News, Research & Insights for American Homeowners, Patriots & Constitutional Conservatives
Whew.
Hey, who’s up for the hair of the dog that nearly destroyed the American financial system in 2008? The good news is that the sudden increase in subprime lending hasn’t hit the mortgage market yet. The bad news is that it’s hitting just about everywhere else: But as financial institutions recover from the losses on [...]
Whew.
Hey, who’s up for the hair of the dog that nearly destroyed the American financial system in 2008? The good news is that the sudden increase in subprime lending hasn’t hit the mortgage market yet. The bad news is that it’s hitting just about everywhere else: But as financial institutions recover from the losses on [...]
Look… I hate being a porcupine in a balloon factory, so I’m not trying to take anything away from the numbers that are even slightly better than they’ve been in the recent past. In fact, I’m an optimist by nature, so I hate being the one that comes off like Calamity Jim.
And, nothing I say should ever stop someone from buying a house in which they plan to live.
But, the structural problems we face have NOT changed, so I see no possibility that we aren’t going to see some continued weakening in the housing market in the years ahead, and I don’t care whether we’re talking Phoenix, or wherever else.
Nothing goes down in a straight line.
The Dow nearly doubled between March of 1935 to March of 1937 and smack dab in the middle of the Great Depression the economy appeared to be back on track. But, it gave up those gains the following year in a crack-that-whip sort of slide slide and a new recession saw unemployment back at 20%. After that, the DOW barely puttered along for the rest of the 1930s, never coming close to recapturing its March 1937 high.
Well, since our economy went off a cliff in 2007 we’ve had several periods during which “experts” have proclaimed that “the worst is behind us.” None has been anywhere close to correct… and many have had a vested interest in what they’re reporting. I understand that optimism is both fun, and a hard thing of which to let go, but the result of blind optimism during a crisis is that we won’t deal with the structural problems that are sure to continue kicking of our collective ass for years to come, and by years I do mean decades.
Lending in this country is… in a phrase, a complete train wreck.
To begin with, the federal government has essentially taken over consumer lending, at least as far as the $10 trillion home mortgage market is concerned. The government’s share of new loans now approaches 100%. Today, the three fastest growing government insurance programs are the FHA, the USDA’s single-family guarantee program, and … yawn… Ginnie Mae.
FHA is flat out bankrupt and after the election will be making headlines as the next bailout. Over the last few years it’s become the new sub-sub-prime. It’s leveraged at a little under an eye-popping 1,000 to one, which dwarfs Fannie’s previous record of 174 to one… and we know how well that never worked out. I want to say defaults are in the 20% range, but that number could be one or two points off in either direction.
The US Department of Agriculture’s (USDA) single-family guarantee program is the poster child for underpricing risk. Ed Pinto, a former chief credit officer at Fannie Mae, and an expert on government lending programs, recently explained that a borrower with a FICO score of 620 is able to get a zero down payment loan of say $150,000. According to Pinto, the all-in cost of the USDA loan is at least $12,000 below what Freddie Mac would require for the same borrower paying five percent down. What’s going to happen down this path shouldn’t be much of a mystery.
Going, going… it’s gone.
We haven’t had a private securitization of mortgage debt since 2007, and we won’t have one for a long time… certainly not until we correct the inadequacies of the system that created our current economic catastrophe, or until institutional investors take stupid pills en masse. That means a market dependent on the government for essentially all lending, and with Europe living on a razor’s edge, that’s just not good. The credit markets remain broken and we won’t see a real rebound until they have been substantively repaired. The way we’re facing facts lately, that could take a generation.
Demand for residential real estate is simply going to be much lower than in the past… half of homeowners are underwater and therefore unable to move. Saddled with debt and unable to find good paying jobs, first time buyers are delaying family formation and therefore their purchases of homes. The unemployment picture is little more than pre-election propaganda… the most recent numbers being largely the result of a warmer than usual winter. And foreclosures in 2011 were simply suppressed last year by litigation, and as banks awaited the settlement with the state AGs… they’re headed higher as we speak.
That makes some comparisons between 2010 and 2011 appear favorable, but it is a meaningless illusion… similar to the illusion of a housing rebound in 2009-10 until we saw the impact of tax incentives and the Fed buying trillions in mortgage-backed securities coming to an end.
What’s next? How about: “CASH FOR CRAP?”
Bring in an old toaster and the federal government will give you $500. Betcha’ that’s going to make for some very encouraging third quarter numbers.
Add to those factors the demographics of our aging baby-boomers, 78 million of us who will de facto be moving less and downsizing as we age. And don’t forget the certainty of a European default at some point in the next couple of years, and it’s just not anywhere near as pretty a picture as we’re going to have painted for us during the election year that’s ahead.
And all of that lackluster performance is occurring in an environment of record low interest rates. What do you suppose will happen to the housing market as those rates rise? Defaults will unquestionably spike once again, and credit will tighten even further. Prices simply have to fall farther before demand will increase enough to stabilize prices, let alone support any real broad based appreciation, because demand isn’t coming to the rescue, we’ve drowned it in a sea of judgmental punishment.
But again… nothing goes down in a straight line, so there will be moments where things will feel like the worst is behind us… followed by times where it will feel like it’s not.
What a house cost in the past, is entirely irrelevant. Real estate prices are not set based on their past, no more than stock prices are priced that way, which is why no one should still be holding Cisco at $84.
A few days ago, to make my point, all the news was “happy-in-homeland.” Today… well… not nearly as much…
From Bloomberg today…
The S&P Supercomposite Homebuilding Index fell 2 percent today. New-home sales fell 1.6 percent to a 313,000 annual pace, the slowest since October, from a 318,000 rate in January that was weaker than previously reported, figures from the Commerce Department showed today in Washington. The median estimate of 78 economists surveyed by Bloomberg News called for 325,000.
