I’ll Be Gone. You’ll Be Gone.

Banks should not be allowed to lobby regarding the regulatory reforms made necessary by their actions.  The public bailed them out a few short months ago and it is egregious that the banks still think they can take the political positions that they do to try to block reform. 

James Galbraith, currently the Lloyd M. Bentsen Chair in government and business relations and professor of economics at the LBJ School of Public Affairs at the University of Texas at Austin speaks on these and other issues on Bill Moyers:

http://www.pbs.org/moyers/journal/10302009/transcript1.html

“And that’s the point about the crisis, is that it could have been prevented. The people in authority two, three, five years ago, knew how to prevent it. They chose not to act, because they were getting a political and an economic benefit out of the speculative explosion that was occurring. “


JAMES GALBRAITH: They let all of this run, because they were getting a superficially stronger economy out of it. The ownership society, all that was a scam, basically, designed to lure people who could never afford these mortgages into accepting them. And yes, I think they, any rational person, certainly people in the industry, knew that this was not going to last. There was a little industry code, I’ve learned, IBGYBG. “I’ll be gone. You’ll be gone.”

BILL MOYERS: Really?

JAMES GALBRAITH: Yeah.

BILL MOYERS: The industry being the securities industry?

JAMES GALBRAITH: Well, and the mortgage originators and the bankers, generally.

BILL MOYERS: But that’s criminal fraud.

JAMES GALBRAITH: Oh sure. There was a huge amount of it. The Bush administration did not actively investigate the fraud that they knew, that the FBI knew was occurring, from 2004 onward. And there will have to be full-scale investigation and cleaning up of the residue of that, before you can have, I think, a return of confidence in the financial sector. And that’s a process which needs to get underway.


BILL MOYERS: The perplexing question to me is whether or not you can reform a system that is so infiltrated by the money from the people who are benefiting from what’s going on, who have a vested interest, and use their money to promote that vested interest to make sure nothing changes.

JAMES GALBRAITH: I think you can. I think the law is powerful. I think you cannot legalize financial fraud. You cannot fully conceal the tracks of financial fraud. You have to put the resources in to uncover it. You have to prosecute it. You have to give appropriate punishments, but we have a system, in this country, for doing that. It is a question of a decision to use the judicial resources that we have, to clean up the system.

BILL MOYERS: Timothy Geithner wants to provide a super-regulator to keep those big five firms in line. Will that work?

JAMES GALBRAITH: No, it will not work. The super-regulator will not be able to control those institutions. And probably will make all of the mistakes that the, if it’s the Federal Reserve, that the Federal Reserve made in the run-up to the last crisis

 

JAMES GALBRAITH: Well, the fact that there is lobbying going on, from financial institutions that were only yesterday bailed out by the taxpayer, is just egregious. It’s an outrage. And I know the administration has said this. And I applaud them for having said it, but the political position of the banks, to me, is just totally unacceptable. The public was obliged to rescue them. It is not their role, now, to be trying to tell Congress what shape and direction of the reform should take. This really should be out of their hands entirely.

Who Owns Foreclosed US Properties

Jeff Nielson’s take below (full piece at http://seekingalpha.com/instablog/407380-jeff-nielson/32957-who-owns-foreclosed-u-s-properties-part-i-scam-in-the-making)

Who OWNS Foreclosed U.S. Properties?, Part I: Scam in the making 4 comments
Oct 25, 2009 11:48 PM
A thanks to Edward Harrison who publishes the blog “Creditwritedowns.com” for his superb explanation of foreclosure and title issues dealing with “foreclosed” properties – in his commentary “What are the legal rights of lenders and homeowners in foreclosure?” It was that article which inspired me to write about some of the legal ramifications, based upon his research and analysis.

There is a lot of material in Mr. Harrison’s commentary, so for those interested in this issue, I recommend going to the source to read it in full. I intend to focus on two of the extremely important issues in that piece: the question of who holds title to a securitized mortgage, and (just as important) who has “standing” to initiate and prosecute a foreclosure.

For people with no familiarity with legal jargon, who has “standing” in a legal proceeding is a question of “proximity” to the case before the court. The test for this issue generally being some direct proprietary interest.

The problem for the Wall Street oligarchs, as they began to hatch their schemes to create the U.S. housing bubble (and their own, concurrent Ponzi-scheme) centered on the importance of their new “invention”: mortgage “securitization”. It is this “securitization” which was the key to creating the U.S. housing-bubble from the supply side – rather than most asset-bubbles which are (at least initially) fueled by demand.

Through this process, banks initiate a mortgage – and then immediately sell it to a 3rd-party. If Wall Street didn’t initiate the mortgage themselves, then they became the first buyer in the chain. Once holding this mortgage, these “financial wizards” sliced-and-diced these mortgages, mixed them together, and packaged and sold them in such a convoluted manner that even with the resources of the U.S. legal system at their disposal, courts have been unable to determine who holds clear, legal title to these mortgages.

However, the Wizards of Wall Street anticipated this legal dilemma. In 1995, they created a shadowy entity called Mortgage Electronic Registration Systems (MERS). Wikipedia defines MERS in this manner:

Mortgage Electronic Registration Systems is claimed to be a privately held company that controls a confidential [emphasis mine] electronic registry designed to track mortgages and the changes of servicing rights and ownership of mortgage loans in the United States.

