I can’t think of any subject that has been so widely and frequently discussed and studied, over such a long period of time, by such a large number of experts and observers, who continually espouse such a diverse range of opinions and cite such a large number of conflicting facts, that is still so misunderstood. Of course we're talking about mortgage loan modifications.
Let’s start with the questions on everyone’s mind… Why aren’t more loans getting modified? Why is it so difficult to get the bank to modify a mortgage? Why are trial modifications ending in foreclosure? Why is it that people are consistently treated so poorly by the banks? Is it the investors that are making it hard to get a loan modification? Is the government doing enough to get banks to modify loans? And should people hire an attorney to help them obtain a loan modification, or go it alone? Or is a modification actually what you want, if by some slim miracle you slip through the cracks and get qualified.
I think the fundamental thing that almost no one understands involves how a bank views a borrower’s request for a loan modification. Lot’s of people, including me in past articles, have said that banks simply don’t want to modify mortgages. Lot’s of people, including me, have also pointed out that servicers make more money by foreclosing than modifying loans. All of those points remain accurate but are not necessarily the reason a modification works or doesn't.
Your bank views you calling to request that your mortgage be modified as the beginning of a process. Maybe you truly need and deserve a loan modification, but maybe not. The only way the bank will be able to tell one way or the other is by putting you through that process, and it’s not a pleasant process in the least. Unless of course you're the loan servicer in which case this is a tremendous opportunity to run up unaccounted fees and random charges.
Let’s say that you’re someone that has good credit, you’ve never missed a payment, and now are saying that you need your loan modified or you may lose your home to foreclosure. When you call your bank to ask about a loan modification, they’re going to tell you that they can’t talk to you until your payment is delinquent by at least 30 days. You hang up the phone. You’re disappointed. And you now have your first decision to make: Do you let your credit score get trashed by going 30 days late on your mortgage? It’s not an easy decision. Once you head down that path it’ll be years before your credit score is back up where it’s always been, and if you need your credit to be good for other reasons, chances are you’ll decide that you no longer want a loan modification because the cost of trying to get one… sacrificing your credit score… is too high.
The bank’s process has just saved the bank quite a bit of money. Had the bank agreed to modify your loan, it would have been like throwing money away unnecessarily because you kept making your payments without them having to modify your loan. (Of course the credit implications of this scenario are far less severe than most people understand but the banks continue to play guilt and shame and end of the world scenarios in order to really push you into not questioning them)
Now, let’s say that you decide to go 30 days delinquent on your mortgage. You call back, now 30 days late, but now your bank tells you that you have to be 90 days late before you can be transferred to a negotiator. You hang up the phone. Again, you’re disappointed. Do you go 90 days late, or do you bring your loan current and forget the whole thing? Some bring their loans current, others don’t.
If you don’t bring your loan back to current status, you’re about to start receiving a series of letters and phone calls designed to make you feel ashamed, guilty and scared. And those letters will come more and more frequently, and they’ll be written using stronger and stronger terms. And chances are you’ll feel worse and worse as time goes by.
Then in 90 days, assuming you’ve gone the distance, you call the bank again. This time they’ll tell you that your credit score is now too low to qualify for a loan modification. Now you’re enraged. You stomp your feet. And then, if there’s anyway you can do it, chances are you bring your loan current and try to forget the whole idea of a loan modification. Maybe you get rid of a car payment to do it, maybe you rent out a room or take on a part-time job to generate the extra income you need, or maybe you borrow the money from a relative. You never even bring up the whole experience to your friends or family members because you’re ashamed that it even happened. You’re ashamed that you were having trouble making the mortgage payment that you signed up for, and you’re ashamed about having gone 90 days late on your mortgage payment and almost losing your home. The whole thing becomes one of those skeletons that you hope will soon fade away in your closet of memories. Besides, what would your friends or family members even say if you did tell them? Do you think they’d be on your side and angry at the way your bank treated you? Or would they take the view that the bank had every right to handle your situation the way they did, because after all, you signed the mortgage and agreed to make the payments… the bank has no obligation to lower your payment just because you having trouble making it. You’re lucky the bank didn’t foreclose, in the eyes of your friends or family members.
Oh, and one or two more things, while we’re at it… maybe you should have opted for a little less house and not gone quite so far out on a limb… maybe you should have spent a little less on your car too, and not used your credit cards for all those nice clothes you wear… maybe you’re just living way beyond your means. You’re probably not saving for retirement either. You’re one of THOSE irresponsible people and maybe losing your home to foreclosure would teach you a lesson.
But, let’s say for a moment that you could not find a way to bring your mortgage payment current when told, when you were 90 days delinquent, that your score was now too low to qualify for a modification. Now you’re 120 days behind, and soon it’s been six months since you’ve made a payment to your bank on your loan. By now the bank is sending you the most threatening letters imaginable. They could foreclose at any moment according to the letters, and their tone tells you that you are basically an irresponsible failure who cannot be trusted because your word means nothing. You promised to make the payment and now you’re not living up to that promise. You’re a promise breaker… a liar. How do you sleep at night? You shouldn’t even have friends, because if your friends knew what you were up to, they likely wouldn’t want to be your friend anymore.
You’re now seven months late, then eight, and then nine. Now the bank is calling you almost daily, the pressure is becoming unbearable, you’re trying everything to make more money so that you can make the payment. If you do find a way to come up with the cash, you bring your mortgage payment current immediately. If you get a new job that pays more, you call your bank and start begging and explaining that everything is going to be okay… you’re working again… if they’d just please understand… you’re a good person… you’ll pay your payment every month and on time from now on… you’re sooooo sorry to have gotten behind… How about $1200 this week, and then $1200 the following week, and then $2000 by the end of the… blah, blah, blah. Does it feel like the bank is trying to bleed you dry? Cause they are! At this point the bank will continue to come up with fees and deadlines until one day you're unable to meet the demand and they will foreclose just after they've taken every last dollar out of your pocket as you desperately try to save your home.
You’re a babbling fool that will agree to just about anything the bank says at that moment. If the person you’re talking to at the bank acts the slightest bit nice to you, or comes off as even a little bit understanding of your situation… you gush with appreciation and feel like you want to be their BFF. Thank you, thank you, thank you, thank you, thank you, thank you… really… thank you so much. My husband thanks you, my children thank you… my dog thanks you. Yuck. It’s disgusting, really.
Or, maybe that’s not what happens. And now you’re almost eleven months late. You’re working. You could make a reasonable payment if you weren’t so far behind. You’ll never be able to pay off the arrears though, so what’s the point. You’re desperate… you’re about to give up and resign yourself to the fact that you’re going to lose your home to foreclosure. You’re trying to get used to the idea that you’ll soon be packing and calling the moving truck… its heart wrenching for anyone to watch.
Since foreclosure is now imminent, the bank can’t threaten to ruin your credit score anymore, as it’s already ‘F’ and would be ‘G’ if scores went that low. The bank is now trying to figure out two things:
1. What is the likelihood of you being able to make the payment if the bank modifies your loan? What if they take the amount in arrears, tack it on to the back end of the loan, and reduce your monthly payment by a couple hundred a month? Would that do it? Or would you agree to the deal and then not be able to make the modified payment… and again in six months end up right back in foreclosure where you are now.
If the bank thinks that might happen, they won’t modify your loan. They’d rather foreclose now than go through this same thing next year and end up foreclosing then. But that’s not the most important factor to your bank… this is all about your bank’s degree of certainty that if they modify your loan, you won’t be back in foreclosure anytime soon, and likely never. Your bank views a loan modification as pretty close to unthinkable in the first place, so it’s unquestionable that it’s a once in a lifetime thing in their eyes. You should be too embarrassed to even ask a bank to modify a loan a second time, according to your bank. It’s almost like… if that happens, you’ll probably want to change your name and move to another state. What a load of crap the banks have peddled our way all these years.
So, you see… it’s a range. In order to get your loan modified, you need to fall somewhere between “Definitely won’t default again if loan reasonably modified,” and “Will self-cure the mortgage before home is actually taken back by the bank”. Get it?
I talk to people all the time that have recently applied for a loan modification, and they always talk to me about how it will cost the bank more to foreclose on their particular house, so they expect the bank to modify the loan. But then the bank refuses, and I hear people say that they can’t understand it because the bank should do what’s in the best interests of investors. Then we start talking about how servicers make more money foreclosing, all of which is true. The problem with this line of thinking, however, is that it fails to incorporate all the data… it’s not just a numbers game to the bank. First they need to know, if they offer you nothing, will you really end up losing the home to foreclosure, or will you let the Devil himself rent out a room to avoid that shameful outcome? Then they need to know that if they do accommodate you and provide you with a modification, chances are good that you’ll never miss a payment for the rest of your life.
So, how should a bank go about getting the answer to either or both of those key questions? Self-cure and/or re-default? It’s not like you can find the answer to either of those questions from looking at an application or a credit report. You certainly can’t tell by talking to someone on the phone.
The only way a bank can know for sure whether you’re going to self-cure and eject yourself from the foreclosure process, is to let you get to that point and see what you do.
It’s like a game of poker… will you fold under extreme stress and pressure and show up with the money to save your home, or will the bank actually be forced to foreclose, and therefore better off to modify your loan… and if they do approve your “mod,” as they say in the biz, will you make it just fine for a long, long time, or will you end up right back where you are today, next year at this time, if not sooner?
Once a bank knows the answer to those two questions about you, then the bank’s cost comparison between modification and foreclosure becomes pivotal, but until then, chances are the bank will play out its inherently superior hand and count on you folding your cards before foreclosure by coming up with the money you said you could not possibly come up with when you were talking with your bank’s representative about a loan modification.
I talked to a woman a few days ago, she said she was in her early sixties, said she owned two homes, desperately needed at least one loan modified and probably both, otherwise she’s going to be on the street. She wanted me to recommend a few attorneys for her to talk to, and I gave her the contact information for the lawyers I knew in reasonably close proximity to her home. Then she asked me a few questions, and the last one I’ll always remember. Referring to the lawyer, she said:
“Do you think I have to tell him about my trust account?” (Adorable, right?) I answered as honestly as I could. I said: “I wouldn’t.” (It’s probably not the right answer, I realize,but I’m just saying…)
The reason that, other things being equal, I advise people to hire an attorney to help them negotiate a loan modification is that their lender or servicer will ALWAYS have a huge built in advantage in any negotiation over the settlement of a debt you contracted to repay, because the moral norms for borrowers work against them, and the market norms that apply to banks, support the bank doing pretty much whatever it thinks it needs to do to get the borrower into compliance with the terms of his or her loan… or reclaim the property.
Even when people hear that a bank did something really egregious or even illegal, many of them just say: “Yeah, well, I guess that can happen.” It’s as if to say that perhaps the bank went too far, but the borrowers were juggling flaming chainsaws in terms of risk, and the bank still has the right to take back its home and punish the irresponsible homeowner who fell outside of our society’s norms by failing to fulfill his or her promise to repay a debt.
See, there are some things in our society that work the way they do only because we believe they will work the way they do. The FDIC, or Federal Deposit Insurance Corporation, is a commonly offered example of this principle at work. The FDIC “guarantees” cash deposits up to $250,000 per account, as of last year, I believe. So, no one has to worry about rushing down to the bank to get their money out if there’s a problem at the bank, the FDIC will cover any loss up to $250,000 per account.