KB Home (KBH), the Los Angeles-based homebuilder that targets first-time buyers, sank 8.9 percent to $10.24. Revenue in the first-quarter was $254.6 million, falling short of the average analyst estimate of $328.6 million.
And here’s Dave Rosenberg from CNBC today…
The current recovery is the weakest one ever and being driven by warm weather, not by fundamental improvements taking place in the economy, says Gluskin Sheff economist David Rosenberg.
Deficit spending and loose monetary policies have further propped up the economy, which is much weaker than otherwise improving economic indicators would suggest.
“Is it growing? How could it not be growing,” Rosenberg said on CNBC.
“We’ve got four years of trillion-dollar-plus deficits, we have a Fed balance sheet that’s tripled in size, zero policy rates for three years. Of course you’re going to get some growth.”
It’s that kind of artificial growth that should worry the country.
“If you want to take a big-picture perspective, this goes down as the weakest economic recovery ever, despite all the ramp up in government stimulus, and that really tells you something.”
While unemployment rates continue to fall, warm weather deserves more credit than policy.
Up to 40 percent of those jobs are weather-related, such as construction jobs coming on line earlier than scheduled.
Warm weather also gave more Americans money to spend due to lower heating bills, which further distorts economic reality. “Employment data were affected by the seasonal adjustments,” Rosenberg says.
“It felt like March in February, and if you apply the March seasonal factors to February, employment would have actually declined.”
Mandelman out.
I happened to walk by Zuccoti Park in Manhattan yesterday, where the Occupy Wall Street protest is centered. I picked up a few pieces of protester literature. I can't say that I was in any way comprehensive in my collection. Some of the literature was just nuts, e.g., a flier blathering about admiralty law usurping the common law and the Trading with the Enemies Act. This flier could just as easily have been found at a Tea Party gathering. It gave new meaning to the term "fringe banking."
But I also picked up a thoughtful and intelligent, for example a flier about public banking and the Bank of North Dakota (the only state-owned bank in the United States). Hmmm. That sounds like a public option for banking. If the financial system is broken, maybe it needs some better competition. It's not such a crazy idea. We actually already do that quite a bit in the mortgage market-FHA, VA, RHS, Ginnie Mae, and historically the FHLBs, HOLC and Fannie Mae (Susan Wachter and I have a forthcoming book chapter on this, to be posted to SSRN soon). We've even done it in straight banking--most people forget that we used to have a U.S. Post Office Bank. We have an FDIC that used to compete with private bank insurance funds (see the opening chapters of Kathleen Day's S&L Hell for a description of the private Maryland S&L insurance fund that failed). And we have federal (public) currency that used to compete with and has now supplanted private bank notes. My point here is not to endorse public options or not, but merely to note that historically they were a response to failed private markets and should be part of the policy discussion.
Last week, the Justice Department decided to end the criminal investigation of former Countrywide Financial CEO Angelo Mozilo. People close to the case say that the overall collapse in the mortgage market has made it too difficult to prosecute the actions of any one particular executive.
So, in other words, Mozilo got off for his role in creating the housing market bubble and sub-prime implosion that fed into the global financial meltdown of 2008, precisely because the meltdown was so large? Well, that’s certainly nice to hear, don’t you think?
I’m not going to attempt to write some scathing or potentially insightful commentary about Mr. Mozilo, I’m sure that’s been done many times before, and frankly… he bores me to no end. But, at the same time I felt like I had to say something about a financial criminal of his stature picking up a get out of jail free card… it simply could not go by without at least a mention.
So, here’s sort of a highlights reel in print… I give you Angelo Mozillo, the man behind Countrywide, IndyMac, two of the most spectacular banking and mortgage industry failures in U.S. history. And not only that, but he also managed to eviscerate Bank of America as he made his way to the exit, retiring in 2008.
Here we go… join me, it’ll be quick, and then you’ll want to throw-up, so stay close to a bathroom is my best advice.
When the mortgage crisis started in October 2006, Mozilo filed a stock trading plan to sell 350,000 shares a month. He revised the plan twice, first in December so he could sell 465,000 shares per month, and then on February 2, 2007, the day Countrywide stock it a record high of $45 a share, he revised it again to sell 580,000 shares per month. En total, Mozillo sold 5.8 million shares for roughly $150 million between November 26, 2006 and the end of 2007.
Mozillo claimed he was only selling shares of his company’s stock according to a prearranged retirement schedule, but during that same time period, Countrywide’s shareholders lost all of the $2.5 billion the company had just spent on repurchasing shares.
The man has impeccable timing, no question about that. Countrywide’s exceptionally high 18% mortgage payment failure rate first appeared in 2006.
In the fall of 2007, Democratic Senator Chuck Schumer wrote a letter to the Federal Housing Finance Board warning its chairman, Ronald A. Rosenfeld about the Federal Home Loan Bank’s $51 billion in cash advances to Countrywide that were collateralized by $64 billion in bad mortgages.
In that letter Sen. Schumer wrote:
“I find these numbers alarming as reports continue to emerge about how Countrywide’s reckless and predatory lending practices were a leading contributor to today’s foreclosure crisis.”
Last October, Mozilo agreed to pay $67.5 million to settle the U.S. Securities and Exchange Commission’s accusations that he misled investors about Countrywide’s health and risk-taking, and generating roughly $140 million of improper gains from insider stock sales. Mozilo neither admitted nor denied any wrongdoing… (Want the actual SEC complaint, CLICK HERE.)