Before I explain the role being played by MERS, and the importance of that role, let me get back to securitization. The reasons why it was absolutely essential in creating a housing-bubble, and Wall Street’s subsequent scams are relatively straightforward, when laid out step-by-step.

Wall Street pretended they were “reducing risk” by securitizing these mortgages and more or less moving them off of their own balance sheets. At first, this was probably true: by taking a fixed amount of debt, and dividing it amongst more people, the risk to the system as a whole (and the individuals) is reduced.

As a simple, numerical example, if I take $100 dollars of debt and initially divide that amongst 10 people, there is a given level of risk for each of these individuals and for the system as a whole (if too many parties should default). If I then split that same $100 dollars of debt and divide it evenly among 100 people, then that reduces both the individual risk and the systemic risk – since the smaller the individual debt, the lower the probability of default. The problem was that Wall Street (and the other players in this market) never intended for the amount of debt to remain fixed.

If you then take the same numerical example, but repeat that process nine more times you now have $1000 worth of debt (ten times the original amount) – but split amongst a group which is ten times larger. Thus, not only do the risks of each party revert to the original ratios (and risks of default) but the systemic risk is ten times greater because ten times more money and ten times more players are now identically leveraged.

It was through these debt “daisy-chains” that the Wall Street oligarchs were allowed to move from the reckless-but-standard 10:1 average leverage for this sector to an insane average of 30:1.

The problem was that both ratings agencies and regulators still pretended that there had been neither an increase in individual risk nor in systemic risk. To persuade these accomplices to “look the other way” with respect to risk required adding one, more ingredient: “credit default swaps” (CDS).

These were bogus “insurance policies” created by Wall Street to “insure” its entire Ponzi-scheme. This provided the pretext for credit-rating agencies to continue rubber-stamping “AAA” on these toxic securities, and allowed regulators Ben Bernanke and Tim Geithner (head of the New York Fed, at the time) to pretend that “systemic risk” was being “controlled”.

As I say, this was clearly and obviously fake “insurance”. Because everyone was pretending that systemic risk was only a tiny fraction of what it actually was, the same regulators allowed Wall Street to only list a tiny fraction of the necessary collateral/assets to write such “insurance policies”. It was through the willful participation of the ratings agencies and the Federal Reserve that Wall Street oligarchs supposedly “insured” over $50 trillion of credit default swaps – obviously an impossibility.

We need look at only one recent example of a credit default swap which “blew up” to make it clear that most of this market was a complete sham. In “Bankster Sues Bankster – AGAIN”, I referred to a lawsuit between Citigroup and Morgan Stanley.

In this example, it was Morgan Stanley which wrote the phony “insurance”, and Citigroup which was the beneficiary. Even after Morgan Stanley liquidated the collateral which “backed” this “insurance”, it is facing a 300:1 pay-out on this “policy”. With the entire U.S. mortgage market still sitting with a 10% delinquency level in this $50 trillion insurance scheme, and with each and every pay-out at astronomical odds (due to the grossly insufficient “collateral” for this insurance), a large number of pay-outs in this market must bankrupt Wall Street – as a matter of simple arithmetic.

This is yet another reason why Wall Street is hiding millions of already-foreclosed properties on their books – and refusing to sell them. The moment that the foreclosure sale takes place, the loss on the mortgage is “crystallized” and the credit default swaps are triggered. In my commentary on Friday, I explained how/why I estimated that Wall Street is currently hiding at least 5 million foreclosed properties in this manner. Meanwhile, the next big wave of foreclosures is just to about to begin (also covered in Friday’s commentary).

Returning to the housing bubble, the conspiracy by U.S. regulators and U.S. ratings agencies to allow Wall Street to leverage the entire U.S. financial system by 30:1 (from 10:1) meant roughly three times as much financing available for the same size of housing market. To accommodate the most rapid and extreme flow of “easy money” in the history of human commerce, many if not most U.S. banks simply erased their “lending standards”. Two years before the U.S. housing bubble officially burst “liars loans” had already become a common term of usage within the financial sector. Again, U.S. regulators were silent accomplices in allowing the eradication of lending standards.

Even without the use of such colourful terms to describe this fraudulently-created housing bubble, it would be obvious to any responsible regulator, rating agency, or banker that if you suddenly lend-out three times as much money to a population whose real incomes are steadily falling that their must be a huge increase in defaults. Thus, not only was this housing bubble a massive fraud on the individual level (through liars loans and other derelictions of duty), but collectively it was also a massive fraud, as it had to be obvious to the U.S. government (and specifically the relevant regulators) that there was an unsustainable “bubble” in the sector, as a whole.

This means that day after day, when Ben Bernanke got in front of the microphone to call the U.S. markets, the U.S. housing sector, and the economy as a whole a “Goldilocks economy” (where everything would keep going up in value) he could not possibly have believed his own words. They were uttered solely to enable the multi-trillion dollar Wall Street Ponzi-scheme to ensnare more victims.

It was thus apparent before the Wall Street-created U.S. housing bubble began that it would end in an unprecedented wave of foreclosures and defaults. In Part II, I will discuss Wall Street’s premeditated plan for dealing with these foreclosures, through its new “front man”, MERS.

[Disclosure: I hold no position in Citigroup or Morgan Stanley]

Themes: U.S. housing sector, U.S. financial sector, U.S. corruption

National Consumer Law Center Testimony on Mortgage Reform

For a little break from vitriol, let’s discuss some of the suggestions for regulatory reform, including the NCLC reservations regarding the proposed HR 1728: Mortgage Reform and Anti-Predatory Lending Act. 