Except, even in the best of times, the FDIC could not possibly come up with the money to cover even a small fraction of bank deposits in this country. If there ever were a disaster that caused all the banks to fail, the FDIC would be meaningless. The FDIC is an independent agency of the federal government and you might call it a “faith based” organization because it only exists to give us faith in our banking system, and only works as intended because of that faith.
Well, loan modification negotiations are a little bit like that. The bank gets to use shame, guilt and fear to get you into compliance with your loan. Once you’re deeply ashamed, you won’t tell anyone what’s going on… and you’ll feel worse every day. Then you become afraid to answer the phone. Then you’re turning off the machine… you won’t even want to hear the phone ring.
Your bank will also greatly exaggerate what it will cost you to lose your property to foreclosure. You’ll be told that you won’t be able to buy anything for a decade, and all kinds of other nonsense. By the time you’re done reading a few of the letters you get from your lender each week, you can easily become convinced that losing your home is almost the end of all opportunity in your life. Might as well be a bum after that. It’s absurd of course… you can buy another home in 2-3 years, if that’s even what you want to do. There’ll be so many foreclosures on the market… you’re going to be hearing about foreclosures selling ten years from now.
The point is, that when homeowners start the process of negotiating with their lender, they’re not only subject to being made to feel guilty and ashamed, but they are also likely to over-estimate the personal cost of foreclosure, all as a result of the bank’s and our society’s intentional efforts to make borrowers feel that way. It’s no accident. You see, we keep the banks open and safe by believing in the FDIC, and we keep people from walking away from their homes when the value of those homes drops significantly by imposing our society’s moral norms, which include shame, guilt and fear, related to repaying debts. If the government and the banks can make homeowners deeply ashamed and afraid to lose their homes, then fewer people will even ever ask for a modification in the first place. With me?
Why the Bank Doesn’t Want You to Hire a Lawyer or other Expert…
When a homeowner hires an attorney to help negotiate a loan modification, that attorney is not going to being made to feel ashamed, guilty, or afraid… the borrower can be made to feel all of those things and more, but the lawyer, not so much. He or she is a hired gun, if you will. That’s why the banks don’t want homeowners to be represented, and why they want homeowners to call them directly.
Treasury looks the other way on this “put-the-borrower-through- @#!*% ” process because it understands that banks have to make sure that they are not throwing away money by modifying loans for borrowers who would have self-cured. Nor does the government want the banks to modify loans for people who won’t be able to make the modified payment. And since the only way for the bank to really know either of those things is to put the borrowers through their paces, as it were. Many will self-cure, some should be foreclosed upon… blend, shake, stir and pour,,, see what comes out. And of those that fall somewhere in the middle, some will have more or less equity, and some will be in markets where houses are selling relatively faster than others.
Out of that psycho-social-financial-market analysis, the bank will modify some loans… but the process used to conduct the so-called analysis is guaranteed to frustrate the @#!*% out of everyone who enters it that’s determined to obtain a loan modification.
Being represented by an attorney or other expert throughout the process is unquestionably better than not being represented, mostly because that attorney won’t be subject to the bank’s tactics of trying to shame, guilt or scare, and as a result of that, is likely to think more clearly than you would be able to. And also because of the attorney’s or other expert’s knowledge of the law related to the foreclosure process and the HAMP guidelines, that attorney is more likely to get a result that’s acceptable to you, the homeowner… and by acceptable, I mean a modification that’s sustainable over time.
Absolutely not. The situation we’re in today is NOT a normal market correction, and I thought I’d better make it clear how I feel about how the banks are handling loan modifications: I hate everything about it, and I think it could not be more wrong. The Obama Administration has continued our government’s tradition of implementing pointless programs designed to help stop the foreclosure crisis. Nothing our government has done has helped in the least… they’ve failed us at every turn.
PAY ATTENTION, I KNOW IT"S BEEN A LONG ARTICLE BUT HERES THE MEAT!
It’s not today’s homeowners that are responsible for the position in which they find themselves… no matter what anyone tells you… it is NOT your fault. If someone would like to debate that point with me, bring it. I’m easy to find. But come to the discussion prepared, because I am.
This meltdown was caused by this country’s financial institutions, and not by people with mediocre credit scores who wanted to buy houses. It’s the banks that did this, but no one is making them do anything to fix what they’ve clearly broken.
We’ve given the banks in this country something like $11 TRILLION so far, and we’re going to have to give them a lot more. The so-called toxic assets are still right where they were last fall, and the banks that were too big to fail last year, are now bigger. They have an obligation to act in the best interests of the homeowners they screwed, and in the best interests of our nation’s economy because without American taxpayers, they wouldn’t even be open for business.
So, don’t read what I’ve written and come away thinking that I approve of the way banks view borrowers asking for loan modifications… I don’t. I’ve only written what you’ve just read because I think it’s important that people understand the dynamics of what’s going on… that the reason they feel guilty and ashamed is because the banks and our government want them to feel that way, so that people don’t just start walking away from their mortgages because they’re so far underwater.
They’re manipulating you into feeling ashamed for being in trouble on your mortgage… but don’t let them make you feel that way. It’s not your fault… it’s the banks that wear the black hats in this horror movie, make no mistake about that. And, in the event that you’ve already lost a home to foreclosure, don’t believe the crap about how your life will be ruined for another ten years. It’s simply not true. You may not be able to buy another house for the next few years, but so what? We haven’t come close to hitting bottom, so you wouldn’t want to buy another home in the near future anyway. All forecasts say that we’ll have 12 million more foreclosures in the next two years, and that number is probably low, so don’t feel alone and ashamed about your situation. The people you’re talking to down the street have problems too, they’re just too ashamed to tell anyone about their situation, just like you’ve been afraid to talk about yours.
Let it go… and let’s turn up the heat on exposing what the banks have done and continue to do.
Please get angry! Get frustrated! Get upset and choose to do something about it.. You'd be surprised at the level of success adequate professional and informed representation can get you. You'll be amazed at the options and choices you have once you stop allowing the banks to shame you into inaction.
Monday, January 31, 2011
Sunday, January 30, 2011
Politics is still sleeping with the enemy.. GET MAD!
By Daniel Pennell, a systems expert who has testified before the Virginia House of Representatives on MERS - VIA Livinglies Web
This week demonstrated how financial special interests have created an obscene and incestuous relationship with the leadership in the state legislature and the Governor’s office in Virginia. This cabal managed to kill off a bill (HB-1506) proposed by Delegate Bob Marshall, a bill designed to protect the integrity of the county property records and preserve the integrity of home owner’s title to their property. Simultaneously they attempted to alter the Uniform Commercial Code (UCC) with HB-1718, such that any “record” (the previous version said document) signed or unsigned by a person they claim owed a debt would be good enough for the banks to win a legal judgment against a person. In other words a spreadsheet from a bank would be good enough to take someone’s home or report someone to a credit bureau. This was in direct response to a Supreme Judicial Court decision in Massachusetts, Ibanez, where the court said that a bank had to have proof it owned a mortgage before it could foreclose.
The problem that HB-1506 addresses originated in 1995 when Wall Street banks took upon themselves the authority to replace the existing public land title recordation system with its 300+ years of successful history, with a member’s only private system. This system called the Mortgage Electronic Registration System (MERS) gutted the public property records and left millions of homes with questionable titles. This was done without any government approval and against the recommendations of the title industry and the county recorders. MERS has been found by 10 state supreme courts to be acting illegally and is currently being sued by CA, NV, TN and 14 other states. The Federal Reserve, Office of the Comptroller of the Currency (OCC), regulator of the national banks and the FDIC are investigating MERS for questionable business practices and for the systemic risk it poses to the nation’s financial system. The CEO resigned last week. Speculation in Washington has the OCC taking over MERS and nationalizing our land records, a clear violation of states’ rights.
Delegate Merricks submitted HB-1718. Bills to change the UCC are rare because the implications of unintended consequences are usually substantial and unforeseeable. The bill summary on the Legislative Information System (LIS) says the bill is intended to address recent court decisions and changes in technology. There is no question that the bill was targeted at both protecting MERS and avoiding a court decision in VA similar to that in MA. Delegate Merricks, member of a bank board and a former vice president of a bank, seems to suggest that take the home first and then figure out who actually is entitled to do so later. Never mind the risk to title that a future buyer of a foreclosed home faces or that we have situations in VA where multiple banks are foreclosing at the same time on the same person. In that fight the winner gets the house and the loser the right to sue the borrower for the loan amount.
The banks wanted HB-1506 killed and HB-1718 passed to protect MERS and, I believe, to avoid providing proof to mortgage investors that they were defrauded. The requirement to record would have provided evidence to investors in mortgage backed securities (MBS) that what they bought was empty; the mortgages were never legally transferred to the MBS. In my humble opinion if you sell someone a security that you claim is backed by collateral when it is not then that would be securities fraud. Among these investors are Fannie Mae and Freddie Mac whose losses are being paid for with tax dollars to the tune of billion of dollars. Other investors include state and private pension funds. The total exposure to the banks exceeds $1.5 trillion. You can see why they would fight so to avoid a $21 fee and the right to use their own “records”.
HB-1506 was killed by the Speaker of the house (Delegate Howell), the Chairman of the Courts Committee (Delegate Albo), the Chairman of the Civil Subcommittee (Delegate Athey) and the governor’s office.
Delegate Howell, the Speaker, sits on the board of Virginia Heartland Bank.
Courts Chairman Albo received 13% of his campaign funds from the VA Bankers Association and more from two major bank servicers.
The lobbyist representing the bankers, Matt Bruning, at the hearing of the Civil Subcommittee was a former aide to the chairman of the subcommittee, Delegate Athey, and an aid to the governor.
A reason given by Delegate Athey for not passing HB-1506 on was that the governor’s office in the person of Terri Suit, head of the governor’s foreclosure task force sent a letter asking the subcommittee to hold off and let the task force work on it. The Virginia Public Access Project reports that Terri Suit, ,chair of the Foreclosure Task Force, was a paid lobbyist for the Mortgage Lenders Association and the “private” members of the Task Force largely comprise representatives of the mortgage industry.
HB-1718 was pulled from the floor when Delegate Marshall threatened to attach an amendment excluding mortgages from the language. Had the speaker left it on the floor, the members would have had to record a vote on the amendment and with the amendment there no longer was reason to pass it. Delegate Merricks sits on the board of Virginia Bank & Trust and has 25 years in the banking industry.
The relationships are so inappropriate as to cause any reasonable citizen to question the integrity of the process.
A survey released today in the Financial Times shows that Americans trust of all large institutions is at an all time low with only 25% of American saying that they trust financial institutions.
A survey published last week ranked Virginia as the country’s second most corrupt state only after Tennessee.
The citizens of Virginia appear to be making an accurate assessment based on the shenanigans going on in Richmond this week.
This week demonstrated how financial special interests have created an obscene and incestuous relationship with the leadership in the state legislature and the Governor’s office in Virginia. This cabal managed to kill off a bill (HB-1506) proposed by Delegate Bob Marshall, a bill designed to protect the integrity of the county property records and preserve the integrity of home owner’s title to their property. Simultaneously they attempted to alter the Uniform Commercial Code (UCC) with HB-1718, such that any “record” (the previous version said document) signed or unsigned by a person they claim owed a debt would be good enough for the banks to win a legal judgment against a person. In other words a spreadsheet from a bank would be good enough to take someone’s home or report someone to a credit bureau. This was in direct response to a Supreme Judicial Court decision in Massachusetts, Ibanez, where the court said that a bank had to have proof it owned a mortgage before it could foreclose.