Mozilo’s internal emails, obtained by the SEC, show him referring to a sub-prime product as “toxic” and saying “the company was flying blind.” (Want to read the rest of the emails obtained by the SEC, CLICK HERE.)
California recently settled a predatory lending case against Mozilo (and another ex-Countrywide executive) for $6.5 million.
When the deal to sell Countrywide to Bank of America was struck in mid-January of 2008, Countrywide was valued at $4 billion and Bank of America’s share price was $38.50. Two weeks later, Countrywide posted a loss of $422 million for the fourth quarter of 2007. By the time the acquisition was completed on July 1, 2008, the deal’s value had fallen to $2.5 billion.
After eight months, $46 billion of TARP funds, $118 billion in government-backed asset guarantees, and an incredibly stupid merger with Merrill Lynch, Bank of America was $3.14 per share in March of 2009.
By then, Countrywide was being sued by everyone imaginable… homeowners, shareholders, municipal employee pension funds, and they were alleging everything from insider trading to inflated fees being charged to homeowners, to unlawful actions, collusion and mortgage fraud, and let’s not forget deceptive advertising having to do with a variety of predatory lending claims brought by Attorneys General from 11 states and led by Illinois and California on October 6, 2008.
Countrywide ultimately settled by agreeing to modify $8.4 billion in principal and interest rates on over 400,000 loans it had initiated, but the company neither admitted nor denied any wrong doing and no fines were levied. Following that, the company settled other predatory lending claims for about an additional $3 billion. But, these settlements led to a class action lawsuit brought by investors who argued that Bank of America didn’t have the right to modify Countrywide’s agreements.
Between July of 2003 and June 30, 2008, Mozilo had taken home more than $470 million in compensation and stock sales, which represents the third highest pay package of any financial or homebuilding executive during that time. If you’d like to see Mozilo’s employment agreement, as taken from the company’s 8K filing with the SEC in 2004, CLICK HERE.
“Mozilo’s fingerprints are all over the economic catastrophe we are living. He was the Typhoid Mary of the mortgage business, spreading the exotic-loan disease far and wide,” said Dan Pedrotty, director of the AFLCIO’s Office of Investments. “He was also grossly overpaid, especially considering the fact that he drove his company off a cliff.”
Time Magazine called Mozilo the #1 Culprit of the Financial Crisis.
Mozilo’s lawyers argued that “Countrywide’s problems were caused by the general collapse of the mortgage market nationally and not by any misdeeds by company executives,” according to the Wall Street Journal.
Best of all, I was dumbfounded to learn that Bank of America is writing the checks for all of these settlements… including one for $22.5 million, another for $45 million, a $60-some million settlement, and even $600 million to settle a class action suit brought by shareholders… even the recent $6.5 million to the State of California… all because BofA agreed to purchase Countrywide, indemnifying Mozilo and his ace lieutenants against legal costs.
So, very well done there.
Okay, that’s all I can take… I just learned something that I had always hoped wasn’t true… Crime Pays!
Mandelman out.
One of the biggest (and largely unaddressed) issues affecting all of Foreclosuredum is the inability to get a clear idea who owns the note and mortgage being sued upon. In many cases, it feels like a moving target and in an alarming number of cases the alleged ownership really does change right in the middle of the case.
In state courts there are alarming numbers of Ex Parte Substitutions of Party Plaintiff and assignments of bid and other very clear and specific actions taken by the dark and shadowy forces that operate the American mortgage market to shift and change and exchange the ownership of millions (billions?) of dollars in mortgages in property in foreclosure.
The fact that not many people care about this major issue is truly disturbing. Some folks are still stuck in the “the borrower owes this money to someone” mode, while others clearly get the fact that we owe a very real obligation to our national economy and probably to our national security and sovereignty to have real answers to the most basic question…
“Who Really Owns All This Mortgage Debt?”
Two opinions, two courts from either side of the country……..
US+BANK+V+EMMANUEL+RE+MERS+SLIPOPINION+Baum+Law+Firm+Conflcit+May+112010
In+re+Reyes+no+standing+for+servicer+in+absence+of+proof+of+assmts-1
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The power brokers and Fat Cats are swarming Washington DC in a concerted effort to paper over and walk away from the massive fraud and liability that permeates the entire mortgage market and our entire economy….
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The simple, unsophisticated motion attached below lies at the heart of the Category 5 hurricane that has been hovering over Florida for years now, it gaining strength and will obliterate the financial markets that are theoretically run or operated by all those big shot, smart guys on Wall Street and in DC. I say theoretically run because I think we’re all recognizing that this whole system has run of it’s track. The entire US mortgage market, and with it or financial system, is like a beat up, broken down jalopy of a big old Winnebago that’s screaming down the highway at full speed…smoke and oil billowing out of it with pieces and parts flying off in every direction. Some of us look at that picture and think, “that don’t look right.” Others, like the big shots in DC and Fat Cats on Wall Street, say, “Everything’s just fine, no problem here folks. Take our word for it, things are just fine..just fine…just fine.”
Bank of America is reported as saying they’ve reviewed all their files and they have not found any significant problems at all….that’s a statement so absurd it defies commentary. Apparently all my clients and every Realtor who will tell you that Bank of America is the absolute worst to deal with are totally wrong.
Denial is a very, very dangerous defense mechanism.
And here is my simple little motion, filed two years ago and never answered yet.
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COMMENT FROM READER: I received a printed copy from the Deutsche Bank, in reply to a complaint I filed against Deutsche Bank to Federal Reserve Bank New York. Title of the Page is “ROLE OF THE TRUSTEE IN THE US MORTGAGE MARKET”
Under the TRUSTEE; It says ” Performs a variety of functions, among them acting as TRUSTEE for the Securitization Trust and sometimes CUSTODIAN FOR THE MORTGAGE DOCUMENTS. A corporate trustee for the mortgage backed securities (MBS) only serves an administrative role, but has no ownership stake nor beneficial interest in the underlying loans of the securitization.
