Los Angeles Personal Injury Lawyer - TILA violations

Salon: Why Loan Modification Scams are Booming

Paul Kiesel — Thu, 24 Sep 2009 18:28:42 GMT

FYI: Here's a link to a blog I wrote a year ago that portends what's being described in the article below.

During the go-go years of the real estate bubble, shady mortgage brokers thrived, thanks to the sluggish response of regulators and law enforcement agencies. Amid the ruins of the crash, there's a new boom attracting unscrupulous mortgage professionals: "Foreclosure rescue" companies promising -- in exchange for a large upfront fee -- to persuade lenders to modify desperate homeowners' mortgages. And authorities are again finding themselves ill-equipped to deal with the deluge.

In a giant game of whack-a-mole, law enforcement agencies at all levels across the country have filed suit against 150 such companies, but they continue to proliferate, and the number of consumer complaints continues to rise.

"This is a very big scam," says California Attorney General Jerry Brown. "They're all over the place, and as soon as you get one, they migrate to somewhere else."

The case of one particularly aggressive firm, 21st Century Legal Services, shows just how ineffective authorities' moves against the companies often are.

Four states have sued 21st Century, and at least three more have open investigations. Over 150 consumers from more than 30 states have filed complaints against 21st Century with the Better Business Bureau. No active firm has more complaints.

Yet the company forges on. Operating under a new name, Fidelity National Legal Services, it continues to solicit consumers nationwide, even in states where authorities have won court injunctions.

Homeowners do not have to pay a company to negotiate on their behalf: They can always contact their mortgage servicer directly for a loan modification, at no cost. But consumers often find the process frustrating. For those who want guidance, nonprofit housing counselors approved by the Department of Housing and Urban Development will help for free.

Consumers should especially be wary of companies charging upfront fees or touting guarantees. The Illinois attorney general says that her office has yet to see any such company operate within the boundaries of state law.

Click here for the rest of the article.

Originally posted at InjuryBoard by Paul Kiesel

L.A. Times: Real Estate Reality

Paul Kiesel — Mon, 26 Jan 2009 16:35:30 GMT

From the Los Angeles Times:

As lawmakers look for a way out of the recession, it's worth remembering how we got into this mess in the first place. The collapse of the housing market sucked trillions of dollars worth of real estate wealth out of the economy, starting a vicious cycle of cutbacks by consumers, lenders and businesses. But the collapse wasn't a one-time event. It's an ongoing process that could take a larger human and economic toll this year than it did in 2008, when the number of troubled homeowners nearly doubled from the year before. According to RealtyTrac, lenders made foreclosure filings on 2.3 million properties last year (more than half a million in California alone), including nearly 2% of all housing units. New laws here and in several other states reduced the pace of foreclosure filings, but they haven't helped homeowners pay their bills. As a consequence, the FDIC projects another near-doubling of housing misery, with 4.4 million mortgages falling 60 to 90 days past due by the end of 2009.

It's no coincidence that more banks are sliding toward insolvency as defaults mount. The financial industry placed a huge bet on Americans paying their mortgages, along with an intricate web of side bets on the U.S. housing market. Keeping more homeowners out of foreclosure could help end the sickening slide in home values, solidifying the ground under the financial industry and coaxing more buyers back into the housing market. It's not as simple as that, of course; rising unemployment has become a major factor in the market, driving more homeowners into default with no hope of recovery. Still, if lenders don't do more for those whose homes could be saved, the situation will only get worse. Some argue that government should let the market take its course. More banks are modifying loans for buyers who can afford somewhat reduced monthly payments, and repossessing homes from buyers who shouldn't have received loans at all. Foreclosure, they say, is a fitting resolution for such people and the lenders that encouraged them. We agree that rescuing people and businesses from their own risk-taking poses a significant moral hazard. That's why we believe that policymakers shouldn't try to shield borrowers or banks from drastically lower property values and lost returns. But government can and should help them adapt to the collapsing market. Given the links between the wave of foreclosures and the overall health of the economy, everyone fares better when lenders and homeowners can strike deals that cost less and preserve more of a home's value than a foreclosure sale would.