Margot Saunders, Counsel for the NCLC testified before the  Committee on Financial Services in April regarding reservations about the current state of the reform bill and suggesting as follows (full testimony available at http://www.consumerlaw.org/issues/predatory_mortgage/content/Testimony-HR-1728-042309.pdf ):

At a hearing before the Subcommittee on Financial Institutions and Consumer Credit on

March 11, 2009, we provided a set of recommendations to reform the mortgage market which we

think are simple, inexpensive and would be very successful. Below these recommendations are

summarized.

 

We propose a different orientation to the mortgage regulation conundrum: rather than

creating a complex set of rules which are enforceable some of the time by some of the players

against some of those involved in the process, create a system which creates incentives to accomplish sustainable and secure credit.

 

We propose to you an approach which carries the following three key characteristics:

 

1. Simplicity – The rules should be fairly easy for most people to understand. Multiple

categories of creditors, borrowers, and types of loans result in confusion, without

establishing a clear structure designed to facilitate fair, affordable, and safe mortgage

lending.

 

2. Transparency – The contracts and obligations of the parties should be simple. The

rules governing the transaction should not only be clearly disclosed, but also be easy

to understand. The disclosures governing today’s mortgages have become

increasingly complex and technical because they are attempting to describe

unbelievably complicated transactions. The disclosures must be correct – but if it is

too difficult to describe the transaction, perhaps the transaction is too complex to be

permitted?

 

3. Appropriate Incentives – The current system rewards originators for making bad

loans – because the originators are paid regardless of whether the loan is unfair,

fraudulent, or unaffordable. Similarly, mortgage servicers are rewarded for servicing

practices which do not sustain homeownership or home-equity. Both the origination

and the servicing systems should be re-tooled so that the originators, the lenders, the

investors and the servicers all profit only from practices which promote sustainable, affordable

and safe home mortgages.

 

Outline of New Mortgage Regulatory Structure

1. Realigning Incentives – Pay Originators from Mortgage Payment Stream Only.

Insurance brokers are paid their commissions entirely from the stream of payments made by the

consumer for the insurance product. If the consumer can no longer afford the product and the

payments stop being made, the broker does not receive payment – so the insurance broker has every

incentive to ensure that the consumer is sold a product that is affordable. The insurance company

also has an incentive to ensure that the consumer can afford the insurance product: as soon as the

commissions are paid, the amount of the premiums that the company receives increases.

The insurance model of compensating brokers should be used for the mortgage industry:

require that both originators and lenders receive all of their costs associated with originating, making

and servicing the loan from the payment stream. A homeowner making payments on the mortgage is

the sign of an affordable, sustainable mortgage – the continued affordability of those payments

should be incentivized by the mortgage regulatory structure.

Currently, the origination process itself is the major source of profit. In fact, it is the only

source of profit for the mortgage broker and a not-insignificant source of profit for the mortgage

lender: both parties generally receive substantial up-front fees (almost always paid for from the

consumer’s home equity) at the origination of the mortgage. The lender, which then generally sells

the loan into a security, also receives compensation at that point. Neither party depends on the

payment stream to recover either their costs associated with making the loan, or for their profit. The

current system encourages loan churning – making new loans to homeowners over and over –

because the making of the loan is what generates the business and the profits in this market. This is the incentive that needs to be changed.

 

If instead the originator received a percentage of each payment for the first – say two – years

– of the loan, that originator would have a strong business incentive to ensure that the homeowner

would both be able to make the first two years’ payments, and that the homeowner would want to

continue making the first two years’s payments.

 

Even if the loan were affordable, if the homeowner refinanced it after the first few months –

say to obtain a lower interest rate – the originator would lose that part of the commission left

unpaid. To avoid this refinancing, at the time loan was first made, both the originator and the lender

would want to ensure that the loan were the best possible loan available at the time for the

homeowner.

This proposal would be structurally simple to implement: simply pass a federal law which

requires that all compensation to the mortgage broker, the originating lender, and the holder, be

recovered entirely through the regularly scheduled payment stream of the loan. Third party fees

necessarily incurred to close the loan would still be paid by the consumer at closing.

 

2. Making Simple, Fair Mortgages the Default Mortgage – Mandating the Offer of a Uniform Mortgage.

Originators should be required to offer every homeowner applicant for a Uniform Mortgage product. The Uniform Mortgage would be defined as a fixed rate, fully amortizing 30 year mortgage at a rate set by the lender in response to the perceived credit risk of the borrower, with no prepayment penalties.

Alternatives to the uniform loan can also be provided by the mortgage originator – but the

costs, risks and benefits would always have to be compared to the uniform mortgage that would be

offered. These comparisons – to be provided contemporaneously with the offer of the alternative

product would have to be provided at the same time as the alternatives are offered, and would be

provided via a simple format developed by the federal agency – presumably the Federal Reserve

Board – charged with developing the details of the new disclosure and transparency regulations.

These two changes – requiring that all profits from the origination process be paid through

the payment stream, plus requiring that homeowners always be offered the uniform fixed rate, fully

amortizing 30 year mortgage, with no prepayment penalty – would be relatively simple to mandate,

simple to implement, simple to comply with, and simple for consumers to understand.

There would essentially be just one variable in the uniform mortgage that would change in

response to the homeowner’s particular circumstances – the fixed rate applicable for the full term.