ROLE OF TRUSTEE IN A FORECLOSURE
Deutsche Bank in its capacity as trustee holds certain mortgage loans for MBS transactions. The BENEFICIAL OWNERS of these loans are INVESTORS in MBS, typically large institutions such as pension funds, mutual funds and insurance companies. Although the trustee of MBS is legal owner of record of mortgage loans. THE TRUSTEE DOES NOT ITSELF HAVE AN ECONOMIC INTEREST IN THE LOANS. Moreover the trustee is only NOMINALLY involved in the foreclosure process.
RESPONSE: I thank the reader for bringing this to my attention and would like copies of the documents sent to ngarfield@msn.com. Here the largest (by far) originator of foreclosure process in the country who is now doing so in its own name is, in writing,. disclaiming any interest, ownership or rights to the loans, much the same as MERS.
This is in direct contradiction to actual testimony and proffers by counsel in the courtroom. I’ve been there and I’ve heard it. It’s a lie. The ONLY real parties in interest are the investors and really IS that simple. The only parties that advanced money to fund this scheme are the investors. THEY created a pool of money first that was then replaced with a complex web of collateralized debt obligations, synthetic CDOs etc.
The ONLY other parties that LEGALLY received any benefit of the money in that pool of money were the homeowners who put their house up as collateral — collateral that overstated, just as the value of the mortgage backed securities was over-stated. Until we all get on the same page about this we can’t fix it. Both the investors and the borrowers were cheated and defrauded through outright lies, deception and hundreds of pages of documents with conflicting provisions. The only provisions in use wer ethose that benfited the itnermediaries to the detriment of both the borrowers and the ivnestors.
The page we need to be on is that there was single transaction between the investor and the borrower. everyone else was an intermediary agent, fiduciary or intervenor unwanted by either the investor or the borrower.
The only people who actually lost money were the real parties in interest — the investor and the borrower. Deutsche Bank and others like it are doing their best to keep the borrowers and investors as far apart as possible just like they did when they did the loan. If the borrowers and investors ever get together and compare notes, they will BOTH file suit against ALL the intermediaries for fraud, breach of contract and breach of fiduciary duties. At that point Deutsche Bank will have no place to hide because they cannot say they are the real party in interest when the real party in interest is standing right there in court.
When we are all on that page, the mortgage mess will unravel along with the death grip that Wall Street has on our economy and millions and homeowners. Investors will recover far more money than they have been offered or paid and borrowers will get to keep their homes with a new mortgage that reflects the realities of the history of their transaction and the true fair market value.
At the risk of being accused of going after the obvious choice for this month’s posterior player, this “Rear” just had to be Mr. Llyod Blankfein, CEO of Goldman Sachs. I mean really… who would you have chosen? Did you watch his testimony in front of the Senate Subcommittee? Can you say “synthetic CDO”?
Lord Blankcheck testified that Goldman’s clients’ trusting the firm was essential to the firm’s success. He then went on to reject any suggestion that Goldman might have the teensy tiniest obligation to disclose the fact that it was betting big against the bonds, and I use that term very loosely, it was selling to investors. After that, Baron Blankcheck went with the all-too-familiar refrain that he just couldn’t answer any other questions about the “ins and outs” of the situation, under the rationale: “Because I just don’t know more than what I’ve heard from Mr Tourre’s testimony.”
He doesn’t know more than that? Wow. See, now I would have thought that in order to be in the running for Goldman’s Chief Executive slot, you would need to know at least a scosh more about how the firm was making billions of dollars while the housing market was causing the entire U.S. economy to circle the drain, than what we heard during one day’s testimony by some 31-year old, junior banker known as Fabrice “Fabulous Fab” Tourre. But, apparently not. Oh well, live and learn, as my mother likes to say.
It was truly something to behold. The Senators grilled various Goldman execs about the firm’s role in the financial crisis, but Baron Blankcheck remained steadfast in denying that Goldman had taken a “short” position against the mortgage market in 2007. He also denied that there was any fraud involved on Goldman’s part.
So, let me get this straight… he doesn’t know anything about the “ins and outs,” as he put it, but yet he’s absolutely positive that the firm didn’t take a short position against the mortgage market in ’07, and knows for sure that there was no fraud involved.
Senator Levin, the Committee’s Chair said: “And you want people to trust you? I wouldn’t trust you.”
Well, sure… Carl wouldn’t trust him, but that’s only because a 10-year old could tell you that the man is lying through his teeth. This is why I think that we’ve gotten too civilized over here… we’ve let decorum grow out of hand. I’m thinking of starting a movement called: “People in Favor of Hitting Bankers With Sticks.” We could call it: PIFOHBWS.
Just think how it would have looked… Blankcheck would have said: “Gee, I couldn’t tell you about the ins and outs of those billions we made,” and someone would have walked over and whacked him with a good size stick. Now that’s what I call compelling television.
Remember a few years back… when Pakistan was having all the political turmoil… bad. And there was civil unrest… bad. And they disbanded the country’s Supreme Court… also very bad. But, if you remember the footage on CNN, you had to kind of envy a country where they get to hit their politicians with sticks, right?
Days after their day in the Senate, in an interview with Michelle Norris, Blankcheck said, referencing Goldman’s buying and selling of securities, “we are the market maker, helping people to acquire the kinds of risks they want to have,” he said. “The clients we have are not deciding to buy or sell something because of what our position is.”
