Prove That Paper is Something Other than Paper and Atlanta Fed Gathers Intelligence But Not Much Else

Remember what it felt like when you watched OJ not speeding down the freeway? This is sort of like that but with more bodies.

These days, Bettye Fine Collins doesn’t talk like a power politician. “It’s not easy being me,” she complains. It’s not hard to understand why. As president of the County Commission in Jefferson County, Alabama, she’s the top elected official in one of the nation’s most financially troubled jurisdictions. The county of 660,000, anchored by Birmingham, has teetered on the brink of bankruptcy since April 2008. That’s when Jefferson County ceased making payments to creditors holding bonds that paid for its sewer system. “It’s a long, terrible situation,” Collins says. “I don’t think there’s another situation in this country that would compare.”

Jefferson County’s problems stem from a noxious mix of incompetence, political paralysis, corruption and bad luck. While a possible solution is in the offing, the tale is a cautionary one—for municipalities across the country, as well as anyone who is owed money by a local government.

Jefferson County’s saga began in 1993, when members of the Cahaba River Society complained that the county’s sewer system was discharging raw sewage into waterways. Federal officials issued a consent decree in which Jefferson County promised to upgrade the system.

To do so, the county issued $3 billion in bonds, an incredible amount for a sewer system with only 150,000 customers. As sewer rates rose to meet those costs and Jefferson County struggled under its debt, county officials looked for a way to lessen its loan payments. In 2002 and 2003, they refinanced their bonds with variable-rate and auction-rate securities. Auction-rate securities are bonds where the interest rate is reset by auctions conducted by brokerage firms every few weeks. “It’s a little like someone buying a house and getting a pretty good 30-year fixed-rate mortgage,” says Christopher “Kit” Taylor, former executive director of the Municipal Securities Rulemaking Board. “Then somebody says, ‘Why don’t you get an adjustable-rate mortgage?’”

Auction-rate securities were supposed to be safe, but the auction-rate market collapsed in February 2008. That wasn’t the county’s only misfortune. The bond insurance companies that were backing the county’s debt suffered their own fiscal problems and their credit was downgraded. All of which caused the county’s interest rates to skyrocket, much like a homeowner whose subprime mortgage has just reset. Revenue from sewer fees could not keep up with the borrowing costs. On April Fool’s Day 2008, Jefferson County couldn’t make its payment on its debt. Instead, it reached an agreement with its creditors to pay the interest and get an extension on the principal.

These forbearance agreements have continued ever since. Last September, creditors took the case to federal court, hoping a judge would appoint a receiver to force the county to pay the nearly $4 billion it now owes. It wasn’t until this June that the judge ruled that federal law prevented him from appointing a receiver. In other words, Alabama’s most populous county simply hasn’t been paying its sewer debt for the past 16 months.

So I guess the answer really is to stop paying. What else can you do at that point?

+1 for the irony of "April Fools Day" in that particular tale.

Or you can make them prove whatever they are trying to hold over your head:

Kathy Lovelace lost her job and was about to lose her house, too. But then she made a seemingly simple request of the bank: Show me the original mortgage paperwork.

And just like that, the foreclosure proceedings came to a standstill.

Lovelace and other homeowners around the country are managing to stave off foreclosure by employing a strategy that goes to the heart of the whole nationwide mess.

During the real estate frenzy of the past decade, mortgages were sold and resold, bundled into securities and peddled to investors. In many cases, the original note signed by the homeowner was lost, stored away in a distant warehouse or destroyed.

Persuading a judge to compel production of hard-to-find or nonexistent documents can, at the very least, delay foreclosure, buying the homeowner some time and turning up the pressure on the lender to renegotiate the mortgage.

"I'm going to hang on for dear life until they can prove to me it belongs to them," said Lovelace, a 50-year-old divorced mother who owns a $200,000 home in Zephyrhills, near Tampa. "I'll try everything I can because it's all I have left."

In interviews with The Associated Press, lawyers, homeowners and advocates outlined the produce-the-note strategy. Exactly how many homeowners have employed it is unknown. Nor is it clear how successful it has been; some judges are more sympathetic than others.

Hopefully more homeowners employ this than getting pissed off waiting for a Bank of America loan modification.

It must be some consolation that others got pounded by ARSs as well?

Well speaking of Alabama, Atlanta Fed has a branch there and it has confused the Internet:

Federal Reserve Bank Business Information

Federal Reserve Bank is a private company categorized under Federal Reserve Banks and located in Birmingham, AL. Current estimates show this company has an annual revenue of unknown and employs a staff of approximately 1 to 4.

4 people?

The Birmingham branch no longer conducts tours. They probably really need that 4th person most days to cover the bank failures in Florida I'm sure.

Actually Atlanta tells you what its plans are for the branch so you don't really need a tour:

As it has in the past, the Atlanta Fed also will continue to gather economic intelligence on Alabama’s economy through its Birmingham board of directors for use in formulating national monetary policy.

Freaky. What do you think they have on Jefferson County?

Regions (RF) wants to help:

Banking experts Wednesday struggled to digest the news. How, they asked, is it possible for a lender to extend loans to an entity that is pondering bankruptcy? While civic goodwill has value, they say, banks have a responsibility to regulators and shareholders to make responsible loans.

"Unless we are all missing something in the county's finances, I can't imagine it," said John Kottmeyer, a banking professor at Samford University who spent 32 years as a commercial lender. "It's a loan to a defaulted entity, and not doing that is beyond Banking 101, it's basic common sense."...

Well what would pressure Regions to make a move like that?

And why was Jefferson County redoing its website in July (that's not cheap) when it hasn't even paid its sewer bills? Responsible lending, Regions, srsly. Oddly enough, the largest item on Jefferson County's FY 2010 budget is the "Environmental Services Fund", where "Environmental Services" covers their sewer system... that hasn't been paid for in 16 months. A $265,634,864 item would certainly catch anyone's eye with nearly every other item in the single millions. With an m, we're talking state not federal.

I sincerely hope Atlanta Fed's Alabama arm gathered that particular bit of economic intelligence. There's a lot more of that out there but somehow I get the feeling they're missing it. Hell, this isn't even my job and I figured it out.

Economic Populist shows us why no one trusts bank regulators any longer. That's assuming that anyone ever did.

Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.