life that states that if the road to hell is paved with good intentions, then the road paved with the federal government's intentions is proof that there exists a place far worse than hell.

The latest example of unintended consequences of the federal government's handling of financial institution "bailout" programs comes from the Dallas Business Journal. It recently wrote a profile of two typical Texas real estate entrepreneurs who saw an opportunity to buy distressed loans from banks and were doing quite well at the task until sellers (banks holding real estate loans) decided that they might as well wait until the Treasury Department stopped standing in a circle, singing "Kumbaya," actually got a "toxic asset purchase" program up and running, and gave the sellers some indication of whether they should deal with capitalists, who might actually drive a hard bargain because they understood basic business principles and were spurred by the desire to make a profit, or whether they should, instead, deal with a government-financed plan where bureaucrats would overpay for assets because basic business principles are the last thing on their minds and the profit motive is as irrelevant as the long-forgotten concept of "federalism."

A group of Dallas investors has put together a $10 million fund to buy up mortgage pools that selling banks consider toxic.

RTR Capital, a joint venture between Cienda Partners, Transition Capital Partners,and others, was formed after about a year of studying mortgage-backed securities.

That first look revealed high prices that just weren?t sustainable, said Phil Wise, founder of Cienda Partners.

That changed last year, and the fund was able to buy pools of performing second mortgages for half of their face value ? or less.

"Why do we care about vultures," a consumer advocate might inquire, quite rightly. Here's why.

By paying so little, RTR can make money even if some portion of the borrowers default.

But default is not in the interest of buyers such as RTR. Rather, they can afford to work with borrowers who are at risk of defaulting.

?If the current holder has them on the books at 100 cents on the dollar, we have the ability to go back to the borrower, restructure the loan, and we still get a good return,? said Dan Patterson, founder and chairman of Transition Capital Partners. ?We can cut somebody?s debt service in half. Our job is to keep that borrower in the home.?

Because they buy the assets for a cheap price, they've got leeway, and an incentive, to modify delinquent loan terms to the extent reasonably required to keep the loan performing and the borrower in the home. And here we thought all that evil capitalists wanted to do was to foreclose and kick borrowers to the curb, usually around the Christmas holidays, because-you know-that's "just the way we roll."

It's hard to believe that these guys are making any money, isn't it?

The early returns for RTR look promising. Two of the four loan pools it has purchased are close to covering their expenses in less than a year. Given that the second mortgage pools it has acquired pay off on average over a period of seven years, that means the fund has a good chance for some strong returns.

Well, that's encouraging, or at least, it WAS encouraging until the federal government threw a dead skunk in the middle of the highway to loan modification heaven.

In the last two months, the sale process has been slowed by the introduction of the federal government?s Public-Private Investment Program.

That program allows buyers such as RTR to use government loan money to do what it has been doing with its own money.

Once that program was introduced in late March, banks quit selling and buyers quit buying, waiting on details of the program.

A private business is humming along, helping banks offload troubled loans, then working them out, and the program grinds to a halt because of uncertainties generated by a government program that moves at a relative snail's pace to get up and running, then switches gears a few times. It's the uncertainty generated by the announcement of these programs coupled with the length of time it takes these programs to be implemented that prolongs the agony.

On the other hand, hope springs eternal, especially in the hearts of Texas entrepreneurs, for whom all glasses are always half full.

?We think it?s a great source of financing for us, but the lenders are sitting on the sidelines to see if that thing gets legs,? Patterson said.

From the banks? perspective, the program could lead to more buyers and better prices for the sellers.

Yeah, it could. Or, maybe, it will merely result in churning a lot of press and accomplishing not much of anything. You remember Hope For Homeowners, don't you? That's another fine example of federal government program to intervene in the private sector that's worked out swimmingly.