Oh really, Lloyd? Okay, let’s say he’s right, Goldman clients aren’t deciding to buy or sell having anything to do with what position Goldman is taking. Then why not disclose Goldman’s position, Lloyd? You know… in the spirit of disclosure, and all.
My favorite line of the day, unquestionably, came from Democratic Senator, Claire McCaskill, when she said quite seriously to Blankcheck and the Boys from the Bank: “You are the bookie, you are the house. You have less oversight than a pit boss in Las Vegas.” And that would be funny, if it weren’t so monumentally sad.
Here’s what’s so frustrating about Lloyd Blankfein and the bankers that broke the world: They made inconceivable fortunes on the downfall of our entire economy. Millions have lost jobs, millions more have lost their homes, taxpayers are on the hook for an amount that’s in the trillions… and these guys got bonuses… cashed out… Ka-ching! And they did so on the backs of U.S. taxpayers.
How’s this for insult to injury: While Blankfein was testifying to the Senate Sub-Committee, he made $2.8 million! Yes, it’s true, according to the New York Daily News. He owns 2,035,364 shares, so every time Goldman stock goes up a penny, the man earns roughly $20,000, and the day he testified, the stock went up more than a buck, from $151.63 to $153.04. By Wednesday of that week, the stock was up by $5.38, so that’s about $10 million, which is not bad for a boy from a working class neighborhood of Brooklyn.
Look, Goldman and Blankfein can claim until the cows come home that they didn’t bet against the housing market, and their clients, but… they did precisely that. I know it, Senator Levin and the rest of his committee knows it, and everyone else should know it too. They weren’t alone, all of the Wall Street bankers did the same, and they all got rich… at the taxpayers’ expense. Because the fact is that without us taxpayers, Goldman would have very likely gone bye-bye in 2008.
In October of 2008, after getting $12 billion from the taxpayers in bailout funds, they paid out more than $14 billion in bonuses at that year’s end. Last year, they set aside something like $90 billion for bonuses. And how much did they get from our bailout of AIG? I don’t even care to count it anymore.
What the bankers have done here is inestimable in terms of the harm they’ve caused, and yet they continue to have political clout at the highest levels of our democracy. Goldman Sachs Chief Lobbyist is now Treasury Secretary Tim Geithner’s Chief of Staff. Goldman Partner, William Dudley, replaced Geithner as President of the New York Federal Reserve.
During the first seven months in office Geithner’s calendar shows more than eighty contacts with Lloyd Blankcheck, Jamie Diamonds of JPMorgan Chase, or Citigroup’s CEO Vikram Pandit, who’s name sounds like a Bond villain. (I picture him petting his cat as he speaks.) Geithner had more contacts with Blankcheck than he did with Senate Banking Chair, Christopher Dodd. As Simon Johnson wrote in his recently published book, Thirteen Bankers, which I absolutely loved, by the way, “In a world where access is a prerequisite for influence, Wall Street had the access to the people that mattered, when it mattered.”
Credit default swaps (“CDSs”) became a way to “go short” on the sub-prime mortgage market. You could package bonds you knew would default and then buy credit default swaps on those bonds.
For $200,000 a year for ten years, you could buy a CDS on a $100 million AAA rated bond. The most you could lose was a few hundred grand, but when the bond defaulted, and you knew it would because you built it, you hit the $100 million jackpot.! Woohoo! You didn’t even need to own the bond to insure against its default.
And if that wasn’t bad enough, the Wall Street crowd didn’t stop at that perverse level of financial innovation, as they like to call it. Oh, no. They securitized everything they could get their hands on, turning almost pure crap into triple A rated mortgage backed securities, turned those mortgage backed securities into CDOs, thus turning garbage into triple A rated gold once again, and then they created “synthetic CDOs” that had nothing inside them but CDSs.
They built a house of cards, placed huge bets on the cards falling down, and then went and switched on a giant fan. Senator Levin made that as clear as could be, and I salute him and his fellow committee members. At the time of this article going to print, the SEC has referred the Goldman case to the Justice Department for criminal prosecution. Perhaps someone can now be held accountable, instead of the borrowers accused of buying homes they couldn’t afford.
“If they’re too big to fail, they’re too big,” says Alan Greenspan on October 15, 2009, who, after reading his book, I still like… so sue me.
Submitted by a reader from an unknown source — might be Dr. Housing Bubble, which is another Blog
To put it bluntly, the U.S. housing market today is in deep water. Nothing exemplifies the transfer of risk to the public from the private investment banks more than the deep losses at Fannie Mae and Freddie Mac. Fannie Mae announced a stunning first quarter loss of $13.1 billion while Freddie Mac lost $8 billion. At the same time, toxic mortgage superstar JP Morgan Chase announced a $3.3 billion profit for Q1. This reversal of fortunes has been orchestrated perfectly by Wall Street. Since the toxic assets were never marked to market, the big losses have been funneled to the big GSEs (and as we will show in this article, now makes up 96.5 percent of the entire mortgage market). In other words, banks are making profits gambling on Wall Street while pushing out mortgages that are completely backed by the government. We are letting the folks that clearly had no system of underwriting mortgages correctly or any financial prudence lend out government backed money and the losses are piling up but only in the nationalized Fannie Mae and Freddie Mac. What a sweet deal. Stick the junk in a taxpayer silo.
I wanted to go into the details on the current U.S. housing market and the data is not pleasant. In fact, it is downright disturbing. For background information, the U.S. has roughly 51 million active mortgages. As we go through the next 10 charts, it is important to keep this in mind. Whitney Tilson’s T2 Partners came out with some riveting charts regarding the current state of the housing market. Let us go through 10 of the most crucial charts.
