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Fed is Convinced Mortgage Crisis will Spill into Next Year

Paul Kiesel — Tue, 08 Jul 2008 15:18:47 GMT

Ben Bernanke, Chairman of the Federal Reserve, said Tuesday morning that new lending rules would be put into effect next week to restrict exotic mortgages and to help curb other dubious lending practices in an effort to protect future homebuyers.

In regards to the current state of financial markets, Mr Bernanke said, "The financial turmoil is ongoing, and our efforts today are concentrated on helping the financial system return to more normal functioning [. . .] It is not too soon, however, to begin to think about the steps we might take to reduce the incidence and severity of future crises," (The New York Times, 7/8/08).

Bernanke is correct in his latter statement; the Fed needs to take the proper steps in order to reduce the incidence of what took place during the subprime boom from happening again, however, in regards to his acknowledgement of the ongoing mortgage crisis, something needs to be down now, in order to help stave off even further market damage/losses. Congress has been unable to pass a housing bill or relief plan for troubled homeowners and the Fed has done little to aid the mortgage crisis, with the exception of endorsing programs like Hope Now, which has provided minute help to people in troubled or fraudulent loans.

However, and fortunately, the Fed is beginning to see that the end is nowhere in sight per the mortgage crisis. In fact, the Fed, and Bernanke through his comments today, seem to suggest that the crisis that has plagued financial markets for the last year will likely spill into next year and grow worse as we finish the year.

This becomes even more apparent through the Fed's announcement today that it will extend a lending program (government loans to Wall Street) that was set up for investment banks and was originally set to last for only six months. The extension of this program will go well into next year or at least for another six months. (This lending program is the same one that helped facilitate JP Morgan Chase's acquisition of Bear Stearns in March.) Now the Fed needs to come up with a better plan to help homeowners, too. Hope Now, as Treasury Secretary Paulson suggested back in May, is "proving insufficient."

New Mortgage Rules

Next Monday, we'll find out what new mortgage rules will go into effect before the end of the month. Based on what Bernanke alluded to today, the new rules will apply to all lenders and not just banks and will only apply to new mortgages not existing ones. Ultimately, the new rules next week could bring about some optimism for consumers as the proposals that have been discussed since December, and that were reiterated today, would do away with most of Newt Gingrich's Home Ownership Equity Protection Act of 1994, which covered less than 1 percent of all mortgages since HOEPA became law (in fact HOEPA helped usher in deregulation of the lending industry amid other industries, along with kickstarting the subprime boom).

Industry lobbyists are complaining loudly about Bernanke's comments today, and that's good news for mostly everybody else.

Originally posted at InjuryBoard by Paul Kiesel

How We Got into this Mortgage Mess

Paul Kiesel — Mon, 07 Jul 2008 17:43:17 GMT

Over the last 15 years, there have been five "avoidable events" stemming from Wall Street's or Congress' actions (or inaction), that led directly to the mortgage crisis.

1. Newt Gingrich and the Home Ownership and Equity Protection Act of 1994 (the latter's goal was written to protect consumers against predatory loans, but it instead helped spark the subprime boom).

2. The "Rodash Fix" revolved around a woman's lawsuit, Martha Rodash, against atwo lenders because of fee misstatements on her Truth in Lending Disclosure form. After Rodash's victory in recouping those costs/fee, dozens of class action lawsuits were filed in similar fashion. However, Congress then passed a major amendment to the 1968 Truth in Lending Act, making certain fees, that were grounds for litigation prior, mute.

3. Phil Gramm and the Commodity Futures Modernization Act of 2000.

4. Senator Sarbanes' unsuccessful effort in instilling "appropriate regulation" to the mortgage industry. Paul Sarbanes and John LaFalce tried to pass the Predatory Lending Consumer Protection Act of 2001 and it failed each and every time is was reintroduced.

5. Wall Street's Darwinian view: Many people in the finance community view the people who have been victimized by the subprime fallout and the lenders who have suffered most on Wall Street as "welcome additions" to the fallen competitor list.

For more on each of these five events that helped precipitate the subprime boom after 2001, CLICK HERE.

