Housing/Mortgage/Real Estate

[Crafty_Dog]

Given the gathering apocalyptic looking storm clouds, I'm thinking the Political Economics thread is becoming a bit unweildy and so begin this one with the latest liberal fascist economic drivel from His Glibness:

IBD

Home Invasions
By INVESTOR'S BUSINESS DAILY | Posted Wednesday, February 25, 2009 4:20 PM PT

Activism: The community organizers who helped tank the housing market plan to seize private property being foreclosed. Acorn's "homesteaders" will squat in homes they don't own as Congress members urge them on.


--------------------------------------------------------------------------------

Read More: Economy


--------------------------------------------------------------------------------


Last October, we noted a campaign appearance in late 2007 by then-candidate Barack Obama at the Heartland Democratic Presidential Forum organized by Deepak Bhargava, executive director of the Center for Community Change.

Before leaders of community organizing groups including Acorn, Obama pledged: "We're gonna be having meetings all across the country with community organizations so that you have input into the agenda for the next presidency of the United States of America."

The kind of input Acorn had in mind, and the agenda it apparently has set for America, was seen last week after Acorn representatives broke into a foreclosed home in southeast Baltimore, part of its "Home Savers" campaign in at least 22 cities.

Under this program, teams of activists will become squatters in foreclosed homes, daring authorities to forcibly evict them. Among those condoning such defiance of the law is Rep. Marcy Kaptur, D-Ohio, who told the squatters: "Stay in your homes. If the American people, anybody out there is being foreclosed, don't leave."

Is this what Congress had in mind when it included several billion dollars in the "stimulus" bill for groups such as Acorn to engage in "neighborhood stabilization" activities? This is like giving fire prevention funds to arsonists.

The irony here is that it was Acorn, under the cover of the Community Reinvestment Act, that intimidated banks into making risky loans in the name of "fairness." And it was Acorn that organized to intimidate financial institutions into giving what have been called "ninja" loans — for no income, no job, no assets — to people who could not afford them.

When Acorn broke into the house at 315 South Ellwood Ave. in Baltimore, member Louis Beverly, after cutting a lock with bolt cutters, proclaimed: "This is our house now." But it isn't Acorn's house. Nor is it the house of former owner Donna Hanks, who bought it in the summer of 2001.

As columnist Michelle Malkin points out, both the house and Ms. Hanks have an interesting history. The house went into foreclosure in the spring of 2006. Somewhere between that purchase and foreclosure, Ms. Hanks refinanced the original home loan to the tune of $270,000. That's a lot of extra cash.

In July 2006, she filed for bankruptcy under Chapter 13 and as part of the deal agreed to pay $10,500 in arrears, which resulted in a halt to the 2006 foreclosure. In September 2006, the bankruptcy court ordered her employer to deduct $340 a month from her bartender salary to pay down the debt.

According to court records, that still left her $1,228 a month in take-home pay from that job. She also claimed second and third jobs bringing home another $1,625 a month. In addition, there was a pro-rated tax refund in the pot. In February 2008, a second foreclosure was filed. Hanks had two years to pay and didn't. She tried to game the system and failed.

President Obama now proposes spending $275 billion to help us pay our neighbors' mortgages and the mortgages of people like Ms. Hanks. Consequences are the incentive to avoid risky behavior.

So why are we rewarding failure and abolishing consequences? Many of the homeowners the government is bailing out took unnecessarily chancy loans that helped bring about the financial crisis.

Some people legitimately need help. Most people don't. More than 90% of Americans are still employed, and more than 90% of homeowners still pay their mortgages on time. Paying one's taxes is patriotic, we're told. So is paying one's mortgage.


Also see http://www.daybydaycartoon.com/2009/02/26/  and the following days-- one of my very favorite strips!

[Chad]

Some people legitimately need help. Most people don't. More than 90% of Americans are still employed, and more than 90% of homeowners still pay their mortgages on time.

The housing "crisis" seems to be concentrated in certain regions: I bolded the relevant text below:

http://media-newswire.com/release_1086806.html

(Media-Newswire.com) - February 25, 2009 — National housing price declines and foreclosures have not been as severe as some analyses have indicated, and they are not as important as financial manipulations in bringing on the global recession, according to a new analysis of foreclosures in 50 states, 35 metropolitan areas and 236 counties by University of Virginia professor William Lucy and graduate student Jeff Herlitz.

Their analysis shows that most foreclosures have been concentrated in California, Florida, Nevada, Arizona and a modest number of metropolitan counties in other states. In fact, they claim that "66 percent of potential housing value losses in 2008 and subsequent years may be in California, with another 21 percent in Florida, Nevada and Arizona, for a total of 87 percent of national declines."

"California had only 10 percent of the nation's housing units, but it had 34 percent of foreclosures in 2008," Lucy and Herlitz reported.

California was vulnerable to foreclosures because the median value of owner-occupied housing in 2007 was 8.3 times the median family income, while the 2007 national average was only 3.2 times higher than median family income ( and in 2000, it was lower still at 2.4 ).

Another vulnerability to foreclosures was seen in the Los Angeles metropolitan area, where more than 20 percent of mortgage-holders in each county were paying at least 50 percent of their income in housing-related costs.

"But even in California, enormous variations existed among jurisdictions, such as in the San Francisco area, where Solano County had 3.69 percent of housing units in foreclosure in November 2008, while only 0.24 percent of housing units were in foreclosure in the City of San Francisco — a 15 to 1 difference," according to Lucy and Herlitz.

Across the country, the run-up in housing prices from 2000 to the national peak in 2006 has contributed to a 10-months' supply of houses for sale, nearly six months more than the norm from 1998 through 2005, they concluded. But most of the excess supply is either foreclosed properties for sale in declining areas — which constituted 45 percent of total sales in some months of 2008 — or "opportunity" sale offerings by owners seeking to take profits on the price escalation of previous years, which often happens when the price of existing homes rise appreciably. Only a small portion of the excess supply is from current construction of new houses, they said.

Potential losses in housing values from 2008 foreclosures in all 50 states — if values decline to 2000 levels — were less than one-third of the $350 billion provided to banks and insurance companies to cope with losses in mortgage-backed securities, Lucy and Herlitz estimated.

"Damage to the balance sheets of large banks and AIG occurred not mainly from losses on foreclosed residential mortgages, but because of borrowing short-range to buy long-range derivatives and from selling credit default swaps insuring derivatives backed by mortgage payments," Lucy and Herlitz said.

"These financial manipulations had high-speed forward gears, but when the housing bubble burst, the banks and AIG discovered they had neglected to create a reverse gear with which they could separate foreclosed properties from some forms of mortgage-backed securities."

Although there are pockets of substantial declines, claims that overall housing values have tanked nationwide are exaggerated, they said. "In the Washington, D.C. metropolitan area, for example, prices have barely changed in the District of Columbia, Alexandria and Arlington County, and parts of Fairfax County in Virginia. The largest price declines ( more than 30 percent in 2008 ) have been in Prince William County, Va., but even there, the range of price declines in its six zip codes ranged from 49 percent to only 6 percent."

The number of foreclosures usually were lower in central cities than in some suburban counties, probably due to less demand in those suburbs, according to Lucy and Herlitz.

Part of this loss of demand can be accounted for by shifts in the age distribution in the population. The population segment from age 30 to 44, when the biggest increase in home ownership occurs, has been declining in recent years. Those are prime child-rearing years for families, so demand for houses with four or more bedrooms has declined and led to an excess of large houses in some counties.

The Obama administration's proposed foreclosure prevention program sets a target of households spending between 31 percent and 38 percent of their income on housing-related expenses. The program will try to prevent foreclosures in residences where Fannie Mae and Freddie Mac have purchased the mortgages by permitting downward adjustments to mortgage rates, to where the value of mortgages is not more than 105 percent of the houses' value, they said.

"This policy will help homeowners where price declines have been modest, as they have been in most states, most metropolitan areas and most counties," Lucy and Herlitz said.

This study includes foreclosure, house value and income data for 2007 or 2008 for 50 states, the 35 largest metropolitan areas and 236 counties in the 35 metropolitan areas.

Lucy is Lawrence Lewis Jr. Professor of Urban and Environmental Planning in U.Va.'s School of Architecture. Herlitz is a graduate student in the Department of Urban and Environmental Planning.

For information, contact William Lucy at 434-295-4453 or whl@virginia.edu.



— By Jane Ford

[Chad]

Politician says that might be solution for area hit hard by foreclosures
The Associated Press
updated 4:38 p.m. CT, Mon., March. 2, 2009
PORT ST. LUCIE, Fla. - Just five years ago, Port St. Lucie was America's fastest-growing large city. Then the foreclosure crisis slammed it like a hurricane.

Today it sits in one of the hardest-hit counties in the nation. Thousands of houses are empty or unfinished. Neighborhoods are littered with for-sale and foreclosure signs and overgrown, neglected yards. Break-ins are on the rise.

But one politician believes he has a unique solution: Declare St. Lucie County a disaster area as if it had been hit by, well, a hurricane.

"This is a manmade disaster," County Commissioner Doug Coward acknowledged. But he said that is why "we've got to do something. Clearly, the economic crisis of the country far exceeds the ability of local governments to solve it, but we're trying be a part of the solution."

The declaration would act like a mini-stimulus plan, giving government officials access to a $17.5 million county fund usually reserved for natural disasters.

The county would be able to put some of that money toward shovel-ready construction projects and loosen the bidding requirements so that local contractors got the jobs. That, in turn, could enable residents to pay their mortgages and stave off foreclosure.

Other politicians fear a disaster declaration could scare off investors and drive down the county's credit rating, which would make it more expensive to borrow money. But the idea has appeal among many homeowners, particularly those in the construction trades, which are seeing unemployment rates of up to 40 percent.

Housing bust
Jacqueline Byers, research director for the National Association of Counties, said she knows of no other U.S. county that is contemplating such a move.

"Everybody is kind of foundering around. Counties are looking for ways to address their shortfalls. This might be an innovative way to do it," she said.

During Port St. Lucie's boom, houses sprang up by the thousands as young and old flocked to the area, lured by affordable prices, open space and a bit of a slower lifestyle.

Port St. Lucie — the spring-training home of the New York Mets, situated inland from the more expensive Atlantic Coast along Florida's Turnpike, about 100 miles north of Miami — nearly doubled in population from 88,000 in 2000 to 151,000 in 2007. Three biotechnology institutions opened in the county.

But then the foreclosure crisis struck and the economy went south. Many people soon realized they had bought more house than they could afford.

The county had more than 10,000 foreclosures last year, up from 4,165 the year before. Unemployment stands at 10.5 percent, more than double three years ago.

The newly out-of-work have been showing up in large numbers at St. Lucie Catholic Church, where free dinners are served every Thursday night. The church began serving meals to about 35 people a year ago. Last week, there were 175.

"We even give them a little bag to take home to try to help them through the week," said volunteer Karen Cuevas. "But we can't give out too much because we're not getting as much in."


Emergency relief
Coward, who hopes to put the disaster-declaration idea to a commission vote within a few weeks, said that the laws regarding the emergency fund refer to manmade as well as natural disasters, and that the county attorney believes the idea is legal. He said the money could go toward new roads, a courthouse expansion, utility improvements and other projects.

Among those who could benefit are Bonnie Bigger, 60, and her 29-year-old son, Jason. Their lender began foreclosure proceedings against them last week for falling $4,500 behind on their $776-a-month mortgage payments on a condo they have been living in since 1984.

She retired a year ago from her job as a 411 operator, but Social Security and disability payments just aren't cutting it, and she has had trouble finding part-time work. Her son, who works in construction, just had his hours cut back by 40 a month.

"We're hurting," he said.

But Port St. Lucie Mayor Patricia Christensen warned that labeling the county a disaster area could have a devastating effect. She said that after word of the idea got out, the city's New York bond issuer called to check on whether it was on the brink of ruin.

"I understand what the county is trying to do," Christensen said. "But we're starting to see improvements in our city. The real estate market is turning around, and although the homes aren't selling for the high prices that they were a few years ago, they are starting to sell."

'Band-Aid on cancer'
The idea may or may not help folks like the Derek and Kellyanne Baehr. They are six months behind on their $2,160-a-month mortgage and struggling to avert foreclosure.


Derek, 40, has been unemployed for the past 10 years after being diagnosed with a rare neurological disorder that will eventually put him in a wheelchair. The couple have lived in their modest, single-story stucco home for four years, and admit they got in over their heads with the $209,000 purchase. They said the house is now worth just $135,000.

After months of trying to work with their lender, they got a slight reduction in their interest rate, but "it was like putting a Band-Aid on cancer," Derek said.

"We can't continue to go on this way," said Kellyanne, 37, who fears she could soon lose her job as an accounting clerk because another round of layoffs is coming. "I cry about every day."


Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
URL: http://www.msnbc.msn.com/id/29470399/

[Crafty_Dog]

WSJ

The Next Fannie Mae
Ginnie Mae and FHA are becoming $1 trillion subprime guarantors..ArticleComments (18)more in Opinion ».EmailPrinter

Much to their dismay, Americans learned last year that they “owned” Fannie Mae and Freddie Mac. Well, meet their cousin, Ginnie Mae or the Government National Mortgage Association, which will soon join them as a trillion-dollar packager of subprime mortgages. Taxpayers own Ginnie too.

Only last week, Ginnie announced that it issued a monthly record of $43 billion in mortgage-backed securities in June. Ginnie Mae President Joseph Murin sounded almost giddy as he cheered this “phenomenal growth.” Ginnie Mae’s mortgage exposure is expected to top $1 trillion by the end of next year—or far more than double the dollar amount of 2007. (See the nearby table.) Earlier this summer, Reuters quoted Anthony Medici of the Housing Department’s Inspector General’s office as saying, “Who would have predicted that Ginnie Mae and Fannie Mae would have swapped positions” in loan volume?

Ginnie’s mission is to bundle, guarantee and then sell mortgages insured by the Federal Housing Administration, which is Uncle Sam’s home mortgage shop. Ginnie’s growth is a by-product of the FHA’s spectacular growth. The FHA now insures $560 billion of mortgages—quadruple the amount in 2006. Among the FHA, Ginnie, Fannie and Freddie, nearly nine of every 10 new mortgages in America now carry a federal taxpayer guarantee.

Herein lies the problem. The FHA’s standard insurance program today is notoriously lax. It backs low downpayment loans, to buyers who often have below-average to poor credit ratings, and with almost no oversight to protect against fraud. Sound familiar? This is called subprime lending—the same financial roulette that busted Fannie, Freddie and large mortgage houses like Countrywide Financial.

View Full Image

Associated Press
 .On June 18, HUD’s Inspector General issued a scathing report on the FHA’s lax insurance practices. It found that the FHA’s default rate has grown to 7%, which is about double the level considered safe and sound for lenders, and that 13% of these loans are delinquent by more than 30 days. The FHA’s reserve fund was found to have fallen in half, to 3% from 6.4% in 2007—meaning it now has a 33 to 1 leverage ratio, which is into Bear Stearns territory. The IG says the FHA may need a “Congressional appropriation intervention to make up the shortfall.”

The IG also fears that the recent “surge in FHA loans is likely to overtax the oversight resources of the FHA, making careful and comprehensive lender monitoring difficult.” And it warned that the growth in FHA mortgage volume could make the program “vulnerable to exploitation by fraud schemes . . . that undercut the integrity of the program.” The 19-page IG report includes a horror show of recent fraud cases.

If housing values continue to slide and 10% of FHA loans end up in default, taxpayers will be on the hook for another $50 to $60 billion of mortgage losses. Only last week, Taylor Bean, the FHA’s third largest mortgage originator in June with $17 billion in loans this year, announced it is terminating operations after the FHA barred the mortgage lender from participating in its insurance program. The feds alleged that Taylor Bean had “misrepresented” its relationship with an auditor and had “irregular transactions that raised concerns of fraud.”

Is anyone on Capitol Hill or the White House paying attention? Evidently not, because on both sides of Pennsylvania Avenue policy makers are busy giving the FHA even more business while easing its already loosy-goosy underwriting standards. A few weeks ago a House committee approved legislation to keep the FHA’s loan limit in high-income states like California at $729,750. We wonder how many first-time home buyers purchase a $725,000 home. The Members must have missed the IG’s warning that higher loan limits may mean “much greater losses by FHA” and will make fraudsters “much more attracted to the product.”

In the wake of the mortgage meltdown, most private lenders have reverted to the traditional down payment rule of 10% or 20%. Housing experts agree that a high down payment is the best protection against default and foreclosure because it means the owner has something to lose by walking away. Meanwhile, at the FHA, the down payment requirement remains a mere 3.5%. Other policies—such as allowing the buyer to finance closing costs and use the homebuyer tax credit to cover costs—can drive the down payment to below 2%.

Then there is the booming refinancing program that Congress has approved to move into the FHA hundreds of thousands of borrowers who can’t pay their mortgage, including many with subprime and other exotic loans. HUD just announced that starting this week the FHA will refinance troubled mortgages by reducing up to 30% of the principal under the Home Affordable Modification Program. This program is intended to reduce foreclosures, but someone has to pick up the multibillion-dollar cost of the 30% loan forgiveness. That will be taxpayers.

In some cases, these owners are so overdue in their payments, and housing prices have fallen so dramatically, that the borrowers have a negative 25% equity in the home and they are still eligible for an FHA refi. We also know from other government and private loan modification programs that a borrower who has defaulted on the mortgage once is at very high risk (25%-50%) of defaulting again.

All of which means that the FHA and Ginnie Mae could well be the next Fannie and Freddie. While Fan and Fred carried “implicit” federal guarantees, the FHA and Ginnie carry the explicit full faith and credit of the U.S. government.

We’ve long argued that Congress has a fiduciary duty to secure the safety and soundness of FHA through common sense reforms. Eliminate the 100% guarantee on FHA loans, so lenders have a greater financial incentive to insure the soundness of the loan; adopt the private sector convention of a 10% down payment, which would reduce foreclosures; and stop putting subprime loans that should have never been made in the first place on the federal balance sheet.

The housing lobby, which gets rich off FHA insurance, has long blocked these due-diligence reforms, saying there’s no threat to taxpayers. That’s what they also said about Fan and Fred—$400 billion ago.

[Crafty_Dog]

By LINGLING WEI and PETER GRANT
Federal Reserve and Treasury officials are scrambling to prevent the commercial-real-estate sector from delivering a roundhouse punch to the U.S. economy just as it struggles to get up off the mat.

Their efforts could be undermined by a surge in foreclosures of commercial property carrying mortgages that were packaged and sold by Wall Street as bonds. Similar mortgage-backed securities created out of home loans played a big role in undoing that sector and triggering the global economic recession. Now the $700 billion of commercial-mortgage-backed securities outstanding are being tested for the first time by a massive downturn, and the outcome so far hasn't been pretty.

The CMBS sector is suffering two kinds of pain, which, according to credit rater Realpoint LLC, sent its delinquency rate to 3.14% in July, more than six times the level a year earlier. One is simply the result of bad underwriting. In the era of looser credit, Wall Street's CMBS machine lent owners money on the assumption that occupancy and rents of their office buildings, hotels, stores or other commercial property would keep rising. In fact, the opposite has happened. The result is that a growing number of properties aren't generating enough cash to make principal and interest payments.

 .The other kind of hurt is coming from the inability of property owners to refinance loans bundled into CMBS when these loans mature. By the end of 2012, some $153 billion in loans that make up CMBS are coming due, and close to $100 billion of that will face difficulty getting refinanced, according to Deutsche Bank. Even though the cash flows of these properties are enough to pay interest and principal on the debt, their values have fallen so far that borrowers won't be able to extend existing mortgages or replace them with new debt. That means losses not only to the property owners but also to those who bought CMBS -- including hedge funds, pension funds, mutual funds and other financial institutions -- thus exacerbating the economic downturn.