The problem that HB-1506 addresses originated in 1995 when Wall Street banks took upon themselves the authority to replace the existing public land title recordation system with its 300+ years of successful history, with a member’s only private system. This system called the Mortgage Electronic Registration System (MERS) gutted the public property records and left millions of homes with questionable titles. This was done without any government approval and against the recommendations of the title industry and the county recorders. MERS has been found by 10 state supreme courts to be acting illegally and is currently being sued by CA, NV, TN and 14 other states. The Federal Reserve, Office of the Comptroller of the Currency (OCC), regulator of the national banks and the FDIC are investigating MERS for questionable business practices and for the systemic risk it poses to the nation’s financial system. The CEO resigned last week. Speculation in Washington has the OCC taking over MERS and nationalizing our land records, a clear violation of states’ rights.
Delegate Merricks submitted HB-1718. Bills to change the UCC are rare because the implications of unintended consequences are usually substantial and unforeseeable. The bill summary on the Legislative Information System (LIS) says the bill is intended to address recent court decisions and changes in technology. There is no question that the bill was targeted at both protecting MERS and avoiding a court decision in VA similar to that in MA. Delegate Merricks, member of a bank board and a former vice president of a bank, seems to suggest that take the home first and then figure out who actually is entitled to do so later. Never mind the risk to title that a future buyer of a foreclosed home faces or that we have situations in VA where multiple banks are foreclosing at the same time on the same person. In that fight the winner gets the house and the loser the right to sue the borrower for the loan amount.
The banks wanted HB-1506 killed and HB-1718 passed to protect MERS and, I believe, to avoid providing proof to mortgage investors that they were defrauded. The requirement to record would have provided evidence to investors in mortgage backed securities (MBS) that what they bought was empty; the mortgages were never legally transferred to the MBS. In my humble opinion if you sell someone a security that you claim is backed by collateral when it is not then that would be securities fraud. Among these investors are Fannie Mae and Freddie Mac whose losses are being paid for with tax dollars to the tune of billion of dollars. Other investors include state and private pension funds. The total exposure to the banks exceeds $1.5 trillion. You can see why they would fight so to avoid a $21 fee and the right to use their own “records”.
HB-1506 was killed by the Speaker of the house (Delegate Howell), the Chairman of the Courts Committee (Delegate Albo), the Chairman of the Civil Subcommittee (Delegate Athey) and the governor’s office.
Delegate Howell, the Speaker, sits on the board of Virginia Heartland Bank.
Courts Chairman Albo received 13% of his campaign funds from the VA Bankers Association and more from two major bank servicers.
The lobbyist representing the bankers, Matt Bruning, at the hearing of the Civil Subcommittee was a former aide to the chairman of the subcommittee, Delegate Athey, and an aid to the governor.
A reason given by Delegate Athey for not passing HB-1506 on was that the governor’s office in the person of Terri Suit, head of the governor’s foreclosure task force sent a letter asking the subcommittee to hold off and let the task force work on it. The Virginia Public Access Project reports that Terri Suit, ,chair of the Foreclosure Task Force, was a paid lobbyist for the Mortgage Lenders Association and the “private” members of the Task Force largely comprise representatives of the mortgage industry.
HB-1718 was pulled from the floor when Delegate Marshall threatened to attach an amendment excluding mortgages from the language. Had the speaker left it on the floor, the members would have had to record a vote on the amendment and with the amendment there no longer was reason to pass it. Delegate Merricks sits on the board of Virginia Bank & Trust and has 25 years in the banking industry.
The relationships are so inappropriate as to cause any reasonable citizen to question the integrity of the process.
A survey released today in the Financial Times shows that Americans trust of all large institutions is at an all time low with only 25% of American saying that they trust financial institutions.
A survey published last week ranked Virginia as the country’s second most corrupt state only after Tennessee.
The citizens of Virginia appear to be making an accurate assessment based on the shenanigans going on in Richmond this week.
Thursday, January 27, 2011
HAMP and The Treasury
So we've all heard about the HAMP modification program. It's been in the news for quite some time now and modification companies still suggest that struggling homeowners should scrape together their last few dollars and throw it to them so they can save their home.
The tragedy in this process is two fold. Firstly how someone can take a fee from another party without adding value is beyond me. There is no extra incentive for a servicer to accommodate a third party request for modification. Meaning that the third party adds no additional value to the homeowner who files his/her own paperwork. The only exception to this would be the third party document preparer who suggests that they are familiar with the banks qualifying process and what the borrowers income, assets, and other qualifiers need to be in order to get approved. Of course if this is the value that a modification expert intends to provide it seems obvious that the provider intends on manipulating the correct numbers and to provide the bank with the numbers that would fit in their box for approval regardless of what the true figures may be. This leaves the borrower on the hook for signing a document that does not reflect the borrowers true position and giving the bank leverage to pursue recourse based on fraud in the future long after the modification "expert" has moved on. Sounds pretty close to some of the foolishness that got us into this mess in the first place to me.
The other issue with modifications is that the servicers and banks are not incentivized to secure these modifications with homeowners. The financial incentives are far greater to bleed a homeowner dry with trial periods, late fees, lost paperwork, and other nefarious charges in order to line the pockets of the servicer. The bank of course has no intention of reworking any loan as it would have to purchase it back from the end investor or at a minimum get the investor to agree to new terms in order to facilitate an actual modification.
So you are asking yourself... "How come some people are getting modified?" The answer is that they aren't. The bank will occasionally alter front end terms on a security by giving the borrower a temporary teaser rate adjustment. While the bank shows the borrower the new payment in 16pt bold and italic font what they fail to highlight is that the fully indexed rate is not being reset but is actually accruing as a negative amortization feature and the additional interest that would've been paid had no adjustment been offered will eventually find it's way back into the loan re amortized over the course of the remaining unadjusted period or as a balloon at the end of the loan. And of course you know I don't even need to explain principle reduction because regardless of how far upside you are the bank is not making an adjustment.
So what are you to do? The secret to success when dealing with the banks right now is creating leverage and frankly getting mad enough to want to stand up for yourself and fight back. The banks have committed levels of fraud in servicing, securitizing, fees, and origination that would take a hundred blogs to explain even in it's most basic forms.
As Marcy Kaptur Congresswoman from Ohio recently shouted from the floor of congress... "People are rapidly losing hope and trust. They believe their government has been captured by special interests and no longer cares about them, and they are right.... You don't leave your home until you have had adequate legal representation!"
People please if not me find someone to protect you. Foreclosure, modifications, NOD's, Servicing, etc. are all legal procedures by nature. You have laws that can protect you and can bring the banks to the table in an honest and fair negotiation. Don't be willing to stand by and continue to let them have their way with you and every other hard working American homeowner who is so discouraged they have lost hope. Don't throw your money away at modification processes that have proven time and again that they are unsuccessful take some control back and fight for what's yours!
http://www.msnbc.msn.com/id/41299299/ns/business-real_estate/ Please Read and Get Mad!
(found this the day after I posted this blog)
A BILL to Terminate the Home Affordable Modification Program of the Department of the Treasury
The tragedy in this process is two fold. Firstly how someone can take a fee from another party without adding value is beyond me. There is no extra incentive for a servicer to accommodate a third party request for modification. Meaning that the third party adds no additional value to the homeowner who files his/her own paperwork. The only exception to this would be the third party document preparer who suggests that they are familiar with the banks qualifying process and what the borrowers income, assets, and other qualifiers need to be in order to get approved. Of course if this is the value that a modification expert intends to provide it seems obvious that the provider intends on manipulating the correct numbers and to provide the bank with the numbers that would fit in their box for approval regardless of what the true figures may be. This leaves the borrower on the hook for signing a document that does not reflect the borrowers true position and giving the bank leverage to pursue recourse based on fraud in the future long after the modification "expert" has moved on. Sounds pretty close to some of the foolishness that got us into this mess in the first place to me.
The other issue with modifications is that the servicers and banks are not incentivized to secure these modifications with homeowners. The financial incentives are far greater to bleed a homeowner dry with trial periods, late fees, lost paperwork, and other nefarious charges in order to line the pockets of the servicer. The bank of course has no intention of reworking any loan as it would have to purchase it back from the end investor or at a minimum get the investor to agree to new terms in order to facilitate an actual modification.
So you are asking yourself... "How come some people are getting modified?" The answer is that they aren't. The bank will occasionally alter front end terms on a security by giving the borrower a temporary teaser rate adjustment. While the bank shows the borrower the new payment in 16pt bold and italic font what they fail to highlight is that the fully indexed rate is not being reset but is actually accruing as a negative amortization feature and the additional interest that would've been paid had no adjustment been offered will eventually find it's way back into the loan re amortized over the course of the remaining unadjusted period or as a balloon at the end of the loan. And of course you know I don't even need to explain principle reduction because regardless of how far upside you are the bank is not making an adjustment.
So what are you to do? The secret to success when dealing with the banks right now is creating leverage and frankly getting mad enough to want to stand up for yourself and fight back. The banks have committed levels of fraud in servicing, securitizing, fees, and origination that would take a hundred blogs to explain even in it's most basic forms.
As Marcy Kaptur Congresswoman from Ohio recently shouted from the floor of congress... "People are rapidly losing hope and trust. They believe their government has been captured by special interests and no longer cares about them, and they are right.... You don't leave your home until you have had adequate legal representation!"
People please if not me find someone to protect you. Foreclosure, modifications, NOD's, Servicing, etc. are all legal procedures by nature. You have laws that can protect you and can bring the banks to the table in an honest and fair negotiation. Don't be willing to stand by and continue to let them have their way with you and every other hard working American homeowner who is so discouraged they have lost hope. Don't throw your money away at modification processes that have proven time and again that they are unsuccessful take some control back and fight for what's yours!
http://www.msnbc.msn.com/id/41299299/ns/business-real_estate/ Please Read and Get Mad!
(found this the day after I posted this blog)
A BILL to Terminate the Home Affordable Modification Program of the Department of the Treasury
Tuesday, January 25, 2011
Structured Finance 2.0
The real estate boom of the past decade resulted from the explosive combination of a few financial innovations greatly expanded during the previous decade most often with the help of calculated deregulations offered by politicians to their biggest benefactors. Structured finance, credit default swaps, and sub prime lending all moved into high demand and complicated structures. Most regulators, generally insiders, only saw the upside of these new structures and since they were sold to sophisticated investors well versed in risk and leverage they were subject to limited oversight by the SEC. Credit default swaps were protected by regulatory indifference and the Commodity Futures Act and Sub prime was fueled with a wink and nod approach by the Fed. The lack of oversight was intentional and had taken many years of deregulation to accomplish but at this point it was what both Wall Street and politicians wanted.
Traditionally banks had structured financial assets tied to the real economy. I.e. stocks, bonds, currencies, gold, etc. Structured products on the other hand were generated to have any set of given properties and returns they wanted and were backed entirely with derivatives. (Side bets on other financial assets) So you can either invest in complicated algorithms that produce returns based on performance of actual product or you can invest directly in the product that the calculations are based on. To complicate the issue further it is also possible to invest in a hybrid structure that contains both real assets as well as derivative bets against other real assets in a series of highly complicated mixes.