Originally posted at InjuryBoard by Paul Kiesel

Truth in Lending Ruling Could Jolt Banking Industry

Paul Kiesel — Mon, 07 Jul 2008 14:51:40 GMT

A lawsuit that was filed by a Wisconsin couple in 2005 against mortgage lender Chevy Chase Bank for Truth in Lending Act violations (TILA) is set to get a ruling any day now. If the ruling by the 7th U.S. Circuit Court of Appeals comes back favorable for the plaintiffs, which many experts believe it will, the outcome of such a ruling would send shockwaves throughout the banking industry as many other states would now be able to pursue legal remedies, like rescinding the loan, per TILA violations by the originator of the mortgage.

In the 2005 lawsuit, the Wisconsin couple accuse the lender of misleading them into believing the loan's interest rate would stay at 1.95 percent for five years (locked at that rate). However, by the time the second monthly payment was due, the interest rate went well above 6 percent (their prior fixed rate, before they refinanced to the stated lower interest rate, was 5.75 percent; the Wisconsin couple had very good credit).

The couple is looking for rescission for themselves and the thousands of others that have joined their class-action lawsuit, however, Chevy Chase's attorney, Christine Scheuneman, is arguing that rescission under the Truth in Lending Act is not available under a class-wide status.

And, of course, the Financial Services Association is not looking forward to a positive ruling for the plaintiffs, as it wrote in an amicus brief, "Class certification of rescission claims would saddle the mortgage lending industry and secondary market with billions of dollars of class action exposure for supposed violation of TILA that do not give rise to any actually damages," (Reuters.com, 6/30/08).

The financial services sector and more importantly lenders or originators of these loans are afraid of being "saddled" with its original financial obligation to the borrower? They should be saddled with that responsibility. Think about the borrower who thought he or she was getting a fair loan or a better loan than prior, the loan terms being clearly spelled out, only to find out that not only was the individual put in a worse loan than the prior loan, but was now in a loan that was nothing like the terms disclosed upon origination. The lenders need to be accountable for putting themselves, borrowers and investors into this mortgage mess, and the borrowers either need the current loan to be reformed or rescinded, the latter allowing the borrower to get into a better mortgage and, thus, keeping the home they're currently in.

An adverse ruling for borrowers would cut off the important remedy of rescission. If that is the case, more people will lose their homes, more foreclosed homes will be on the market and will have to be maintained by the lender, and other homeowners in areas with high foreclosure rates will lose value in their home: everyone will continue on the losing streak of the mortgage meltdown.

Originally posted at InjuryBoard by Paul Kiesel

90% of Subprime Loans Belong to Exisiting Homeowners

Paul Kiesel — Sat, 05 Jul 2008 20:09:52 GMT

A commonly held misperception is the idea that homeowners who hold subprime mortgages were first-time buyers. In a Los Angeles Times report experts acknowledge that as many as 90% of all subprime loans are held by borrowers who were refinancing existing loans and NOT first-time buyers. Additionally, the banks would lead us to believe that the majority of "problem" loans are held by real estate speculators and not every day consumers. The truth is, painfully, the majority of troubled loans are held by average every day citizens who did not understand the true cost, terms and conditions of the loans that were sold. It was not so much, though it was certainly a part, of a failure to have regulations as much as it was the failure to ENFORCE existing regulations. Had homeowners been told when they were refinancing from, in many cases, fully amortizing low fixed interest rate loans, that the products they were purchasing were time bombs set to go off within three to five years the majority of these borrowers would have steered well clear. Unfortunately, rather than disclose the negative amortization of the teaser payment plan homeowners were gleefully pulling equity out of their homes without fully digesting the impact of the adjustable mortgage rate features of their loans. Many, if not all, of the borrowers represented by Kiesel Boucher & Larson and the consortium of firms throughout the country, owned their homes and were refinancing their primary residences. Unless relief is provided soon tens of thousands if not more of these homeowners will find themselves truly homeless. While Washington is debating homeowners are losing their most valuable asset.

Originally posted at InjuryBoard by Paul Kiesel

California Senate Passes Key Mortgage Bill

Paul Kiesel — Thu, 03 Jul 2008 17:57:26 GMT

The California Senate passed the first major bill that is designed to help prevent more home foreclosures and it is being sent to the governor. Gov. Schwarzenegger is expected to sign the measure into law.