A typical CMBS is stuffed with mortgages on a diverse group of properties, often fewer than 100, with loans ranging from a couple of million dollars to more than $100 million. A CMBS servicer, usually a big financial institution like Wachovia and Wells Fargo, collects monthly payments from the borrowers and passes the money on to the institutional investors that buy the securities.

CMBS, of course, aren't the only kind of commercial-real-estate debt suffering higher defaults. Banks hold $1.7 trillion of commercial mortgages and construction loans, and delinquencies on this debt already have played a role in the increase in bank failures this year.

But banks' losses from commercial mortgages have the potential to mount sharply, and the high foreclosure rate in the CMBS market could play a role in this. Until now, banks have been able to keep a lid on commercial-real-estate losses by extending debt when it has matured as long as the underlying properties are generating enough cash to pay debt service. Banks have had a strong incentive to refinance because relaxed accounting standards have enabled them to avoid marking the value of the loans down.

"There is no incentive for banks to realize losses" on their commercial-real-estate loans, says Jack Foster, head of real estate at Franklin Templeton Real Estate Advisors.

CMBS are held by scores of investors, and the servicers of CMBS loans have limited flexibility to extend or restructure troubled loans like banks do. Earlier this month, it was no coincidence that CMBS mortgages accounted for the debt on six of the seven Southern California office buildings that Maguire Properties Inc. said it was giving up. "During most of the evolution [of CMBS] no one ever thought all these loans would go into default," says Nelson Rising, Maguire's chief executive.

 
Maguire Properties
 
Among the office buildings that Maguire will turn over to creditors is Stadium Towers Plaza.
.Indeed, many property developers and investors complain there is no way to identify the investors that hold their debt and that it is difficult to negotiate with CMBS servicers. In light of the complaints, the Treasury is considering guidance that would allow servicers to start talking about ways to avoid defaults and foreclosures sooner, according to people familiar with the matter. But investors in CMBS bonds argue that the servicers are ultimately bound contractually to the bondholders.

So Maguire will soon have a lot of company. In a study for The Wall Street Journal, Realpoint found that 281 CMBS loans valued at $6.3 billion weren't able to refinance when they matured in the past three month, even though 173 such loans worth $5.1 billion were throwing off more than enough cash to service their debt.

Mounting foreclosures in the CMBS sector would likely depress values even further as property is dumped on the market. And this would put pressure on banks to write down loans. "What's going on in the CMBS world is a precursor for what might be seen in banks' books," predicts Frank Innaurato, managing director at Realpoint.

The commercial-real-estate market could yet be salvaged by an improving economy and bailout programs coming out of Washington. In addition, capital markets are starting to ease for publicly traded real-estate investment trusts. Since March, more than two dozen REITs have managed to raise more than $13 billion by selling shares.

Still, most of the $6.7 trillion in commercial real estate is privately owned. Also, it is unlikely commercial real estate will benefit much from an early stage of an economic recovery. What landlords need is occupancy and rents to rise, and that means employers have to start hiring and consumers need to shop more. So far, there are few signs this is happening.

Write to Lingling Wei at lingling.wei@dowjones.com and Peter Grant at peter.grant@wsj.com

[Crafty_Dog]

http://www.philstockworld.com/2009/09/09/setting-up-the-next-leg-down-in-housing/

[Crafty_Dog]

The $1.7 trillion mortgage securitization market is still a mess, despite (or in part because of) the Federal Reserve's $700 billion splurge into the market. But another reason may be Treasury's decision to undermine private mortgage-backed securities (MBS) contracts.

BlackRock Inc. Chairman Laurence Fink went so far recently as to call this "one of the biggest issues facing American capitalism." He's worried that to protect banks from billions of dollars more in writedowns on bad second liens (a.k.a., home-equity loans), Treasury is trashing private contracts. "There is modification going on protecting our banks, protecting their balance sheets" and "I'm just very worried about it." Until that issue is cleared up, he says, we won't "get a vibrant securitization market back."

One reason the MBS market blossomed in the first place is because investors who bought a mortgage security believed that first mortgages were senior to second liens. In the event of a foreclosure, second liens would be extinguished first and holders of the first mortgage would get what was left because that's what the contract said.

This changed in April when Treasury announced that instead of foreclosing on delinquent borrowers and wiping out second liens, mortgage servicers (mainly the biggest banks) would be given incentives to modify both loans, thereby spreading the losses. In mid-August, Treasury announced the details of its "Second Lien Modification Program," or 2MP, calling it "a comprehensive solution to help borrowers achieve greater affordability by lowering payments on both first lien and second lien mortgage loans."

Treasury says it is merely trying to help borrowers stay in their homes. But there's little evidence that modifications are stabilizing the market. Treasury's recent release of second-quarter mortgage loan data showed that redefault rates are stubbornly high, even though most new modifications now provide for lower monthly payments of interest and principal.

Nearly 30% of loans modified in the first quarter of this year are now 60 or more days delinquent, up from less than 23% in the first quarter of 2008 and about the same percentage as in the second quarter of 2008. "The percentage of loans that were 60 or more days delinquent or in the process of foreclosure was high and rose steadily in the months subsequent to modification for all quarterly vintages," the report said.

Treasury's other political goal, as Mr. Fink points out, is to help the banks avoid more losses. U.S. financial institutions hold almost $1.1 trillion in second liens, also known as home equity loans or "helocs." Some 42% of all helocs are held by four banks—Bank of America, J.P. Morgan Chase, Citibank and Wells Fargo. Since in a traditional mortgage foreclosure the second loan is usually wiped out, these big four banks have an exposure in the hundreds of billions of dollars.

Mortgage-finance consultant Edward Pinto points out that these same lenders have about $800 billion of first mortgage loans on their books, representing 8% of the total outstanding first mortgage loans in the U.S. But they also act as the servicers on almost 60% of total first mortgages, which means they handle negotiations on loan modifications. Thus when a home owner asks one of the big four banks to redo a loan, the banker may have a greater interest in saving the home-equity loan than in protecting the creditors of the first mortgage.

A vibrant MBS market depends on the sanctity of U.S. contracts. If the world's investors see that the Treasury is willing to reward banks at their expense, there will be fewer such investors in U.S. securities. There will also be less capital for housing. Treasury needs to revisit its foreclosure rules to protect the U.S. reputation of honoring contracts, and the faster the better.

[Crafty_Dog]

Barney Frank, Predatory Lender
Almost two-thirds of all bad mortgages in our financial system were bought by government agencies or required by government regulations.

By PETER J. WALLISON
Recent reports that the Federal Housing Administration (FHA) will suffer default rates of more than 20% on the 2007 and 2008 loans it guaranteed has raised questions once again about the government's role in the financial crisis and its efforts to achieve social purposes by distorting the financial system.

The FHA's function is to guarantee mortgages of low-income borrowers (the mortgages are then sold through securitizations by Ginnie Mae) and thus to take reasonable credit risks in the interests of making mortgage credit available to the nation's low-income citizens. Accordingly, the larger than normal losses that will result from the 2007 and 2008 cohort could be justified by Barney Frank, the chairman of the House Financial Services Committee, as "policy"—an effort to ease the housing downturn through the application of government credit. The FHA, he argued, is buying more weak mortgages in order to help put a floor under the housing market. Eventually, the taxpayers will have to judge whether this policy was justified.

Far more interesting than the FHA's prospective losses on its 2007 and 2008 book are the agency's losses on its 2005 and 2006 guarantees, when the housing bubble was inflating at its fastest rate and there was no need for government support. FHA-backed loans during those years also have delinquency rates between 20% and 30%. These adverse results—not the result of a "policy" effort to shore up markets—pose a significant challenge to those who are trying to absolve the U.S. government of responsibility for the financial crisis.



When the crisis first arose, the left's explanation was that it was caused by corporate greed, primarily on Wall Street, and by deregulation of the financial system during the Bush administration. The implicit charge was that the financial system was flawed and required broader regulation to keep it out of trouble. As it became clear that there was no financial deregulation during the Bush administration and that the financial crisis was caused by the meltdown of almost 25 million subprime and other nonprime mortgages—almost half of all U.S. mortgages—the narrative changed. The new villains were the unregulated mortgage brokers who allegedly earned enormous fees through a new form of "predatory" lending—by putting unsuspecting home buyers into subprime mortgages when they could have afforded prime mortgages. This idea underlies the Obama administration's proposal for a Consumer Financial Protection Agency. The link to the financial crisis—recently emphasized by President Obama—is that these mortgages would not have been made if regulators had been watching those fly-by-night mortgage brokers.

There was always a problem with this theory. Mortgage brokers had to be able to sell their mortgages to someone. They could only produce what those above them in the distribution chain wanted to buy. In other words, they could only respond to demand, not create it themselves. Who wanted these dicey loans? The data shows that the principal buyers were insured banks, government sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac, and the FHA—all government agencies or private companies forced to comply with government mandates about mortgage lending. When Fannie and Freddie were finally taken over by the government in 2008, more than 10 million subprime and other weak loans were either on their books or were in mortgage-backed securities they had guaranteed. An additional 4.5 million were guaranteed by the FHA and sold through Ginnie Mae before 2008, and a further 2.5 million loans were made under the rubric of the Community Reinvestment Act (CRA), which required insured banks to provide mortgage credit to home buyers who were at or below 80% of median income. Thus, almost two-thirds of all the bad mortgages in our financial system, many of which are now defaulting at unprecedented rates, were bought by government agencies or required by government regulations.

The role of the FHA is particularly difficult to fit into the narrative that the left has been selling. While it might be argued that Fannie and Freddie and insured banks were profit-seekers because they were shareholder-owned, what can explain the fact that the FHA—a government agency—was guaranteeing the same bad mortgages that the unregulated mortgage brokers were supposedly creating through predatory lending?

The answer, of course, is that it was government policy for these poor quality loans to be made. Since the early 1990s, the government has been attempting to expand home ownership in full disregard of the prudent lending principles that had previously governed the U.S. mortgage market. Now the motives of the GSEs fall into place. Fannie and Freddie were subject to "affordable housing" regulations, issued by the Department of Housing and Urban Development (HUD), which required them to buy mortgages made to home buyers who were at or below the median income. This quota began at 30% of all purchases in the early 1990s, and was gradually ratcheted up until it called for 55% of all mortgage purchases to be "affordable" in 2007, including 25% that had to be made to low-income home buyers.

It was not easy to find candidates for traditional mortgages—loans to people with good credit records or the resources for a substantial downpayment—among home buyers who qualified under HUD's guidelines. To meet their affordable housing requirements, therefore, Fannie and Freddie reduced their lending standards and reached into the FHA's turf. The FHA, although it lost market share, continued to guarantee what it could, adding to the demand that the unregulated mortgage brokers filled. If they were engaged in predatory lending, it was ultimately driven by the government's own requirements. The mortgages that resulted are now problem loans for the GSEs, the FHA and the big banks that were required to make them in order to burnish their CRA credentials.

The significance of the FHA's troubles is that this agency had no profit motive. Yet it dipped into the same pool of subprime and other nontraditional mortgages that the GSEs and Wall Street were fishing in. The left cannot have it both ways, blaming the private sector for subprime lending while absolving the government policies that created the demand for subprime loans. If the financial crisis was caused by subprime mortgages and predatory lending, the government's own policies made it happen.

Mr. Walllison is a senior fellow at the American Enterprise Institute.

[Crafty_Dog]

Whoa!

http://www.youtube.com/watch?v=cMnSp4qEXNM&NR=1

http://www.youtube.com/watch?v=usvG-s_Ssb0&NR=1

http://www.liveleak.com/view?i=ae3_1222100943

The White House released this list of attempts by President Bush to reform
Freddie Mae and Freddie Mac since he took office in 2001.
Unfortunately, Congress did not act on the president's warnings:


** 2001

April: The Administration's FY02 budget declares that the size of Fannie Mae
and Freddie Mac is "a potential problem," because "financial trouble of a
large GSE could cause strong repercussions in financial markets, affecting
Federally insured entities and economic activity."

** 2002

May: The President calls for the disclosure and corporate governance
principles contained in his 10-point plan for corporate responsibility to
apply to Fannie Mae and Freddie Mac. (OMB Prompt Letter to OFHEO, 5/29/02)

** 2003

January: Freddie Mac announces it has to restate financial results for the
previous three years.

February: The Office of Federal Housing Enterprise Oversight (OFHEO)
releases a report explaining that "although investors perceive an implicit
Federal guarantee of [GSE] obligations," "the government has provided no
explicit legal backing for them." As a consequence, unexpected problems at a
GSE could immediately spread into financial sectors beyond the housing
market. ("Systemic Risk: Fannie Mae, Freddie Mac and the Role of OFHEO,"
OFHEO Report, 2/4/03)

September: Fannie Mae discloses SEC investigation and acknowledges OFHEO's
review found earnings manipulations.

September: Treasury Secretary John Snow testifies before the House Financial
Services Committee to recommend that Congress enact "legislation to create a
new Federal agency to regulate and supervise the financial activities of our
housing-related government sponsored enterprises" and set prudent and
appropriate minimum capital adequacy requirements.

October: Fannie Mae discloses $1.2 billion accounting error.

November: Council of the Economic Advisers (CEA) Chairman Greg Mankiw
explains that any "legislation to reform GSE regulation should empower the
new regulator with sufficient strength and credibility to reduce systemic
risk." To reduce the potential for systemic instability, the regulator would
have "broad authority to set both risk-based and minimum capital standards"
and "receivership powers necessary to wind down the affairs of a troubled
GSE." (N. Gregory Mankiw, Remarks At The Conference Of State Bank
Supervisors State Banking Summit And Leadership, 11/6/03)

** 2004

February: The President's FY05 Budget again highlights the risk posed by the
explosive growth of the GSEs and their low levels of required capital, and
called for creation of a new, world-class regulator: "The Administration has
determined that the safety and soundness regulators of the housing GSEs lack
sufficient power and stature to meet their responsibilities, and
therefore?should be replaced with a new strengthened regulator." (2005
Budget Analytic Perspectives, pg. 83)

February: CEA Chairman Mankiw cautions Congress to "not take [the financial
market's] strength for granted." Again, the call from the Administration was
to reduce this risk by "ensuring that the housing GSEs are overseen by an
effective regulator." (N. Gregory Mankiw, Op-Ed, "Keeping Fannie And
Freddie's House In Order," Financial Times, 2/24/04)

June: Deputy Secretary of Treasury Samuel Bodman spotlights the risk posed
by the GSEs and called for reform, saying "We do not have a world-class
system of supervision of the housing government sponsored enterprises
(GSEs), even though the importance of the housing financial system that the
GSEs serve demands the best in supervision to ensure the long-term vitality
of that system. Therefore, the Administration has called for a new, first
class, regulatory supervisor for the three housing GSEs: Fannie Mae, Freddie
Mac, and the Federal Home Loan Banking System." (Samuel Bodman, House
Financial Services Subcommittee on Oversight and Investigations Testimony,
6/16/04)

** 2005

April: Treasury Secretary John Snow repeats his call for GSE reform, saying
"Events that have transpired since I testified before this Committee in 2003
reinforce concerns over the systemic risks posed by the GSEs and further
highlight the need for real GSE reform to ensure that our housing finance
system remains a strong and vibrant source of funding for expanding
homeownership opportunities in America? Half-measures will only exacerbate
the risks to our financial system." (Secretary John W. Snow, "Testimony
Before The U.S. House Financial Services Committee," 4/13/05)

** 2007

July: Two Bear Stearns hedge funds invested in mortgage securities collapse.

August: President Bush emphatically calls on Congress to pass a reform
package for Fannie Mae and Freddie Mac, saying "first things first when it
comes to those two institutions. Congress needs to get them reformed, get
them streamlined, get them focused, and then I will consider other options."
(President George W. Bush, Press Conference, The White House, 8/9/07)

September: RealtyTrac announces foreclosure filings up 243,000 in August ­
up 115 percent from the year before.

September: Single-family existing home sales decreases 7.5 percent from the
previous month ­ the lowest level in nine years. Median sale price of
existing homes fell six percent from the year before.

December: President Bush again warns Congress of the need to pass
legislation reforming GSEs, saying "These institutions provide liquidity in
the mortgage market that benefits millions of homeowners, and it is vital
they operate safely and operate soundly. So I've called on Congress to pass
legislation that strengthens independent regulation of the GSEs ­ and
ensures they focus on their important housing mission. The GSE reform bill
passed by the House earlier this year is a good start. But the Senate has
not acted. And the United States Senate needs to pass this legislation
soon." (President George W. Bush, Discusses Housing, The White House,
12/6/07)

** 2008

January: Bank of America announces it will buy Countrywide.

January: Citigroup announces mortgage portfolio lost $18.1 billion in value.

February: Assistant Secretary David Nason reiterates the urgency of reforms,
says "A new regulatory structure for the housing GSEs is essential if these
entities are to continue to perform their public mission successfully."
(David Nason, Testimony On Reforming GSE Regulation, Senate Committee On
Banking, Housing And Urban Affairs, 2/7/08)

March: Bear Stearns announces it will sell itself to JPMorgan Chase.

March: President Bush calls on Congress to take action and "move forward
with reforms on Fannie Mae and Freddie Mac. They need to continue to
modernize the FHA, as well as allow State housing agencies to issue tax-free
bonds to homeowners to refinance their mortgages." (President George W.
Bush, Remarks To The Economic Club Of New York, New York, NY, 3/14/08)

April: President Bush urges Congress to pass the much needed legislation and
"modernize Fannie Mae and Freddie Mac. [There are] constructive things
Congress can do that will encourage the housing market to correct quickly by
? helping people stay in their homes." (President George W. Bush, Meeting
With Cabinet, the White House, 4/14/08)

May: President Bush issues several pleas to Congress to pass legislation
reforming Fannie Mae and Freddie Mac before the situation deteriorates
further.

"Americans are concerned about making their mortgage payments and keeping
their homes. Yet Congress has failed to pass legislation I have repeatedly
requested to modernize the Federal Housing Administration that will help
more families stay in their homes, reform Fannie Mae and Freddie Mac to
ensure they focus on their housing mission, and allow State housing agencies
to issue tax-free bonds to refinance sub-prime loans." (President George W.
Bush, Radio Address, 5/3/08)

"[T]he government ought to be helping creditworthy people stay in their
homes. And one way we can do that ­ and Congress is making progress on this
­ is the reform of Fannie Mae and Freddie Mac. That reform will come with a
strong, independent regulator." (President George W. Bush, Meeting With The
Secretary Of The Treasury, the White House, 5/19/08)

"Congress needs to pass legislation to modernize the Federal Housing
Administration, reform Fannie Mae and Freddie Mac to ensure they focus on
their housing mission, and allow State housing agencies to issue tax-free
bonds to refinance subprime loans." (President George W. Bush, Radio
Address, 5/31/08)

June: As foreclosure rates continued to rise in the first quarter, the
President once again asks Congress to take the necessary measures to address
this challenge, saying "we need to pass legislation to reform Fannie Mae and
Freddie Mac." (President George W. Bush, Remarks At Swearing In Ceremony For
Secretary Of Housing And Urban Development, Washington, D.C., 6/6/08)

July: Congress heeds the President's call for action and passes reform of
Fannie Mae and Freddie Mac as it becomes clear that the institutions are
failing.
In 2005-- Senator John McCain partnered with three other Senate Republicans
to reform the government¹s involvement in lending.
Democrats blocked this reform, too.

[Crafty_Dog]

Fears of a New Chill in Home Sales

By DAVID STREITFELD
Published: October 27, 2009
Even as new figures show house prices have risen for three consecutive months, concerns are growing that the real estate market will be severely tested this winter.

Artificially low interest rates and a government tax credit are luring buyers, but both those inducements are scheduled to end. Defaults and distress sales are rising in the middle and upper price ranges. And millions of people have lost so much equity that they are locked into their homes for years, a modern variation of the Victorian debtor’s prison that is freezing a large swath of the market.

