Tag: Economics 101

The Huffington Post Investigation Fund (dot org) is reporting that major Wall Street Banksters and Hedge Funds are getting into the kind of get rich quick real estate scams you normally find in a late night infomercial.

This particular confidence game is to purchase the right to collect back taxes, fees, and liens from cash strapped local governments at discounts on the dollar and then sick their high retainer, temporarily idle, forclosure departments on the homeowners to run up fees, fines, and forclosures.

I’ll quote it as I would any article of similar length, they allow crossposting but the embed code violates too many rules.

The New Tax Man: Big Banks And Hedge Funds

By Fred Schulte and Ben Protess, Huffington Post Investigative Fund

First Posted: 10-18-10 08:28 AM Updated: 10-18-10 09:40 AM

Nearly a dozen major banks and hedge funds, anticipating quick profits from homeowners who fall behind on property taxes, are quietly plowing hundreds of millions of dollars into businesses that collect the debts, tack on escalating fees and threaten to foreclose on the homes of those who fail to pay.

…

In exchange for paying overdue real estate taxes, the investors gain legal powers from local governments to collect the debt and levy fees. At first, property owners may owe little more than a few hundred dollars, only to find their bills soaring into the thousands. In some jurisdictions, the new Wall Street tax collectors also chase debtors over other small bills, such as for water, sewer and sidewalk repair.

…

Years ago, the big banks left the buying of tax liens largely to local real estate specialists and small-time investors. These days, banks and hedge funds, stung by the failure of many speculative investments, see tax liens as a relatively safe option that can yield returns of around 7 percent.

Some banks also are packaging tax liens as securities – in a similar way to how unpaid home loans are securitized – and selling them to investors.

If mortgage holders fail to pay overdue taxes, an investor could waltz off with a home worth hundreds of thousands of dollars for the price of paying the owner’s tax bill. Most homeowners eventually pay their debt.

…

Some two dozen states and the District of Columbia allow tax sales, which spare the governments from added expenses of hiring their own debt collector, or foreclosing and becoming a landlord. Local governments generally require minimal identification – for instance, a Social Security number. They allow bidders to choose whatever names they wish, and don’t check to see if bidders are using multiple identities.

In the Middle Ages this was called Tax Farming.

What You Don’t Know about "Mortgagegate" Could Crush the U.S. Banking System

By Shah Gilani, Contributing Editor, Money Morning

October 15, 2010

(T)he odds that a financial tsunami will result from Mortgagegate are building each day. If this storm strikes with its full fury , it could be the kind of credit-crisis aftershock that undermines the tentative handhold that the U.S. recovery is so desperately clinging to.

…

Here’s the problem. In creating MERS, these institutions actually changed the land-title system that this country – for much of its history – has relied upon to determine legal ownership status of land titleholders.

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MERS is facing class-action lawsuits and civil racketeering suits around the country and their members are being individually named in all these suits. One suit alleges that MERS owes California a potential $60 billion to $120 billion in unpaid land-recording fees.

How Wall Street Hid Its Mortgage Mess

By WILLIAM D. COHAN, The New York Times

October 14, 2010, 7:30 pm

This is where things got interesting. Clayton provided the inquiry commission with documents that summarized its findings for the six quarters between January 2006 and June 2007, when mortgage-underwriting standards were arguably at their worst and the housing bubble was inflating rapidly. Of the 911,039 mortgages Clayton examined for its Wall Street clients – a sample of about 10 percent of the total mortgages that the banks intended to package into securities – only 54 percent were found to meet the underwriting guidelines. Standards deteriorated over time, with only 47 percent of the mortgages Clayton examined meeting the guidelines by the second quarter of 2007.

So, did Wall Street throw all those mortgages back into the pond as being too risky for securities they were going to sell to clients? Of course not – many were packaged right into their product. There were degrees of nefariousness: Some Wall Street firms were better about including higher-quality mortgages in their mortgage-backed securities than others. For instance, at Goldman Sachs, 77 percent of the nearly 112,000 mortgages reviewed met the guidelines, while at Citigroup only 58 percent did. At Lehman Brothers, which later filed for bankruptcy, 74 percent of the mortgages sampled and then packaged up as securities met underwriting guidelines.

In fact, the banks probably weren’t disappointed at all by the shaky status of many of these loans: in part because they could use the information that some of the mortgages were rotten to get a discount from the mortgage originators on the price paid for the entire portfolio. The people who should have been concerned were the investors who bought the securities from the Wall Street firms. But the amazing revelation of the Sacramento hearing was that the investment banks did not pass this very valuable information on to their customers.