The bill would require lenders to give homeowners earlier and extensive warning that their home loans were heading in to default. The bill will take effect immediately upon Gov. Schwarzenegger's signature.

The Los Angeles Times reports that a third provision on the bill, that is more important than it might sound, requires lenders to maintain property that is sitting empty after a foreclosure. In effect, the provision will curb lenders from immediately foreclosing on a person's mortgage, and prompt the lender -- or at least give some moderate incentive to the lender -- to work out a deal with the borrower.

Senate President Pro Tem Don Perata (D-Oakland), who authored the bill, said, "SB1137 will make a difference right away [. . .] This legislation is an important piece of the puzzle of how to best protect California homeowners and communities from the fallout from the nation's mortgage crisis," (Los Angeles Times, 7/3/08).

The "Mortgage Default Warning Bill" is an excellent first step by the state Senate to combat the foreclosure crisis that has hit California very hard (one of four states with the most foreclosures over the last year; Arizona, Florida and Nevada are the other three). State Assembly Speaker Karen Bass said that Wednesday's passage of the foreclosure-prevention bill would create momentum to resurrect a handful of related measures that were killed in the Senate two weeks ago. According to Bass, there are "an effective package of bills to submit to the governor in August."

There is one more key bill that might pass as well in August. Assemblyman Ted Lieu (D-Torrance) seeks to prohibit stated-income loans, which allow people to qualify for mortgages without verifying their income or if they'd even be able to make the monthly payments. Also in Lieu's bill is a provision that would ban less-than-interest-only loans or "teaser rate" loans/payments. These loans are essentially negative amortization loans, however, on the TILA disclosure forms, this is not stated; a violation of the Truth in Lending Act.

Originally posted at InjuryBoard by Paul Kiesel

IndyMac and Fed Working Together

Paul Kiesel — Wed, 02 Jul 2008 20:44:19 GMT

IndyMac, in a securities filing late Monday, said that it is working with U.S. regulators on a plan to shore up the company's safety and soundness. However, other than their statements on raising capital, little information was divulged by the struggling bank.

The U.S. Office of Thrift Supervision, which regulates IndyMac, didn't release any statements per IndyMac's filing.

What remains to be seen is whether IndyMac gets a bailout. There are two scenarios:

1. The Fed decides that IndyMac's failure, along with other struggling financial stocks, could precipitate a panic on Wall Street, therefore, they save the bank. Just today, rumors were thrown around that GM might seek bankruptcy protection, resulting in higher oil prices and the Dow reporting at the end of trading that it is down more than 20% from its peak in October, 2007. Adding IndyMac to the list of victims from what is now being considered a "bear market" could be detrimental to a quicker turnaround for the stock market and the economy. If the Fed decides to jump in and save what is now the #11 producer of U.S. home mortgages (since Countrywide was swallowed by Bank of America and Bear Stearns by JP Morgan Chase), they will facilitate a deal between a more stable, sound bank in acquiring IndyMac's assets and risk (losses), however, with a large cushion of government money insuring the deal; lowering the risk for the acquiring bank.

2. The Fed feels like it's necessary to let IndyMac remain accountable for its terrible financial situation, thus, the bank fails and is made an example of as the poster child of irresponsible lending; and that IndyMac's lending practices and overall avarice during the subprime boom will not and should not be rewarded with government assistance.

As each day melts into the other this summer, so does each scenario. Until IndyMac elucidates on what is really going on in its ability to raise capital and reveals what its predicted future losses are estimated at, then it is difficult to gauge an end result for the Pasadena-based bank.

Originally posted at InjuryBoard by Paul Kiesel

Will IndyMac Get a Bailout, Too?

Paul Kiesel — Tue, 01 Jul 2008 20:31:02 GMT

The Center for Responsible Lending released evidence yesterday, June 30, that IndyMac put itself in a hole by, "engaging in unsound and abusive lending during the nation's mortgage boom," (Center For Responsible Lending, 6/30/08).