“Plenty of pain yet to come,” said Joshua Shapiro, chief United States economist for MFR. He is forecasting an imminent resumption of price declines.

This summer, housing seemed at last to be stabilizing. A flood of last-minute buyers trying to conclude a deal before the tax credit expires Nov. 30 helped push up the Standard & Poor’s/Case-Shiller home price index a seasonally adjusted 1 percent in August, it was announced on Tuesday.

That was the first time since early 2006 that the widely watched measure of 20 metropolitan areas put together three consecutive increases.

While underlining the importance of that long-awaited rise, Maureen Maitland, the S.& P. vice president for index services, warned, “Everything is up for grabs this winter.”

Consumers seem acutely aware of the strains ahead. The Conference Board’s consumer confidence index fell unexpectedly in October, after reaching its high for the year in September, the board announced on Tuesday.

The only hot sector of the real estate market has been foreclosures. Investors and first-time buyers have been competing for these, often creating bidding wars. But with the economy still weak, many analysts expect more foreclosures.

Another factor likely to weigh on home sales in the coming months is a rise in interest rates. As the Federal Reserve ceases its buying of mortgage-backed securities, rates may well drift up to 6 percent, from 5 percent.

Worries about the fragility of the housing market, fanned by the real estate industry, may prompt an extension of the tax credit. The controversial program has spurred as many as 400,000 buyers, including Brenda Colon, a nurse in Las Vegas.

“If you had told me in January that I would be buying a house, I would have laughed,” said Ms. Colon, 48, who lives with her two daughters and granddaughter. “But the tax credit was just the kicker to throw me over.”

Yet despite the tax credit and other local and federal incentives for homebuyers in Las Vegas, prices there are continuing to fall, shedding 0.8 percent in August. The city’s home prices have declined on average more than 55 percent from their peak, more than in any other metropolis.

Whenever the tax credit finally expires, Las Vegas and every other city will have to confront the inevitable question after all such stimulus packages: what will motivate the buyers of tomorrow?

“In my office, people were buying homes left and right because of that tax credit,” said Kitty Berberick, who works for an insurance company in Las Vegas. “That credit was a godsend.”

Ms. Berberick, 62, could not strike a deal in time, and now has signed another lease for her apartment. If the credit is not extended, she said, she is likely to give up the search entirely until the market really crashes.

This, of course, is the sort of fatalistic attitude that relentlessly drove down prices last fall.

“Everyone keeps telling me, it’s going to go down before it goes up,” Ms. Berberick said. “I hope it does, because then I can buy.”

The recovery is both modest and tentative when measured against the preceding plunge. Prices have fallen nearly a third from their peak, and are down 11.4 percent over the last year.

In most major cities, it is as if the housing boom never happened. Prices over all are back to where they were in the fall of 2003. Some cities have been pushed down even more: In Cleveland, prices are at 2001 levels; in Detroit they’re at 1995.

It is the magnitude of this decline that makes Karl E. Case, the Wellesley professor for whom the Case-Shiller index is partly named, an optimist.

While acknowledging “there are a lot of dangers out there,” Mr. Case said “housing is as affordable as it’s been in 20 years. I don’t see a very rapid recovery, but I think we’ve seen the bottom.”

Sixteen of the 20 cities in the index rose in August, including San Francisco, up 2.6 percent, and Minneapolis, which rose 2.3 percent. Besides Las Vegas, three cities fell: Charlotte, Cleveland and Seattle. New York was up 0.3 percent.

The Case-Shiller numbers on prices lag behind the National Association of Realtors’ report on existing-home sales, which has been issued for September. Sales were up 9.4 percent from August, with the tax credit again getting much of the credit.

Critics of the credit argue that the number of those who merely qualify for it — and gladly take it — greatly outnumber those it is precisely intended to assist: people who would not have bought a house otherwise. That means, they argue, that the government is essentially paying more than $40,000 for each purchase that would not have occurred without the credit.

That is an expensive proposition, said Roberton Williams, a senior fellow at the Tax Policy Center who has closely followed the issue. “The bigger threat to the housing market is not the reduction in demand from the end of the credit, but the continuing wave of foreclosures we’re likely to see over the next 18 months,” he said.

In California, there is strong evidence that foreclosures are beginning to migrate from the subprime inland areas to the more exclusive coastal region.

According to MDA DataQuick, third-quarter notices of default in Santa Barbara were up 25 percent from 2008; in San Luis Obispo, they rose 46 percent; in Marin County, they were up 66 percent.

Defaults in hard-hit Sacramento, by contrast, were up only 10 percent. In Merced County in the Central Valley, an epicenter of the bust, they actually fell.

While defaults are only the first stage in foreclosure, Mr. Shapiro, the MFR economist, expects many formerly creditworthy homeowners to go under. He says he thinks the recent improvement in Case-Shiller numbers is an aberration rather than the beginning of a long-term improvement, with consequences for the larger economy.

“Another leg down in home prices, even if much more limited than the initial move, would nonetheless weigh on consumer spending,” Mr. Shapiro said, adding that he did not expect a second recession

[Crafty_Dog]

Until we have comments from an economically literate and honest source, here's this from POTH.

Housing Agency’s Cash Reserves Down Sharply 
Brendan Smialowski for The New York TimesDavid H. Stevens, the Federal Housing Administration commissioner, during a Congressional hearing in October.

By DAVID STREITFELD
Published: November 12, 2009
The Federal Housing Administration, the government agency whose loan-insurance programs have become a crucial source of support for the housing market, said on Thursday that its cash reserves had dwindled significantly in the last year as more borrowers defaulted on their mortgages.

“There is a real risk. Nobody has a crystal ball,” said Shaun Donovan, secretary of Housing and Urban Development.
The agency released an audit that spelled out the rapid deterioration of its finances. It is tightening loan standards in hopes it will not become another drain on the United States Treasury, but is reluctant to clamp down so much that it snuffs out the tentative recovery in housing.

How successfully the agency walks this tightrope could well determine whether the recovery gathers force, or whether home prices slide again — perhaps creating a fresh economic downturn.

As recently as a few weeks ago, the F.H.A. had said that even under the bleakest economic forecast, its cash cushion would quickly recover. On Thursday, it abandoned that position.

“There is a real risk. Nobody has a crystal ball,” Shaun Donovan, secretary of housing and urban development, said in an interview. “We recognize there is a possibility that the reserves go below zero and stay there.”

Still, Mr. Donovan stressed that the agency, which had a role in one out of five home purchases in the last year, would not need a direct taxpayer bailout.

“There is no extraordinary action that Congress or anyone else needs to take,” he said during a news conference in Washington.

Instead, the agency would borrow from the Treasury, under authority previously granted by Congress. In the worst case, involving a protracted recession, the audit said the F.H.A. would run out of capital in 2011 and have to borrow $1.6 billion from the Treasury to pay insurance claims, a relatively small sum.

That is not a situation the agency considers likely. In line with many analysts, the agency expects the housing market to turn down again over the next nine months and then to recover. Under this projection, foreclosures would be manageable and the reserves would quickly grow.

The F.H.A.’s annual audit was scheduled for release last week, but was mysteriously delayed at the last minute. On Thursday, as it released the document, the agency explained that it wanted its auditors to include more negative forecasts as a way of understanding the worst-case risk.

The audit showed reserves to be 0.53 percent of the total portfolio, far below the 2 percent minimum mandated by Congress and far less than the audit last year had forecast. In 2007, just before housing prices began their worst slump in decades, the reserves were above 6 percent.

Ann Schnare, a consultant who has analyzed the F.H.A. balance sheet, put the situation this way: “They’re running on empty.”

As the fortunes of the F.H.A. have deteriorated over the last few months, the agency has become a focal point for dissatisfaction over federal efforts to prop up the housing market.

It is drawing comparisons to Fannie Mae and Freddie Mac, the giant agencies created by Congress to keep the mortgage market supplied with cash by buying up pools of home loans. With borrowers defaulting in the downturn, Fannie and Freddie have required enormous bailouts.

The F.H.A.’s role differs from that of Fannie and Freddie. Through its insurance, it helps marginal buyers get loans if they do not have the 20 percent down payment a traditional bank loan requires. The agency requires a 3.5 percent down payment. Critics say it went overboard and insured too many loans to unqualified borrowers in 2007 and 2008, a position with which the agency itself now agrees.

Nearly one in five loans it insured in 2007 falls into the category of “seriously delinquent,” it said Thursday. These loanholders are at least three months behind in their payments. For 2008 loans, 12 percent of them were seriously delinquent.

The F.H.A. says it is insuring loans to more financially secure buyers with higher credit scores. The average credit score of new borrowers, it said, is 693, compared with 633 two years ago.

In a sense, the agency is bulking up and giving as many loans as it can to qualified buyers as a way to diminish the relative size of the pool of problem loans. It guaranteed more than $360 billion in mortgages in the last year, four times the amount of 2007.

Critics say this is only increasing the size of the ultimate peril.

“They keep saying they’re going to outrun their problems, but some way, somehow, the taxpayer is going to end up on the hook,” said Edward Pinto, a former executive with Fannie Mae.

During the news conference, Secretary Donovan and the agency’s commissioner, David H. Stevens, said that the cash reserve, the figure that has fallen to 0.53 percent of loans outstanding, was merely a supplement to a much larger fund that the F.H.A. was holding against expected losses. Between the two accounts, the agency has $31 billion to cover losses over the next 30 years.

The F.H.A.’s problems stem from its rapid transition from a wallflower to the most popular student in class.

During the housing boom, buyers flocked to private subprime lenders, who offered deals that required no money down and no documentation. The F.H.A., which required its token down payment and documentation of the borrower’s earning power, lost ground.

But as the market tumbled and the subprime outfits failed, F.H.A. loans became the next best thing. Brian Montgomery, who ran the F.H.A. for the Bush administration, said in a recent interview that the agency felt it had no choice but to open the doors to a broader group of applicants.

Citing pressure from Congress and the White House, Mr. Montgomery said: “We had to let these loans through.”

Mr. Montgomery, now a consultant, says that anyone dismayed by the possibility of yet another bailout should feel a different emotion toward the Department of Housing and Urban Development and, for that matter, himself: gratitude.

“They should be going over to the H.U.D. building and frankly thanking the career staff for saving them from a depression,” Mr. Montgomery said.

Louise Story contributed reporting.

[Crafty_Dog]

second post

By EDWARD PINTO
All agree that the bursting of the housing bubble caused the financial collapse of 2008. Most agree that the housing bubble started in 1997. Less well understood is that this bubble was the result of government policies that lowered mortgage-lending standards to increase home ownership. One of the key players was the controversial liberal advocacy group, Acorn (Association of Community Organizations for Reform Now).

The watershed moment was the 1992 Federal Housing Enterprises Financial Safety and Soundness Act, also known as the GSE Act. To comply with that law's "affordable housing" requirements, Fannie Mae and Freddie Mac would acquire more than $6 trillion of single-family loans over the next 16 years.

Congress's goal was to force these two government-sponsored enterprises (GSEs) to purchase loans that had been originated by banks—loans that were made under the pressure of another federal law, the 1977 Community Reinvestment Act (CRA), to increase lending in low- and moderate-income communities.

From 1977 to 1991, $9 billion in local CRA lending commitments had been announced. CRA lending by large banks increased dramatically after the affordable housing mandate was in place in 1993, growing to $6 trillion today. As Ellen Seidman, director of the federal Office of Thrift Supervision, said in a speech before the Greenlining Institute on Oct. 2, 2001, "Our record home ownership rate [increasing from 64.2% in 1994 to 68% in 2001], I'm convinced, would not have been reached without CRA and its close relative, the Fannie/Freddie requirements."

View Full Image

Associated Press
 .The 1992 GSE Act was the fuse, and the trillions of dollars in subsequent CRA and GSE affordable-housing loans would fuel the greatest housing bubble our nation has ever seen. But who lit the fuse?

The previous year, as Allen Fishbein, currently an adviser for consumer policy at the Federal Reserve, has noted, Acorn and other community groups were informally deputized by then House Banking Chairman Henry Gonzalez to draft statutory language setting the law's affordable-housing mandates. Interim goals were set at 30% of the single-family mortgages purchased by Fannie and Freddie, and the Department of Housing and Urban Development has increased that percentage over time. The goal of the community groups was to force Fannie and Freddie to loosen their underwriting standards, in order to facilitate the purchase of loans made under the CRA.

Thus a provision was inserted into the law whereby Congress signaled to the GSEs that they should accept down payments of 5% or less, ignore impaired credit if the blot was over one year old, and otherwise loosen their lending guidelines.

The proposals of Acorn and other affordable-housing advocacy groups were acceptable to Fannie. Fannie had been planning to use the carrot of affordable-housing lending to maintain its hold over Congress and stave off its efforts to impose a strong safety and soundness regulator to oversee the company. (It was not until 2008 that a strong regulator was created for Fannie and Freddie. A little over a month later both GSEs were placed into conservatorship; they have requested a combined $112 billion in assistance from the federal government, and much more will be needed over the next few years.)

The result of loosened credit standards and a mandate to facilitate affordable-housing loans was a tsunami of high risk lending that sank the GSEs, overwhelmed the housing finance system, and caused an expected $1 trillion in mortgage loan losses by the GSEs, banks, and other investors and guarantors, and most tragically an expected 10 million or more home foreclosures.

As a result of congressional and regulatory actions, the percentage of conventional first mortgages (not guaranteed by the Federal Housing Administration or the Veteran's Administration) used to purchase a home with the borrower putting 5% or less down tripled from 9% in 1991 to 27% in 1995, eventually reaching 29% in 2007.

Fannie and Freddie acquired $1.2 trillion of loans from banks and other lenders from 1993 to 2007. This amounted to 62% of all such conventional home purchase loans with a down payment of 5% or less that were originated nationwide over the same period.

Fannie and Freddie also acquired $2.2 trillion in subprime loans and private securities backed by subprime loans from 1997 to 2007. Acorn and the other advocacy groups succeeded at getting Congress to mandate "innovative and flexible" lending practices such as higher debt ratios and creative definitions of income. And the serious delinquency rate on Fannie and Freddie's $1.5 trillion in high-risk loans was 10.3% as of Sept. 30, 2009.

This is about seven times the delinquency rate on the GSEs' traditional loans. Fifty percent of the high-risk loans are estimated to be CRA loans, with much of the remainder useful to the GSEs in meeting their affordable-housing goals.

The flood of CRA and affordable-housing loans with loosened underwriting standards, combined with declining mortgage interest rates—to 5% in 2003 from 10% in early 1991—resulted in a massive increase in borrowing capacity and fueled a house price bubble of unprecedented magnitude over the period 1997-2006.

Now this history may repeat itself as many of the same community groups are pushing Congress to expand CRA to cover all mortgage lenders, credit unions, insurance companies and others financial industry segments. Are we about to set the stage for another catastrophe?

Mr. Pinto was the chief credit officer at Fannie Mae from 1987 to 1989. He is currently a consultant to the mortgage-finance industry.

[DougMacG]

Crafty,  The Pinto piece is the best I have read describing how this all went wrong.  Liberals think it was the greedy capitalists packaging and disguising bad loans in portfolios that caused the problems, but \packaging mortgages of different sizes and shapes would not have caused any new problem IF the underlying loans had been based on creditworthiness, with real valuations and down payments, with default rates at or under the historic levels of between 1 and 2%.

Unfortunately there is a segment of America not ready for home ownership and forcing them in before they are ready doesn't work.  There is a segment of our country without a consistent work history, that does not have good credit or a history of paying all their bills, much less on time.  They tend to live in America's inner cities and they are disproportionately non-white.  If you lend based on creditworthiness or opposed the bill of 1992 or the expansions upon expansions of forced and incentivized bad lending policies, you were labeled racist.

Programs made in the name of affordability are what made the product unaffordable - just like we are doing with health care and college tuition. 

If we wanted real affordability, we would: 1) use market discipline to control the price, not skew it with artificial rules and subsidies, and: 2) Affordability, meaning cost as a fraction of income, comes mostly from the denominator - INCOME, which is based on education, effort and getting people to participate positively in our economic system.  Most government intervention and spending programs do the opposite.

Handing people freebies that require negative behavior to qualify, and artificial flooding of markets with taxpayer money has exactly the opposite affect; it increases dependency and pushes costs up further and further from reach.

[Rarick]

Nice article.  It explains some things that I did not quite get.  I think that 2 other factors that might be considered are the Banking act in the 90's that allowed savings and loans to do commercial banking- I think it was part of the S&L bailout back then.  The government probably did not want to jail a those boards of directors that it found had violated the rules.

The other reason is a kind of "common sense rule of thumb".  We were taken off the gold standard back during the depression- it got reduced to a fractional standard "temporarily". Later due to money supply concerns, the standard was dropped completely.  I suspect that, in the absence of a standard, a new one just naturally developed. (Nature fills a niche, or power rises in a vacuum?) That standard became- dirt- or real estate.  When the banking act mentioned below was passed, the "moderating influence" was decoupled from the economy.  The result was a boom and bubble and the inflation was held down by the Fed- masking what was happening.

This was done in the name of providing houses for people who had not "earned" them by gaining the finances, and knowledgfe to iknow what the hidden costs of owning a house are.  I also hear (rumor alert?) that it was permissible in some cases to have "Affidavits of income", which people lied on, and they were never checked due to pressures to "earn the buck".

[Crafty_Dog]

Near zero interest rates (in relation to inflation and taxes), the FMs taking the risk and the CRA requiring the banks to make bad loans.  What could go wrong?

[Crafty_Dog]

The economy and the stock market may be recovering from their swoon, but more homeowners than ever are having trouble making their monthly mortgage payments, according to figures released Thursday.

A couple waits to speak to a financial counselor at an event last month in Daly City, California, aimed at helping people get their mortgages restructured to avoid foreclosure.
Nearly one in 10 homeowners with mortgages was at least one payment behind in the third quarter, the Mortgage Bankers Association said in its survey. That translates into about five million households.

The delinquency figure, and a corresponding rise in the number of those losing their homes to foreclosure, was expected to be bad. Nevertheless, the figures underlined the level of stress on a large segment of the country, a situation that could snuff out the modest recovery in home prices over the last few months and impede any economic rebound.

Unless foreclosure modification efforts begin succeeding on a permanent basis — which many analysts say they think is unlikely — millions more foreclosed homes will come to market.

“I’ve been pretty bearish on this big ugly pig stuck in the python and this cements my view that home prices are going back down,” said the housing consultant Ivy Zelman.

The overall third-quarter delinquency rate is the highest since the association began keeping records in 1972. It is up from about one in 14 mortgage holders in the third quarter of 2008.

The combined percentage of those in foreclosure as well as delinquent homeowners is 14.41 percent, or about one in seven mortgage holders. Mortgages with problems are concentrated in four states: California, Florida, Arizona and Nevada. One in four people with mortgages in Florida is behind in payments.

Some of the delinquent homeowners are scrambling and will eventually catch up on their payments. But many others will slide into foreclosure. The percentage of loans in foreclosure on Sept. 30 was 4.47 percent, up from 2.97 percent last year.

In the first stage of the housing collapse, defaults and foreclosures were driven by subprime loans. These loans had low introductory rates that quickly moved to a level that was beyond the borrower’s ability to pay, even if the homeowner was still employed.

As the subprime tide recedes, high-quality prime loans with fixed rates make up the largest share of new foreclosures. A third of the new foreclosures begun in the third quarter were this type of loan, traditionally considered the safest. But without jobs, borrowers usually cannot pay their mortgages.

“Clearly the results are being driven by changes in employment,” Jay Brinkmann, the association’s chief economist, said in a conference call with reporters.

In previous recessions, homeowners who lost their jobs could sell the house and move somewhere with better prospects, or at least a cheaper cost of living. This time around, many of the unemployed are finding that the value of their property is less than they owe. They are stuck.

“There will be a lot more distressed supply entering the market, and it will move up the food chain to middle- and higher-price homes,” said Joshua Shapiro, chief United States economist for MFR Inc.

