Banking Law

Although a final condemnation will have to await the drafting of a bill that's in process in Colorado, a preliminary press report justifies a hearty shout of "WTF"?

With foreclosure rates a problem in Colorado and throughout the country, Rep. Jerry Frangas, D-Denver, is drafting a bill that is intended to preserve property values in communities affected by residential foreclosures.

According to a draft of the bill obtained Thursday, the proposed legislation requires electric, gas and water utility companies to disclose when it appears a residence has been unoccupied for 60 days.

The proposed legislation also allows local authorities and mortgage companies to close or block off windows in abandoned property -- including removing weeds, brush and trash from the properties.

Mortgage companies that fail to maintain properties after 30 days' notice could be fined or cited for abatement efforts.

The standard deed of trust forms in use in Colorado should already give a lender the right to enter upon the property and to prevent or abate "waste." However, if this bill proposes that the state will impose a duty upon lenders to clean up properties that secure their loans prior to the time that they complete foreclosure proceedings and take title to the property, and subject them to fines if they do not, then I expect that lenders will squawk loudly.

Perhaps we're jumping the gun. It wouldn't be the first time. We'll see what this piece of sausage legislation looks like once it's introduced.

While we're on the subject of bad legislation, let's not leave out a piece of federal legislation introduced last week by Congressmen Mike Castle and Paul Kanjorski, the Emergency Mortgage Loan Modification Act of 2008, which was the subject of an article in Housing Wire.That bill would shield servicers from legal liability arising out of their decision to engage in "bulk modifications" of loans in a securitized pool, if the loans are in payment default or payment default is "reasonably forseeable." To sail into the "safe harbor" provided by the bill, the loan servicer must "reasonably believe that the net present value to be realized on the loan, as determined under the applicable contract, will be maximized by entering into the workout plan."

Although in his press release Rep. Kanjorski opines that the bill does not violate private contracts, that opinion is debatable. Paul Jackson at Housing Wire puts the problem succinctly.

Part of the problem, as HW covered earlier, may be that the highest-rated securities in most subprime RMBS deals have yet to suffer a wave of downgrades; the result, sources say, is that investors in different classes are at odds with each other over what is in their best interests.

As we mentioned only yesterday, when Congress messes with private contractual rights, trial lawyers get orgasmic. A commenter at Housing Wire wryly predicted the ultimate effect of such legislation.

The politicians really do need to buy a clue. Do they really think the big boys who hold the AAA or other highly rated paper are slugs, and that they?ll just sit on their hands and take the losses?

This law really should be named the Legal Profession Full Employment Act of 2008. Because I can guarantee you that government interference in these contractual arrangements will result in litigation - with a very strong claim that this proposed government action is an illegal taking. The aggrieved parties here aren?t you average folks - these are the big boys, with the big bucks, and who will hire the big guns.

If this legislation passes, count on it being in litigation for at least 5 years - and with an injunction prohibiting its enforcement as well. Meaning, no servicer will rely on the law, and nothing will change - other than more lawyers making more money litigating

over it.

Don't count on politicians "buying a clue." Of course, a special interest group can always buy a politician a clue (and his or her vote), but professional politicians rarely come out-of-pocket for clues.