The report is titled, "IndyMac: What Went Wrong?" And it finds substantial evidence that IndyMac routinely offered and made loans with little concern as to whether their customers could repay the loan.

Three main issues are brought up in the CRL's report:

-IndyMac pushed through loans based on inflated appraisals and income data that exaggerated borrowers' finances;

-IndyMac worked hand-in-hand with mortgage brokers who misled borrowers about their rates and other loan terms and stuck them with unwarranted fees (TILA violations);

-IndyMac treated many elderly and minority consumers unfairly.

Obviously, over the last six months, much of the criticism concerning the mortgage crisis has revolved around subprime mortgages, but IndyMac, rather, was a bigger player in regards to "Alt-A" loans, and if it were to go bankrupt, it would likely have a greater impact on the economy as it has billions of dollars of Alt-A loans floating around mortgage market.

Alt-A borrowers have a higher interest rate than prime borrowers, but they also have lower rates than subprime borrowers; they tend to take out larger loans than a subprime borrower. In 2006, IndyMac was the leading Alt-A lender, and their avarice in writing billions of dollars in loans, with little evidence that the borrower could repay it, has come back to haunt them along with many other Alt-A lenders (not to mention the stock market and confidence amidst all lending institutions). And as we'll see in the coming months, prime borrowers will be swallowed by the mortgage crisis as their rates reset as well, adding even more fuel to the fire.

The question that remains as IndyMac's shares traded at an all-time low today, 52 cents a share, is: Will a bank like Bank of America come in and save the hemorrhaging IndyMac (with, maybe, the assistance of the U.S. government) or will IndyMac be made an example of for their insidious lending practices and their irresponsible lending?

Originally posted at InjuryBoard by Paul Kiesel

California Error: Hospitals Injured Over 1,000 Patients Since July, 2007

Paul Kiesel — Tue, 01 Jul 2008 13:53:59 GMT

The Los Angeles Times reported today that California Hospitals have injured over 1,000 patients between July, 2007 and May of this year. The incidents are officially called "adverse events," however, they're also known as "never events" because the incidents are considered preventable and should not have ever occurred. (These type of hospital errors occur at a rate of about a 100 times a month.)

For instance, in March of this year, a 76-year-old woman died at Pomona Valley Hospital Medical Center after a nurse gave her two drugs. The problem was that the doctor had not prescribed either drug. There was also, last November, a patient whose appendix was taken out when the patient was in the hospital for a completely different issue -- the patient did not need an appendectomy.

Other than the fact the hospitals should have "never" caused a mistake like either of the aforementioned incidents to occur, the hospitals are still charging the patients for the doctors' or nurses' mistakes. Naturally, the hospitals do not want to absorb the superfluous costs themselves, but why do they feel the harmed patients are obligated to pick up their mistake-filled tabs?

According to the Los Angeles Times, "Revelations of such errors have led lawmakers and hospital associations in at least seven states to protect patients from having to pay for the cost of care that went awry. In Sacramento , an assemblyman proposed a ban on reimbursing hospitals for the types of injuries tracked by the state. But when lobbyists for doctors and hospitals objected, he scaled it back to cover far fewer errors," (LA Times, 6/30/08).

The Los Angeles Times also provides examples of the type of adverse-event-injuries taking place and their frequency:

The most recent figures [on adverse-event-injuries] available cover the 10 months since July 2007. In that time, 466 patients developed bedsores so severe that the dead skin formed a crater or rotted through to the muscle or bone.

Another 145 patients had foreign objects such as surgical equipment left in their bodies. Thirty-four died while under anesthesia. In 41 surgeries, doctors performed the wrong procedure or operated on the wrong body part or on the wrong patient.

Other than carelessness, another problem that is enabling these avoidable injuries is overcrowded emergency rooms. A 2006 study found that California had fewer emergency rooms per resident than any other state.

And the number of adverse events that have been reported (1,002 injuries since last July) are likely well under the actual number. According to Dr. Donald Bernwick, president of the Institute for Healthcare Improvement (nonprofit), the number of mistakes is much higher than what California hospitals have disclosed. Dr. Berwick's institute has estimated that "as many as 15 million patients nationwide are harmed each year in hospitals."