Many analysts say they believe that foreclosures, instead of peaking with the unemployment rate as they traditionally do, will most likely be a lagging indicator in this recession. The mortgage bankers expect foreclosures to peak in 2011, well after unemployment is expected to have begun falling.

There was one sliver of good news in the survey: the percentage of loans in the very first stage of default — no more than 30 days past due — was down slightly from the second quarter. If that number continues to decline, at least the ranks of the defaulted will have peaked.

“It’s arguably a positive, but it doesn’t undermine the fact that there are still five or six million foreclosures in process,” Ms. Zelman said.

The number of loans insured by the Federal Housing Administration that are at least one month past due rose to 14.4 percent in the third quarter, from 12.9 percent last year. An additional 3.3 percent of F.H.A. loans are in foreclosure.

The mortgage group’s survey noted, however, that the F.H.A. was issuing so many loans — about a million in the last year — that it had the effect of masking the percentage of problem loans at the agency. Most loans enter default when they are older than a year.

When the association removed the new loans from its calculations, the percentage of F.H.A. mortgages entering foreclosure was 30 percent higher.

The association’s survey is based on a sample of more than 44 million mortgage loans serviced by mortgage companies, commercial and savings banks, credit unions and others. About 52 million homes have mortgages. There are 124 million year-round housing units in the country, according to the Census Bureau

[Crafty_Dog]

Wall St. Finds Profits Again, Now by Reducing Mortgages


By LOUISE STORY
Published: November 21, 2009
As millions of Americans struggle to hold on to their homes, Wall Street has found a way to make money from the mortgage mess.

Investment funds are buying billions of dollars’ worth of home loans, discounted from the loans’ original value. Then, in what might seem an act of charity, the funds are helping homeowners by reducing the size of the loans.

But as part of these deals, the mortgages are being refinanced through lenders that work with government agencies like the Federal Housing Administration. This enables the funds to pocket sizable profits by reselling new, government-insured loans to other federal agencies, which then bundle the mortgages into securities for sale to investors.

While homeowners save money, the arrangement shifts nearly all the risk for the loans to the federal government — and, ultimately, taxpayers — at a time when Americans are falling behind on their mortgage payments in record numbers.

For instance, a fund might offer to pay $40 million for a $100 million block of mortgages from a bank in distress. Then the fund could arrange to have some of those loans refinanced into mortgages backed by an agency like the F.H.A. and then sold to an agency like Ginnie Mae. The trick is to persuade the homeowners to refinance those mortgages, by offering to reduce the amounts the homeowners owe.

The profit comes when the refinancings reach more than the $40 million that the fund paid for the block of loans.

The strategy has created an unusual alliance between Wall Street funds that specialize in troubled investments — the industry calls them “vulture” funds — and American homeowners.

But the transactions also add to the potential burden on government agencies, particularly the F.H.A., which has lately taken on an outsize role in the housing market and, some fear, may eventually need to be bailed out at taxpayer expense.

These new mortgage investors thrive in the shadows. Typically, the funds employ intermediaries to contact homeowners and arrange for mortgages to be refinanced.

Homeowners often have no idea who their Wall Street benefactors are. Federal housing officials, too, are in the dark.

Policymakers have encouraged investors and banks to put more consumers into government-backed loans. The total value of these transactions from hedge funds is small compared with the overall housing market.

Housing experts warn that the financial players involved — the investment funds, their intermediaries and certain F.H.A. approved lenders — have a financial incentive to put as many loans as possible into the government’s hands.

“From the borrower’s point of view, landing in a hedge fund or private equity fund that’s willing to write down principal is a gift,” said Howard Glaser, a financial industry consultant and former official at the Department of Housing and Urban Development.

He went on: “From the systemic point of view, there is something disturbing about investors that had substantial short-term profit in backing toxic loans now swooping down to make another profit on cleaning up that mess.”

Steven and Marisela Alva say they do not know who helped them with their mortgage. All they know is that they feel blessed.

Last December, the couple got a letter saying that a firm had purchased the mortgage on their home in Pico Rivera, Calif., from Chase Home Finance for less than its original value. “We want to share this discount with you,” the letter said.

“I couldn’t believe it,” said Mr. Alva, a 62-year-old janitor and father of three. “I kept thinking to myself, ‘Something is wrong, something is wrong. This sounds too good.’ ”

But it was true. The balance on the Alvas’ mortgage was ultimately reduced to $314,000 from $440,000.

The firm behind the reduction remains a mystery. The Alvas’ new loan, backed by the F.H.A., was made by Primary Residential Mortgage, a lender based in Utah. But the letter came from a company called MCM Capital Partners.

In the letter, MCM said the couple’s loan was owned by something called MCMCap Homeowners’ Advantage Trust III. But MCM’s co-founders said in an interview that MCM does not own any mortgages. They would not reveal the investor that owned the Alvas’ loan because they had agreed to keep that client’s identity confidential.

Michael Niccolini, an MCM founder, said, “We are changing people’s lives.”

==========

(Page 2 of 2)



In Washington, mortgage funds are lobbying for policies that favor their investments, particularly mortgages held in securitized bundles. They want more mortgage balances to be lowered, which might help mortgage bonds perform better. Big banks generally oppose such reductions, which lock in banks’ losses on the loans.



In April, about a dozen investment firms formed a group called the Mortgage Investors Coalition to press their case. One investor who is speaking out is Wilbur L. Ross, who runs a fund that buys mortgages and owns a large mortgage servicing company.

Mr. Ross said modifications that simply lower interest rates or lengthen the duration of a loan, as is typical in the government modification program, do not work well.

“They make a payment or two, but then one night the husband and wife will sit down at the table and say, ‘Do we really want to make 140 monthly payments into a rat hole?’ ” Mr. Ross said.

The Fortress Investment Group, a hedge fund in New York, is one of the firms at the forefront of picking through mortgages. Fortress created a $3 billion credit fund in 2008 partly to buy loans from banks like Citigroup, which were under pressure to purge loans to raise cash.

“They’re going ahead and they are refinancing them and getting their money out right away,” said Roger Smith, an analyst at Fox-Pitt Kelton. “What Fortress is doing is actually good for the borrower.” Congress, however, may not be happy that hedge funds are making money this way, Mr. Smith said.

Fortress, which declined to comment, typically buys batches of loans and works with other companies to evaluate which ones might qualify for F.H.A., Fannie Mae or Freddie Mac refinancing.

Sometimes Fortress works with Nationstar, a mortgage servicer and originator that it owns. Other times, Fortress uses an outside partner like Meridias Capital, a lender in Henderson, Nev., that once originated Alt-A loans, which are just above subprime.

After the mortgage market imploded, Meridias began dissecting portfolios of troubled loans for investment funds.

Because firms like Fortress purchase blocks of mortgages at distressed prices, they are able to reduce the principal amount of the loans. Nick Florez, president of Meridias, calls such transactions an “incentive refinance.” He said he would not agree to take a loan unless he could help the homeowner. He said he was able to reduce the loan amount by 11 percent on average.

“I’m giving money away,” said Mr. Florez, who is a 35-year-old Las Vegas native. “It’s really a feel-good business.”

It is too early to know how the new loans will work.

David H. Stevens, the new commissioner of the F.H.A., said he was monitoring F.H.A. lenders but did not have thorough information about which ones work with distressed investors. So far he has not seen a problem from loans coming from hedge funds.

“They’re helping to protect people in their homes and they’re refinancing people from a distressed situation,” he said.

But he acknowledged that funds have an incentive to aggressively push homeowners into federally guaranteed loans, since the investors get their money back as soon as they complete the refinancing.

Seth Wheeler, a senior adviser in the Treasury Department who specializes in housing policy, declined to say whether the investment firms that are lowering principal for homeowners are altruistic or not.

“Investors are doing it where it both benefits the investor and the borrower,” he said.

Part of the risk may be determined by how the funds compensate the F.H.A. lenders and whether the lenders are beholden to the funds for business.

David Zitting, the chief executive of Primary Residential Mortgage, the company that refinanced the Alva family’s loan, said his company did not receive fees from the hedge funds.

“They have all sorts of motivations that, frankly, we don’t understand,” he said. “We don’t do anything special for them because that’s not fair lending.”

The Alvas had to dip into their savings to qualify for their new federally insured loan, since the biggest F.H.A. mortgage they could get was for $285,000, they said. They paid off $21,000 in credit-card and car loans, and put up an additional $29,000 for their new mortgage, depleting their already meager savings.

Brian Chappelle, a mortgage consultant, said loans to people like the Alvas, with modest incomes and scant savings, could turn out to be risky.

“It does raise risk concerns for F.H.A.,” he said.

The Alvas are grateful for the help. Their home is, Marisela said, a dream come true. “I’m very happy,” she said. “We never thought this was possible.”

[Crafty_Dog]

http://iamfacingforeclosure.com/blog/2009/12/01/anatomy-of-a-government-abetteded-fraud-why-indymaconewest-always-forecloses/

Interesting article by a friend of mine.

The latest insight on the foreclosure crisis — and help for those in need.
Today is Friday, December 11th, 2009
HomeThe ForumTrusted Attorneys
 
Listing CriteriaForeclosure Basics
 
Beware of Foreclosure ScamsExample Hardship LetterLoss Mitigation Phone NumbersOverview of Methods to Stop ForeclosureAbout UsRSS.About the Author
 
Patrick Pulatie is the CEO for Loan Fraud Investigations (LFI). LFI is a Forensic/Predatory Lending Audit company in Antioch CA, and has been doing homeowner audits since Nov 07. LFI works daily with Attorneys throughout California, assisting homeowners in the fight to save their homes. He and Attorneys are constantly developing new strategies to counter foreclosure efforts by lenders.

See All Posts by This Author

Anatomy of a Government-Abetted Fraud: Why Indymac/OneWest Always Forecloses
December 1st, 2009 • Related • Filed Under
Filed Under: Avoid Foreclosure • FDIC • HAMP • IndyMac/OneWest • facing foreclosure • featured • government-abetted fraud
Several times per week, I get phone calls from attorneys. These calls all start out the same. “I am unable to get loan modifications done through a lender. What can I do?” The first question I ask is if the lender is Indymac/One West. Invariably, it is.

I also field the same type of calls from homeowners and from loan modification companies. Everyone is having the problem of Indymac not cooperating with regard to doing loan modifications. Furthermore, if I google the issue or check out loan modification forums, the same is true on the internet.

What is going on with Indymac/One West? Why aren’t they doing loan modifications? This article will try and bring together the known facts for a better understanding of the situation, and discuss what the Indymac situation means for foreclosures in general — and the government’s response to the crisis. First, to understand the situation today, one must have an understanding of the recent history of Indymac.

History
Indymac was a national bank in the U.S. It was insured by the FDIC. On July 11, 2008, Indymac failed and was taken over by the FDIC.

Indymac offered mortgage loans to homeowners. A large number of these loans were Option ARM mortgages using stated income programs. The loans were offered by Indymac retail, and also through Mortgage Bankers would fund the loans and then Indymac would buy them and reimburse the Mortgage Banker. Mortgage Brokers were also invited to the party to sell these loans.

During the height of the Housing Boom, Indymac gave these loans out like a homeowner gives out candy at Halloween. The loans were sold to homeowners by brokers who desired the large rebates that Indymac offered for the loans. The rebates were usually about three points. What is not commonly known is that when the Option ARM was sold to Wall Street, the lender would realize from four to six points, and the three point rebate to the broker was paid from these proceeds. So the lender “pocketed” three points themselves for each loan.

When the loans were sold to Wall Street, they were securitized through a Pooling and Servicing Agreement. This Agreement covered what could happen with the loans, and detailed how all parts of the loan process occurred.

Even though Indymac sold off most loans, they still held a large number of Option ARMs and other loans in their portfolio. As the Housing Crisis developed and deepened, the number of these loans going into default or being foreclosed upon increased dramatically. This reduced cash and reserves available to Indymac for operations.

In July, 2008, the FDIC came in and took over Indymac. The FDIC looked for someone to buy Indymac and after negotiations, sold Indymac to One West Bank.

OneWest Bank and its Sweetheart Deal
OneWest Bank was created on Mar 19, 2009 from the assets of Indymac Bank. It was created solely for the purpose of absorbing Indymac Bank. The principle owners of OneWest Bank include Michael Dell and George Soros. (George was a major supporter of Barack Obama and is also notorious for knocking the UK out of the Euro Exchange Rate Mechanism in 1992 by shorting the Pound).

When OneWest took over Indymac, the FDIC and OneWest executed a “Shared-Loss Agreement” covering the sale. This Agreement covered the terms of what the FDIC would reimburse OneWest for any losses from foreclosure on a property. It is at this point that the details get very confusing, so I shall try to  simplify the terms. Some of the major details are:

OneWest would purchase all first mortgages at 70% of the current balance
OneWest would purchase Line of Equity Loans at 58% of the current balance.
In the event of foreclosure, the FDIC would cover from 80%-95% of losses, using the original loan amount, and not the current balance.
How does this translate to the “Real World”? Let us take a hypothetical situation. A homeowner has just lost his home in default. OneWest sells the property. Here are the details of the transaction:

The original loan amount was $500,000. Missed payments and other foreclosure costs bring the amount up to $550,000. At 70%, OneWest bought the loan for $385,000
The home is located in Stockton, CA, so its current value is likely about $185,000 and OneWest sells the home for that amount. Total loss for OneWest is $200,000. But this is not how FDIC determines the loss.
‘FDIC takes the $500,000 and subtracts the $185,000 Purchase Price. Total loss according to the FDIC is $315,000. If the FDIC is covering “ONLY” 80% of the loss, then the FDIC would reimburse OneWest to the tune of $252,000.
Add the $252,000 to the Purchase Price of $185,000, and you have One West recovering $437,000 for an “investment” of $385,000. Therefore, OneWest makes $52,000 in additional income above the actual Purchase Price loan amount after the FDIC reimbursement.
At this point, it becomes readily apparent why OneWest Bank has no intention of conducting loan modifications. Any modification means that OneWest would lose out on all this additional profit.

Note: It is not readily apparent as to whether this agreement applies to loans that IndyMac made and Securitized but still Services today. However, I believe that the Agreement does apply to Securitized loans. In that event, OneWest would make even more money through foreclosure because OneWest would keep the “excess” and not pay it to the investor!

Pooling And Servicing Agreement
When OneWest has been asked about why loan modifications are not being done, they are responding that their Pooling and Servicing Agreements do not allow for loan modifications. Sheila Bair, head of the FDIC has also stated the same. This sounds like a plausible explanation, since few people understand the Pooling and Servicing Agreement.  But…

Parties Involved
Here is the”dirty little secret” regarding Indymac and the Pooling and Servicing Agreement. The parties involved in the Agreement are:

The Sponsor for the Trust was…………Indymac
The Seller for the Trust was……………Indymac
The Depositor for the Trust was………..you guessed it………….Indymac
The Issuing Entity for the Trust was……………….(drumroll)……………….Indymac
The Master Servicer for the Trust was……..once again………Indymac
In other words, Indymac was the only party involved in the Pooling and Servicing Agreement other than the Ratings Agency who rated these loans as `AAA’ products.

To make matters worse, Indymac wrote the Agreement in order to protect itself from liability for these garbage loans. By creating  separate Indymac Corporations — which the Depositor, Sponsor, and other entities were — Indymac created a bankruptcy-remote vehicle that could not come back to them in terms of liability. However, they did not count on certain MBS securities and portfolio loans coming back to bite them and force them under.

Now, the questions become:

If Indymac was responsible for Securitization at every step in the Process, and was responsible for writing the Pooling and Servicing Agreement, can they be held accountable for the loans that they are foreclosing on?
Since Indymac was the Issuing Entity, can they actually modify loans, but refuse to do so because they can make money for OneWest Bank by refusing to do so?
Does Indymac have to “buy back” the loan from the Indymac Trust in order to do a loan modification?
These are questions that I have no answer for. All I know is that at every step of the way, Indymac was involved in the process, and have taken steps to protect themselves from liability for loans that should never have been made.

Loan Modifications
As referred to earlier, the Agreement covers all aspects of the Securitization Process. With respect to Loan Modifications, the Agreement for Indymac INDA Mortgage Loan Trust 2007 – AR5, states on Page S-67:

Certain Modifications and Refinancings

The Servicer may modify any Mortgage Loan at the request of the related mortgagor, provided that the Servicer purchases the Mortgage Loan from the issuing entity immediately preceding the modification.

Page S-12 states the same “policy”:

The servicer is permitted to modify any mortgage loan in lieu of refinancing at the request of the related mortgagor, provided that the servicer purchases the mortgage loan from the issuing entity immediately preceding the modification. In addition, under limited circumstances, the servicer will repurchase certain mortgage loans that experience an early payment default (default in the first three months following origination). See “Servicing of the Mortgage Loans—Certain Modifications and Refinancings” and “Risk Factors—Risks Related To Newly Originated Mortgage Loans and Servicer’s Repurchase Obligation Related to Early Payment Default” in this prospectus supplement.

These sections would appear to suggest that the only way that OneWest could modify the loan would be as a result of buying the loan back from the Issuing Trust. However, there may be an out. Page S-12 also states:

Required Repurchases, Substitutions or Purchases of Mortgage Loans

The seller will make certain representations and warranties relating to the mortgage loans pursuant to the pooling and servicing agreement. If with respect to any mortgage loan any of the representations and warranties are breached in any material respect as of the date made, or an uncured material document defect exists, the seller will be obligated to repurchase or substitute for the mortgage loan as further described in this prospectus supplement under “Description of the Certificates—Representations and Warranties Relating to Mortgage Loans” and “—Delivery of Mortgage Loan Documents .”

The above section may be the key for litigating attorneys to fight Indymac. If fraud or other issues can be raised that will show a violation of the Representations and Warranties, then this could potentially force Indymac to modify the loan.

HAMP
At this point, it becomes important to note that Indymac/OneWest signed aboard with the HAMP program in August 2009. Even though they became a part of the program, they are still refusing to do most loan modifications. Instead, they persist in foreclosing on almost all properties. And even when they say that they are attempting to do loan modifications, they are fulfilling all necessary requirements so that they can foreclose the second that they “decide” the homeowner does not meet HAMP requirements, — which, since they can make more money by foreclosing on the property, meets the HAMP requirements for doing what is in the best interests of the “investor”.

Why did Indymac even sign up for HAMP, if they have no intention of executing loan modifications?  Clearly, just for appearances.

One Final Question
It now becomes incumbent upon me to ask one final question. The Shared-Loss Agreement states the following:

2.1 Shared-Loss Arrangement.

(a) Loss Mitigation and Consideration of Alternatives. For each Shared-Loss Loan in default or for which a default is reasonably foreseeable, the Purchaser shall undertake, or shall use reasonable best efforts to cause third-party servicers to undertake, reasonable and customary loss mitigation efforts in compliance with the Guidelines and Customary Servicing Procedures. The Purchaser shall document its consideration of foreclosure, loan restructuring (if available), charge-off and short-sale (if a short-sale is a viable option and is proposed to the Purchaser) alternatives and shall select the alternative that is reasonably estimated by the Purchaser to result in the least Loss. The Purchaser shall retain all analyses of the considered alternatives and servicing records and allow the Receiver to inspect them upon reasonable notice.

Such agreements are usually considered to be interpreted to the benefit of the homeowner, as with HAMP and other programs. In legalese, it is called “Intent”.

What was the “Intent” of the Shared-Loss Agreement? Was the intent to provide OneWest Bank solely with a profitable incentive to take over Indymac Bank? If so, then OneWest has been truly successful in every manner.

Or was the intent to offer to OneWest Bank a way to be compensated for losses for foreclosures, but with the primary goal to assist homeowners in trouble? If this was the intent, then OneWest has failed miserably in its actions. And if so, could OneWest be actionable by the Federal Government for fraud?

In fact the true “Intent” was to limit losses to the Treasury Department. Each and every loan modification done would save the Treasury, and the tax payer, from 80-95 cents on every dollar.