The advantage of structured finance is twofold. First it creates new assets that can be invested in while not being limited to OTC stocks and bonds. Structured finance as its name implies could be engineered to very specific investor terms of yield and timing which was essential for timing liabilities of the investors. Secondly by creating assets that were more customized for investors, businesses ability to raise capital should be easier.
As an example if an airline flight across the world were the real asset being invested in an investor would be hedged against possible risk if it included an option to buy oil at a cheap price in the future. Thus if oil prices rise hurting the profitability of the flight by decreasing demand, the secondary option would increase in value thus protecting the initial investment. Additionally, of course by multi tiering investments this way the banks would increase their fees and revenues for the additional structures. The other advantage that made these so appealing for the larger banks was that they had the greatest ability to create unique leveraging giving them the ability to charge a premium for these bundled packages and increasing their profit line as well as the volume of transactions.
As banks began structuring MBS and CDO SPV's for investors instead of the typical standard yield across the board they tiered the returns and graded the risk into multiple levels called tranches. This structure allowed the securities to generally be graded AAA without much thought and it allowed the banks to restructure entirely new products based on the high yielding higher risk 2nd and 3rd tiers. Eventually banks began creating CDO's squared which consisted entirely of other CDO's while still getting AAA grades. As housing prices increased due to the aggressive nature of lending which was of course due to the high demand for mortgage backed structured finance the bets seemed increasingly less risky as prices continued to climb. This perfect storm if you will was obviously doomed to fail as price climbs on the assets would be capped at whatever amount borrowers were able to continue making mortgage payments. This is why as the housing boom continued into the later stages lenders continued to create loan structures that allowed borrowers to purchase higher priced assets at lower incomes. This structuring allowed the banks to keep running up profits despite the obvious end of the line.
The issue of fraud at the point of structured finance is not just procedural but conceptual as well. To contest that banks clearly didn't account correctly and sold investors a bill of goods on the securitization side is obvious and is being proven in the courts today. What is also starting to be addressed now is the suggestion that banks using these structured finance tools to generate revenue continued to draw homeowners into loans that everyone knew would eventually default and that were clearly overvalued. The train was being floored even though everyone knew the tracks ended quickly up ahead.
From Sub prime to Alt A to Option ARMS retail financing options were created with a clear design to qualify more buyers in order to sell more structured finance at the expense of homeowners and investors worldwide.
As the banks passed through the risk from these obligations to investors they collected their substantial fees and bonuses.
If this weren't enough once retail demand for their mortgage backed securities began to wane instead of reading market conditions they created shell companies to purchase the derivatives that they couldn't sell on the open market thus creating false demand and keeping valuations high by manipulating the market forces. This not only moved product off the books and made the banks more attractive and sound but it of course generated millions in bonuses for the enterprising individuals who managed the false sales.
While structured finance is a useful tool, when it is unregulated the temptation to manipulate and abuse is far too powerful. It's time to take our markets back from those who choose to abuse them and it's time to call them to account for what they've done. Leaving millions of Americans homeless, upside-down, and in debt at the expense of bonuses is not acceptable behavior and even without formal regulation should've been stopped before we ended up here.
Traditionally banks had structured financial assets tied to the real economy. I.e. stocks, bonds, currencies, gold, etc. Structured products on the other hand were generated to have any set of given properties and returns they wanted and were backed entirely with derivatives. (Side bets on other financial assets) So you can either invest in complicated algorithms that produce returns based on performance of actual product or you can invest directly in the product that the calculations are based on. To complicate the issue further it is also possible to invest in a hybrid structure that contains both real assets as well as derivative bets against other real assets in a series of highly complicated mixes.
The advantage of structured finance is twofold. First it creates new assets that can be invested in while not being limited to OTC stocks and bonds. Structured finance as its name implies could be engineered to very specific investor terms of yield and timing which was essential for timing liabilities of the investors. Secondly by creating assets that were more customized for investors, businesses ability to raise capital should be easier.
As an example if an airline flight across the world were the real asset being invested in an investor would be hedged against possible risk if it included an option to buy oil at a cheap price in the future. Thus if oil prices rise hurting the profitability of the flight by decreasing demand, the secondary option would increase in value thus protecting the initial investment. Additionally, of course by multi tiering investments this way the banks would increase their fees and revenues for the additional structures. The other advantage that made these so appealing for the larger banks was that they had the greatest ability to create unique leveraging giving them the ability to charge a premium for these bundled packages and increasing their profit line as well as the volume of transactions.
As banks began structuring MBS and CDO SPV's for investors instead of the typical standard yield across the board they tiered the returns and graded the risk into multiple levels called tranches. This structure allowed the securities to generally be graded AAA without much thought and it allowed the banks to restructure entirely new products based on the high yielding higher risk 2nd and 3rd tiers. Eventually banks began creating CDO's squared which consisted entirely of other CDO's while still getting AAA grades. As housing prices increased due to the aggressive nature of lending which was of course due to the high demand for mortgage backed structured finance the bets seemed increasingly less risky as prices continued to climb. This perfect storm if you will was obviously doomed to fail as price climbs on the assets would be capped at whatever amount borrowers were able to continue making mortgage payments. This is why as the housing boom continued into the later stages lenders continued to create loan structures that allowed borrowers to purchase higher priced assets at lower incomes. This structuring allowed the banks to keep running up profits despite the obvious end of the line.
The issue of fraud at the point of structured finance is not just procedural but conceptual as well. To contest that banks clearly didn't account correctly and sold investors a bill of goods on the securitization side is obvious and is being proven in the courts today. What is also starting to be addressed now is the suggestion that banks using these structured finance tools to generate revenue continued to draw homeowners into loans that everyone knew would eventually default and that were clearly overvalued. The train was being floored even though everyone knew the tracks ended quickly up ahead.
From Sub prime to Alt A to Option ARMS retail financing options were created with a clear design to qualify more buyers in order to sell more structured finance at the expense of homeowners and investors worldwide.
As the banks passed through the risk from these obligations to investors they collected their substantial fees and bonuses.
If this weren't enough once retail demand for their mortgage backed securities began to wane instead of reading market conditions they created shell companies to purchase the derivatives that they couldn't sell on the open market thus creating false demand and keeping valuations high by manipulating the market forces. This not only moved product off the books and made the banks more attractive and sound but it of course generated millions in bonuses for the enterprising individuals who managed the false sales.
While structured finance is a useful tool, when it is unregulated the temptation to manipulate and abuse is far too powerful. It's time to take our markets back from those who choose to abuse them and it's time to call them to account for what they've done. Leaving millions of Americans homeless, upside-down, and in debt at the expense of bonuses is not acceptable behavior and even without formal regulation should've been stopped before we ended up here.
Friday, January 21, 2011
Commodities Bubble
Again another repost from April of 2008 and yet still very applicable. The commodities markets are heating up again due to a significant move out of the USD. These same principles need to be addressed and yet it's 3 years later. Someone needs to force the legislative and executive branches to account for this mess.
(April 2008 repost)
Bernanke is really putting his flawed logic to the test if he drops the banking rates again next Tuesday. From the beginning of his term as Fed chief there has been some inclinations as to his true positions on inflationary pressures and his seemingly controversial dismissal of their relevance in the broader market. His absolute commitment to accommodate and bow to big money's whims has been overlooked by many. Jim Cramer (Mad Money) virtually begged Bernanke to listen to the poor hedge fund managers and bank exec's during the CDO free fall from his MSNBC platform. Looking at Cramers record it would appear his greatest success is baldness and screaming. His investment house over it's entire existence is a woeful display of mismanagement and bad bets but since he had an associated level of success at a time when everyone was succeeding we now have to listen to him. When the hedges and banks mark to market indexing left them high and dry and they were stuck holding billions in questionable debt they had yet to unload to school teachers, metal workers, policemen, and the rest of us; they began screaming that the system that had brought them such success was now clearly flawed and could no longer be trusted. Instead of holding strong and governing the markets Bernanke has decided it's better to concede to the spectacle and tuxedo adorned monopoly men of Wall Street. He has consistently dropped rates and encouraged bailouts all while watching the dollar freefall to it's lowest levels ever against the Euro. He's watched as commodities have soared and has encouraged continued profiteering by lowering the inner banking rates and opening lending windows to non institutionalized banks. By doing so he can claim his trying to eliminate the credit crunch but all he's really doing is allowing the same individuals who ran the mortgage industry into a brick wall during their cash grab to turn their full efforts with an equal lack of restraint into the commodities market. Nobody could possibly believe that the cheap money made available by the Fed is going to collateralized debt, it's going straight into the commodities market and Bernanke keeps feeding the frenzy by discounting rates. The logic is absurd and clearly a man with the intelligence and experience of Bernanke is aware of exactly what's going on.
With an anticipated drop of .25% during next weeks meeting we can expect commodities are going to continue their rise. Oil and grain futures will continue to be used as a wealth driven tool as opposed to a hedge. If Bernanke chooses to take a stand and leave rates where they are, the sell off will be quick and prices will begin to realign themselves. Do we really need hedge individual fund managers to make billions in salaries at the expense of the many? Capitalism without restraint is oppression. Those who have bear a responsibility to act fairly and responsibly. Restraint, accountability, and compassion need to be returned to business. Our current success at any cost mentality is going to upend the very platforms we have used to achieve our current positions.
My question to Ben Bernanke is how much longer will you suffer that the least of those in this world suffer at the expense of significant profit lines for the few? Isn't your job Sir to protect the markets as a whole and not defend the few who are already positioned and protected? How many will be killed in food riots before you take a stand? You act as if you feel what you're doing is in the best interests of the world, but I contend that is only the case if your world doesn't extend past the platinum clubs of the Wall Street elitist's. It's time you either admit your true purpose or do the right thing. Leave the rates alone. Let the fat cats take care of themselves for minute while you care for those who you are truly positioned to serve.
(April 2008 repost)
Bernanke is really putting his flawed logic to the test if he drops the banking rates again next Tuesday. From the beginning of his term as Fed chief there has been some inclinations as to his true positions on inflationary pressures and his seemingly controversial dismissal of their relevance in the broader market. His absolute commitment to accommodate and bow to big money's whims has been overlooked by many. Jim Cramer (Mad Money) virtually begged Bernanke to listen to the poor hedge fund managers and bank exec's during the CDO free fall from his MSNBC platform. Looking at Cramers record it would appear his greatest success is baldness and screaming. His investment house over it's entire existence is a woeful display of mismanagement and bad bets but since he had an associated level of success at a time when everyone was succeeding we now have to listen to him. When the hedges and banks mark to market indexing left them high and dry and they were stuck holding billions in questionable debt they had yet to unload to school teachers, metal workers, policemen, and the rest of us; they began screaming that the system that had brought them such success was now clearly flawed and could no longer be trusted. Instead of holding strong and governing the markets Bernanke has decided it's better to concede to the spectacle and tuxedo adorned monopoly men of Wall Street. He has consistently dropped rates and encouraged bailouts all while watching the dollar freefall to it's lowest levels ever against the Euro. He's watched as commodities have soared and has encouraged continued profiteering by lowering the inner banking rates and opening lending windows to non institutionalized banks. By doing so he can claim his trying to eliminate the credit crunch but all he's really doing is allowing the same individuals who ran the mortgage industry into a brick wall during their cash grab to turn their full efforts with an equal lack of restraint into the commodities market. Nobody could possibly believe that the cheap money made available by the Fed is going to collateralized debt, it's going straight into the commodities market and Bernanke keeps feeding the frenzy by discounting rates. The logic is absurd and clearly a man with the intelligence and experience of Bernanke is aware of exactly what's going on.