The Mortgage Morass

By PAUL KRUGMAN, The New York Times

Published: October 14, 2010

Now an awful truth is becoming apparent: In many cases, the documentation doesn’t exist. In the frenzy of the bubble, much home lending was undertaken by fly-by-night companies trying to generate as much volume as possible. These loans were sold off to mortgage “trusts,” which, in turn, sliced and diced them into mortgage-backed securities. The trusts were legally required to obtain and hold the mortgage notes that specified the borrowers’ obligations. But it’s now apparent that such niceties were frequently neglected. And this means that many of the foreclosures now taking place are, in fact, illegal.

This is very, very bad. For one thing, it’s a near certainty that significant numbers of borrowers are being defrauded – charged fees they don’t actually owe, declared in default when, by the terms of their loan agreements, they aren’t.

Beyond that, if trusts can’t produce proof that they actually own the mortgages against which they have been selling claims, the sponsors of these trusts will face lawsuits from investors who bought these claims – claims that are now, in many cases, worth only a small fraction of their face value.

And who are these sponsors? Major financial institutions – the same institutions supposedly rescued by government programs last year. So the mortgage mess threatens to produce another financial crisis.

But always remember that as large as the problem is for the banksters your proximate problem is that you may not have clear title to your property if it’s registered with MERS and not the town, city, county, or state.

Atrios and some other people have been collecting a few links, the most recent of which are gratifyingly starting to realize the gravity of systemic Title Fraud to home owners everywhere.

Since almost everyone else does I’ll start off with the 5 part Rortybomb series-

• Foreclosure Fraud For Dummies, 1: The Chains and the Stakes
• Foreclosure Fraud For Dummies, 2: What is a Note, and Why is it So Important?
• Foreclosure Fraud For Dummies, 3: Why Are Servicers So Bad At Their Job?
• Foreclosure Fraud For Dummies, 4: How Could This Explode into a Systemic Crisis?
• Foreclosure Fraud For Dummies, 5: The Necessity of Government Action and Ways Out of The Crisis

This piece from Salon references some of the Rortybomb coverage (another piece by John Carney is frequently cited as a one piece introduction)-

Obama’s foreclosure nightmare

By Andrew Leonard, Salon.com, Tuesday, Oct 12, 2010 13:45 ET

But the key facts are these: In the process of making mortgage loans, transferring ownership of those loans,  slicing and dicing them into securities and, finally, initiating foreclosure proceedings on loans in default, banks, lenders and mortgage servicers engaged in illegal activity on a large scale. The legally mandated procedures put into place to ensure that no errors are ever made with respect to the transfer of property  simply weren’t followed. Key documents necessary to prove ownership — to prove that a bank, for example, has the legal right to begin foreclosure proceedings, cannot be located and may not even exist.

Whether you want to dismiss this debacle as a concatenation of paperwork errors made while seeking economies of scale, or out-and-out calculated fraud by the mortgage industry against homeowners, is in some ways an irrelevant game of semantics. When legally mandated procedures aren’t followed, courts get upset, investors start wondering if they’ve been sold a bill of goods, and the litigation floodgates fly open. Bank of America and GMAC and other lenders have declared their own foreclosure moratoriums because they have suddenly realized that they are looking at potentially devastating legal liabilities.

Progressives can be excused for feeling an almost unlimited sense of schadenfreude at the suddenly scrambling banks. For many people, on the left and right, there would be nothing more pleasurable than the sight of, say, Citigroup, bankrupted by a sea of mortgage-related lawsuits. It is also of course enormously important to take advantage of this opportunity to completely rethink the government’s approach to the foreclosure crisis, and find a way to keep people in their homes with mortgages that are more appropriate to their current financial wherewithal. By itself, however, a national foreclosure moratorium isn’t going achieve that — it will just postpone resolution of the problem, and in the process conceivably create some dangerous new risks.

And here’s where Obama’s problem lies. The foreclosure crisis isn’t just about banks playing fast and loose with people’s homes. The recklessness with which banks and mortgage servicers handled their business has thrown into question the entire architecture of securities assembled from mortgages. All that toxic waste just turned a Hungarian sludge shade of bright flashing orange. If and when the owners of those securities start their own legal actions or demand that the issuers of the securities take them back, the biggest financial institutions in the United States will once again teeter on the brink — and threaten to bring all the rest of us down with them. There are systemic risk implications to this “paperwork” lollapalooza.