Chart 1 – Homes in foreclosure
The ultimate sign of housing distress is foreclosure. This should be obvious. So for all the talk of a housing recovery I point to the above chart. Today, as in right now, we are in record territory for the number of homes in foreclosure. 14 percent of all U.S. mortgages are in some form of foreclosure. If you do the rough math, this equates to:
51 million x .14 = 7,140,000 mortgages in default or 30+ days late
I always get this question about how folks arrive at the figure of 7 million. The above equation should give you an idea. This by the way is not a good situation. And with many toxic loans including option ARMs and Alt-As still lingering in the market, we have a few more years of problems baked in unfortunately.
Chart 2 – Foreclosure filings
Building off chart one, foreclosure filings are still at record levels. In fact we are heading to a 3.5 to 4 million foreclosure year in 2010! This is somehow a positive thing for the market? People forget that foreclosures happen because of underlying economic issues. If everyone was making big bucks and homes were going up in value then we wouldn’t have this problem. Just look at the number of foreclosure filings back in 2005. Roughly 60,000 to 70,000 per month. Last month we hit 367,000+ which was an all time record. When foreclosure filings get back down to more normal levels, then we can say the housing market is improving.
What about strategic defaults? At most, 1 out of 5 foreclosures is probably a strategic default. But that means 4 out of 5 are losing their home because they can’t pay. This is why we absolutely need bigger down payment requirements. If you get a government backed loan (aka the 96.5 percent of the market) then you should at the very minimum put down 10 percent from actual cash sources (no using tax credit nonsense).
Chart 3 – Home prices dropping
I think some people have a hard time understanding why home prices have fallen lately. Well, when a large part of home sales are distress properties prices usually shoot to the downside. We had a nice little bump from the alphabet soup of government programs including HAMP, tax credits, and other gimmicks but the trend is back to lower prices. Why? Because the underlying economy is still not healthy. Now that people have to at least show some proof of income, it turns out that many cannot afford high priced houses. Is this a surprise to anyone? What do you expect when your strategy involves kicking the can down the road? The above chart basically shows one World Cup kick to the can.
Chart 4 – Nationalized housing market
Congratulations, you are the housing market. 96.5% of all originated loans are now government backed. Remember Fannie Mae and Freddie Mac and their epic continuing losses? Apparently banks have no problem originating loans as long as they can use the government money to gamble in the stock market.
Wall Street enjoys handing your money out. They like to beat on their chest about the free market but have no intention of lending out their own money (i.e., your bailout funds). In fact, Wall Street has convinced itself that your money is basically their hard earned cash. For the risky housing market, they’ll be the middleman in lending out mortgages that are defaulting in mass. What do they care if the economy is on stable footing? They don’t care if you lose your job and can’t pay the mortgage in one or two years. By then, the banks will be gambling in another bubble putting another sector of the economy at risk.
Chart 5 – Housing overhang
Remember that 7 million figure? Well there it is. Keep in mind that we keep adding to this pile because foreclosure filings are running at 300,000+ per month. So the market is actually saturated with inventory. You may not always see this in the actual data but we’ve gone through multiple case studies of shadow inventory. This large amount of overhang will add additional pressure to housing prices in the next few years. In fact, with this amount of housing we have anywhere from 7 to 9 years of inventory to clean out!
Chart 6 – Distress inventory as sales
The dip you see in 2009 was basically the failed efforts of HAMP and other bank stalling efforts. Now that banks have basically nationalized the housing market and have made Fannie Mae and Freddie Mac their dumping ground, they really don’t care. They can use the taxpayer money they get under the guise of helping homeowners to speculate on Wall Street while funneling GSE debt to the public. An absolute win for them. The biggest and most risky of debt gets pushed to taxpayers while the lion share of profits stays in house as bonuses. The system couldn’t be more corrupt or broken.
Chart 7 – Not paying and living with no foreclosure
This is a stunning chart. 24% of those that have made no payment in the last year are still not in foreclosure! In other words, you have tens of thousands of people living rent free while banks pretend everything is fine and claim billions of dollars in profits. What a sham! Just look at the 24 months with no payment column. 39,000 people have not made a payment in 2 years and no foreclosure has been filed!
Chart 8 – Home equity lines
With so many homes underwater, the second mortgage market has virtually disappeared. But we still have $842 billion in loans made during the peak of the bubble outstanding. Most of these are actually held by the big four banks and that is probably another reason why banks are moving aggressively against some while letting others stay in their home without payment. In fact, if you look at the above chart it seems that if you leveraged yourself with multiple mortgages banks might wait to move on you while if you only had one mortgage backed by a GSE, you’re out. Fannie Mae and Freddie Mac defaults on standard mortgages are spiking to record levels.
This means further bank losses but can Wall Street gambling outpace the losses from the housing market?
Chart 9 – nonpayment savings
There is an upside to not paying on your mortgage. More money to spend! Ironically some of the recent increase in consumer spending hasn’t come from job gains or actual employment improvement. It has come from people not paying their mortgage, downsizing (or getting a similar house for half off), and using the freed up income to spend. The estimate is that $8 to $12 billion per month is freed up from people not paying on their mortgage. You must have some uncanny self delusion to spin that as good news.
Chart 10 – REO vs distress
This chart pretty much sums it up. Banks are moving on current REOs (the small batch that they have) and pumping this up as good news but the 90 days plus foreclosure number is still trending up. How is this magic done? We’ve talked about it above. You simply don’t move on delinquent homeowners. You ignore actual losses. You mark your assets to fantasy valuations.