These changes would make the process of obtaining a mortgage, as well as the mortgage itself,

transparent.

 

3. Common Sense Rules Should Be Required. Deregulation of the mortgage origination

and servicing process has produced some strikingly absurd situations: lenders making loans without

determining the borrowers’ ability to make the scheduled mortgage payments, who then find that

those homeowners cannot in fact afford the increasing payments; foreclosures on homes when the

investors, the communities, as well as the homeowners would benefit from loan modifications

instead.

 

Common sense rules for sustainable long-term home ownership help not only homeowners

but also investors. Federal law should require that those making the decisions about the origination

and foreclosure of home mortgages must include some basic, common-sense requirements. For

example, the following rules should be applicable to all home mortgages made in the future:

 

  1. 1.        Mandate that Originators Find that the Homeowners Can Afford All

Payments Due on Loan. Originators must be required to determine that the

homeowners’ income will be sufficient to afford all of the payments due on the loan.

This includes separate components:

• All scheduled payments due under the terms of the loan, including any

potential increases in the interest rate or principal, must be found to be

affordable.

• All other housing debt, as well as monthly contribution requirements for

property insurance and taxes, must be included in the sum of housing debt.

• All income must be verified through independent means, either using wage

statements, bank account and deposit records, or tax information.

 

  1.  Mortgage Loans Above Value of Home Should be Prohibited. Originators

should be prohibited from making a mortgage loan for more than the home is worth

at the time the loan is made. Similarly, the terms of the mortgage loan should not

contemplate that the principal of the loan will climb to an amount over the value of

the home. In the current marketplace lenders have made hundreds of thousands of

Payment Option Arm Loans (see next section for more discussion about the dangers

of these loans) which included basic loan terms contemplating that the principal of

the loans would climb above the home’s value at origination. This is a recipe for

foreclosure – which is exactly what we are seeing. Similarly, inflated appraisals have

become commonplace in states which did not experience the steep increases in real

estate values – and homeowners and investors are both suffering. To counter these

inflated appraisals, originators should be held fully responsible.

 

  1. No Foreclosures Permitted without Modification of Loans. Federal law should

impose one critical requirement before lenders are permitted to foreclose on a

primary residence: the servicer must evaluate the homeowner’s situation and offer an

affordable loan modification where it will produce more income for the investor

than a foreclosure. Currently servicers make more money from a foreclosure than a

loan modification. Moreover, the income structure for servicer fees encourages them

to pad loans with high servicer fees, pushing more homeowners into foreclosure.

The servicer fee structure also needs to be changed.

 

  1. Full Enforcement Should be Incentivized – While relying on enforcement of the rules

through government administrative action or private litigation is not a sufficient means of making

the market successful, public and private enforcement are essential back-ups which serve two

essential purposes: 1) they ensure compliance with the rules, and 2) they allow the individuals

actually harmed by the violations of the rules to use those rules to protect themselves.

All rules should be enforceable by federal regulators and state attorneys general, as well as by

private lawyers. Attorneys’ fees and costs should be recoverable by prevailing homeowners.

Additionally there should be a general prohibition against unfair, unconscionable or deceptive acts

and practices applicable to all involved in the loan origination, servicing and holding. Statutory

damages, along with actual damages should be awardable for violation of these rules, up to the value

of the combination of the amount remaining due on the loan, plus what has been paid.

 

  1. Full Responsibility – No one involved in the creation, the funding of, or the

enforcement of a mortgage loan which violates the rules should be permitted to profit from a loan

made in violation of the established rules. Here, again, the complexity and negative incentives in the

current mortgage marketplace have allowed too many entities to make money from activities which

support fraudulent practices, faulty underwriting, and anti-homeowner practices. This needs to be

changed, so that everyone in the process profits from practices which sustain homeownership and

home equity.

 

  1. No preemption – In the current mortgage debacle, it has become clear that the state

laws protecting consumers are the last bastion of redress for those homeowners who are fortunate

enough to find an attorney able to protect them from foreclosure. State laws on fraud, unfair trade

practices, unconscionability, foreclosure defenses, good faith and fair dealing, conspiracy, joint

venture, as well as other torts and contract defenses, have been the primary way many individual

homes have been saved. The rich and textured common law in the states has been particularly useful

to the courts as they craft appropriate responses to the new and complex set of problems that have

arise in recent years.

Elizabeth Warren Straight Up

See today’s HuffPo for her full comments and exclusive video that was taken for Michael Moore’s Capitalism movie but some of which was cut: http://www.huffingtonpost.com/2009/10/21/elizabeth-warren-speaks-w_n_329425.html?igoogle=1

“Financial products, and they are products, just like toasters, are sold today with the most dangerous features embedded in them because that’s what drives profitability. What’s astonishing is that we let this happen. You can’t buy a toaster in America that has a one in five chance of exploding. But you can buy a mortgage that has a one in five chance of exploding, and they don’t even have to tell you about it… We have consumer protection for everything you touch, taste, smell, feel… But there is no equivalent for credit cards, for mortgages; there’s nothing.”

Warren describes how “the very people who drove the car over the cliff have been instrumental in shaping how the American taxpayer was supposed to save it. In the past,” she notes, “when you drove the car over a cliff, you lost your job.” She criticized the government for not conducting a thorough and transparent investigation into the causes of the financial crisis, which is essential because “responsibility is not just about blame. Responsibility is about making sure we fix this and it will not happen again.”