With an anticipated drop of .25% during next weeks meeting we can expect commodities are going to continue their rise. Oil and grain futures will continue to be used as a wealth driven tool as opposed to a hedge. If Bernanke chooses to take a stand and leave rates where they are, the sell off will be quick and prices will begin to realign themselves. Do we really need hedge individual fund managers to make billions in salaries at the expense of the many? Capitalism without restraint is oppression. Those who have bear a responsibility to act fairly and responsibly. Restraint, accountability, and compassion need to be returned to business. Our current success at any cost mentality is going to upend the very platforms we have used to achieve our current positions.
My question to Ben Bernanke is how much longer will you suffer that the least of those in this world suffer at the expense of significant profit lines for the few? Isn't your job Sir to protect the markets as a whole and not defend the few who are already positioned and protected? How many will be killed in food riots before you take a stand? You act as if you feel what you're doing is in the best interests of the world, but I contend that is only the case if your world doesn't extend past the platinum clubs of the Wall Street elitist's. It's time you either admit your true purpose or do the right thing. Leave the rates alone. Let the fat cats take care of themselves for minute while you care for those who you are truly positioned to serve.
Mark to Market Accounting Bias
I'm not one to toot my own horn but I think it's important that we recognize the issues assoiciated with deregulation and allowing the inmates to run the "ass"ylum (thanks for reminding me Sandra)as we have with commodities, structured obligations, accounting strategies, and general financial recklessness.
I wrote this piece in April of 2008 nearly three years ago and I feel it still needs to be addressed and finally writers and economists like William Issac the former head of the FDIC and author of Senseless Panic are being heard.
I read today that some economists have suggested that we freeze the "mark to market" pricing index that governs the values of securitized obligations for the next 12mos. What they are hoping is that stabilization of the indexes that sell and trade CDO's (sub-prime mtg debt) will help us find financial footing across all sectors. The sentiment seems more of a cash grab than an actual strategy to steady the roiling debt markets we are currently experiencing.
Let's start with the purpose of the "mark to market" financial grading system. As new debt instruments were established over the past 7yrs they didn't have a history of valuation. CDO's, CMO's, etc. were all valued based on market interest instead of market history because they were such new debt tools. Using a "mark to market" approach a daily value was calculated more or less on what people were willing to pay for the securities.
Now that the markets have destabilized and the instruments are being sold at deep discounts many are suggesting it's unfair to try and determine value using the system that brought them all the increases during their run. It seems that the sentiment is that if the mark to market is working overly optimistically then it is reasonable and an accurate assessment of qualified value but if the market is overly pessimistic then the valuations can't be trusted. The double standard is ridiculous.
That these financial minds of our times would make such a patently flawed suggestion and try to pass it off as protectionism is offensive and less than subtle. Clearly the banking and financial industries have only their interests at heart while attempting to spin it as a stabilization tool for the entire economy. Maybe they should've stabilized it during the run up. Maybe Greenspan should've recognized the potential pitfalls and done some preventive maintenance instead of dropping the mess right in Bernankes lap with a smile and a handshake. Not really Greenspan's strong point or philosophy for that matter.
Politicians not surprisingly have begun regurgitating the information that has been spoon fed them from the industry. McCain even recently mentioned the need to consider a stabilizing force in the mark to market evaluations. I'm not convinced if on rebuttal Mr. McCain could even remember his quote not to mention justify it's intent. I guess what angers me is that while profiteering on the backs of individuals on the front end with mortgages that nobody expected they could keep up with as well as back end profits by selling these same mortgages to investors with AAA ratings the industry is now suggesting it shouldn't suffer for their own indiscretions because it may effect the broader market and we just can't afford that. My thoughts, we can't afford not too. It's time for money to be accountable.
I wrote this piece in April of 2008 nearly three years ago and I feel it still needs to be addressed and finally writers and economists like William Issac the former head of the FDIC and author of Senseless Panic are being heard.
I read today that some economists have suggested that we freeze the "mark to market" pricing index that governs the values of securitized obligations for the next 12mos. What they are hoping is that stabilization of the indexes that sell and trade CDO's (sub-prime mtg debt) will help us find financial footing across all sectors. The sentiment seems more of a cash grab than an actual strategy to steady the roiling debt markets we are currently experiencing.
Let's start with the purpose of the "mark to market" financial grading system. As new debt instruments were established over the past 7yrs they didn't have a history of valuation. CDO's, CMO's, etc. were all valued based on market interest instead of market history because they were such new debt tools. Using a "mark to market" approach a daily value was calculated more or less on what people were willing to pay for the securities.
Now that the markets have destabilized and the instruments are being sold at deep discounts many are suggesting it's unfair to try and determine value using the system that brought them all the increases during their run. It seems that the sentiment is that if the mark to market is working overly optimistically then it is reasonable and an accurate assessment of qualified value but if the market is overly pessimistic then the valuations can't be trusted. The double standard is ridiculous.
That these financial minds of our times would make such a patently flawed suggestion and try to pass it off as protectionism is offensive and less than subtle. Clearly the banking and financial industries have only their interests at heart while attempting to spin it as a stabilization tool for the entire economy. Maybe they should've stabilized it during the run up. Maybe Greenspan should've recognized the potential pitfalls and done some preventive maintenance instead of dropping the mess right in Bernankes lap with a smile and a handshake. Not really Greenspan's strong point or philosophy for that matter.
Politicians not surprisingly have begun regurgitating the information that has been spoon fed them from the industry. McCain even recently mentioned the need to consider a stabilizing force in the mark to market evaluations. I'm not convinced if on rebuttal Mr. McCain could even remember his quote not to mention justify it's intent. I guess what angers me is that while profiteering on the backs of individuals on the front end with mortgages that nobody expected they could keep up with as well as back end profits by selling these same mortgages to investors with AAA ratings the industry is now suggesting it shouldn't suffer for their own indiscretions because it may effect the broader market and we just can't afford that. My thoughts, we can't afford not too. It's time for money to be accountable.
(Christopher Peterson MERS) Chris Peterson MERS
Chris Peterson Professor of Law at the University of Utah's Law School discussing before congress some of the issues relating to a circumvention of property rights using the shell corporation MERS by the banking industry. What we need to recognize is that this was not only an affront to our county and municipal coffers this was a ruse to take a transparent system of public record and make it opaque for the benefit of trading and selling individual property. The issue we have now is that without qualifying the banks standing in a foreclosure homeowners could potential receive claims from multiple individuals or entities that all suggest an ownership of their mortgage proceeds. If clear standing isn't presented how is a homeowner to know who legitimately to pay off in order to fulfill their obligation?
http://www.youtube.com/watch?v=8VpCUfC9k6M
http://www.youtube.com/watch?v=8VpCUfC9k6M
MERS Rundown
The big banks are reporting that profits are up. Citigroup is celebrating a 46% gain in share prices and net income of $1.31 billion.
Wells Fargo just reported strong profits.Yet there are many reasons to doubt the good news. As I've said before, it is more likely that they are toast.
First, the income reports result in large part from reductions to loan loss reserves.
Yes, banks are partying like it is 1999—everything is hunky-dory so there is no reason to sock away reserves against possible defaults. Heck, no one is going to default in 2011.
Right? Move those reserves into the profits column.
Banks are not making any money in traditional lines of business—that is, by making loans. No one wants loans. The economy is down for the count. Other than pulling money out of loan loss reserves, banks can only make profits by revaluing assets.
The write-downs of trashy mortgages need to be reversed. Banks trade trash with each other at higher prices, recording profits. They sell trash to the government at inflated prices—more on that below. And they jack up late fees on homeowners, credit card users, and other debtors. Even though none of those borrowers can actually pay the late fees, the banks book the revenue now.
But here is the much bigger problem: the banks are getting sued from here to Pluto by homeowners, soldiers and sailors, Fannie and Freddie, PIMCO, the NYFed, and just about anybody with access to a lawyer. And, increasingly, the banks are losing.
JPMorgan-Chase was caught stealing homes from military personnel. The bank admitted 14 outright thefts—improper foreclosures. It is illegal to foreclose on active duty personnel. But illegal activity is routine business practice at the big banks. They flaunt the laws. They then claim they had some paperwork problems. Oh, you know, banking is such a complex business, you never know whose home you are taking. Widow, Orphan, Military Personnel. What the heck. Who keeps track, anyway? The bank also admitted that it overcharged 4000 active duty personnel—jacking up their mortgage interest rates to 9 or 10 percent even though those serving our country are supposed to get 6% rates (6? How generous is that?). The bank now says it feels their pain—“we feel particularly badly about the mistakes we made here” said bank officials in a statement. Because they got caught, of course. Routine overcharges are the business model at the big banks. Then they pile on late fees when families cannot afford the overcharges. Finally, they take the homes and throw the owners out onto the streets. Paperwork problems, you know. No prison terms for theft of homes by bank officials. At best, the bank says it is sorry and promises it will do better in the future. It would be interesting if bank robbers were allowed to pursue the same strategy.
Ok, next problem on the docket. Citigroup is still selling trash—to Freddie, no less. A recent audit has disclosed that 15% of the mortgages Citi sold to Freddie in 2010 were frauds. Folks, these are not the old trash Citi originated in the heyday of fraudulent loans back in 2004-06. No, these were all new originations, “underwritten” between February and May of 2010. I put “underwritten” in quotes, because it is clear Citi is not checking credit-worthiness. These are loans that are rated “not acceptable quality” by Freddie. They've got missing documents, the properties were not properly appraised, the incomes of homebuyers did not meet requirements, and the homes did not qualify, either. In other words, they had the same litany of problems that all the junk mortgages had back in 2005. Citi has learned no lessons from the fiasco it helped to created.
Indeed, Sanjiv Das, CEO of CitiMortgage (that originates loans for Citi) argued that with “only” a 15% rate of fraudulent mortgages, that qualifies as “one of the most outstanding stories” of Citi's business model; it represents a “fantastic job” he claimed. True, it is down from a 30% fraud rate in the fourth quarter of 2009. And, who knows, maybe this really is the least fraudulent business the big banks have going on right now—compared with money laundering, drug running, and who knows what else, this might really be the shining example of good citizenship on Wall Street.
So, fantastic improvement, Citi. The bank has cut its fraud rate in half. Still, just about one out of every seven mortgages it sells is a fraud. Just what kind of business can stay in business with a fraud rate like that? Oh, a big “too big to fail” sort of bank. Experts say that “the percentage of acceptable quality loans should be in the high 90s”—not down around 85%. This is a bank that received massive bail-outs by government, and is still screwing government by selling trashy garbage to Freddie. Vikram Pandit, currently the darling of the financial press because he manufactured presumably fake profits at the bank, declined to comment. That is quite a surprise.
Meanwhile, Citigroup upped its reserves to cover buybacks to $952 billion. Credit Suisse reckons it will need between $2.2 billion and $4.3 billion for defective mortgages it sold between 2005 and 2008. But like all estimates of the size of this catastrophe, that will prove to be orders of magnitude too small. In the third quarter of 2010 there were over 2000 repurchase agreements from Citigroup mortgage buyers demanding that Citi take back the junk it sold.