In total the housing market is in worse shape today than it was a few years ago. If the stock market was tied to housing we probably have a Dow 20,000 with 14 million foreclosures. The bailouts have been one large transfer of wealth to the banking sector. Remember that the bailouts were brought about under the guise of helping the housing market and keeping people in their homes. None of that has happened. Ironically the only thing that seems to keep people in their home is when they stop paying their mortgage! If that is the strategy we have arrived at after $13 trillion in bailouts and backstops to Wall Street we are in for a world of problems.
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11 May, 2010 Fannie Mae, Freddie Mac, alt-a, bailout, banking, debt, foreclosures, fraud, housing-2010, housing-data, market analysis, mortgages, wall street, write-downs
The case follows on the dismissal of numerous foreclosure cases in which judges across the U.S. have found that the materials banks had submitted to support their claims were wrong. Faulty bank paperwork has been an issue in foreclosure proceedings since the housing crisis took hold a few years ago. It is often difficult to pin down who the real owner of a mortgage is, thanks to the complexity of the mortgage market.
the majority of foreclosures go unchallenged, some homeowners have won the right to keep their homes by proving the bank couldn’t show, on paper, that it owned the mortgage.
[LPS a/k/a DOCX] produces documents needed by banks to prove they own the mortgages. LPS’s annual report said that the processes under review have been “terminated,” and that the company has expressed its willingness to cooperate. Ms. Kersch declined to comment further on the probe.
Editor’s Note: The executive branch is finally becoming involved. The foreclosure mills have been producing dubious and/or fraudulent, fabricated, forged documentation for 3 years or more. Some of these foreclosure mills are operating in the same office and owned by the law firms prosecuting foreclosures. Maybe sooner than later these unethical, illegal practices will stop and the people responsible will be prosecuted for criminal violations, civil fines, and administrative grievances in which their licenses will be revoked.
But in the end we still have millions of homes whose title is at least clouded, probably defective and will soon become unmarketable as title companies realize the issues presented by fraudulent foreclosures by entities other than the creditor.
Wall Street Journal
April 3, 2010
U.S. Probes Foreclosure-Data Provider
Lender Processing Services Unit Draws Inquiry Over the Steps That Led to Faulty Bank Paperwork
By AMIR EFRATI and CARRICK MOLLENKAMP
A subsidiary of a company that is a top provider of the documentation used by banks in the foreclosure process is under investigation by federal prosecutors.
The prosecutors are “reviewing the business processes” of the subsidiary of Lender Processing Services Inc., based in Jacksonville, Fla., according to the company’s annual securities filing released in February. People familiar with the matter say the probe is criminal in nature.
Michelle Kersch, an LPS spokeswoman, said the subsidiary being investigated is Docx LLC. Docx processes and sometimes produces documents needed by banks to prove they own the mortgages. LPS’s annual report said that the processes under review have been “terminated,” and that the company has expressed its willingness to cooperate. Ms. Kersch declined to comment further on the probe.
A spokesman for the U.S. attorney’s office for the middle district of Florida, which the annual report says is handling the matter, declined to comment.
The case follows on the dismissal of numerous foreclosure cases in which judges across the U.S. have found that the materials banks had submitted to support their claims were wrong. Faulty bank paperwork has been an issue in foreclosure proceedings since the housing crisis took hold a few years ago. It is often difficult to pin down who the real owner of a mortgage is, thanks to the complexity of the mortgage market.
During the housing boom, mortgages were originated by lenders, quickly sold to Wall Street firms that bundled them into debt pools and then sold to investors as securities. The loans were supposed to change hands but the documents and contracts between borrowers and lenders often weren’t altered to show changes in ownership, judges have ruled.
Related Documents
Documents processed by LPS that said an entity called “Bogus Assignee” owned the mortgage:
That has made it hard for banks, which act on behalf of mortgage-securities investors in most foreclosure cases, to prove they own the loans in some instances.
LPS has said its software is used by banks to track the majority of U.S. residential mortgages from the time they are originated until the debt is satisfied or a borrower defaults. When a borrower defaults and a bank needs to foreclose, LPS helps process paperwork the bank uses in court.
LPS was recently referenced in a bankruptcy case involving Sylvia Nuer, a Bronx, N.Y., homeowner who had filed for protection from creditors in 2008.
Diana Adams, a U.S. government lawyer who monitors bankruptcy courts, argued in a brief filed earlier this year in the Nuer case that an LPS employee signed a document that wrongly said J.P. Morgan Chase & Co. had owned Ms. Nuer’s loan.
Documents related to the loan were “patently false or misleading,” according to Ms. Adams’s court papers. J.P. Morgan Chase, which has withdrawn its request to foreclose, declined to comment.
Linda Tirelli, a lawyer for Ms. Nuer, declined to comment directly on the case.
Ms. Kersch said LPS didn’t actually create the document and that the company’s “sole connection to this case is that our technology and services were utilized by J.P. Morgan Chase and its counsel.”
While the majority of foreclosures go unchallenged, some homeowners have won the right to keep their homes by proving the bank couldn’t show, on paper, that it owned the mortgage.
Some lawyers representing homeowners have claimed that banks routinely file erroneous paperwork showing they have a right to foreclose when they don’t.
Firms that process the paperwork are either “producing so many documents per day that nobody is reviewing anything, even to make sure they have the names right, or you’ve got some massive software problem,” said O. Max Gardner, a consumer-bankruptcy attorney in Shelby N.C., who has defended clients against foreclosure actions.
The wave of foreclosures and housing crisis appears to have helped LPS. According to the annual securities filing, foreclosure-related revenue was $1.1 billion last year compared with $473 million in 2007.
LPS has acknowledged problems in its paperwork. In its annual securities filing, in which it disclosed the federal probe, the company said it had found “an error” in how Docx handled notarization of some documents. Docx also has processed documents used in courts that incorrectly claimed an entity called “Bogus Assignee” was the owner of the loan, according to documents reviewed by The Wall Street Journal.