“If the people who were directly affected, people whose lives have been wrecked by this, are not represented at the table, we won’t get the right solutions,” Warren says emotionally. “Yeah, we’ll patch this up – and then in ten years it crashes again and it crashes again and it crashes again… My job is to be here for the people who just don’t get a voice in this game. They’ve been shut out now for 30 years in this. It’s to say no more.”

At one point Warren laments: “I teach contract law at Harvard Law School, and I can’t understand my own credit card. No, I am not kidding you.”

Read more at: http://www.huffingtonpost.com/2009/10/21/elizabeth-warren-speaks-w_n_329425.html?igoogle=1

More love for Elizabeth Warren:

Elizabeth Warren for President by Matt Taibbi http://trueslant.com/matttaibbi/

Also Neil Garfield on Living Lies: http://livinglies.wordpress.com/2009/10/21/wisdom-succumbs-to-wise-guys/

Professor Warren on the Daily Show in April, explaining what was done with the TARP money: http://www.thedailyshow.com/watch/wed-april-15-2009/elizabeth-warren-pt–1

http://www.thedailyshow.com/watch/wed-april-15-2009/elizabeth-warren-pt–2

Capitalism without bankruptcy is like Christianity without hell.

Durbin: “And They Frankly Own the Place”

[Remember back in May when Durbin's bankruptcy bill was defeated that would have allowed bankruptcy judges to modify a loan on a primary residence, and he made that speeech (brave in its honesty) on the Senate floor about how the banks still run the government and that American homeonwers have no powerful lobby to speak for them?   In today's week of hearing about Wall Street's crazy bonuses (profits are easy to come by when you eat all of your competitors and gamble with cheap government money) and the appointment of a 29 year old Goldman employee to a head regulatory post at the SEC (are they punking us? I mean, seriously), Durbin's lesson merits a quick review. ]

Senator Richard (Dick) Durbin remarked on power the financial services industry still wields at a time when that industry is theoretically under great scrutiny: “The banks — hard to believe in a time when we’re facing a banking crisis that many of the banks created — are still the most powerful lobby on Capitol Hill. And they frankly own the place.”

Full transcript here: http://www.pbs.org/moyers/journal/05082009/profile.html
The banking lobby won a significant victory in Congress on May 1, 2009 when 12 Democrats joined a united Republican Caucus to vote down an amendment to President Obama’s housing bill. At issue was a measure that would have allowed bankruptcy judges to modify mortgages to help homeowners avoid foreclosure.

The House version of the bill, which provides wide housing assistance and consumer protection measures, passed with the amendment, but Speaker Nancy Pelosi recently said she does not expect the measure to be included in the final bill since the Senate voted it down.

Democrats had hoped allowing bankruptcy judges to adjust mortgages on primary residences would encourage banks to renegotiate mortgages with homeowners facing foreclosure — a key part of President Obama’s plan to address the financial crisis. Judges are already permitted to adjust mortgages for second homes, farms and ranches. Banks claim that allowing judges to adjust primary mortgages would increase their risk and raise the price of mortgages across the board.

Senator Richard Durbin, who sponsored the amendment, explained to Bill Moyers on THE JOURNAL why he thinks it’s an important measure, and what eventually led to its defeat.

Senator Durbin mentions Simon Johnson’s recent article in the ATLANTIC, in which Johnson notes that even in the midst of great public unpopularity, the finance industry retains enormous power in the halls of Congress. Senator Durbin believes it was the banking sector’s opposition that defeated the bill, “The banking industry fought me tooth and nail, with one exception, Citigroup, that came out for this early on and stuck with me to the bitter end. But the banking industry, the associations and groups, fought me all the way.”

Two watchdog groups connect the banking industry’s continued political clout, despite its public unpopularity, to the amount of money they give to Congress in the form of campaign contributions. Following the defeat of Senator Durbin’s measure, The Center for Responsive Politics pointed out that the finance, insurance and real estate industry was the number one donor to 6 of the 12 Democrats who voted against the measure and was among the top donors to the rest.

And a recent report from the Center for Public Integrity shows that the 25 largest originators of subprime mortgages, the risky loans some say are at the heart of the recent financial crisis, spent over $370 million in Washington fighting against regulation. The report also found that at least 21 of the 25 ventures were either backed or owned by banks now receiving bailout money.

Senator Durbin recently introduced a bill with Senator Arlen Specter to create a voluntary public financing system for members of Congress. As he tells Bill Moyers on the JOURNAL: “I think that is a good move for our democracy, and it’s one which we ought to acknowledge is at the heart of many of the issues we face.”

>Tracking Campaign Dollars Online

Affidavits “Just Come From the Printer”

 

We often see notices of default that are unsubstantiated, and fail under any threshold evidence tests. 

This is from Professor Katie Porter and her blog www.creditslips.org.

Lying Is Wrong

posted by Katie Porter

You might think that we all caught the lesson that lying is wrong somewhere between Sunday School and warnings that Santa only brings presents to good boys and girls. But an Ohio federal court recently caught a debt buyer making a a load of lies–under oath, no less. The opinion in Midland Funding v. Brent shows the underbelly of debt collection and just how far such high-volume, routinized, computerized processes have strayed from the idealized litigation model of truth-telling.