Unfortunately, in California payments are restricted to $250,000 for medical claims, regardless of how avoidable the injury is. This has been unchanged since 1976. If inflation is taken in to account, that dollar amount would translate to over $3.5 million in medical expenses and noneconomic damages, but the State of California has not adjusted the maximum amount for medical claims in over thirty years. If a person has suffered from an "adverse event" and wants to recoup costs attributed to the incident, including future costs/loss wages, plaintiffs are limited to a maximum of $250,000 for noneconomic damages even if there is more than one defendant being sued for medical malpractice. Furthermore, the surviving spouse and children of a deceased patient are also limited to $250,000 for noneconomic damages in a medical malpractice wrongful death case. However, the spouse of an injured plaintiff suing for his or her own emotional distress as a "direct victim" of the physician's malpractice, or for loss of consortium, is entitled to a separate $250,000 limit for noneconomic damages.

Originally posted at InjuryBoard by Paul Kiesel

Fed Backed Bear Stearns Deal to Prevent a "Contagion"

Paul Kiesel — Fri, 27 Jun 2008 15:49:18 GMT

On Friday, the Federal Reserve released documents showing why, in March, it chose to save Bear Stearns from bankruptcy. Ultimately, the Fed felt compelled to do something because of fear that immediate failure within Bear Stearns would cause a contagion from infecting other parts of the nation's financial system.

At first, the Fed solicited many investors to step up and take on Bear Stearns' assets, however, they determined that JP Morgan was going to be the most capable investor to acquire the flailing bank. Once that decision was made, the Fed brought the $28.82 billion required to make the $30 billion transaction go through (JP Morgan only risked a little over $1 billion in comparison).

"The Fed's decision to take this action was 'based on recent, rapidly changing developments,' the documents said. 'These development demonstrated that there had been impairment of a broad range of financial markets' that Wall Street firms rely on for financing," (Los Angeles Times, 6/27/08).

Basically, the Fed applied the domino theory to Bear Stearns and felt that if it collapsed then several other banks in similar financial conditions (or with pessimistic future financial conditions) could fail to, causing a type of implosion on Wall Street. Most critics of this assessment suggest that the Fed's actions are more or less akin to a government bailout; contrary to the White House which has been opposed to any sort of bailout to "lenders and speculators," particularly President Bush, over the last six months.

Nonetheless, the documents released by the Fed add very little to the aftermath of the Bear Stearns bailout and why it took place, instead of first trying to help subprime borrowers who were preyed upon by companies like Bear Stearns. We're still left with the feeling that if an IndyMac needs the capital (which it apparently does need), or a bailout, the government will come to their rescue and broker a deal, once again, before facilitating any aid to troubled homeowners.

Originally posted at InjuryBoard by Paul Kiesel

IndyMac may be the Next Mortgage Lender on the Brink of Failure

Paul Kiesel — Thu, 26 Jun 2008 20:28:41 GMT

U.S. Senator Charles Schumer asked U.S. regulators to analyze the financial health of Indymac, as Schumer believes the company may be on the brink of failure. The FDIC, the Office of Thrift Supervision, the Federal Housing Finance Board and the Federal Home Loan Bank of San Francisco all received letters from Sen. Schumer that express his views that IndyMac is having "serious problems."

According to the Los Angeles Times, Sen. Schumer wrote in the letter that he is, "concerned that IndyMac's financial deterioration poses significant risks to both taxpayers and borrowers [. . .] the bank could face a failure if prescriptive measures are not taken quickly."

Indymac was the largest Alt-A lender in the nation, as the company signed up many borrowers who were just short of qualifying for prime mortgages. Indymac's value has decreased 97% over the past year, and is currently trading at just over $1 a share.

It appears IndyMac will have to raise capital and have to raise it fast, as the company has reported that it's lost over $900 million in the past three quarters, and has likely omitted some dividends and said that it won't make money this year. I'd look out for another government bailout package, as long as another bank comes to the table and is willing to acquire IndyMac in the same fashion JP Morgan Chase did with Bear Stearns.

Originally posted at InjuryBoard by Paul Kiesel