Since, technically, One West would get 5-20 cents of any savings, it should have been an incentive to use foreclosure alternatives. But the reality is  that the quick turnaround on foreclosure seems to give OneWest a better return. As a result, OneWest appears to simply ignore the intent and just foreclose (as far as I can tell).

So, OneWest’s failure to modify loans may actually amount to fraud on the Treasury and US taxpayers.

Conclusion
I have presented the story of Indymac/OneWest and what is happening today. But the story does not end with OneWest. There are over 50 different lenders and servicers who have Shared-Loss Agreements executed with the FDIC. Each Agreement offers essentially the same terms. Though other Lenders do not appear to be acting as flagrantly as OneWest, they are all still engaging in the same actions.

What is the solution for this problem?

For homeowners individually, the most successes are being achieved by borrowers who are getting knowledgeable attorneys who will not just threaten litigation, but are also willing to act and file the necessary lawsuits. That tends to bring OneWest Bank to the table.
For the country as a whole, and homeowners in mass, the problem must be brought to the attention of your local Congress Critters. You must hold their feet to the fire. They must know that if they do not respond to what OneWest and other lenders are doing, then they are subject to being voted out of their nice and cushy Congressional Offices.
Will this be easy? No way. After all, the lenders have the money and the ears of Congress. But if we do not draw the line here, then

[Crafty_Dog]

Second post of the day

REAL ESTATE DECEMBER 10, 2009
American Dream 2: Default, Then Rent
By MARK WHITEHOUSE
Interactive graphics:


1) http://online.wsj.com/article/SB126040517376983621.html#project%3DRECOVER0912%26articleTabs%3Dinteractive


2) http://online.wsj.com/article/SB126040517376983621.html#project%3DSTRATEGIC_DEFAULTS_0912%26articleTabs%3Dinteractive




PALMDALE, Calif. -- Schoolteacher Shana Richey misses the playroom she decorated with Glamour Girl decals for her daughters. Fireman Jay Fernandez misses the custom putting green he installed in his backyard.

But ever since they quit paying their mortgages and walked away from their homes, they've discovered that giving up on the American dream has its benefits.

Both now live on the 3100 block of Club Rancho Drive in Palmdale, where a terrible housing market lets them rent luxurious homes -- one with a pool for the kids, the other with a golf-course view -- for a fraction of their former monthly payments.

"It's just a better life. It really is," says Ms. Richey. Before defaulting on her mortgage, she owed about $230,000 more than the home was worth.

People's increasing willingness to abandon their own piece of America illustrates a paradoxical change wrought by the housing bust: Even as it tarnishes the near-sacred image of home ownership, it might be clearing the way for an economic recovery.

Thanks to a rare confluence of factors -- mortgages that far exceed home values and bargain-basement rents -- a growing number of families are concluding that the new American dream home is a rental.

Some are leaving behind their homes and mortgages right away, while others are simply halting payments until the bank kicks them out. That's freeing up cash to use in other ways.

Ms. Richey's family of five used some of the money to buy season tickets to Disneyland, and plans to take a Carnival cruise to Mexico in March. Mr. Fernandez takes his girlfriend out to dinner more frequently. "We're saving lots of money," Ms. Richey says.

The U.S home-ownership rate has charted its biggest decline in more than two decades, falling to 67.6% as of September from a peak of 69.2% in 2004. And more renters are on the way: Credit firm Experian and consulting firm Oliver Wyman forecast that "strategic defaults" by homeowners who can afford to pay are likely to exceed one million in 2009, more than four times 2007's level.

Stiffing the bank is bad for peoples' credit, and bad for banks. Swelling defaults could also mean more losses for taxpayers through bank bailouts.

Analysts at Deutsche Bank Securities expect 21 million U.S. households to end up owing more on their mortgages than their homes are worth by the end of 2010. If one in five of those households defaults, the losses to banks and investors could exceed $400 billion. As a proportion of the economy, that's roughly equivalent to the losses suffered in the savings-and-loan debacle of the late 1980s and early 1990s.

The flip side of those losses, though, is massive debt relief that can help offset the pain of rising unemployment and put cash in consumers' pockets.

For the 4.8 million U.S. households that data provider LPS Applied Analytics estimates haven't paid their mortgages in at least three months, the added cash flow could amount to about $5 billion a month -- an injection that in the long term could be worth more than the tax breaks in the Obama administration's economic-stimulus package.

"It's a stealth stimulus," says Christopher Thornberg of Beacon Economics, a consulting firm specializing in real estate and the California economy. "The quicker these people shed their debts, the faster the economy is going to heal and move forward again."

As the stigma of abandoning a mortgage wanes, the Obama administration could face an uphill battle in its effort to keep people in their homes by pressuring banks to cut their mortgage payments. Some analysts argue that's not always the right approach, particularly if it prevents people from shedding onerous debts and starting afresh.

"The effect of these programs is often to lead homeowners to make decisions that are not in their economic best interests," says Brent White, a law professor at the University of Arizona who has studied mortgage defaults.

Few places in the U.S. were better suited to attract true believers in home ownership than Palmdale. A farming community that expanded in the 1950s to accommodate the aerospace industry around nearby Edwards Air Force Base, the city more than doubled its population from 1990 to the present as it became the final frontier for Los Angeles-area workers looking to buy.

About half of Palmdale's 147,000 residents endure a daily commute that can extend to two hours or more one way. In return, they get a homestead in a high-desert locale of haunting beauty, with Joshua trees dotting the landscape, and real-estate developments locked into a master grid of streets with anonymous names such as Avenue O-8 or Avenue M-4.

The 3100 block of Club Rancho Drive, built by Beazer Homes mostly in 2002, captures the essence of Palmdale's appeal. Winding along the southern edge of the Rancho Vista golf course just south of Avenue N-8, its spacious homes, verdant lawns and imported birch and sycamore trees exude a sense of middle-class tranquility.

Club Rancho became a solid community of owner-occupiers, many of whom stretched their finances to the limit. As of the end of 2007, total mortgage debt attached to the 13 houses on the block for which records are available had reached $4.5 million.

Fast-forward to the end of 2009, and the picture changes radically. Thanks to a 50% drop in home prices, at least two owners on the block now owe between $60,000 and $160,000 more on their mortgages than their houses are worth. Four more homes have already passed through foreclosure into the hands of new owners.

In the process, the block's total mortgage debt has fallen 37%, to $2.7 million.

Much of Club Rancho also has converted to rentals, a shift mirrored across Palmdale. Five homes on the 3100 block are now occupied by renters, up from only two in 2007. In the past six months, at least three families have moved into those rentals after walking away from other homes.

Ms. Richey, the teacher, arrived in Palmdale in 1999. In 2004, she and her husband, Timothy, bought a two-story home on Caspian Drive, near Avenue O-8, with a no-down-payment loan. They took pride in the amenities they installed: a powder room with granite countertops, a backyard pool and play area, and the purple-and-turquoise fantasy playroom upstairs for their three daughters.

But the value of the house plunged to less than $200,000 in 2009. Their $430,000 mortgage, with its $3,700 monthly payment, began to look more like an unwanted burden. By May, amid troubles getting tenants for two rental properties she also owned, Ms. Richey decided the time had come to cut a deal with America's Servicing Co., a unit of Wells Fargo & Co. servicing the mortgage on the house.

After three months of wrangling, she says she finally received a modification approval. The new monthly payment: about $3,300, far more than she had hoped. A Wells Fargo spokesman confirmed the bank offered Ms. Richey a modification under the Obama administration's Making Home Affordable program, and said, "The Richeys turned down the lowest payment we could offer."

Ms. Richey and her husband had already been working on Plan B -- exploring the neighborhood's "For Rent" signs.

On one trip, they drove by the house at 3152 Club Rancho Drive. It was bigger than their house on Caspian, had a pool with three waterfalls, and boasted a cascading staircase that Ms. Richey says she could picture her daughters descending on prom night. The rent was $2,195 a month.

The situation presented Ms. Richey with a quandary now facing more than 10 million U.S. homeowners who owe more on their mortgages than their houses are worth.

On one hand, walking away from her home would be easy. California is one of 10 states that largely prevent mortgage lenders from going after the other assets of borrowers who default. But she also had to consider the negatives. Her credit could be tarnished for years and, perhaps most importantly, she feared her friends and neighbors might ostracize her.

"It was scary," she says, noting that people tended to keep such decisions to themselves for fear of being stigmatized. "It's still very hush-hush."

Tom Sobelman, whose family of four lives across the street from Ms. Richey, at 3127 Club Rancho Drive, sees mortgages as a moral as well as financial obligation. He's still paying the mortgage on an investment property he owns nearby, despite the fact that the rent is about $1,000 a month short of covering his costs.

Mr. Sobelman, 37, argues that people who choose to default are unfairly benefiting at the expense of taxpayers, who have put trillions of dollars at risk to bail out struggling banks. "All these people are gaming the system, and I'm paying for it," he says. "My kids are going to be paying it off."

Mr. Sobelman has plenty of company. In a recent study of people who owe more on their mortgages than their houses are worth, economists Luigi Guiso, Paola Sapienza and Luigi Zingales found that about four out of five believe defaulting on a mortgage is morally wrong if one can afford to pay it. But they also found that the people become 82% more likely to say they'll default if they know someone else who defaulted.

Moral or not, the individuals who want to shed their mortgage debts are quickly transforming the Palmdale real-estate market.

Adam Robbins, who runs the local Realty World franchise and manages about 80 properties, says about 90% of his prospective tenants are people in Ms. Richey's situation. So he and other rental managers are loosening rules to accept people who have been through foreclosures.

"Those are all good people," he says. "They just got bad loans or bought at the wrong time."

Ms. Richey and her family made the move to Club Rancho Drive in August, when she was already several months behind on the mortgage. With Mr. Robbins's help, she recently sold the house on Caspian Drive for $195,000, money that the bank will accept to settle the $430,000 mortgage debt. She's also considering walking away from the mortgages on her two rental properties.

Showing a visitor the personal touches in her new home, including a $1,800 dining set she bought with some of her newly available income, she notes the advantages of being a renter rather than an owner.

"You take a risk for the American dream," she says. "I don't have to worry about paying property tax, homeowners' insurance, the landscaping, cleaning the pool or any repairs."

Others on Ms. Richey's block have made similar moves. Mr. Fernandez, the firefighter, moved into 3139 in July, after stopping the $4,800 monthly payments on the home he owned around the corner on Champion Way.

Mr. Fernandez says he made four attempts to modify the larger of the two mortgages on his home, which add up to $423,000. Ultimately, he was offered a monthly payment that, together with back taxes, was higher than what he had been paying. Today he's working to partially reimburse his lenders, IndyMac Bank (now OneWest Bank) and American First Credit Union, by selling the home, which he expects to fetch about $300,000.

A spokeswoman for OneWest Bank said the bank "offered Mr. Fernandez the lowest payment possible under the [Federal Deposit Insurance Corp.] loan modification guidelines." A spokesman for American First said the company always seeks to help clients stay in their homes.

With an income of about $8,300 a month and a rent of $2,200, Mr. Fernandez says he now has the wherewithal to do things he couldn't when he was stretching to pay the mortgage. He recently went to concerts by Rob Thomas and Mat Kearney. He also kept his black BMW 6 Series coupe, which has payments of about $700 a month.

"I don't know if I'll buy another house again, because it's such a huge headache," he says.

[Crafty_Dog]

Happy New Year, readers, but before we get on with the debates of 2010, there's still some ugly 2009 business to report: To wit, the Treasury's Christmas Eve taxpayer massacre lifting the $400 billion cap on potential losses for Fannie Mae and Freddie Mac as well as the limits on what the failed companies can borrow.

The Treasury is hoping no one notices, and no wonder. Taxpayers are continuing to buy senior preferred stock in the two firms to cover their growing losses—a combined $111 billion so far. When Treasury first bailed them out in September 2008, Congress put a $200 billion limit ($100 billion each) on federal assistance. Last year, the Treasury raised the potential commitment to $400 billion. Now the limit on taxpayer exposure is, well, who knows?

The firms have made clear that they may only be able to pay the preferred dividends they owe taxpayers by borrowing still more money . . . from taxpayers. Said Fannie Mae in its most recent quarterly report: "We expect that, for the foreseeable future, the earnings of the company, if any, will not be sufficient to pay the dividends on the senior preferred stock. As a result, future dividend payments will be effectively funded from equity drawn from the Treasury."

The loss cap is being lifted because the government has directed both companies to pursue money-losing strategies by modifying mortgages to prevent foreclosures. Most of their losses are still coming from subprime and Alt-A mortgage bets made during the boom, but Fannie reported last quarter that loan modifications resulted in $7.7 billion in losses, up from $2.2 billion the previous quarter.

The government wants taxpayers to think that these are profit-seeking companies being nursed back to health, like AIG. But at least AIG is trying to make money. Fan and Fred are now designed to lose money, transferring wealth from renters and homeowners to overextended borrowers.

Even better for the political class, much of this is being done off the government books. The White House budget office still doesn't fully account for Fannie and Freddie's spending as federal outlays, though Washington controls the companies. Nor does it include as part of the national debt the $5 trillion in mortgages—half the market—that the companies either own or guarantee. The companies have become Washington's ultimate off-balance-sheet vehicles, the political equivalent of Citigroup's SIVs, that are being used to subsidize and nationalize mortgage finance.

This subterfuge also explains the Christmas Eve timing. After December 31, Team Obama would have needed the consent of Congress to raise the taxpayer exposure beyond $400 billion. By law, negative net worth at the companies forces them into "receivership," which means they have to be wound down.

Unlimited bailouts will now allow the Treasury to keep them in conservatorship, which means they can help to conserve the Democratic majority in Congress by increasing their role in housing finance. With the Federal Reserve planning to step back as early as March from buying $1.25 trillion in mortgage-backed securities, Team Obama is counting on Fan and Fred to help reflate the housing bubble.

That's why on Christmas Eve Treasury also rolled back a key requirement of the 2008 bailout—that Fan and Fred begin shrinking the portfolios of mortgages they own on their own account, which total a combined $1.5 trillion. Risk-taking will now increase, so that the government can once again follow Barney Frank's infamous advice that the companies "roll the dice" on subsidies for affordable housing.

All of which would seem to make the CEOs of Fannie and Freddie the world's most overpaid bureaucrats. A release from the Federal Housing Finance Agency that also fell in the Christmas Eve forest reports that, after presiding over a combined $24 billion in losses last quarter, Fannie CEO Michael Williams and Freddie boss Ed Haldeman are getting substantial raises. Each is now eligible for up to $6 million annually.

Freddie also has one of the world's highest-paid human resources executives. Paul George's total compensation can run up to $2.7 million. It must require a rare set of skills to spot executives capable of losing billions of dollars.

Where is Treasury's pay czar when we actually need him? You guessed it, Fannie and Freddie are exempt from the rules applied to the TARP banks. The government gave away the game that these firms are no longer in the business of making profits when it announced that the CEOs will be paid entirely in cash, though it is discouraging that practice at other big banks. Who would want stock in the Department of Housing and Urban Development?

Meanwhile, these biggest of Beltway losers continue to be missing from the debate over financial reform. The Treasury still hasn't offered its long-promised proposals even as it presses reform on banks that played a far smaller role in the financial mania and panic. Senate Banking Chairman Chris Dodd (D., Conn.) and ranking Republican Richard Shelby recently issued a joint statement on their "progress" toward financial regulatory reform, but their list of goals also doesn't mention Fannie or Freddie.

Since Mr. Shelby has long argued for reform of these government-sponsored enterprises, their absence suggests that Mr. Dodd's longtime effort to protect Fan and Fred is once again succeeding. It would be worse than a shame if, having warned about the iceberg for years, Mr. Shelby now joins Mr. Dodd in pretending that these ships aren't sinking.

In today's Washington, we suppose, it only makes sense that the companies that did the most to cause the meltdown are being kept alive to lose even more money. The politicians have used the panic as an excuse to reform everything but themselves.

[Rarick]

Find an honest real estate pro.  (yeah I know they are salesman, but you can hope) Put him in charge of renegotiation of mortgages policy, and limit the bank's recovery to 80% of value at most.  They have already been bailed out, if they cannot make a go of it like Chrysler did in the 70's, let them go down the drain.  "Too big to faill" is crap, it seems that there needs to be a serious "holy crap!" moment handed to them (kind of like coming home at 16-17 to bags packed with your name on them setting on the porch....) to get it together, take the pain/ loss and fix themselves.

Alternatively, if you are going to be just handing out money, figure out the "almost able, or were able to make payments until layoff" and pay off those mortgages.  Those who were fraudulent in their applications or never were really able to make payments- turn them into renters.  Take their title away and let the bank grow a rental agency branch...........

[Crafty_Dog]

What about the sanctity of contract?!? 

[G M]

Sanctity of contract? The rule of law is soooo pre-obama. We have Changed!

[Crafty_Dog]

Well, as it I see it, that is precisely the fight we have ahead.

[Crafty_Dog]

I disagree with your reasoning completely.

If there was dishonesty, then there are a great variety of fraud related statutes-- but that is not the issue here. 

The government pumped up a credit bubble (virtual zero interest rates, the FMs, the CRA, and more), people lied on their apps, banks didn't care because the loans were guaranteed by the FMs etc etc. 

If you allow the State to break contracts between private parties, the damage done is deep, profound, and long lasting. 

[DougMacG]

"...the damage done is deep, profound, and long lasting."

So true.  A mortgage is the claim against the property guaranteeing the payment with a specific right to take it back if necessary.  Eliminate that right and everything is an unsecured loan.  Or make ever-changing rules and restrictions that are applied unevenly and what you get is called a third world country.

People under-appreciate things like foreclosure, bankruptcy, right to fire employees etc.  They all sound so negative but are part of our freedoms, part of free markets, dynamic capitalism and a stable set of ground rules needed to make large, long term investments.  You don't give up your first born and they don't chop off your arm.  But they do get to take your house if you don't pay and they should get to hire someone else if they don't think you do your job well enough.  You get to start over, find new work where you are more appreciated, get a smaller house if necessary or play a part in rejuvenating an older part of town that lost some value.

Who benefited when values were only going up and up and up, artificially and beyond affordability?  I would argue the answer is really no one.  Mine went up 8-fold, and all I really had was the same property with richer neighbors and higher property taxes.

[DougMacG]

This story is from last May.  Happy to look at new numbers for failed programs.  Posting this separate from the argument that forced negotiation is wrong; it also doesn't work.  If you identify that someone cannot afford a place, then show them there is a positive consequence for defaulting... what is (70%)most likely to happen next??  I wonder if it cost us $4-$6 to give away each dollar like it did with cash for clunkers.

http://www.housingwire.com/2009/05/22/fannie-program-sees-70-recidivism/
Fannie Program Sees 70% Recidivism
A program aimed at helping delinquent borrowers become current once more on their mortgages will likely see decreased volumes at mortgage giant Fannie Mae (FNM: 1.12 -2.61%) after the Federal Housing Finance Agency (FHFA) noted a significant majority of participants soon redefaulted after receiving aid.

[G M]

It's not about fixing the economy, it's about the dems buying votes, as usual.


[youtube]http://www.youtube.com/watch?v=P36x8rTb3jI[/youtube]

[DougMacG]

There isn't a need to 'adjust things' in a firm contract.  You gave them the right to take back in exchange for the money to buy.  You make the payments and then they release the lien against the property.  If/when you miss they have a choice of remedies - collect the money owing or take back the asset securing the loan.  When they take back the property you are released from your obligation for the rest of the payments.  Make it more complicated, make it more costly to take back and up go the costs, fees and interest rates, making money harder to find and houses harder to buy.

You can apply for a new, longer loan to stretch out the payments from the same or a different mortgage company to replace the existing mortgage during its term.  But that is voluntary and far different than forcing a business to negotiate/take less or pay later than what was promised in the original contract. 