The case began when a debt buyer purchased defaulted credit card debt and filed suit against a consumer. The debt buyer’s law firm used the debt buyer’s “You’ve Got Claims” system (really, that is its name) to request an affidavit from the debt buyer to file in support of the collection case. Where do such affidavits come from? According to later testimony of the debt buyer’s employee who signs 200 to 400 affidavits per day, “they just come from the printer” (again, I’m not making this up.) The court couldn’t square that answer with the first paragraph of the affidavit in which the employee attests that “I make the statements herein based upon my personal knowledge.” The court goes on to describe the affiant’s lack of knowledge of nearly all the facts in the affidavit, noting that the affiant did not retain the attorney, was not familiar with the account, did not know the last time a payment was made, did not know if the consumer was a minor or mentally incapacitated, and did not know the outstanding balance. As an additional disability, the affidavit wasn’t actually signed in the presence of a notary, making it improperly sworn. The court ruled that the use of the false, deceptive and misleading affidavit in the debt collection suit was a violation of the Fair Debt Collection Practices Act.

The law in Midland is boring. It is wrong to lie to a court, and it is wrong to lie in a debt collection. The action here is that there actually was an action. Some consumer went to the effort to put a debt buyer’s affidavit to the test, leading to the conclusion that the process for generating such affidavits was sorely lacking. How many debt buyers, or default mortgage servicers, also have employees who get their affidavits “from the printer?” Or who have “personal knowledge” of consumers they have never met and of accounts they have never reviewed? Or who send affidavits “off to be notarized?” If the processes used here are typical of the industry, there could be a lot of liars out of luck.

Rep. Kaptur and Professor Johnson on Bill Moyers

This is a good piece regarding Rep. Kaptur and Professor  Johnson’s appearance on Bill Moyers. Go to Bill Moyers’ site to see more. Here’s a snippet:
http://www.pbs.org/moyers/journal/10092009/profile.html

Simon Johnson, professor of Global Economics and Management at MIT’s Sloan School of Management, and Representative Marcy Kaptur (D-OH), explain to Bill Moyers that the outlook for the rest of America isn’t so rosy. Not only are many Americans still suffering the collapse of the housing market, they say, but Congress and the president haven’t made the changes needed to prevent a much worse catastrophe sometime in the future.

To highlight the disparity between bailing out the banks and helping homeowners, Rep. Kaptur points to her district, where she sees one of the now-profitable banks not doing enough to help struggling borrowers:
Let me give you a reality from ground zero in Toledo, Ohio. Our foreclosures have gone up 94 percent. A few months ago, I met with our realtors. And I said, “What should I know?” They said, “Well, first of all, you should know the worst companies that are doing this to us.” “Well, give me the top one.” They said, “JPMorgan Chase.”
Johnson adds that even bailed-out banks have little incentive to help homeowners:
I’m afraid that it’s pretty obvious, and it’s very tragic, that they have no interest in helping the homeowners. They make money with what they’re doing. They expected a lot of these mortgages they made to default, okay? It was in their models. A high default rate. Now, they didn’t expect house prices to come down so much. That’s where they got their losses. But they absolutely made these loans expecting they would have to foreclose on people. And figuring they would make money on that.
Too late to reign in the banks?
The problem, Rep. Kaptur and Johnson agree, is that Congress and the Executive Branch didn’t sufficiently reign in the banks because the banks have too much power in Washington. Responding to a recent ASSOCIATED PRESS report about Treasury Secretary Timothy Geithner’s close ties to a few powerful bankers, Rep. Kaptur said, “Wall Street and Washington is a circuit. And because Mr. Geithner headed the New York Fed, that historic relationship, unfortunately, continues. And it gives them special access and special power to influence policy.”

Johnson agrees, arguing that these links are especially beneficial in a time of crisis: “And in a crisis, when everything is up for grabs, you don’t know what’s going on, the people who will take your phone calls, right, in government and the people who are going to be standing in the oval office, making the key decisions — that’s the heart of the system. That’s the heart of how you get your agenda through, by changing their worldview.”

Rep. Kaptur believes that Congress has also failed to use its power to hold the banks accountable for their actions: “Congress has really shut down. I’m disappointed in both chambers, because wouldn’t you think, with the largest financial crisis in American history, in the largest transfer of wealth from the American people to the biggest banks in this country, that every committee of Congress would be involved in hearings? [...] What we’re seeing is tangential hearings on very arcane aspects of financial reform [...] rather than hearings on the fundamental new architecture of reforming the American financial system.”

And now that the banks have stabilized, they may have successfully prevented any meaningful reform. Johnson explains that “the opportunity for real reform has already passed. And, not only is there not going to be change, but I’ll go further — I’ll say it’s going to be worse, what comes out of this, in terms of the financial system, its power, and what it can get away with.”

Strategic Defaults on the Rise

[This study addresses the groups that are beginning to strategically default. The banks try to push moral buttons regarding personal responsibility, especially in the courts.  Does this strike anyone else as supreme hypocrisy?   Even if we just conveniently forget about the origin of this crisis, the banks and big business are the first to unload a toxic asset or breach a contract for economic benefit (their own).  And let's not forget who signed off on all of these crap mortgages, oh, and made billions in the securitization thereof.  Pot, meet kettle.]

The rich bail faster on mortgages

Wealthy but ‘underwater’ homeowners are giving up on paying their mortgages as a financial tactic, a study finds. Those with smaller loans are less likely to do so.

[Related content: homes, home financing, mortgage, foreclosure, credit score]
By Marilyn Lewis
MSN Money

Why not just walk away?
Increasingly, homeowners with good credit and no late payments are making what appears to be a strategic decision to walk away when their home’s value falls below what’s owed.