In a similar scam, Bank of America agreed to settle with Freddie and Fannie. Countrywide (taken over by BofA) had faced $127 billion in buyback claims for faulty securities it sold. Again, the problem was that the underlying mortgages did not meet the “reps and warranties” the bank had provided. It paid Freddie $1.28 billion and Fannie $1.52 billion—a measly 2+% of the value of the fraudulent mortgages the bank sold. Four Democratic members of Congress rightly objected—how could this settlement represent “the best possible recovery of funds available to taxpayers”? Meanwhile, Freddie posted 5 straight quarters of losses, receiving $63 billion in aid from the Treasury to cover its bad deals with banks like BofA. Apparently the deal with BofA was pushed through by Treasury Secretary Geithner, who continues to protect his Wall Street benefactors. But as Yogi said, it ain't over until it's over. BofA will be sued again and again over these fraudulent mortgages, by those with deeper pockets who are not subject to Timmy's will and access to Uncle Sam's purse.
Courts continue to chip away at the justifications banks and their Frankenstein creation, MERS, have created for theft of homes. MERS was manufactured by the industry to evade proper recording of property sales in county recorder's offices. This will sound overly dramatic, but there is no other way to accurately state it: MERS was from inception a criminal conspiracy designed to cheat counties out of recording fees, the US Treasury out of taxes, and homeowners out of their homes. That conspiracy will have to be proven in the courts, but everyday and everywhere courts are ruling against MERS. The fiction perpetrated by MERS is that it is simultaneously a nominee of the true owner of the mortgage debt and at the same time it is the mortgagee of the security instrument. (You cannot simultaneously be the party of interest and the nominee, of course.) It also disclaims any financial interest in the mortgage and has no claim on the mortgage payments. But it claims that it can operate as the agent of unnamed owners of the mortgage instrument, unknown owners who—since they are unknown—have never designated MERS as agent. I won't repeat my earlier missives: you must have a clear chain of title, demonstrating proper assignment of the mortgage at every step. It looks like none of MERS's mortgages meet that—which is what the Massachusetts Supreme Court ruling was all about.
Judges are waking up to the multiple scams. In Utah, judges are allowing homeowners to pursue a “quiet title action”. The owner seeks clear title to property free of lien by lenders or others. Typically, in a home purchase, the homebuyer signs a promissory note (note) held by the lender and a deed of trust (mortgage) that is recorded at the county recorder's office. The holder of the note has the right to receive mortgage payments; the mortgage provides the right to foreclose. In US law, the “mortgage follows the note”—the note holder who has the mortgage can foreclose if the payments are not made. In a quiet title action, the owner takes advantage of the fact that MERS purposely separated notes and mortgages, listing itself on the trust deeds as the beneficiary of the note.
Utah courts have recognized that as a fraud. MERS—with no financial interest in the mortgage—cannot be beneficiary. It is just a data registry. It makes no loans. It has virtually no employees. It does not receive mortgage payments. It was designed to defraud counties and the IRS. Hence, homeowners can go to court without any notification to MERS, serving legal papers only to the legal owners of the title to the property. This is usually some title company, that is supposed to be the trustee of the trust deed (mortgage). In cases in Utah, these title companies either did not respond at all, or they simply said that they didn't “know who the beneficiary of the trust deed is” and denied any interest in the deed. The judges then handed the deeds over to the homeowners. While they can still be sued for the mortgage payments they owe, the homeowners got their homes free and clear. In other words, no one can foreclose on them. Their debts are unsecured.
MERS has screwed up the records so badly that in many or most cases no one knows who holds the notes, who is entitled to receive mortgage payments, and who has got the deed. What we used to call “mortgage backed securities” are probably mostly unsecured. It is not clear that any of the securitizations of home mortgages were done properly. In that case, the securities are not mortgage backed. Mortgage servicers do not have the right to foreclose, and neither do the securities holders. Homeowners can follow the example in Utah because, apparently, all states have a similar provision to allow “quiet title action”. The mortgage debts are not secured by homes. The homeowners can keep their homes and tell the banks to take a flying leap.
And that makes the banks toast. Forget anything you read about their income, their profit rates, their recovery. They've got to take back the unbacked mortgage securities—they do not meet the “reps and warranties”. And there is no property behind them, so foreclosure is out of the question. They can pursue homeowners in court—but homeowners lost their jobs and in any case could not afford the houses the lender fraudsters put them into. Yet, they get to stay in the homes, can claim their titles, and can negotiate for better terms with banks that are failing.
The next several years will be fun. Bet on the lawyers.
Wells Fargo just reported strong profits.Yet there are many reasons to doubt the good news. As I've said before, it is more likely that they are toast.
First, the income reports result in large part from reductions to loan loss reserves.
Yes, banks are partying like it is 1999—everything is hunky-dory so there is no reason to sock away reserves against possible defaults. Heck, no one is going to default in 2011.
Right? Move those reserves into the profits column.
Banks are not making any money in traditional lines of business—that is, by making loans. No one wants loans. The economy is down for the count. Other than pulling money out of loan loss reserves, banks can only make profits by revaluing assets.
The write-downs of trashy mortgages need to be reversed. Banks trade trash with each other at higher prices, recording profits. They sell trash to the government at inflated prices—more on that below. And they jack up late fees on homeowners, credit card users, and other debtors. Even though none of those borrowers can actually pay the late fees, the banks book the revenue now.
But here is the much bigger problem: the banks are getting sued from here to Pluto by homeowners, soldiers and sailors, Fannie and Freddie, PIMCO, the NYFed, and just about anybody with access to a lawyer. And, increasingly, the banks are losing.
JPMorgan-Chase was caught stealing homes from military personnel. The bank admitted 14 outright thefts—improper foreclosures. It is illegal to foreclose on active duty personnel. But illegal activity is routine business practice at the big banks. They flaunt the laws. They then claim they had some paperwork problems. Oh, you know, banking is such a complex business, you never know whose home you are taking. Widow, Orphan, Military Personnel. What the heck. Who keeps track, anyway? The bank also admitted that it overcharged 4000 active duty personnel—jacking up their mortgage interest rates to 9 or 10 percent even though those serving our country are supposed to get 6% rates (6? How generous is that?). The bank now says it feels their pain—“we feel particularly badly about the mistakes we made here” said bank officials in a statement. Because they got caught, of course. Routine overcharges are the business model at the big banks. Then they pile on late fees when families cannot afford the overcharges. Finally, they take the homes and throw the owners out onto the streets. Paperwork problems, you know. No prison terms for theft of homes by bank officials. At best, the bank says it is sorry and promises it will do better in the future. It would be interesting if bank robbers were allowed to pursue the same strategy.
Ok, next problem on the docket. Citigroup is still selling trash—to Freddie, no less. A recent audit has disclosed that 15% of the mortgages Citi sold to Freddie in 2010 were frauds. Folks, these are not the old trash Citi originated in the heyday of fraudulent loans back in 2004-06. No, these were all new originations, “underwritten” between February and May of 2010. I put “underwritten” in quotes, because it is clear Citi is not checking credit-worthiness. These are loans that are rated “not acceptable quality” by Freddie. They've got missing documents, the properties were not properly appraised, the incomes of homebuyers did not meet requirements, and the homes did not qualify, either. In other words, they had the same litany of problems that all the junk mortgages had back in 2005. Citi has learned no lessons from the fiasco it helped to created.
Indeed, Sanjiv Das, CEO of CitiMortgage (that originates loans for Citi) argued that with “only” a 15% rate of fraudulent mortgages, that qualifies as “one of the most outstanding stories” of Citi's business model; it represents a “fantastic job” he claimed. True, it is down from a 30% fraud rate in the fourth quarter of 2009. And, who knows, maybe this really is the least fraudulent business the big banks have going on right now—compared with money laundering, drug running, and who knows what else, this might really be the shining example of good citizenship on Wall Street.
So, fantastic improvement, Citi. The bank has cut its fraud rate in half. Still, just about one out of every seven mortgages it sells is a fraud. Just what kind of business can stay in business with a fraud rate like that? Oh, a big “too big to fail” sort of bank. Experts say that “the percentage of acceptable quality loans should be in the high 90s”—not down around 85%. This is a bank that received massive bail-outs by government, and is still screwing government by selling trashy garbage to Freddie. Vikram Pandit, currently the darling of the financial press because he manufactured presumably fake profits at the bank, declined to comment. That is quite a surprise.
Meanwhile, Citigroup upped its reserves to cover buybacks to $952 billion. Credit Suisse reckons it will need between $2.2 billion and $4.3 billion for defective mortgages it sold between 2005 and 2008. But like all estimates of the size of this catastrophe, that will prove to be orders of magnitude too small. In the third quarter of 2010 there were over 2000 repurchase agreements from Citigroup mortgage buyers demanding that Citi take back the junk it sold.
In a similar scam, Bank of America agreed to settle with Freddie and Fannie. Countrywide (taken over by BofA) had faced $127 billion in buyback claims for faulty securities it sold. Again, the problem was that the underlying mortgages did not meet the “reps and warranties” the bank had provided. It paid Freddie $1.28 billion and Fannie $1.52 billion—a measly 2+% of the value of the fraudulent mortgages the bank sold. Four Democratic members of Congress rightly objected—how could this settlement represent “the best possible recovery of funds available to taxpayers”? Meanwhile, Freddie posted 5 straight quarters of losses, receiving $63 billion in aid from the Treasury to cover its bad deals with banks like BofA. Apparently the deal with BofA was pushed through by Treasury Secretary Geithner, who continues to protect his Wall Street benefactors. But as Yogi said, it ain't over until it's over. BofA will be sued again and again over these fraudulent mortgages, by those with deeper pockets who are not subject to Timmy's will and access to Uncle Sam's purse.
Courts continue to chip away at the justifications banks and their Frankenstein creation, MERS, have created for theft of homes. MERS was manufactured by the industry to evade proper recording of property sales in county recorder's offices. This will sound overly dramatic, but there is no other way to accurately state it: MERS was from inception a criminal conspiracy designed to cheat counties out of recording fees, the US Treasury out of taxes, and homeowners out of their homes. That conspiracy will have to be proven in the courts, but everyday and everywhere courts are ruling against MERS. The fiction perpetrated by MERS is that it is simultaneously a nominee of the true owner of the mortgage debt and at the same time it is the mortgagee of the security instrument. (You cannot simultaneously be the party of interest and the nominee, of course.) It also disclaims any financial interest in the mortgage and has no claim on the mortgage payments. But it claims that it can operate as the agent of unnamed owners of the mortgage instrument, unknown owners who—since they are unknown—have never designated MERS as agent. I won't repeat my earlier missives: you must have a clear chain of title, demonstrating proper assignment of the mortgage at every step. It looks like none of MERS's mortgages meet that—which is what the Massachusetts Supreme Court ruling was all about.
Judges are waking up to the multiple scams. In Utah, judges are allowing homeowners to pursue a “quiet title action”. The owner seeks clear title to property free of lien by lenders or others. Typically, in a home purchase, the homebuyer signs a promissory note (note) held by the lender and a deed of trust (mortgage) that is recorded at the county recorder's office. The holder of the note has the right to receive mortgage payments; the mortgage provides the right to foreclose. In US law, the “mortgage follows the note”—the note holder who has the mortgage can foreclose if the payments are not made. In a quiet title action, the owner takes advantage of the fact that MERS purposely separated notes and mortgages, listing itself on the trust deeds as the beneficiary of the note.