[Crafty_Dog]

Exactly.

Changing subjects a bit:

Taylor Disputes Bernanke

Please consider Taylor Disputes Bernanke on Bubble, Says Low Rates Played Role.

John Taylor, creator of the so-called Taylor rule for guiding monetary policy, disputed Federal Reserve Chairman Ben S. Bernanke’s argument that low interest rates didn’t cause the U.S. housing bubble.

“The evidence is overwhelming that those low interest rates were not only unusually low but they logically were a factor in the housing boom and therefore ultimately the bust,” Taylor, a Stanford University economist, said in an interview today in Atlanta.

“It had an effect on the housing boom and increased a lot of risk taking,” said Taylor, 63, who was attending the American Economic Association’s annual meeting.

Taylor echoed criticism of scholars including Dean Baker, co-director of the Center for Economic and Policy Research in Washington, who say the Fed helped inflate U.S. housing prices by keeping rates too low for too long. The collapse in housing prices led to the worst recession since the Great Depression and the loss of more than 7 million U.S. jobs.

“It had an effect on the housing boom and increased a lot of risk taking,” said Taylor, 63, who was attending the American Economic Association’s annual meeting.

Taylor echoed criticism of scholars including Dean Baker, co-director of the Center for Economic and Policy Research in Washington, who say the Fed helped inflate U.S. housing prices by keeping rates too low for too long. The collapse in housing prices led to the worst recession since the Great Depression and the loss of more than 7 million U.S. jobs.

“Low rates certainly contributed to the crisis,” Baker said in an interview on Jan. 3. “I don’t know how he can deny culpability. You brought the economy to the brink of a Great Depression.”

[Crafty_Dog]

January 10, 2010
THE WAY WE LIVE NOW
Walk Away From Your Mortgage!
By ROGER LOWENSTEIN

Source: First American CoreLogic, November 2009

John Courson, president and C.E.O. of the Mortgage Bankers Association, recently told The Wall Street Journal that homeowners who default on their mortgages should think about the “message” they will send to “their family and their kids and their friends.” Courson was implying that homeowners — record numbers of whom continue to default — have a responsibility to make good. He wasn’t referring to the people who have no choice, who can’t afford their payments. He was speaking about the rising number of folks who arevoluntarily choosing not to pay.

Such voluntary defaults are a new phenomenon. Time was, Americans would do anything to pay their mortgage — forgo a new car or a vacation, even put a younger family member to work. But the housing collapse left 10.7 million families owing more than their homes are worth. So some of them are making a calculated decision to hang onto their money and let their homes go. Is this irresponsible?

Businesses — in particular Wall Street banks — make such calculations routinely. Morgan Stanley recently decided to stop making payments on five San Francisco office buildings. A Morgan Stanley fund purchased the buildings at the height of the boom, and their value has plunged. Nobody has said Morgan Stanley is immoral — perhaps because no one assumed it was moral to begin with. But the average American, as if sprung from some Franklinesque mythology, is supposed to honor his debts, or so says the mortgage industry as well as government officials. Former Treasury Secretary Henry M. Paulson Jr. declared that “any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property is simply a speculator — and one who is not honoring his obligation.” (Paulson presumably was not so censorious of speculation during his 32-year career at Goldman Sachs.)

The moral suasion has continued under President Obama, who has urged that homeowners follow the “responsible” course. Indeed, HUD-approved housing counselors are supposed to counsel people against foreclosure. In many cases, this means counseling people to throw away money. Brent White, a University of Arizona law professor, notes that a family who bought a three-bedroom home in Salinas, Calif., at the market top in 2006, with no down payment (then a common-enough occurrence), could theoretically have to wait 60 years to recover their equity. On the other hand, if they walked, they could rent a similar house for a pittance of their monthly mortgage.

There are two reasons why so-called strategic defaults have been considered antisocial and perhaps amoral. One is that foreclosures depress the neighborhood and drive down prices. But in a market society, since when are people responsible for the economic effects of their actions? Every oil speculator helps to drive up gasoline prices. Every hedge fund that speculated against a bank by purchasing credit-default swaps on its bonds signaled skepticism about the bank’s creditworthiness and helped to make it more costly for the bank to borrow, and thus to issue loans. We are all economic pinballs, insensibly colliding for better or worse.

The other reason is that default (supposedly) debases the character of the borrower. Once, perhaps, when bankers held onto mortgages for 30 years, they occupied a moral high ground. These days, lenders typically unload mortgages within days (or minutes). And not just in mortgage finance, but in virtually every realm of our transaction-obsessed society, the message is that enduring relationships count for less than the value put on assets for sale.

Think of private-equity firms that close a factory — essentially deciding that the company is worth more dead than alive. Or the New York Yankees and their World Series M.V.P. Hideki Matsui, who parted company as soon as the cheering stopped. Or money-losing hedge-fund managers: rather than try to earn back their investors’ lost capital, they start new funds so they can rake in fresh incentives. Sam Zell, a billionaire, let the Tribune Company, which he had previously acquired, file for bankruptcy. Indeed, the owners of any company that defaults on bonds and chooses to let the company fail rather than invest more capital in it are practicing “strategic default.” Banks signal their complicity with this ethos when they send new credit cards to people who failed to stay current on old ones.

Mortgage holders do sign a promissory note, which is a promise to pay. But the contract explicitly details the penalty for nonpayment — surrender of the property. The borrower isn’t escaping the consequences; he is suffering them.

In some states, lenders also have recourse to the borrowers’ unmortgaged assets, like their car and savings accounts. A study by the Federal Reserve Bank of Richmond found that defaults are lower in such states, apparently because lenders threaten the borrowers with judgments against their assets. But actual lawsuits are rare.

And given that nearly a quarter of mortgages are underwater, and that 10 percent of mortgages are delinquent, White, of the University of Arizona, is surprised that more people haven’t walked. He thinks the desire to avoid shame is a factor, as are overblown fears of harm to credit ratings. Probably, homeowners also labor under a delusion that their homes will quickly return to value. White has argued that the government should stop perpetuating default “scare stories” and, indeed, should encourage borrowers to default when it’s in their economic interest. This would correct a prevailing imbalance: homeowners operate under a “powerful moral constraint” while lenders are busily trying to maximize profits. More important, it might get the system unstuck. If lenders feared an avalanche of strategic defaults, they would have an incentive to renegotiate loan terms. In theory, this could produce a wave of loan modifications — the very goal the Treasury has been pursuing to end the crisis.

No one says defaulting on a contract is pretty or that, in a perfectly functioning society, defaults would be the rule. But to put the onus for restraint on ordinary homeowners seems rather strange. If the Mortgage Bankers Association is against defaults, its members, presumably the experts in such matters, might take better care not to lend people more than their homes are worth.

Roger Lowenstein, an outside director of the Sequoia Fund, is a contributing writer for the magazine. His book “The End of Wall Street” is coming out in April.

[Crafty_Dog]

This from POTH   
======================
Justice Dept. Fights Bias in Lending Recommend
By CHARLIE SAVAGE
Published: January 13, 2010

WASHINGTON — The Justice Department is beginning a major campaign against banks and mortgage brokers suspected of discriminating against minority applicants in lending, opening a new front in the Obama administration’s response to the foreclosure crisis.

Tom Perez, the assistant attorney general for the department’s Civil Rights Division, is expected to announce Thursday in New York that the administration is creating a new unit that will focus exclusively on unfair lending practices.

“We are looking at any and every practice in the industry,” Mr. Perez said in a recent interview.

As part of an expansion of the Civil Rights Division approved by Congress last year, the Justice Department is hiring at least four lawyers and an economist for the new unit, while about half a dozen current staff members will transfer into it.

Mr. Perez plans to formally announce the new unit at the “Wall Street Project” conference organized by the Rev. Jesse Jackson’s Rainbow/PUSH Coalition. He characterized the effort as a major turnaround, and criticized the previous administration as failing to scrutinize lending practices amid the subprime mortgage boom.

While past lending discrimination cases primarily focused on “redlining” — a bank’s refusal to lend to qualified borrowers in minority areas — the new push will instead center on a more recent phenomenon critics have called “reverse redlining.”

In reverse redlining, a mortgage brokerage or bank systematically singles out minority neighborhoods for loans with inferior terms like high up-front fees, high interest rates and lax underwriting practices. Because the original lender would typically resell such a loan after collecting its fees, it did not care about the risk of foreclosure.

It is a rarely used theory, and it carries political risks. Some critics have contended that government rules pushing banks to lend to minority and low-income borrowers contributed to the financial meltdown. The campaign could rekindle that debate.

“They encourage lenders to make risky loans for reasons such as diversity, and then when lenders have a problem because they made too many risky loans, they condemn them for that,” said Ernest Istook, a fellow at the conservative Heritage Foundation and a former Republican congressman from Oklahoma.

Still, Mr. Istook emphasized that he was “not defending anybody who engages in wrongful redlining practices.”

A representative of the Mortgage Bankers Association, the lobbying arm of the real estate finance industry, did not respond to a request for comment.

Under federal civil rights laws, a lending practice is illegal if it has a disparate impact on minority borrowers, and the Obama administration is signaling that it intends to make the enforcing of fair lending laws a signature policy push in 2010.

The division has already opened 38 investigations into accusations of lending discrimination. Under federal lending laws, it can seek compensation for borrowers who were victimized by any illegal conduct, as well as changes in a lender’s practices.

John Relman, a housing lawyer, said there was plenty of evidence that some banks violated fair housing laws during the subprime boom.

Mr. Relman has helped the Cities of Baltimore and Memphis sue Wells Fargo over the costs taxpayers incurred because of foreclosures. As part of those lawsuits, he obtained affidavits from former Wells Fargo loan officers who said the bank had systematically singled out minority borrowers for high-interest, high-fee mortgages, bypassing its own underwriting rules. The State of Illinois has also sued the bank.

Wells Fargo has denied any wrongdoing. Last week, a judge dismissed Baltimore’s lawsuit, saying there were too many other causes of the damage to inner-city neighborhoods to blame the bank. Mr. Relman said the city intended to file a new complaint that focused more narrowly on recouping costs associated with specific properties.

But it is much easier for the federal government to sue banks like Wells Fargo. Mr. Relman said he hoped the Justice Department decided to join the cases.

“Not only would we welcome them; we encourage them to get involved,” Mr. Relman said. “It’s long overdue.”

Mr. Perez has hired Eric Halperin as a special counsel for fair lending. Mr. Halperin, a career lawyer in the division from 1998 to 2004, is currently the Washington director and head litigator for the Center for Responsible Lending, a nonprofit group that focuses on financial products it deems predatory.

The division has also gained access to data the Treasury Department is collecting from banks about loan modifications for people seeking to avoid foreclosure. It intends to search for signs of any disparate impact on minorities.

The Justice Department is also working with several state attorneys general who have taken an interest in bringing potential lawsuits over banks’ subprime lending practices.

Richard Cordray, the attorney general of Ohio, said federal and state officials were sharing information and helping one other develop potential legal theories about how to go after reverse redlining.

“We are looking at a common problem and a common pattern to determine what can be done about it,” Mr. Cordray said.

[Crafty_Dog]

Well, in my opinion this is exactly the sort of liberal fascist drivel that contributed so much to the housing bubble to begin with.

[G M]

http://hotair.com/archives/2010/01/15/video-moral-hazard-and-the-root-of-the-financial-collapse/

Moral hazard and economics 101.

[Crafty_Dog]

Goodness no!

I was referring to the piece that I posted. 

Sorry for the confusion.

[Crafty_Dog]

I saw a seemingly serious conversation on the CNN biz show this morning (including with Nobel laureate Stiglitz(sp?) that the Fed is scheduled to stop buying mortgages in March.  Not sure I got the details right, but it seems like gravity is about to assert itself , , , ?

[Crafty_Dog]

By DAVID STREITFELD
Published: February 2, 2010
In 2006, Benjamin Koellmann bought a condominium in Miami Beach. By his
calculation, it will be about the year 2025 before he can sell his modest
home for what he paid. Or maybe 2040.


Benjamin Koellmann paid $215,000 for his apartment in Miami Beach in 2006,
but now units are selling in foreclosure for $90,000. “There is no financial
sense in staying,” he said.

New research suggests that when a home’s value falls below 75 percent of the
amount owed on the mortgage, the owner starts to think hard about reneging
on a home loan.

“People like me are beginning to feel like suckers,” Mr. Koellmann said.
“Why not let it go in default and rent a better place for less?”

After three years of plunging real estate values, after the bailouts of the
bankers and the revival of their million-dollar bonuses, after the Obama
administration’s loan modification plan raised the expectations of many but
satisfied only a few, a large group of distressed homeowners is wondering
the same thing.   New research suggests that when a home’s value falls below
75 percent of the amount owed on the mortgage, the owner starts to think
hard about walking away, even if he or she has the money to keep paying.  In
a situation without precedent in the modern era, millions of Americans are
in this bleak position. Whether, or how, to help them is one of the biggest
questions the Obama administration confronts as it seeks a housing policy
that would contribute to the economic recovery.

“We haven’t yet found a way of dealing with this that would, we think, be
practical on a large scale,” the assistant Treasury secretary for financial
stability, Herbert M. Allison Jr., said in a recent briefing.

The number of Americans who owed more than their homes were worth was
virtually nil when the real estate collapse began in mid-2006, but by the
third quarter of 2009, an estimated 4.5 million homeowners had reached the
critical threshold, with their home’s value dropping below 75 percent of the
mortgage balance.  They are stretched, aggrieved and restless. With figures
released last week showing that the real estate market was stalling again,
their numbers are now projected to climb to a peak of 5.1 million by June —
about 10 percent of all Americans with mortgages.

“We’re now at the point of maximum vulnerability,” said Sam Khater, a senior
economist with First American CoreLogic, the firm that conducted the recent
research. “People’s emotional attachment to their property is melting into
the air.”

Suggestions that people would be wise to renege on their home loans are at
least a couple of years old, but they are turning into a full-throated
barrage. Bloggers were quick to note recently that landlords of an
11,000-unit residential complex in Manhattan showed no hesitation, or shame,
in walking away from their deeply underwater investment.

“Since the beginning of December, I’ve advised 60 people to walk away,” said
Steve Walsh, a mortgage broker in Scottsdale, Ariz. “Everyone has lost hope.
They don’t qualify for modifications, and being on the hamster wheel of
paying for a property that is not worth it gets so old.”

Mr. Walsh is taking his own advice, recently defaulting on a rental property
he owns. “The sun will come up tomorrow,” he said.

The difference between letting your house go to foreclosure because you are
out of money and purposefully defaulting on a mortgage to save money can be
murky. But a growing body of research indicates that significant numbers of
borrowers are declining to live under what some waggishly call “house
arrest.”  Using credit bureau data, consultants at Oliver Wyman calculated
how many borrowers went straight from being current on their mortgage to
default, rather than making spotty payments. They also weeded out owners
having trouble paying other bills. Their estimate was that about 17 percent
of owners defaulting in 2008, or 588,000 people, chose that option as a
strategic calculation.  Some experts argue that walking away from mortgages
is more discussed than done. People hate moving; their children attend the
neighborhood school; they do not want to think of themselves as skipping out
on a debt. Doubters cite a Federal Reserve study using historical data from
Massachusetts that concludes there were relatively few walk-aways during the
1991 bust.

The United States Treasury falls into the skeptical camp.

“The overwhelming bulk of people who have negative equity stay in their
homes and keep paying,” said Michael S. Barr, assistant Treasury secretary
for financial institutions.

It would cost about $745 billion, slightly more than the size of the
original 2008 bank bailout, to restore all underwater borrowers to the point
where they were breaking even, according to First American.   Using
government money to do that would be seen as unfair by many taxpayers, Mr.
Barr said. On the other hand, doing nothing about underwater mortgages could
encourage more walk-aways, dealing another blow to a fragile economy.

“It’s not an easy area,” he said.

Walking away — also called “jingle mail,” because of the notion that
homeowners just mail their keys to the bank, setting off foreclosure
proceedings — began in the Southwest during the 1980s oil collapse, though
it has never been clear how widespread it was.

In the current bust, lenders first noticed something strange after real
estate prices had fallen about 10 percent.

An executive with Wachovia, one of the country’s biggest and most aggressive
lenders, said during a conference call in January 2008 that the bank was
bewildered by customers who had “the capacity to pay, but have basically
just decided not to.” (Wachovia failed nine months later and was bought by
Wells Fargo. )

=========

(Page 2 of 2)



With prices now down by about 30 percent, underwater borrowers fall into two
groups. Some have owned their homes for many years and got in trouble
because they used the house as a cash machine. Others, like Mr. Koellmann in
Miami Beach, made only one mistake: they bought as the boom was cresting.

It was April 2006, a moment when the perpetual rise of real estate was
considered practically a law of physics. Mr. Koellmann was 23, a management
consultant new to Miami.
Financially cautious by nature, he bought a small, plain one-bedroom
apartment for $215,000, much less than his agent told him he could afford.
He put down 20 percent and received a fixed-rate loan from Countrywide
Financial.

Not quite four years later, apartments in the building are selling in
foreclosure for $90,000.

“There is no financial sense in staying,” Mr. Koellmann said. With the
$1,500 he is paying each month for his mortgage, taxes and insurance, he
could rent a nicer place on the beach, one with a gym, security and valet
parking.

Walking away, he knows, is not without peril. At minimum, it would ruin his
credit score. Mr. Koellmann would like to attend graduate school. If an
admission dean sees a dismal credit record, would that count against him?
How about a new employer?

Most of all, though, he struggles with the ethical question.

“I took a loan on an asset that I didn’t see was overvalued,” he said. “As
much as I would like my bank to pay for that mistake, why should it?”

That is an attitude Wall Street would like to encourage. David Rosenberg,
the chief economist of the investment firm Gluskin Sheff, wrote recently
that borrowers were not victims. They “signed contracts, and as adults
should also be held accountable,” he wrote.

Of course, this is not necessarily how Wall Street itself behaves, as
demonstrated by the case of Stuyvesant Town and Peter Cooper Village. An
investment group led by the real estate giant Tishman Speyer recently
defaulted on $4.4 billion in debt that it had used to buy the two apartment
developments in Manhattan, handing the properties back to the lenders.

Moreover, during the boom, it was the banks that helped drive prices to
unrealistic levels by lowering credit standards and unleashing a wave of
speculative housing demand.

Mr. Koellmann applied last fall to Bank of America for a modification,
noting that his income had slipped. But the lender came back a few weeks ago
with a plan that added more restrictive terms while keeping the payments
about the same.

“That may have been the last straw,” Mr. Koellmann said.

Guy D. Cecala, publisher of Inside Mortgage Finance magazine, says he does
not hear much sympathy from lenders for their underwater customers.

“The banks tell me that a lot of people who are complaining were the ones
who refinanced and took all the equity out any time there was any
appreciation,” he said. “The banks are damned if they will help.”

Joe Figliola has heard that message. He bought his house in Elgin, Ill., in
2004, then refinanced twice to get better terms. He pulled out a little
money both times to cover the closing costs and other expenses. Now his
place is underwater while his salary as circulation manager for the local
newspaper has been cut.

“It doesn’t seem right that I can rent a place somewhere for half of what I’m
paying,” he said. “I told my bank, ‘Just take a little bite out of what I
owe. That would ease me up. Isn’t that why the president gave you all this
money?’ ”

Bank of America did not agree, so Mr. Figliola, who is 48, sees no recourse
other than walking away. “I don’t believe this is the right thing to do,” he
said, “but I’ve got to survive.”

[Crafty_Dog]

Just flagging the issue, NOT agreeing with the analysis herein.
=====================

http://www.bloomberg.com/apps/news?pid=20601109&sid=aFCB.UOdUErg&pos=15#
On the Edge’ Banks Face Writedowns on FDIC Auctions (Update1)

By James Sterngold

March 8 (Bloomberg) -- A Federal Deposit Insurance Corp. plan to auction more than $1 billion in assets seized from failed banks next month, including a loan to build a W Hotel in Atlanta, may trigger writedowns that weaken lenders nationwide.