“The American consumer has had a long-held taboo against walking away from the home, and this crisis seems to be eroding that,” concludes a report on research by Experian, the credit agency, and Oliver Wyman, a management consultant company.

The better their credit rating, the more likely homeowners were to default. The trend is most pronounced where prices have fallen furthest: Florida and the West, especially California.

The finding — that 588,000 borrowers appear to have strategically defaulted in 2008, a 128% increase from the year before — surprised the researchers. Piyush Tantia, who conducted the research for Oliver Wyman, and Charles Chung of Experian spotted the trend while analyzing 24 million credit files to see what they could learn about mortgage delinquency.

Foreclosure as a financial strategy
Strategic defaulters stand out among the 14 million to 15 million “underwater” mortgages, the researchers said, because they:

Pay all their bills consistently and on time until abruptly stopping mortgage payments with no attempt to get current again.
Keep current on other debts after defaulting on the mortgage.
Keep up payments on home equity lines of credit, sometimes drawing out cash, before defaulting on both the first mortgage and credit line.
This “sophisticated” combination of moves and timing suggests borrowers are employing foreclosure as a calculated financial strategy, said Tantia and Chung.

They conclude that 18% of the borrowers with mortgages 60 days past due in the fourth quarter of 2008 were acting strategically, up from 3% — “barely noticeable,” the report says — in late 2004. Most defaults, however, are driven by financial distress. Defaults due to troubled finances grew from 31% to 51% of loans in the same time frame.

Broken taboo
It appears that the more money people feel they’re losing, the more likely they are to bolt. Owners with smaller loans were less likely to strategically default, even when facing the same percentage of loss.

For example, “once you hit the $200,000-and-up loan size in California, you start to see about 33% strategic defaults,” said Tantia. A similar pattern, with 18% to 20% strategic defaults and lower loan amounts, plays out in the rest of the country: “This tells us that the threshold probably is a dollar value and not a percentage.”

From 2005 to 2008, strategic defaults rose by 68 times in California, by 46 times in Florida and by three to 18 times in other regions. Strategic default was seven times more common among mortgages originated in 2006 than those begun in 2004.

“Starting about a year ago, the good-credit people, the Little League coaches, the schoolteachers and the retail managers, the higher levels, started walking away,” says Kurtis Squyres, whose company, FarBelowMarket.com, buys homes in the Coachella Valley east of Los Angeles that banks have foreclosed on and sells the properties to investors. “I even had a DA who had talked about it. He was very seriously considering buying another house because his credit was still intact, and then walking. His conscience got the better of him, but that shows how tempting it is.”

Makes sense to some
Strategic defaults may sound cynical, but such calculations are becoming familiar to real-estate professionals. The word is that “your credit will heal before you recover what you borrowed against it,” says Squyres. The alternative, a short sale, is difficult, lengthy and uncertain of success, he says.

Even if true, strategic defaulters face a long sentence in credit hell: It takes seven years plus 180 days from the date of the first missed mortgage payment for a foreclosure to exit your credit record, says Liz Pulliam Weston, an MSN Money personal finance columnist.

“Your credit scores start getting trashed the minute you miss a payment. The more payments you miss, the worse the damage,” says Weston, the author of “Your Credit Score, Your Money & What’s at Stake.” “The effect on your scores diminishes over time if you handle credit responsibly from then on.”

Almost certainly your score will fall into subprime territory, a FICO score of 620 or less. “I know one real-estate investor with multiple foreclosures whose score fell to 305 — just above the absolute bottom,” Weston says.

However, real-estate agent Heidi Wyble, a short-sale expert in La Quinta, Calif., believes the statistics on strategic defaulters hide factors “behind the scenes,” like divorce, impending job loss or an unsuccessful struggle to get bank approval for a short sale. And if borrowers are becoming more ruthless, she says, banks weren’t exactly philanthropists to begin with.

Despite counseling 10 to 20 clients a week, she says she hasn’t seen many who go straight into default without a thought about their credit.

The big picture
In June, three university researchers published a separate look at strategic defaults (“Moral and Social Restraints to Strategic Default on Mortgages”). They predicted that, if a home’s value slips 15% or more below the mortgage amount, about 26% of homeowners who could afford their payments would default anyway.

“We’re in a completely different economic environment today, where for the first time since the Great Depression millions of Americans have mortgage loans that exceed the value of their home,” that paper says. It concludes that the stigma of default is less severe among people younger than 35 and older than 65, among those with higher incomes or more education and among African-Americans.

Banks and government produce reams of data on foreclosures, including missed payments, loan types and amounts and loan-to-value ratios. But lenders can’t access data on borrowers’ income and assets, which would tell more about the motivations of defaulters.
Why not just walk away?
Tantia and Chung, who oversees Experian’s “decision sciences” research, used the bigger credit picture to try to get around that limitation, hoping their work would help government and banks identify the troubled borrowers most likely to make good use of government help.

“The question that drove us to do the study in the first place is: ‘How do we avoid these foreclosures?'” said Tantia. “And all the loan modification programs that the government has launched: ‘Are they enough?'”