…

My guess is that the White House economic brain trust is fully aware of how bad this could get, and that their caution on endorsing a national foreclosure moratorium is connected to the uncertainty as to what the systemic implications of bringing the entire mortgage industry to a screeching halt might be. That’s fine, but it’s not enough. If Wall Street is once again teetering on the brink, then the Obama administration has leverage — leverage to make a deal that keeps Americans in their homes, defuses the foreclosure pandemic and ensures that the interests of average citizens are protected, along with the integrity (such as it is) of the larger financial system. Any kind of solution that attempts to address the gaping legal hole at the heart of the foreclosure mess must be paired with relief for distressed homeowners. It’s that simple.

Here’s a CNBC piece you may have missed-

Foreclosure Fraud: It’s Worse Than You Think

By: Diana Olick, CNBC Real Estate Reporter, Published: Tuesday, 12 Oct 2010 | 1:14 PM ET

A source of mine pointed me to a recent conference call Citigroup had with investors/clients.  It featured Adam Levitin, a Georgetown University Law professor who specializes in, among many other financial regulatory issues, mortgage finance. Levitin says the documentation problems involved in the mortgage mess have the potential “to cloud title on not just foreclosed mortgages but on performing mortgages.”

And one from AP-

Robo-signers: Mortgage experience not necessary

Banks hired hair stylists, teens to process foreclosure documents, workers’ testimony shows

Michelle Conlin, AP Real Estate Writer, Tuesday October 12, 2010, 9:21 pm  

NEW YORK (AP) — In an effort to rush through thousands of home foreclosures since 2007, financial institutions and their mortgage servicing departments hired hair stylists, Walmart floor workers and people who had worked on assembly lines and installed them in “foreclosure expert” jobs with no formal training, a Florida lawyer says.

In depositions released Tuesday, many of those workers testified that they barely knew what a mortgage was. Some couldn’t define the word “affidavit.” Others didn’t know what a complaint was, or even what was meant by personal property. Most troubling, several said they knew they were lying when they signed the foreclosure affidavits and that they agreed with the defense lawyers’ accusations about document fraud.

…

Though some have chalked up the foreclosure debacle to an overblown case of paperwork bungling, the underlying legal issues are far more serious. Yes, swearing that you’ve reviewed documents you’ve never seen is a legal offense. But at the center of the foreclosure scandal looms something much larger: the question of who actually owns the loans and who has the right to foreclose upon them. The paperwork issues being raised by lawyers and attorneys generals have the potential to blight not just the titles of foreclosed properties but also those belonging to homeowners who have never missed a mortgage payment.

If there is one single simple message I want you to take away from my writing about this issue, IT’S NOT JUST FORECLOSURES!

Every transfer of real estate from a seller to a buyer involves a title search which includes little things like just what are the boundaries of the property AND WHO OWNS IT!

If you pay cash, who owns “your” property is perfectly clear (usually) but we don’t customarily hand over wheel barrows of bills or even cut a check.

Usually you purchase by financing and share your title with a bank which has the right to seize your property if you don’t make the payments specified in your contract.  You’ll also be expected to pay for “title insurance”.  This protects the bank’s investment if it is later discovered that the person who sold it to to you has about as much right to sell it as I have to sell you the Brooklyn Bridge (you set a hard bargain, how about just what you have in your pocket right now?).  You, on the other hand, won’t get much satisfaction from it.

Now if you don’t pay the bank they take your property and sell it.  That’s foreclosure.  But what if you are paying the bank and have a better offer come along?

Well, normally you could just pay the bank what you owe (including the penalties in the fine print that they use to make this difficult and expensive for you and profitable for them) and accept the money from the new purchaser and transfer the title.

You found a sucker who’s willing to buy the Brooklyn Bridge for more than you paid me?  Congratulations Gordon Gekko.  Greed is good.

On the other hand, what has happened if you have financed or re-financed in the last 10 years is that your title (even supposing I had a legitimate claim to the Brooklyn Bridge because it was built on and with the bones of my Viking Ancestors) has been sliced and diced into so many pieces that the banks can’t track it anymore.

You can’t sell your property because you don’t have clear title.

Anyone who buys property at the moment is no better than a rube who’d buy the Brooklyn Bridge if the price was right, and this is ALL property.  That there is a market at all is a testimony to how many rubes are born every minute.

Now me, I have the $6.45 you had in your pocket which I’ve already invested in a bottle of Night Train so I can sleep under my bridge.

Your government, Barack Hussein Obama and all his Washington Wall Street Wizard Advisors, think that if they can just keep you from peeking at that man behind the curtain you’ll always find a sucker to sell to, but the title insurance companies aren’t buying it.

Nor should you.

I’ve tried to document in my posts on economics what a dismal position the United States is in.  I’ve tried to explain what Keynesian/Samuleson analysis predicts.  I’m Neo-Classical.