Almost half of the loans were originated by Silverton Bank N.A., whose collapse last May was the biggest in Georgia history. Community banks that joined Silverton in providing $80 million for the 237-room hotel and condominium complex, as well as backing for 39 other projects, could be forced to write down their stakes to reflect sale prices.

The auctions may have wider repercussions. Of the $41 billion in assets seized from failed banks held by the FDIC as of the end of January, $15.6 billion are real estate loans and about 4 percent of those involve participations by other lenders, according to agency spokesman Andrew Gray.

“These banks can’t believe that the regulator they pay to protect them is going to sell these loans to someone who can flip them and cause them serious losses,” said Robert Reynolds, a lawyer at Reynolds Reynolds & Duncan LLC in Tuscaloosa, Alabama, who represents 25 lenders that took part in financing the W Hotel. “Our banks just cannot believe they’re being treated in a way that ultimately hurts the FDIC’s insurance fund, because some of them are right on the edge.”

Bank Failures

A total of 140 banks failed last year, and FDIC Chairman Sheila Bair said the number may be higher this year. It stands at 26 as of March 6. The agency said on Feb. 23 that 702 banks were on its “problem” list as of Dec. 31, up from 552 at the end of the third quarter. The FDIC’s insurance fund had a deficit of $20.9 billion at the end of the year.

“This whole thing is a mess waiting to happen across the country,” said Geoffrey Miller, a professor of securities law at New York University and director of the Center for the Study of Central Banks and Financial Institutions.

“Unlike the subprime mortgage problems, which hit mostly bigger financial institutions, the commercial real estate crisis is going to hit mostly smaller and regional banks,” Miller said. “It was common for them to make these loans and buy participations. It’s a systemic problem that the FDIC has to deal with.”

‘Maximize’ Recovery

That view was echoed by John J. Collins, president of Community Bankers of Washington in Lakewood, Washington. Some banks in his state have expressed concern that they may have to take writedowns as a result of the FDIC sale of seized loans in which they participated, he said.

“We have a number of banks teetering on the edge, and we don’t need this problem,” Collins said in an interview.

The FDIC is “required by statute to maximize its recovery on receivership assets,” Greg Hernandez, an agency spokesman, said in an e-mail. “This is achieved through a broad, competitive bid process.”

The agency is also trying to encourage public retirement funds that control more than $2 trillion to buy all or part of failed lenders, according to people briefed on the matter.

A $416 million package of Silverton assets being auctioned for the FDIC by Deutsche Bank AG includes $254 million of loans for commercial real estate projects such as the W Hotel in which the bank sold participations, according to Deutsche Bank’s announcement of the sale. They range from providing $752,000 in financing for convenience stores in Los Angeles to $46 million for a Le Meridien Hotel in Philadelphia. Bids are due April 12.

The FDIC will entertain offers for individual loans or the entire Silverton portfolio, retaining a 60 percent interest to benefit from future profits, Hernandez said.

W Hotel

The agency is separately auctioning $610.5 million of overdue loans seized from failed U.S. lenders, including $85.3 million in Silverton assets and $220.2 million issued by New Frontier Bank in Greeley, Colorado. That sale is being handled by New York-based Mission Capital Advisors LLC. The deadline for bids is April 6.

The loan for construction of the W Hotel in downtown Atlanta was made in April 2008, a month after the collapse of Bear Stearns Cos., according to Reynolds. The developer of the property is Atlanta-based Barry Real Estate Cos., which owns commercial projects in Atlanta, Dallas, Orlando, Florida and Birmingham, Alabama.

One Condo Sale

The hotel, managed by Starwood Hotels & Resorts Worldwide Inc., opened in January 2009. It offers amenities such as a Bliss Spa and a service for obtaining skybox seats at Atlanta Braves baseball games.

Silverton’s Specialty Finance Group LLC, which made the loan, notified the developer that it was in default, according to a letter dated April 16.

The hotel is operating at “close to 60 percent” occupancy, said Hal Barry, chairman of Barry Real Estate. The occupancy rate for luxury hotels nationwide in the fourth quarter of last year was 60.6 percent, according to Smith Travel Research Inc. in Hendersonville, Tennessee. There are also 76 condominiums in the complex, of which one has sold, he said. He declined to comment about the status of the loan.

A sale of Silverton’s $23 million share of the financing at half its book value could force participating banks to take more than $30 million in writedowns, Reynolds said.

The sale of loans from failed banks in 2009 brought on average 43 percent of their book value, according to an FDIC summary. Non-performing loans, those on which the borrower has defaulted or there is little prospect of repayment, were sold for 26 percent of their book value on average.

Servicing Rights

Reynolds has proposed that the FDIC sell Silverton’s interest in the project separately from its lead role in servicing the loan. That would enable the participating banks to buy the servicing rights and seek a long-term workout, avoiding any immediate writedowns. Selling the servicing rights along with Silverton’s portion of the loan, which give the owner the ability to restructure or foreclose on a loan, could encourage short-term investors, Reynolds said.

If the loan is sold to a buyer who restructures it at less than book value or forecloses on the property, participating banks would have to write down their stakes, said Russell Mallett, a partner at PricewaterhouseCoopers LLP in New York who specializes in bank accounting. Absent a restructuring, banks have flexibility in how they value loans, he said.

“This is not a perfect real estate development, but it could work its way out of its problems if they get more funding and we’re patient,” said Ralph Banks, executive vice president of Merchants & Farmers Bank of Greene County in Eutaw, Alabama, which owns less than $1 million of the loan.

‘Decreases’ Value

That view was supported by executives at two other lenders that bought participations who asked not to be identified because their banks’ roles as owners of the W Hotel loan haven’t been disclosed.

The FDIC has a policy of not splitting servicing rights from loan ownership because it “decreases the value of those assets,” said Hernandez, the agency spokesman.

Reynolds said the banks he represents may bid for Silverton’s share of the W Hotel loan if they can come up with the capital in order to stave off writedowns. Some of the lenders are already in financial trouble, he said, declining to identify them. One that participated in the loan, Florida Community Bank in Immokalee, Florida, failed on Jan. 29.

‘Deal With Themselves’

Silverton, a wholesale bank based in Atlanta with no consumer operations, was owned and overseen by more than 400 community lenders in the region. It was founded in 1986 and provided banking services, including wire-transfer systems, bond trading and credit-card operations, to about 1,400 institutions in 44 states.

Reynolds said the banks that owned Silverton, some of which had representatives on its board, never imagined it would fail.

“My clients had a long, successful record with Silverton,” Reynolds said. “When they signed their participations, they felt they were signing a deal with themselves because they all owned the bank. We all thought this was a way to diversify risk.”

The bank’s troubles began in early 2007, when it changed from a state to a national charter so it could accelerate its growth, according to a report by the Treasury Department’s Office of Inspector General, which reviews failures of banks regulated by the Office of the Comptroller of the Currency.

Defaults Double

Silverton’s commercial real estate lending rose to $1.2 billion at the end of 2008 from $681 million at the end of 2006, the report said. The bank had $4.1 billion in assets when it failed last year, and the FDIC said the closing will cost its insurance fund $1.3 billion.

“The board and management either chose to ignore or failed to acknowledge the indicators of a declining real estate market,” the inspector general’s report said.

Real estate loans at U.S. banks that are at least 90 days overdue or that are expected to default almost doubled in 12 months to 7.1 percent, according to December FDIC data. Non- performing loans for construction and development rose to 16 percent from 8.6 percent.

“This is a situation the FDIC is going to face more, since the number of bank failures is going up,” said Gerard Cassidy, an analyst at RBC Capital Markets in Portland, Maine. “The FDIC is not in the business of managing loans, so they do have to sell them. But they also have to look at the bigger picture and take a global approach by liquidating those assets without hurting the banks that bought participations.”

[Crafty_Dog]

Foreclosures Are Rising
By: Diana Olick
The new foreclosure wave is here.

Yes, banks are ramping up loan modifications and ramping up short sales and ramping up deeds in lieu of foreclosure, but the plain fact is that as the systems are oiled, the loans are moving through faster, and the pig in the python is showing its face.

We won't get the numbers until next week, but sources tell me they will likely be a new monthly record. Tens of thousands of loans have been hitting the "notice of trustee sale" bin, and that means they are coming to foreclosure.  The actual foreclosure numbers have been down recently because of all the modification efforts, but as we see more loans not qualifying for modifications and more loans defaulting on modifications, the foreclosure numbers rise.

And this is just the beginning.

All the uniform policies and practices that the government has put in place, whether on modifications or short sales, will quicken the process. Foreclosures, which can now take 2 years plus to complete, will happen in less than a year, start to finish.

Clearly the Administration knew of the impending rise in foreclosures, as it revamped its modification, refinance and short sale programs last month, increasing incentives all around and pushing for principal write down. The big question of course is how will the new wave affect home prices, especially in the hardest hit markets.


I pushed Fannie Mae's chief economist Doug Duncan on this in an interview today on the mortgage giant's new National Housing Survey. He cited the over 5 million mortgages out there that are seriously delinquent, and said that while the 30-day delinquencies seem to have peaked, "certainly some of the foreclosure backlogs are working their way through the system at this point." He also said home prices will dip again before hitting bottom later this year.

Yesterday we saw a big bump in the Realtors' Pending Home Sales Index, but my sources tell me that was largely driven by contracts on short sales, which have a far lower rate of closing than regular sale contracts. Estimates are that only about 35 percent of short sale contracts go to closing versus 80 percent of conventional sale contracts.


The home buyer tax credit deadline is 24 days away, and that is pushing some of the numbers up, but not as much as some had hoped.

Credit Suisse's Dan Oppenheim noted an uptick in buyer traffic in March thanks to the credit, but his survey of real estate agents found, "buyers remain hesitant due to employment concerns. Most of the demand occurred at the low-end of the market."
http://www.cnbc.com/id/36195838

[DougMacG]

Posting about Justice Stevens elsewhere I was reminded again about the Kelo decision where the government gets to decide who owns YOUR house and I noticed that the timing of that decision coincides with the peak of the housing market.  It's not that people don't still need homes or want to own their own and make them nice, it's just that the dream of paying off your mortgages and having 100% control over your small piece of America for a lifetime (and pass it on to your heirs) has became a farce.  Your rights as what we used to call the property owner don't extend much further than having your name appear as 'taxpayer' on the next property tax assessment.

People kept putting large amounts borrowed money into homes but were less and less motivated to invest very much of their own, which happened to make the market less and less stable prior to collapse.

[Crafty_Dog]

By PETER J. WALLISON
Now that nearly all the TARP funds used to bail out Wall Street banks have been repaid, the government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac stand out as the source of the greatest taxpayer losses.

The Congressional Budget Office has estimated that, in the wake of the housing bubble and the unprecedented deflation in housing values that resulted, the government's cost to bail out Fannie and Freddie will eventually reach $381 billion. That estimate may be too optimistic.

Last Christmas Eve, Treasury removed the $400 billion cap on what the government might be required to invest in these two GSEs in the future, and this may tell the real story about the cost to taxpayers. In typical Washington fashion, everyone has amnesia about how this disaster occurred.

The story is all too familiar. Politicians in positions of authority today had an opportunity to prevent this fiasco but did nothing. Now—in the name of the taxpayers—they want more power, but they have never been called to account for their earlier failings.

One chapter in this story took place in July 2005, when the Senate Banking Committee, then controlled by the Republicans, adopted tough regulatory legislation for the GSEs on a party-line vote—all Republicans in favor, all Democrats opposed. The bill would have established a new regulator for Fannie and Freddie and given it authority to ensure that they maintained adequate capital, properly managed their interest rate risk, had adequate liquidity and reserves, and controlled their asset and investment portfolio growth.

These authorities were necessary to control the GSEs' risk-taking, but opposition by Fannie and Freddie—then the most politically powerful firms in the country—had consistently prevented reform.

The date of the Senate Banking Committee's action is important. It was in 2005 that the GSEs—which had been acquiring increasing numbers of subprime and Alt-A loans for many years in order to meet their HUD-imposed affordable housing requirements—accelerated the purchases that led to their 2008 insolvency. If legislation along the lines of the Senate committee's bill had been enacted in that year, many if not all the losses that Fannie and Freddie have suffered, and will suffer in the future, might have been avoided.

Why was there no action in the full Senate? As most Americans know today, it takes 60 votes to cut off debate in the Senate, and the Republicans had only 55. To close debate and proceed to the enactment of the committee-passed bill, the Republicans needed five Democrats to vote with them. But in a 45 member Democratic caucus that included Barack Obama and the current Senate Banking Chairman Christopher Dodd (D., Conn.), these votes could not be found.

Recently, President Obama has taken to accusing others of representing "special interests." In an April radio address he stated that his financial regulatory proposals were struggling in the Senate because "the financial industry and its powerful lobby have opposed modest safeguards against the kinds of reckless risks and bad practices that led to this very crisis."

He should know. As a senator, he was the third largest recipient of campaign contributions from Fannie Mae and Freddie Mac, behind only Sens. Chris Dodd and John Kerry.

With hypocrisy like this at the top, is it any wonder that nearly 80% of Americans, according to new Pew polling, don't trust the federal government or its ability to solve the country's problems?

Mr. Wallison is a senior fellow at the American Enterprise Institute.

[Crafty_Dog]

A friend writes:

I am not claiming the absence of fraud in the origination of mortgages.  I am talking about the impact of mortgage securities and derivatives of mortgage securities upon the balance sheets of deposit banks and investment banks.  Also, I am talking about the creation and sale of these securities and derivative securities by investment banks to other institutional investors.

 

As the real estate boom progressed, banks and mortgage companies originated more and more bad mortgage loans.  These loans continued to be securitized along with the good loans that were originated at the same time.  Even though these mortgage securities contained the bad loans, federal government approved credit rating agencies continued to rate these securities as AAA and AA debt.  Why?  Mainly because of flawed risk models that ignored the individual components of the mortgage security and focused upon quantitative analyses of probable default rates.  These models underestimated the probability and the size of the eventual default rates.

 

The Basel accords encouraged deposit banks and investment banks to invest their own capital into low risk assets.  They also encouraged the same institutions to rely upon the government approved ratings agencies to determine the risk of their assets.  Why?  Because the banks could then show their regulators that government regulated third parties without any financial interest in the bank had determined the riskiness of their assets.

 

Why was there a sudden demand by institutions and people to own mortgage securities?  Simply, it was the low interest rate environment created by the regulators of the deposit banks.  Everyone from Lehman to my parents wanted higher interest.  Mortgages were safe because real estate never went down in value.  Right?

 

So, then, let’s address David’s original complaint.  It focused upon the creators and sellers of the mortgage securities and the derivatives of those securities.  Let’s assume David’s opinion is entirely true.  Still, the investment banks and securities firms operate in a highly regulated environment.  They are self-regulated by FINRA.  In turn, the SEC oversees and must approve every FINRA regulation that is implemented.  Moreover, the SEC itself directly regulates the investment advisory business at these big investment banks, hedge funds at and independent of these banks, and the securities themselves.

 

The Federal Reserve, the OCC, the States’ banking regulators, and the FDIC all regulate and oversee the deposit banks.  Their examiners obviously saw that these banks owned growing amounts of mortgage securities on their balance sheets.  None of these regulators thought to ask these banks why they owned mortgages originated at other banks and not their own.  Why?  Because all of these securities were comprised of slices of lots of mortgages thereby spreading the risk even better than keeping one’s own mortgages plus the regulated ratings agencies all said that this paper was rated AAA and AA.  Diversification.  Ratings.

 

The reason that internal “whistleblowers” (and I use that term loosely) like Mr. Lee were ignored was simply that their employers owned stuff that was rated investment grade and that the employers had bought into the flawed risk model.  Government approved regulators had also approved the risk models.  So had the ratings agencies. 

 

The only effective risk management came from the short sellers like Paulson.  They were the only people that actually looked into the individual mortgage components of each security and derivative.  Also, they had studied the residential and commercial real estate markets and had concerns about another cycle of oversupply.  But they needed investment vehicles through which they could invest against mortgage securities according to their analyses.  Hence, the synthetic CDO.  But since the synthetic CDO is also a security, it, too, is regulated by the SEC.

 

So, the solution proposed by the political class is to create more of the same type of regulatory institutions that have missed the excesses of every investment and credit cycle since their creation.  Yep, next time, it will be different.  Right.  Like Natalie Wood’s character in Miracle on 34th Street, “I believe.  I believe.  I believe …”

[DougMacG]

"because of flawed risk models that ignored the individual components of the mortgage security and focused upon quantitative analyses of probable default rates.  These models underestimated the probability and the size of the eventual default rates."

I agree with what he writes and that is only part of the story.  He is not denying fraud, just saying that plenty more went wrong.  But the whole program of trying to force money into neighborhoods without sound lending fundamentals was a fraud in itself, an invitation for worse fraud in the field, and the whole ratings debacle was a fraud.  Those of in the neighborhoods watched it happen and those who watched the Fannie Mae-Freddie Mac Oversight Hearings watched it happen.  Billions or trillions in fraud, under our nose, without consequence.

Home lending is a 3-legged stool that collapses when you remove any one of the legs: a) creditworthiness of the borrower, b) income of the borrower and c) the ratio of real equity to real value in the asset. If a solid income earner with a history of paying his/her bills saves up and pays 10-20% for a down payment and borrows less than a third of his/her income for housing expense, then that loan has normal chance of default which I think is between 1 and 2% and the loss to the mortgage company is negligible.

How can it be that we chopped out the legs of the stool on lending fundamentals and then predict that default rates will remain low and constant?  That is beyond incompetence.  There should be consequence.

How could we not know in a highly leveraged, speculated and overpriced market that there would be a correction and that the higher the market went the harder it would fall?  How could we think that choosing an anti-growth agenda in November 2006 to take unemployment from 4.9 to 10.3% would not put millions of people without savings out of their house payment?  How could we not know that stricter use of 'mark to market' rules even for loans that are not in default would exaggerate the collapse in values of the portfolios?

For all we have learned, what are we doing now?  Increasing the federal role in mortgage lending from 90% to 100% and continuing to flood FREE MONEY into false housing values with the extended homebuyer credit of thousands of dollars to anyone, paying people to move instead of staying put.  Looks like a continuing recipe for self-destruction to me.

I know areas of Minneapolis where the whole block got the funny loans and the whole block went to foreclosure while none of those lenders, borrowers, originators, realtors or appraisers have been prosecuted for organized fraud crimes. This foreclosure map of one side of one relatively prosperous city, Minneapolis, is a must see IMO!  http://ww2.startribune.com/projects/foreclosures/northminneapolis.html

How could a financial rating service or a government oversight agency not  see this coming and still draw a salary?  

[Crafty_Dog]

Additional comments from my friend:

I am not beating the drum for the ratings agencies to be “the responsible party”.  I am merely pointing out that the ratings agencies were an important part of the entire regulated system.  The regulatory system encouraged reliance upon the evaluations of the agencies.

 

As the 1990’s progressed, purchasers of credit securities wanted higher yields than government bonds and bank deposit interest were providing.  Mortgage securities appeared to be the right answer to this market demand.  Conventional wisdom held that real estate value would remain relatively stable.  Default rates were low and predictable.  In fact, prepayment was thought to be the biggest risk to an MBS holder.  Yields were better than traditionally safe investments.  Prepayment and default risk could be minimized by spreading these risks across large pools of mortgages.  The largest issuers of MBS were Fannie Mae and Freddie Mac, both of which possessed the undeclared backing of the federal government.

 

As interest rates remained low in this decade, more and more investors flocked to the higher relative yields of the MBS.  This led Wall Street to create derivatives so that large holders of MBS could hedge their risk.  In this environment, there were likely sales abuses.  However, Wall Street did not cause large numbers of sophisticated and unsophisticated investors to buy mortgage debt and the derivatives of mortgage debt.  Higher yield combined with apparent relative safety caused the demand for these securities to skyrocket.