The researchers found distinctly different behavior among the three largest groups of people in default:

“Strategic” defaulters have perfect payment histories before suddenly going 60 days late on their mortgages. After default they remain current on other debts. Another surprise: Two-thirds of strategic defaulters bail on primary homes, not investments. However, strategic defaults are growing among owners of all homes. “It’s useless to spend energy modifying these loans because it’s not the payment that matters in their case,” says Chung. They are likely to take advantage of loan-modification programs for free rent and then default again.
“Distressed” defaulters: Most — 53% — of defaulting property owners fit the conventional picture: They skip payments on the mortgage and other debts, yet keep trying to recover by paying occasionally until they’re overwhelmed. These defaulters need loan modifications and help managing finances and even those may not be enough to prevent eventual failure.
Cash-flow “managers” are the heroes of the report; in situations identical to those of the strategic defaulters, they show the intention to make good on mortgages by continuing to try to pay even after skipping some payments. A third of this group pulls the loan out of trouble within six months. “This group’s performance is about twice as strong as average,” the report says. With resources and motivation, it found, people in this group could be the best candidates for loan-modification offers.

Congressional Oversight Panel on HAMP

Well guess what? It doesn’t work well for many homeowners, especially where there is negative equity. Thanks Captain Obvious. But seriously, here is the summary of the report:

Treasury’s Strategy is ‘Inadequate’ to Address Coming Wave of Foreclosures; For Many Homeowners, Foreclosure Will Be Delayed, Not Avoided
WASHINGTON, D.C. – The Congressional Oversight Panel today released its October oversight report, “An Assessment of Foreclosure Mitigation Efforts after Six Months.” The Panel expresses concern about the limited scope and scale of the Making Home Affordable program and questions whether Treasury’s strategy will lead to permanent mortgage modifications for many homeowners.

Rising unemployment, weak home prices, and impending mortgage rate resets still threaten to cast millions of Americans out of their homes, with devastating effects on families, local communities, and the broader economy. One in eight mortgages is currently in foreclosure or default, and this crisis is estimated to produce 10 to 12 million foreclosures. While Treasury is still in the early stages of implementing its centerpiece foreclosure mitigation program, called the Home Affordable Modification Program (HAMP), the Panel has three concerns with the current approach.

The Panel found, “It increasingly appears that HAMP is targeted at the housing crisis as it existed six months ago, rather than as it exists right now.” The program is limited to certain mortgage configurations. Many of the coming foreclosures are likely to be payment option adjustable rate mortgage and interest-only loan resets, many of which exceed HAMP eligibility limits. Treasury’s strategy also makes no provision for foreclosures due to unemployment, which now appear to be one of the biggest drivers of foreclosure.

Foreclosures continue every day as Treasury ramps up the program, with foreclosure starts outpacing new HAMP trial modifications at a rate of more than two to one. Some homeowners who would have qualified for modifications may have lost their homes before the program could reach them. Even once the program is fully operational, Treasury’s own projections indicate, in the best case, fewer than half of the predicted foreclosures would be avoided.

The Panel found, “The result for many homeowners could be that foreclosure is delayed, not avoided.” HAMP modifications are often not permanent: For many homeowners, payments will rise after five years, and although the program is still in its early stages, only a very small proportion of trial modifications have converted into longer term modifications. The Panel is also concerned about homeowners who face negative equity or are “underwater” – that is, the value of the loan exceeds the value of their home. For many borrowers, HAMP modifications increase negative equity, a factor that appears to be associated with increased rates of re-default.

The full report can be found at cop.senate.gov. The Panel held a field hearing in Philadelphia with senior executives of Treasury, Fannie Mae, Freddie Mac, representatives for major financial institutions and housing advocates to inform the findings of this report. Testimony from the hearing can be found on the Panel’s website.

The Congressional Oversight Panel was created to oversee the expenditure of the Troubled Asset Relief Program (TARP) funds authorized by Congress in the Emergency Economic Stabilization Act of 2008 (EESA) and to provide recommendations on regulatory reform. The Panel members are: former Securities and Exchange Commissioner Paul S. Atkins, Congressman Jeb Hensarling (R-TX), Richard H. Neiman, Superintendent of Banks for the State of New York, Damon Silvers, Associate General Counsel of the AFL-CIO and Elizabeth Warren, Leo Gottlieb Professor of Law at Harvard Law School.

Upcoming Hearing on Rejected HAMP Applicants’ Plea for Due Process

Currently, plaintiffs have brought suit in a Minnesota federal district court to claim that HAMP provides benefits that trigger procedural due process rights.  Many banks have opted into HAMP yet they continue to deny homeowners without giving reasons or providing a method for appeal.  Many people are out on the street with no remedy. 

The matter has been briefed on the plaintiffs’ motion for a preliminary injunction halting all foreclosures until HAMP can be refined to add an appellate process and other accountability/transparency improvements. 

Here’s a brief summary of the case via the Housing Preservation Project’s Press release and a blog post on attorney Bublick’s blog:

http://www.hppinc.org/_uls/resources/Press_Release_-_HAMP_Litiga.pdf

http://jbublick.blogspot.com/2009/08/hearing-set-for-hamp-preliminary.html

Here is the Plaintiff’s Memorandum in Support of the Motion for Preliminary Injunction:

http://www.hppinc.org/_uls/resources/HAMP_PI_Memo.pdf

Plaintiffs’ Reply Brief:
http://www.hppinc.org/_uls/resources/Reply_Memo.pdf

Here is the GAO Report on how Treasury needs to make HAMP program more transparent and accountable.
http://www.hppinc.org/_uls/resources/GAO_REPORT_ON_HAMP.pdf