But now I’m going the full Roubini.

Title Fraud, let’s call it what it is, casts a question on the entire United States housing market- the single largest economic asset in the world financial system and leveraged up the wahzoo.  We are talking about vanishing tens of trillions of paper profits from the portfolios of the ‘stakeholders’.

This is going to cause massive economic disruption.  Easily the equal of 2008.

Welcome to shotgun and private fire department America.

Not that I’m in favor of either of those policies,  I think that even if people had minimum wage government jobs digging holes and filling them that would be about as good as anything except Food Stamps which also benefit billionaire ‘family farmers’.

There’s a ‘Jobs not Food Stamps’ program for you.

This is big.  Really, really big.

And whither CRE?  Et tu Brutus?

Ezra Klein: What’s happening here? Why are we suddenly faced with a crisis that wasn’t apparent two weeks ago?

Janet Tavakoli: This is the biggest fraud in the history of the capital markets. And it’s not something that happened last week. It happened when these loans were originated, in some cases years ago. Loans have representations and warranties that have to be met. In the past, you had a certain period of time, 60 to 90 days, where you sort through these loans and, if they’re bad, you kick them back. If the documentation wasn’t correct, you’d kick it back. If you found the incomes of the buyers had been overstated, or the houses had been appraised at twice their worth, you’d kick it back. But that didn’t happen here. And it turned out there were loan files that were missing required documentation. Part of putting the deal together is that the securitization professional, and in this case that’s banks like Goldman Sachs and JP Morgan, has to watch for this stuff. It’s called perfecting the security, and it’s not optional.

EK: And how much danger are the banks themselves in?

JT: When we had the financial crisis, the first thing the banks did was run to Congress and ask for accounting relief. They asked to be able to avoid pricing this stuff at the price where people would buy them. So no one can tell you the size of the hole in these balance sheets. We’ve thrown a lot of money at it. TARP was just the tip of the iceberg. We’ve given them guarantees on debts, low-cost funding from the Fed. But a lot of these mortgages just cannot be saved. Had we acknowledged this problem in 2005, we could’ve cleaned it up for a few hundred billion dollars. But we didn’t. Banks were lying and committing fraud, and our regulators were covering them and so a bad problem has become a hellacious one.

So let me tell you why foreclosure fraud is a big deal.

You see it’s not so much that banks are lying on court papers and breaking and entering houses illegally though those are a pretty big deal.

Nope.  It’s more that tens of trillions of dollars of paper valuations (an asset is only worth what you can sell it for) is now in question.

By dividing and bundling mortgages and failing to do the proper paperwork just to save a few bucks the banksters have put the entire land title chain of ownership under dispute.  This goes back to when bad King Charles the First (well, he was beheaded after all) granted a royal sanction to your stealing your land fron the Indians Natives (nor was he the first in any sense).

The point is that not only are the trillions of dollars of leveraged derivatives about to lose any value they ever had, but the underlying mortgages are going to be  uncollectible.

Insure against that AIG.

The result is not just going to be massive bank failures, but a complete lock up of all real estate transactions.

So serf, you are now bound to your land and can only sell to a boyar and a stupid one at that because he has no clear claim.

This is magnitudes worse than the market meltdown in 2008.

You know, with it I can move the world.

So I think we need to distiguish between paper and paper.

Currency of any kind is an illusion, you can eat gold but you’ll starve to death on it.  It’s a medium of exchange and a store of value.  As tasty as a vinagette makes it there’s no nutrition.  But people will trade potatoes for it so there is some utility.

And then there is leverage.  All I need is my down payment and then it’s all a cash flow problem Ponzi scheme.  These bets may be backed by the kind of insurance AIG offers but the illusion is gone.

These are nothing but desperate bets on black and even double zeros are not providing the margin the house needs to stay open.

In simulation I like playing Craps because the odds are good on certain bets if you have a big enough wallet to sustain some modest losses.

You know, a system.

Mine is based on Place Bets and Buy Bets on the 5, 6, 8, and 9 and their favorable odds rate entirely depends on if they’re off during the Come Out roll (if you didn’t understand all of that you should stay out of dank back alleys and brightly lit casinos).

In the maths a Derivative is the rate of change on a curve and our Wall Street Croupiers have decided that they can securitize a bet on on that change and with a compliant Ratings Agency sell that to you as something with value.

They’re nucking futz.

When we talk about “de-leveraging” this is what we’re talking about.  This fictional valuation disappears as do your table stakes which is why you always take your winnings away.  There’s hardly any retail investment in equities because the market is crooked to the core.