Utah courts have recognized that as a fraud. MERS—with no financial interest in the mortgage—cannot be beneficiary. It is just a data registry. It makes no loans. It has virtually no employees. It does not receive mortgage payments. It was designed to defraud counties and the IRS. Hence, homeowners can go to court without any notification to MERS, serving legal papers only to the legal owners of the title to the property. This is usually some title company, that is supposed to be the trustee of the trust deed (mortgage). In cases in Utah, these title companies either did not respond at all, or they simply said that they didn't “know who the beneficiary of the trust deed is” and denied any interest in the deed. The judges then handed the deeds over to the homeowners. While they can still be sued for the mortgage payments they owe, the homeowners got their homes free and clear. In other words, no one can foreclose on them. Their debts are unsecured.
MERS has screwed up the records so badly that in many or most cases no one knows who holds the notes, who is entitled to receive mortgage payments, and who has got the deed. What we used to call “mortgage backed securities” are probably mostly unsecured. It is not clear that any of the securitizations of home mortgages were done properly. In that case, the securities are not mortgage backed. Mortgage servicers do not have the right to foreclose, and neither do the securities holders. Homeowners can follow the example in Utah because, apparently, all states have a similar provision to allow “quiet title action”. The mortgage debts are not secured by homes. The homeowners can keep their homes and tell the banks to take a flying leap.
And that makes the banks toast. Forget anything you read about their income, their profit rates, their recovery. They've got to take back the unbacked mortgage securities—they do not meet the “reps and warranties”. And there is no property behind them, so foreclosure is out of the question. They can pursue homeowners in court—but homeowners lost their jobs and in any case could not afford the houses the lender fraudsters put them into. Yet, they get to stay in the homes, can claim their titles, and can negotiate for better terms with banks that are failing.
The next several years will be fun. Bet on the lawyers.
MERS
So I've been screaming for a couple years that the mortgage system has been taken over by virtual pirates without remorse or regulation. I've seen it from the inside out and am very comfortable asserting the position that homeowners have been duped and finally the courts are starting to agree with me! Here are a couple articles that explain the process and where the inherent flaws are in the recording system and why they aren't just harmless attempts at saving costs but legitimate attempts to ursurp power from individuals by tapping into their single greatest physical asset and source of liquidity.
From Richard Eskow:
People are debating the need for a "systemic fix"to address the foreclosure crisis. What we really need is a systemic redesign, from the ground up. Fortunately, the design was laid down centuries ago -- by 800 years of law, and by the idea that free people are entitled to limit the unwarranted power of others over their persons and property. These principles are a good foundation for structuring future negotiation, legislation, or regulation.
The president wooed corporate executives this week with a Wall Street Journal editorial called "Toward a 21st Century Regulatory System." What we really need is a 21st century banking system, built on ancient principles and not fly-by-night profiteering.
You could encode those principles in a document and call it the Borrower's Bill of Rights. You could even call it the Mortgage Magna Carta, since some of the basic principles involved date back that far.
People are taking action. The Commonwealth of Virginia is debating a law that would restore some basic homeowner rights and would severely restrict the use of MERS, a database and pseudo-company created by the mortgage industry to bypass property law and expedite the buying and selling of bundled mortgages at something approaching the speed of light. Homeowners and investors in mortgage-backed securities are teaming up against the banks (although they'll part way again soon, since their interests conflict in many ways). Attorneys General from all 50 states are conducting a joint investigation and are negotiating with the major banks. FDIC Chair Sheila Bair wants to create a "claims commission" for wrongly foreclosed homeowners, like the claims program for victims of the BP disaster in the Gulf.
These efforts are good, but they lack a unifying principle. Even the idea of a "systemic fix" or "systemic redesign" doesn't go far enough, because it doesn't establish the foundation for redesign. What's needed is a new charter, a new set of rights and principles for people who engage with the banking system (or have rescued it with their tax dollars). These "borrower's rights" would stabilize the banking system and protect both investors and stockholders. That means we're not talking about a socialist revolution, just the rule of law and sound business practices.
Let's not pretend that we live in a system where anyone who doesn't like the terms of a loan can turn it down. Banks operate in close collusion, so if you want to borrow you'll have to do it on their terms. It's an asymmetrical relationship. People can't turn these loans down individually, but they can set the rules of the road as a society, by working through their elected representatives.
What would those rules of the road, these borrower's rights, look like? Let's throw out a few to get the ball rolling:
1. Contracts must be honored. As banks sold mortgages to each other, the new mortgage holder often ignored many of the terms of the original loan. Due dates, penalties, and other provisions were unilaterally changed, often with no notice to the borrower until the penalties started showing up. A contract is an agreement between both parties, and it must be understood that if a bank breaches its terms that bank has broken the contract.
2. State and local laws can't be overruled by private enterprise. MERS was created to bypass the law by naming itself as the "owner" of mortgages that it freely admitted it didn't own. It was a dummy corporation, but we were the dummies for letting it happen. MERS permitted banks to foreclose without proper documentation, without holding the deed to the property, and without giving the homeowner his or her day in court.
From the Magna Carta, 1215 C.E.: "No free man shall be seized or imprisoned, or stripped of his rights or possessions, or outlawed or exiled, or deprived of his standing in any other way, nor will we proceed with force against him, or send others to do so, except by the lawful judgment of his equals or by the law of the land."
3. Real-world assets (like homes) can't become digital gambling chips. They must be backed by deeds and other documents that link them with reality. Mortgage bankers will tell you MERS was created just to make transactions faster and easier. There's nothing wrong with electronic databases and exchanges. But you can attach the digital image of a deed or court record very, very easily. By not requiring that these documents be obtained and registered in county courthouses, it became too easy to flip mortgages in the speculative market.
If this 'digital gaming' system didn't create the housing bubble and market collapse, it certainly made it more likely. The process needs to decelerate a little to stabilize the economy. There's nothing wrong with electronic databases, but it's easy to attach the image of a document to any computer record. That reconnects the economic virtual reality of the bankers with the physical (and legal) reality where actual people live in actual homes.
4. If you break the law, you pay the price. No more retroactive immunity, easy plea-bargain deals, or soft fines for bank crimes. What's more, if a bank exectutive breaks the law, the fine must be paid by the executive, not the bank's shareholders.
And how about a little jail time now and then? If you launder drug money for the Mexican cartels and don't wind up in the joint -- just because you're a banker -- then the criminal justice system needs a "systemic fix" too. Remember: If you can't do the time, don't do the crime.
5. When you cut a plea-bargain deal, or get rescued by the taxpayer, you must admit your wrongdoing. We said no "easy" deals or cushy settlements. There will be deals and settlements, of course. But an admission of wrongdoing should be required in every case. And it should be issued publicly, by the bank's CEO.
(I'm lookin' at you, Jamie Dimon! That Alabama corruption case was really sleazy.)
6. No more clauses allowing the banks to enter "abandoned" homes. Banks have been forcing this provision into their contracts for years. (Remember, it's not a symmetrical negotiation between two equal parties.) This provision has been the source of many abuses, and it should be outlawed. If a bank thinks it has the right to seize a home, let it go to court like everybody else.
(See the Magna Carta quote, above. What is this -- a Monty Python routine?)
7. Auditors must be legally liable if they certify sketchy and/or fraudulent bank programs as financially sound. PriceWaterhouseCoopers just skated on a technicality from an investors' lawsuit over allegedly fraudulent activities at AIG, in businesses which PWC certified to be sound. That's a miscarriage of justice.
If you should've known better -- in PWC's case it was their job to know, and it's impossible to imagine how they could not have known -- you should pay the legal price for your behavior. (Conflict alert: I used to work at AIG.)
8. We need ratings agencies that aren't inept, corrupt, compromised, or beholden to the companies they're rating. And yes, I do mean S&P and Moody's. Their internal emails and other documents showed they were morally compromised at best. They got everything wrong. They rated the worst junk in the world "AAA." They were a fundamental reason for the economy's collapse.
Raters should be able to rate -- and when they call themselves "agencies," that should mean "agency" as in the EPA and not "agency" as in "ad agency." I'm not familiar with the work of Jules Kroll, but his new rating company sounds like a good idea. Rather than just read what the banks give him, he says he'll conduct due diligence and investigate them. What a concept -- it sounds almost like a business. Or an agency.
9. If we rescue you, we call the shots.From now on, anybody who rescues a bank without creating strict rules of conduct going forward shall be deemed to have committed "regulatory malpractice." If one business rescues another -- a manufacturer rescuing a supplier, for example -- it takes a chunk of the profits and sets the terms for future deals. We rescued the big banks, did a victory dance just for getting our money back (they made a bundle off interest), and are still giving them sweet deals. What's more, they're sticking it to the American consumers who rescued them, every chance they get.
That's gotta stop.
10. Nobody gets rich by f*cking up. If you run your company into the ground, so that it will fail without massive taxpayer help, you're a failure in business. Period. If you pay yourselves massive bonuses after we rescue you, you're rewarding yourselves for being lousy at your jobs. (Here's a case in point.) That ends now. If anybody collects billions in payouts, it's us (see above).
And stop telling us you're worried about the deficit -- it just gives us more reason to pay it down with the bonuses you couldn't have earned without us.
11. If you're collecting low (or zero) interest money at the Fed's "discount window," you better be lending it. Too many banks are collected those low-interest loans and investing it in non-productive areas, or flat-out speculating with it. Financial reform slowed that down a little, but didn't stop it. Lending is down, for both businesses and homeowners. So why is there such a long line at the discount window?
12. 'Claims Commissions' are good, but the list of acceptable claims should include fraudulent lending and inappropriate contract changes -- and they shouldn't be limited to defaulting homeowners. Many underwater homeowners are paying loans that were deceptively issued and/or administered. The "claims commission" idea shouldn't be used to convince the public that only a few extreme cases are responsible for the problem. Millions of mortgages are defective, and should be repaired in a just way. Sounds like a job for the Claims Commission.
13. Banks shouldn't make money writing bad deals.Banks make money on bad deals when they own the servicing companies that collect fees and penalties. Even the best underwriting will miss a few risky borrowers. But the book of business at any major bank is saturated with defaulting or struggling homeowners. That means the bank wrote a lot of loans it shouldn't have written. By owning the servicers, banks can make money from their own bad judgment. And it's an egregious conflict of interest.
Banks shouldn't own servicing companies, or profit from their own underperformance in any other way.
14. Underwater homeowners shouldn't be bailing out hugely profitable banks. Sure, bank earnings are down for some banks this quarter (though others are doing spectacularly.) Whatever their margins, they're in a lot better shape than most underwater homeowners. So why aren't banks being asked to renegotiate the principal on some of these loans, especially primary residences? They're being bled dry so that banks don't have to admit they're sitting on a lot of artificially inflated assets. That's just prolonging the inevitable, at a high human cost.
The most moderate approach would be to say that banks and homeowners got into this mess together and should share the cost of getting out. I wouldn't be that "moderate."