 

The systemic failure in this area occurred because the assumptions in the generally accepted risk models failed.  The regulators and Wall Street all accepted these assumptions.  Buyers of the debt securities accepted these assumptions.  When the risk model failed, owners of these securities wanted to know the specific default risk they faced in each mortgage security that they owned.  That specific risk was not easily determinable because the securities themselves were complicated.  If someone owned a derivative, they needed first to learn the identities of the actual mortgage securities that the derivative concerned.  Then, they needed to determine the state of the actual mortgages covered by the security referenced by the derivative.  Supply flooded the secondary credit markets and bids dried up because potential buyers could not easily determine the default risk in any security that had been offered.

 

Most everyone in most mortgage securities transactions believed in the same risk models.  The regulators believed in the same risk models.  The rating agencies believed in the same risk models.  The Wall Street firms that made markets, that bought, and that sold these securities believed in the same risk models.  Only a few short sellers using credit default swaps began to doubt those models.

 

Without the demand for higher yields and without the assumption that mortgage securities were almost as safe as US government debt, capital would not have flowed into mortgage securities.  Without that capital, New Century, WaMu, Countrywide and all of the other sub-prime and Alt-A blackguards would not have had possessed capital sufficient to make all of their bad loans.  This does not excuse the fraud at mortgage origination and any fraud committed by any Wall Street firm that marketed mortgage securities and their derivatives.  IMO, however, these things occurred because of the systemic failure; they did not cause the systemic failure.

[Crafty_Dog]

http://www.americanthinker.com/2010/05/has_the_sec_charged_the_right.html

[Crafty_Dog]

The President: Good evening. As we speak, our nation faces a multitude of challenges. At home, our top priority is to recover and rebuild from a recession. Abroad, our brave men and women in uniform are taking the fight to al Qaeda wherever it exists. Tonight, I want to speak with you about a battle we're waging against an enemy that is assaulting the very homes our citizens live in.

In September 2008, Fannie Mae and Freddie Mac imploded when their losses became unsustainable. In part because so many of our financial institutions relied on mortgage-backed securities based on bad loans, a housing crisis exploded into a financial crisis. And Americans continue to suffer from the effects. Unlike a hurricane or oil spill, where the damage is obvious to the eye, the damage wrought by Fannie and Freddie is much more insidious. As president, I have many smart people in my administration. But you do not need a Nobel Prize to know the problem here.

Fannie and Freddie bought mortgages offered by banks, which it then resold as mortgaged-backed securities. Banks liked this, because it meant more money to lend. In the name of enabling ever more Americans to own their homes, and encouraged by Congress, Fannie and Freddie expanded into ever more risky mortgages. In the end, these two companies helped send billions in loans to Americans who lacked the means to pay them back—while spreading risk throughout our financial system.

"I have met with moms and dads who bought modest houses that were within their means—and now find their tax dollars going to bail out neighbors who bought bigger houses not within their means."
.Think of these bad loans as a nasty leak polluting our financial system. While most other large financial firms either have failed or are now recovering, the damage caused by Fannie and Freddie continues largely unabated. The Congressional Budget Office says that plugging these bad loans has already cost taxpayers $145.9 billion, making them the single largest bailout of all.

Make no mistake: We will fight Fannie and Freddie with everything we have got for as long as it takes. We will make these two government-created companies pay for the damage they have caused. In fact, we are going to make Fannie and Freddie pay with their lives. Tonight I'd like to lay out our battle plan going forward:

First, the cleanup. For more than three decades there's been a culture of corruption in the regulatory oversight of these companies. I inherited a situation in which these firms lobbied and captured their regulators. Fannie and Freddie's privileged place in the market was sustained because they were a source of riches for Washington's Republican and Democratic establishments. Even today we see this oily alliance at work in the recent decision by Congress to exempt Fannie and Freddie from their financial reform bill.

Tonight I promise you: We will do whatever it takes, for as long as it takes, to change this.

One of the lessons we've learned from Fannie and Freddie is that you cannot combine private profit with taxpayers bearing risk. For decades we've propped up Fannie and Freddie's near monopoly. And for decades we have failed to face up to the fact that homeownership is not the best path for everyone. Time and again, reform has been blocked by former congressmen of both parties whom these companies hired to spread the money around and persuade Congress to back off.

So the second thing I will do is meet with the chairmen of Fannie Mae and Freddie Mac. And I will tell them the day of reckoning has come. We are going to break up Fannie and Freddie and end the privileges they enjoy from the government.


 
.You know, for generations, Americans have scrimped and saved to provide a better life for their families. That is now in jeopardy. I have met with moms and dads who bought modest houses that were within their means—and now find their tax dollars going to bail out neighbors who bought bigger houses not within their means. I have stood with retirees whose pensions have been devastated. And I have sat in the living rooms of families who now face foreclosure on homes they were falsely assured they could afford.

The sadness and the anger they feel is not just about the money they've lost. It's about a wrenching anxiety that their way of life may be lost. I am a prayerful man. But I do not believe that the American people should have to pray that their own government isn't undermining their homes, their savings, and the lives they have built for their families.

The financial crisis was not caused by Fannie and Freddie alone. But fixing them is essential. To this important task, we bring hope, which comes from the confidence that free men and women in a free economy will in the end make better decisions than any government. And tonight we revive that hope by delivering change to two of the fattest cats Washington has ever known.

Thank you, and may God bless America.

Write to MainStreet@wsj.com

[Crafty_Dog]

My savy friend Rick N. writes:

"I think that Nicholas Taleb had the best idea for working out the housing debacle.  The creditor banks must exchange the now unsecured part of their debt for equity in the devalued real estate.  Re-write the loan balances and payments based upon the current market values and let the owners and the banks share in any future gains in proportion to the amount of the write-down versus the original mortgage balance.  Don’t subsidize the banks with federal aid for the write-down but don’t require them to post more capital on their books.  Reduce the individuals’ cost bases to the new amount and let capital gains be calculated from the lower amount.  This should help reduce the demand for money and permit excess liquidity to be withdrawn over time."

Some other savy responses:
Rick,

The banks cannot write down the balances of the loans to current market values.  To do so would be to immediately cause reserve issues, and the FDIC would have to walk in and close the banks.  That would happen to every bank in the country.  You cannot just say that the banks don't have to worry about the lack of capital reserves in this case.  Heck, they are all insolvent anyway.

Then, the government would have to "bail-out" the banks with trillions of dollars of taxpayer money.  You know what that means.

What about all the homeowners who are not underwater with their properties?  Even in California, only 1 in 4 are underwater.  So, the other homeowners get screwed.

Then, what about the privately securitized loans?  That amounts to at least 40% of the loans.  Would they be required to do the same?  Write down to fair market value?  Then each investor would lose their money.  The remaining Trusts would become insolvent.

What about the Contracts Clause in the US Constitution?  A forced write-down by the government would be unconstitutional. 

One can simply say that this and that should be done, but the realities are much different.

The only way that the Housing Crisis will  end is for the government to get out of the way and let the foreclosures continue.  Let the private sector approach the banks, using people who understand how to save banks with new capitalization and then selling off the bad loans for 25-30 cents on the dollar.

Get it over fast, instead of this drip, drip, drip.
==========================


Remember the Chrysler Bond Holders got ¼ of what the unsecured debtor the UWA. Contracts schmontracts, this bunch of redistributionist doesn’t give a rat’s ass for contract law.

 

What about the Contracts Clause in the US Constitution?  A forced write-down by the government would be unconstitutional.

================

Then, the government would have to "bail-out" the banks with trillions of dollars of taxpayer money."


That may be what our idiots in Washington would do, but it's not what they "have" to do and not what they should do. According to Hussman's arithmetic, in most cases corporate bond holders wouldn't even be totally wiped out in a normal restructuring -- and depositors would lose nothing. This bailing out of bankers has been done not for the sake of "us," but for the sake of the bailed out bankers.


Pat, you are so right when you say this problem has to be resolved by the private sector. All of this interest rate manipulation, government purchases of Fannie and Fredie, leveraged bank purchases of Treasuries, federal guarantees of this and that ... it's all distorting pricing throughout the economy and wrecking havoc with the distribution of capital and the entire productive system. Nothing is going to work quite right until our government disengages itself in a significant way. If, instead, the government continues to double up on its bet we can start to worry about a serious calamity.


Rick, I don't much like Taleb's suggestions as you are presenting them simply because it is yet another "central planning" solution. If the banks can and want to renegotiate mortgages, they are free to do that in the context of free exchange -- we don't need some kind of national policy decision on that point. This whole debacle has been caused, from top to bottom, by bad ideas implemented by government.


To use Bass's tired cliche, everything the government and the Fed have done so far has only "kicked the problem down the road." Nothing is getting straightened out, in fact many problems are being exacerbated. Sure, some prices have adjusted in apparently the right direction (house prices have fallen, for example) but these new prices are determined by the myriad of distortional policies in place, not by free people entering into voluntary exchanges on unfettered markets.


Tom
===============

Neither Taleb nor I advocate a governmentally forced work-out.  It should be voluntary and done under the provisions of each contract that permit amendments with the written mutual consent of the parties.  Work-outs like this are done all of the time when debt is swapped for equity.  That does not violate the Constitution’s contract clause.  In fact, to the extent that government subsidies create a different incentive, one could argue that the subsidies themselves and the GSE’s themselves effectively violate the contracts clause.

 

The reserve issue is governmental regulation.  The equity in the secured assets provides an offset to the lost value of the loan.  And, what is the alternative?  Kicking the can further down the road?

Rick

PS: I’m curious about why every responder so far has assumed that Taleb’s proposed solution was “governmental” or “central planning.”  The only governmental involvement would be waivers by the banking regulators of any reserve capital requirements.  Everything else in the proposal is an appeal for a mutually agreed upon debt-for-equity swap between debtor and creditor as the best way for both parties to deleverage
===========

[G M]

http://www.msnbc.msn.com/id/38811725/ns/business-the_new_york_times

**Real estate as an investment is dead.**

[Crafty_Dog]

September 5, 2010
Housing Woes Bring New Cry: Let Market Fall
By DAVID STREITFELD

 
The unexpectedly deep plunge in home sales this summer is likely to force the Obama administration to choose between future homeowners and current ones, a predicament officials had been eager to avoid.

Over the last 18 months, the administration has rolled out just about every program it could think of to prop up the ailing housing market, using tax credits, mortgage modification programs, low interest rates, government-backed loans and other assistance intended to keep values up and delinquent borrowers out of foreclosure. The goal was to stabilize the market until a resurgent economy created new households that demanded places to live.

As the economy again sputters and potential buyers flee — July housing sales sank 26 percent from July 2009 — there is a growing sense of exhaustion with government intervention. Some economists and analysts are now urging a dose of shock therapy that would greatly shift the benefits to future homeowners: Let the housing market crash. When prices are lower, these experts argue, buyers will pour in, creating the elusive stability the government has spent billions upon billions trying to achieve.

“Housing needs to go back to reasonable levels,” said Anthony B. Sanders, a professor of real estate finance at George Mason University. “If we keep trying to stimulate the market, that’s the definition of insanity.”

The further the market descends, however, the more miserable one group — important both politically and economically — will be: the tens of millions of homeowners who have already seen their home values drop an average of 30 percent.
The poorer these owners feel, the less likely they will indulge in the sort of consumer spending the economy needs to recover. If they see an identical house down the street going for half what they owe, the temptation to default might be irresistible. That could make the market’s current malaise seem minor.

Caught in the middle is an administration that gambled on a recovery that is not happening.

“The administration made a bet that a rising economy would solve the housing problem and now they are out of chips,” said Howard Glaser, a former Clinton administration housing official with close ties to policy makers in the administration. “They are deeply worried and don’t really know what to do.”

That was clear last week, when the secretary of housing and urban development, Shaun Donovan, appeared to side with current homeowners, telling CNN the administration would “go everywhere we can” to make sure the slumping market recovers.  Mr. Donovan even opened the door to another housing tax credit like the one that expired last spring, which paid first-time buyers as much as $8,000 and buyers who were moving up $6,500. The cost to taxpayers was in the neighborhood of $30 billion, much of which went to people who would have bought anyway.   Administration press officers quickly backpedaled from Mr. Donovan’s comment, saying a revived credit was either highly unlikely or flat-out impossible. Mr. Donovan declined to be interviewed for this article. In a statement, a White House spokeswoman responded to questions about possible new stimulus measures by pointing to those already in the works.

“In the weeks ahead, we will focus on successfully getting off the ground programs we have recently announced,” the spokeswoman, Amy Brundage, said.

Among those initiatives are $3 billion to keep the unemployed from losing their homes and a refinancing program that will try to cut the mortgage balances of owners who owe more than their property is worth. A previous program with similar goals had limited success. If last year’s tax credit was supposed to be a bridge over a rough patch, it ended with a glimpse of the abyss. The average home now takes more than a year to sell. Add in the homes that are foreclosed but not yet for sale and the total is greater still.  Builders are in even worse shape. Sales of new homes are lower than in the depths of the recession of the early 1980s, when mortgage rates were double what they are now, unemployment was pervasive and the gloom was at least as thick.

The deteriorating circumstances have given a new voice to the “do nothing” chorus, whose members think the era of trying to buy stability while hoping the market will catch fire — called “extend and pretend” or “delay and pray” — has run its course.

“We have had enough artificial support and need to let the free market do its thing,” said the housing analyst Ivy Zelman.

Michael L. Moskowitz, president of Equity Now, a direct mortgage lender that operates in New York and seven other states, also advocates letting the market fall. “Prices are still artificially high,” he said. “The government is discriminating against the renters who are able to buy at $200,000 but can’t at $250,000.”

A small decline in home prices might not make too much of a difference to a slack economy. But an unchecked drop of 10 percent or more might prove entirely discouraging to the millions of owners just hanging on, especially those who bought in the last few years under the impression that a turnaround had already begun.

The government is on the hook for many of these mortgages, another reason policy makers have been aggressively seeking stability. What helped support the market last year could now cause it to crumble.  Since 2006, the Federal Housing Administration has insured millions of low down payment loans. During the first two years, officials concede, the credit quality of the borrowers was too low.

With little at stake and a queasy economy, buyers bailed: nearly 12 percent were delinquent after a year. Last fall, F.H.A. cash reserves fell below the Congressionally mandated minimum, and the agency had to shore up its finances.  Government-backed loans in 2009 went to buyers with higher credit scores. Yet the percentage of first-year defaults was still 5 percent, according to data from the research firm CoreLogic.

“These are at-risk buyers,” said Sam Khater, a CoreLogic economist. “They have very little equity, and that’s the largest predictor of default.”

This is the risk policy makers face. “If home prices begin to fall again with any serious velocity, borrowers may stay away in such numbers that the market never recovers,” said Mr. Glaser, a consultant whose clients include the National Association of Realtors.  Those sorts of worries have a few people from the world of finance suggesting that the administration should do much more, not less.

William H. Gross, managing director at Pimco, a giant manager of bond funds, has proposed the government refinance at lower rates millions of mortgages it owns or insures. Such a bold action, Mr. Gross said in a recent speech, would “provide a crucial stimulus of $50 to $60 billion in consumption,” as well as increase housing prices.

The idea has gained little traction. Instead, there is a sense that, even with much more modest notions, government intervention is not the answer. The National Association of Realtors, the driving force behind the credit last year, is not calling for a new round of stimulus.  Some members of the National Association of Home Builders say a new credit of $25,000 would raise demand but their chances of getting this through Congress are nonexistent.

“Our members are saying that if we can’t get a very large tax credit — one that really brings people off the bench — why use our political capital at all?” said David Crowe, the chief economist for the home builders.

That might give the Obama administration permission to take the risk of doing nothing.

[Crafty_Dog]

Talk about a financial scandal. A consumer borrows money to buy a house, doesn't make the mortgage payments, and then loses the house in foreclosure—only to learn that the wrong guy at the bank signed the foreclosure paperwork. Can you imagine? The affidavit was supposed to be signed by the nameless, faceless employee in the back office who reviewed the file, not the other nameless, faceless employee who sits in the front.

The result is the same, but politicians understand the pain that results when the anonymous paper pusher who kicks you out of your home is not the anonymous paper pusher who is supposed to kick you out of your home. Welcome to Washington's financial crisis of the week.

In the 23 states that require judicial foreclosures, lenders seeking to seize property from a delinquent borrower must file a summary judgment motion in court. Typically, this document must be signed in the presence of a notary by a "witness" who has reviewed the relevant documents and confirmed that the borrower is in default and the lender owns the mortgage.

View Full Image

Associated Press
 .Recently GMAC Mortgage, whose parent Ally Financial is majority-owned by the U.S. government, suspended foreclosures in those 23 states after acknowledging that in some cases notaries may not have been present and the signers may have relied upon others to review the documents instead of doing it themselves. Bank of America and J.P. Morgan Chase then halted their own foreclosures in those 23 states to ensure they are following the letter of the law, and yesterday BofA announced its moratorium is now nationwide.

We're not aware of a single case so far of a substantive error. Out of tens of thousands of potentially affected borrowers, we're still waiting for the first victim claiming that he was current on his mortgage when the bank seized the home. Even if such victims exist, the proper policy is to make them whole, not to let 100,000 other people keep homes for which they haven't paid.

In their zeal to find and prosecute the great bank defendant, state Attorneys General aren't waiting to see if anyone within their borders was actually harmed. In a civil suit, Ohio's Attorney General Richard Cordray has even charged an Ally employee with fraud for signing the documents without reading them. In a Journal interview, Mr. Cordray compared the employee to Nazis at Nuremberg who claimed they were just following orders.

As far as we know, House Speaker Nancy Pelosi hasn't compared any bank employees to Nazis, but this week she demanded an investigation by the Department of Justice. The next day Attorney General Eric Holder announced that his Financial Fraud Enforcement Task Force is examining the issue. But even if one believes this is more than a technicality, the issue is whether the banks violated state laws, not federal ones.

On Thursday, Senate Majority Leader Harry Reid jumped into the fray by demanding a halt to all foreclosures in Nevada, though Nevada is not one of the 23 states affected and therefore presents not even a theoretical violation of the law. The same day, Representative Edolphus Towns (D., N.Y.) demanded a national foreclosure moratorium, which Mr. Reid then endorsed on Friday. Even normally sober Republican Senator Richard Shelby has called for a federal probe of bank regulators.

Yes, the same crew (Mr. Shelby excepted) that ran roughshod over its own transparency rules—not to mention the established customs of the House and Senate—to restructure American medicine is now appalled that some paperwork at private businesses may have been incorrectly processed. To be clear, bank employees appear guilty of sloppy work, and problems in the back office should be corrected, but freezing activity in a $2.8 trillion financial market is the last thing this economy needs and is in no way proportional to the problems reported so far.

Now President Obama is refusing to sign a previously noncontroversial measure to have states recognize notarized documents from other states. Among other things, the bill would have streamlined the process of moving people out of homes they can't afford and therefore would have helped to allow housing markets to clear and begin to heal. Allowing supply to meet demand in housing must not be one of the "progressive agendas" that Mr. Obama recently told Rolling Stone he is committed to advancing.

If evidence emerges of policies or actions that wrongly threw people out of their homes, by all means investigate and prosecute violations of law. But allowing people to live in homes without paying for them is not cost-free. That cost will be borne directly by investors in mortgage-backed securities and mortgage servicing companies, and ultimately by American taxpayers, who now stand behind 90% of new mortgages, thanks to guarantees by Fannie Mae, Freddie Mac and the Federal Housing Administration.

The bigger damage here is to the housing market, which desperately needs to find a bottom by clearing excess inventory and working through foreclosures as rapidly as possible. The moratoriums further politicize the housing market and further delay a housing recovery. In an economy and a financial system engulfed in Washington-created uncertainty, the political class has decided to create still more.