Ms. Kersch said the “bogus” phrase was used as a placeholder. “Unfortunately, on a few occasions, the document was inadvertently recorded before the field was updated,” she said.
Write to Amir Efrati at amir.efrati@wsj.com and Carrick Mollenkamp at carrick.mollenkamp@wsj.com
see FORECLOSURE_SUBPRIME_MORTGAGE_LENDING_AND_MERS1
Editor’s Note: This appears to be public domain. The article is excellent in its analysis of MERS. Here is the Table of Contents:
FORECLOSURE, SUBPRIME MORTGAGE LENDING, AND THE MORTGAGE ELECTRONIC REGISTRATION SYSTEM
Christopher L. Peterson*
TABLE OF CONTENTS
I.
THE AMERICAN REAL PROPERTY RECORDING SYSTEM
II.
THE ORIGIN AND OPERATION OF MERS
III.
THE QUESTIONABLE LEGAL FOUNDATION OF MERS
A.
MERS Does Not Own Legal Title to Mortgages Registered On Its Database
B.
MERS Lacks Standing to Bring Mortgage Foreclosures
C.
MERS’ Foreclosure Efforts Implicate the Federal Fair Debt Collection Practices Act
i.
MERS is a Third Party Debt Collector
ii.
Mortgage Servicers that Cloak Themselves in MERS’ Name Should be Construed as Debt Collectors
D.
Loans Recorded in MERS’ Name May Lack Priority Against Subsequent Purchasers for Value and Bankruptcy Trustees
IV.
ANALYZING MERS’ ROLE IN THE RESIDENTIAL MORTGAGE MARKET
A.
MERS and the Mortgage Foreclosure Crisis
B.
MERS and Atrophy of the Land Title Information Infrastructure
C.
Title Recording Law and Democratic Governance
Due to the major U.S. role in the mortgage market, certain classes of borrowers cannot find home loans as publicly financed debt mounts.
For many, selling a home nowadays is tough enough.
But recent changes in mortgage laws are sparking uproar.
Realtors complain new rules passed after the housing bust are actually hurting the recovery and keeping homes from getting sold.
For the Drawert family, the hardest part about selling their Plano home, came after they found a buyer.
“It cost us a lot of stress, we almost lost the deal,” Paul Drawert said.
It’s a common complaint across North Texas.
Many are finding home sales are stalling, due to paperwork.
“It was a problem we didn’t need to have. It is absolutely driving down the prices,” said Patti Tejes, a realtor.
The effects of new Fannie Mae and Freddie Mac rules, passed in May, after the foreclosure crisis, are unfolding now.
It’s called the Home Valuation Code of Conduct: new rules to fight mortgage fraud and prevent inflated home values by cracking down on home appraisers.
Critics complain the changes are too severe, causing lowball appraisals, that are driving down prices and killing sales.
“You’ve got a buyer willing to buy a property, a seller willing to sell a property, and you’ve got everybody’s hands tied by the HVCC rules currently in place,” said Tejes.
Take the Drawert home – the buyer and seller agreed to a price of $635,000.
Heidi Bruty was anxious to move in.
“Everything seemed to be closing in, coming in on time, and when the appraisal came, it was a real blow,” Bruty said.
That was because the appraisal came in at $514,000, more than a $100,000 lower that the agreed price, so the bank denied the loan.
“This is incorrect, there’s no house in that neighborhood that has ever even sold close to that price,” said Bruty.
They believe the appraiser compared the custom home to much smaller track ones in different neighborhoods.
“It’s about people getting shafted over this rule,” said broker, Kirk Tatom.
He now sees appraisers coming from miles away, comparing homes from different zip codes, even cities.
“They’re unfamiliar with the area. This house is on a golf course, overlooks a green, and they used all the comps that backed up to major roads – those aren’t comparable homes,” he said.
Banks used to pick their own appraisers but to eliminate corruption, now many hire third-party companies.
For a few weeks, appraiser Micah Beck worked under the new system but stopped, saying the rules are encouraging a culture of quick, shoddy appraisals.
“You give them what they want, which is in the last three months, you grab three sales and throw them on there, bing, bang, boom, you’re out the door. These guys popping out appraisals so fast for 100 bucks a pop, they’ll use the most recent three sales and shoot the value low, so they can keep doing them quickly, without a lot of grief,” he said.
New rules have been introduced to fight mortgage fraud.
Congress is now considering ordering a moratorium on the rules.
But supporters say changes were needed to keep home values in check and that critics are only using the appraisal rules as a scapegoat for the sinking housing market.
“I think HVCC is good. For a long time, we’ve needed changes to separate the appraisers from the lenders and mortgage brokers,” Allen Gardiner from the Appraisal Institute said.
For the Drawerts, the changes nearly sabotaged the deal.
After weeks, the buyers found another bank, and got a higher appraisal though it was still thousands less than the contract.
By then, the Drawerts were desperate to sell.
“You had a willing buyer, willing seller, a willing lender and you had an appraiser from outside the area, from Little Elm, Texas, who came in and undervalued the home and screwed up the deal,” said Erin Drawert.
A new reality: even with a buyer a house can still be far from sold.
E-mail jbetz@wfaa.com.
“Two giant players in the US mortgage finance market share a ‘bleak’ near- to immediate-term outlook as losses continue to mount, according to Moody’s Investors Service.”
“South Korean banks are set to return to the global mortgage securitization market and diversify their funding base, even if investor caution about Asian mortgage assets has recently raised costs for their securitized debt.”
Foreclosure News