15. After you've wrecked everything, don't make me listen to your complaints about regulation. This isn't exactly a "right," unless you count the right to be free from unwarranted intrusion of absurd ideas into a person's brain. But it's inhumane to make sensible people keep listening to whining about regulation -- from executives who ran their own companies, their entire industry, and the complete freakin' world economy into the ground. The President shouldn't be apologizing for regulations in the Wall Street Journal. He should be reminding its readers that on the street for which that paper is named, highly paid executives brought their companies to the brink of ruin and had to be saved by the government they so freely disparage.
In the name of sanity and decency, let's stop hearing complaints about regulation from people whose unregulated actions caused a worldwide economic meltdown. What's next -- gripes about radiation safety from the people who operated Chernobyl?
These aren't randomly selected ideas. Together they re-establish the rule of law, anchor the lending process back in physical reality, reduce the "moral hazard" that lets bankers avoid the consequences of their actions, and restore balance between banks, government, and their trading partners.
As we said, they're mostly meant as food for thought. Better ones would be appreciated. But isn't it time we made the most important "systemic fix" of all -- the one that repairs the broken link between a bank and the society in which it operates?
Richard (RJ) Eskow, a consultant and writer (and former insurance/finance executive), is a Senior Fellow with the Campaign for America's Future. This post was produced as part of the Curbing Wall Street project. Richard also blogs at A Night Light.
(Thanks Richard)
From Richard Eskow:
People are debating the need for a "systemic fix"to address the foreclosure crisis. What we really need is a systemic redesign, from the ground up. Fortunately, the design was laid down centuries ago -- by 800 years of law, and by the idea that free people are entitled to limit the unwarranted power of others over their persons and property. These principles are a good foundation for structuring future negotiation, legislation, or regulation.
The president wooed corporate executives this week with a Wall Street Journal editorial called "Toward a 21st Century Regulatory System." What we really need is a 21st century banking system, built on ancient principles and not fly-by-night profiteering.
You could encode those principles in a document and call it the Borrower's Bill of Rights. You could even call it the Mortgage Magna Carta, since some of the basic principles involved date back that far.
People are taking action. The Commonwealth of Virginia is debating a law that would restore some basic homeowner rights and would severely restrict the use of MERS, a database and pseudo-company created by the mortgage industry to bypass property law and expedite the buying and selling of bundled mortgages at something approaching the speed of light. Homeowners and investors in mortgage-backed securities are teaming up against the banks (although they'll part way again soon, since their interests conflict in many ways). Attorneys General from all 50 states are conducting a joint investigation and are negotiating with the major banks. FDIC Chair Sheila Bair wants to create a "claims commission" for wrongly foreclosed homeowners, like the claims program for victims of the BP disaster in the Gulf.
These efforts are good, but they lack a unifying principle. Even the idea of a "systemic fix" or "systemic redesign" doesn't go far enough, because it doesn't establish the foundation for redesign. What's needed is a new charter, a new set of rights and principles for people who engage with the banking system (or have rescued it with their tax dollars). These "borrower's rights" would stabilize the banking system and protect both investors and stockholders. That means we're not talking about a socialist revolution, just the rule of law and sound business practices.
Let's not pretend that we live in a system where anyone who doesn't like the terms of a loan can turn it down. Banks operate in close collusion, so if you want to borrow you'll have to do it on their terms. It's an asymmetrical relationship. People can't turn these loans down individually, but they can set the rules of the road as a society, by working through their elected representatives.
What would those rules of the road, these borrower's rights, look like? Let's throw out a few to get the ball rolling:
1. Contracts must be honored. As banks sold mortgages to each other, the new mortgage holder often ignored many of the terms of the original loan. Due dates, penalties, and other provisions were unilaterally changed, often with no notice to the borrower until the penalties started showing up. A contract is an agreement between both parties, and it must be understood that if a bank breaches its terms that bank has broken the contract.
2. State and local laws can't be overruled by private enterprise. MERS was created to bypass the law by naming itself as the "owner" of mortgages that it freely admitted it didn't own. It was a dummy corporation, but we were the dummies for letting it happen. MERS permitted banks to foreclose without proper documentation, without holding the deed to the property, and without giving the homeowner his or her day in court.
From the Magna Carta, 1215 C.E.: "No free man shall be seized or imprisoned, or stripped of his rights or possessions, or outlawed or exiled, or deprived of his standing in any other way, nor will we proceed with force against him, or send others to do so, except by the lawful judgment of his equals or by the law of the land."
3. Real-world assets (like homes) can't become digital gambling chips. They must be backed by deeds and other documents that link them with reality. Mortgage bankers will tell you MERS was created just to make transactions faster and easier. There's nothing wrong with electronic databases and exchanges. But you can attach the digital image of a deed or court record very, very easily. By not requiring that these documents be obtained and registered in county courthouses, it became too easy to flip mortgages in the speculative market.
If this 'digital gaming' system didn't create the housing bubble and market collapse, it certainly made it more likely. The process needs to decelerate a little to stabilize the economy. There's nothing wrong with electronic databases, but it's easy to attach the image of a document to any computer record. That reconnects the economic virtual reality of the bankers with the physical (and legal) reality where actual people live in actual homes.
4. If you break the law, you pay the price. No more retroactive immunity, easy plea-bargain deals, or soft fines for bank crimes. What's more, if a bank exectutive breaks the law, the fine must be paid by the executive, not the bank's shareholders.
And how about a little jail time now and then? If you launder drug money for the Mexican cartels and don't wind up in the joint -- just because you're a banker -- then the criminal justice system needs a "systemic fix" too. Remember: If you can't do the time, don't do the crime.
5. When you cut a plea-bargain deal, or get rescued by the taxpayer, you must admit your wrongdoing. We said no "easy" deals or cushy settlements. There will be deals and settlements, of course. But an admission of wrongdoing should be required in every case. And it should be issued publicly, by the bank's CEO.
(I'm lookin' at you, Jamie Dimon! That Alabama corruption case was really sleazy.)
6. No more clauses allowing the banks to enter "abandoned" homes. Banks have been forcing this provision into their contracts for years. (Remember, it's not a symmetrical negotiation between two equal parties.) This provision has been the source of many abuses, and it should be outlawed. If a bank thinks it has the right to seize a home, let it go to court like everybody else.
(See the Magna Carta quote, above. What is this -- a Monty Python routine?)
7. Auditors must be legally liable if they certify sketchy and/or fraudulent bank programs as financially sound. PriceWaterhouseCoopers just skated on a technicality from an investors' lawsuit over allegedly fraudulent activities at AIG, in businesses which PWC certified to be sound. That's a miscarriage of justice.
If you should've known better -- in PWC's case it was their job to know, and it's impossible to imagine how they could not have known -- you should pay the legal price for your behavior. (Conflict alert: I used to work at AIG.)
8. We need ratings agencies that aren't inept, corrupt, compromised, or beholden to the companies they're rating. And yes, I do mean S&P and Moody's. Their internal emails and other documents showed they were morally compromised at best. They got everything wrong. They rated the worst junk in the world "AAA." They were a fundamental reason for the economy's collapse.
Raters should be able to rate -- and when they call themselves "agencies," that should mean "agency" as in the EPA and not "agency" as in "ad agency." I'm not familiar with the work of Jules Kroll, but his new rating company sounds like a good idea. Rather than just read what the banks give him, he says he'll conduct due diligence and investigate them. What a concept -- it sounds almost like a business. Or an agency.
9. If we rescue you, we call the shots.From now on, anybody who rescues a bank without creating strict rules of conduct going forward shall be deemed to have committed "regulatory malpractice." If one business rescues another -- a manufacturer rescuing a supplier, for example -- it takes a chunk of the profits and sets the terms for future deals. We rescued the big banks, did a victory dance just for getting our money back (they made a bundle off interest), and are still giving them sweet deals. What's more, they're sticking it to the American consumers who rescued them, every chance they get.
That's gotta stop.
10. Nobody gets rich by f*cking up. If you run your company into the ground, so that it will fail without massive taxpayer help, you're a failure in business. Period. If you pay yourselves massive bonuses after we rescue you, you're rewarding yourselves for being lousy at your jobs. (Here's a case in point.) That ends now. If anybody collects billions in payouts, it's us (see above).
And stop telling us you're worried about the deficit -- it just gives us more reason to pay it down with the bonuses you couldn't have earned without us.
11. If you're collecting low (or zero) interest money at the Fed's "discount window," you better be lending it. Too many banks are collected those low-interest loans and investing it in non-productive areas, or flat-out speculating with it. Financial reform slowed that down a little, but didn't stop it. Lending is down, for both businesses and homeowners. So why is there such a long line at the discount window?
12. 'Claims Commissions' are good, but the list of acceptable claims should include fraudulent lending and inappropriate contract changes -- and they shouldn't be limited to defaulting homeowners. Many underwater homeowners are paying loans that were deceptively issued and/or administered. The "claims commission" idea shouldn't be used to convince the public that only a few extreme cases are responsible for the problem. Millions of mortgages are defective, and should be repaired in a just way. Sounds like a job for the Claims Commission.
13. Banks shouldn't make money writing bad deals.Banks make money on bad deals when they own the servicing companies that collect fees and penalties. Even the best underwriting will miss a few risky borrowers. But the book of business at any major bank is saturated with defaulting or struggling homeowners. That means the bank wrote a lot of loans it shouldn't have written. By owning the servicers, banks can make money from their own bad judgment. And it's an egregious conflict of interest.
Banks shouldn't own servicing companies, or profit from their own underperformance in any other way.
14. Underwater homeowners shouldn't be bailing out hugely profitable banks. Sure, bank earnings are down for some banks this quarter (though others are doing spectacularly.) Whatever their margins, they're in a lot better shape than most underwater homeowners. So why aren't banks being asked to renegotiate the principal on some of these loans, especially primary residences? They're being bled dry so that banks don't have to admit they're sitting on a lot of artificially inflated assets. That's just prolonging the inevitable, at a high human cost.
The most moderate approach would be to say that banks and homeowners got into this mess together and should share the cost of getting out. I wouldn't be that "moderate."
15. After you've wrecked everything, don't make me listen to your complaints about regulation. This isn't exactly a "right," unless you count the right to be free from unwarranted intrusion of absurd ideas into a person's brain. But it's inhumane to make sensible people keep listening to whining about regulation -- from executives who ran their own companies, their entire industry, and the complete freakin' world economy into the ground. The President shouldn't be apologizing for regulations in the Wall Street Journal. He should be reminding its readers that on the street for which that paper is named, highly paid executives brought their companies to the brink of ruin and had to be saved by the government they so freely disparage.
In the name of sanity and decency, let's stop hearing complaints about regulation from people whose unregulated actions caused a worldwide economic meltdown. What's next -- gripes about radiation safety from the people who operated Chernobyl?
These aren't randomly selected ideas. Together they re-establish the rule of law, anchor the lending process back in physical reality, reduce the "moral hazard" that lets bankers avoid the consequences of their actions, and restore balance between banks, government, and their trading partners.
As we said, they're mostly meant as food for thought. Better ones would be appreciated. But isn't it time we made the most important "systemic fix" of all -- the one that repairs the broken link between a bank and the society in which it operates?
Richard (RJ) Eskow, a consultant and writer (and former insurance/finance executive), is a Senior Fellow with the Campaign for America's Future. This post was produced as part of the Curbing Wall Street project. Richard also blogs at A Night Light.
(Thanks Richard)
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