Only sucker bets and quick money on the felt now.

More Economics 101

Let’s say I have an asset, a lottery payout, a bond, a judgement, a mortgage note, something that is guaranteed to pay out a specific amount of revenue over time.

Well, I can sell that for cash money right now at a certain amount of risk surcharge (not that I do, but it’s a common practice).  I can bundle large quantities of them to reduce my risk surcharge, I can group them from the most to least risky and sell them at market.

Caveat Emptor.

The Ratings Agencies will criminally overvalue them and the tranching will pollute the title so the underlying debt is potentially uncollectable.  23 States think so.  Quite a hair trim!

I’m surprised there’s a housing market at all.

Accountancy is supposed to be boring!

The Defining Issue: Who Should Get the Tax Cut – The Rich or Everyone Else?

by Robert Reich, Sunday, September 19, 2010

Who deserves a tax cut more: the top 2 percent – whose wages and benefits are higher than ever, and among whose ranks are the CEOs and Wall Street mavens whose antics have sliced jobs and wages and nearly destroyed the American economy – or the rest of us?

…

The rich spend a far smaller portion of their money than anyone else because, hey, they’re rich. That means continuing the Bush tax cut for them wouldn’t stimulate much demand or create many jobs.

But it would blow a giant hole in the budget – $36 billion next year, $700 billion over ten years. Millionaire households would get a windfall of $31 billion next year alone.

…

The $1.3 trillion Bush tax cut of 2001 was a huge windfall for people earning over $500,000 a year. They got about 40 percent of its benefits. The Bush tax cut of 2003 was even better for high rollers. Those with net incomes of about $1 million got an average tax cut of $90,000 a year. Yet taxes on the typical middle-income family dropped just $217. Many lower-income families, who still paid payroll taxes, got nothing back at all.

And, again, nothing trickled down.

As I’ve emphasized, the U.S. economy has suffered mightily from the middle class’s lack of purchasing power, while most of the economic gains have gone to the top. (The crisis was masked for years by women moving into paid work, everyone working longer hours, and, more recently, the middle class going into deep debt – but all those coping mechanisms are now exhausted.) The great challenge ahead is to widen the circle of prosperity so the middle class once again has the capacity to keep the economy going.

The Winds of Deflation

by Robert Reich, Friday, September 17, 2010

(Y)ou have what could be a recipe for deflation: Flat consumer prices, weekly earnings, and hours, coupled with increased pessimism about where the economy is heading.

Consumers aren’t buying. They’re acting rationally. Their debt load is still huge, they’re worried about keeping their jobs, they know they have to tighten belts, and they’re justifiably worried about the future.

But for the nation as a whole, it spells even more trouble. If consumers hold back even more, prices will start dropping. When and if they do, consumers will hold back even more in anticipation of still lower prices. That means more layoffs and less hiring.

It’s a vicious cycle. And once deflation sets in, it’s hard to reverse. Just ask Japan.

Why No Amount of Fiscal or Monetary Stimulus Will Be Enough, Given How Small A Share of Total Income the Middle Now Receives

by Robert Reich, Tuesday, September 21, 2010

Every indicator suggests third-quarter growth will be as slow if not slower than in the second quarter. Consumer confidence is down. Retail sales are down. Housing sales are down. Commercial real estate is in trouble.

A growth rate of 1.6 percent means even higher unemployment ahead. Maybe we’re not in a double-dip but we might as well be in one. Growth this slow is the equivalent of heading downward, relative to the growth needed to get us out of the hole we’re in.

…

Even though (The E)conomy is heading downward, flooding it with more money may not help.

The problem isn’t the cost of capital. Most businesses can get all the money they need. Big ones are still sitting on $1.8 trillion in cash.

The problem is consumers, who are 70 percent of the economy. They can’t and won’t buy enough to turn the economy around. Most don’t qualify for more credit given how much they already owe (or have already defaulted on).

Without consumers, businesses have no reason to borrow more. Except to speculate by buying back their own stock and doing mergers and acquisitions, which is exactly what they’re doing.

…

(The Economy) can’t run on its own because consumers have reached the end of their ropes.

After three decades of flat wages during which almost all the gains of growth have gone to the very top, the middle class no longer has the buying power to keep the economy going. It can’t send more spouses into paid work, can’t work more hours, can’t borrow any more. All the coping mechanisms are exhausted.

Anyone who thinks China will get us out of this fix and make up for the shortfall in demand is blind to reality.

So what’s the answer? Reorganizing the economy to make sure the vast middle class has a larger share of its benefits. Remaking the basic bargain linking pay to per-capita productivity.