Finding the right way to help borrowers, however, is a tricky business. Congress' biggest initiative, the Hope for Homeowners program, was supposed to refinance 400,000 defaulting loans into government-guaranteed mortgages over three years. In its first three months, it received only 412 applications and provided a grand total of 17 loans. The near-complete disinterest in the program stems from the restrictions and fees that Congress imposed to limit the cost to taxpayers -- a penny-wise, pound-foolish strategy. Meanwhile, lenders' early efforts to help borrowers fared poorly, with a high percentage defaulting again on their mortgages. But more recent efforts, such as the FDIC's handling of defaulting IndyMac Bank loans and Fannie Mae's modification of loans bought from investors, show that 60% or more of the borrowers in trouble can be rescued with the right set of terms.

Those successes and failures help draw the outlines of the right response to the foreclosure problem. Lenders need to follow the lead of the FDIC, Bank of America and JPMorgan Chase in setting affordability formulas that enable them to reevaluate borrowers and modify mortgages on a mass scale.

For the rest of the article, click here.

Originally posted at InjuryBoard by Paul Kiesel

Rep. Maxine Waters of California: The Banking Industry "Has Owned this Congress Far Too Long"

Paul Kiesel — Sun, 25 Jan 2009 22:58:29 GMT

There is a fight building over judges' roles in altering loan terms on mortgages that are either unaffordable or that were structured improperly from their origination.

Congressional Democrats say the quickest way to save homeowners is to let them declare bankruptcy and allow the judges to dictate new mortgage terms.

This seems to be a practical approach to a terrible problem that is engulfing most of the country. (Most Americans can name at least one person who's going through either foreclosure, in an "underwater" mortgage, live near foreclosed homes or going through their own foreclosure.) However, the banking industry, led by 10 groups representing the lending industry and other businesses are "fighting back fiercely," according to MSNBC.com.

The groups collectively spent $83 million in lobbying throughout 2008 and shows how strong of a hold the banking industry has had on Congress throughout the George W. Bush administration.

Congresswoman Maxine Waters (D-CA), who backs the bankruptcy proposal being touted by her fellow Democrats, has said repeatedly that the banking industry "has owned this Congress far too long."

Additionally, President Barack Obama told Democratic leaders on Friday that he also backs the congressional Democrats' mortgage term modification plan.

Foreclosure Exposure

Paul Kiesel — Fri, 23 Jan 2009 19:30:38 GMT

What are the foreclosure numbers nationwide? It appears nobody knows the exact numbers, but many fear it's much greater than what's been reported.

Below is an article from CNNMoney that discusses the problems with the numbers that have been reported. Keep in mind, there is a wave of foreclosures that will take place during the first half of 2009, due to prime borrowers facing interest rate resets on pay-option ARM loans (loans that were originated in 2006 and 2007). This will result in higher foreclosure inventory and a slower recovery from all of the foreclosures that occurred in 2008.

Click here for an article that discusses and prognosticates California's looming second foreclosure flood and click here for anyone who needs information about protecting one's self, if he or she chooses to attempt a loan modification with their lender.

From CNNMoney

Housing might be in worse shape than we think.

There is probably even more excess housing inventory gumming up the market than current statistics indicate, thanks to a wave of foreclosures that has yet to hit the market.

The problem: Many foreclosed homes and other distressed properties that are now owned by banks have yet to be listed for sale. The volume of this so-called 'ghost inventory' could be substantial enough to depress already steeply falling prices when it does go on the market.

"That's not good news," said Pat Newport, an analyst with IHS Global Insight. "[Excess] inventory is the biggest problem in housing these days, and it leads to lower housing prices, which leads to more foreclosures."

RealtyTrac, the online marketer of foreclosed properties, recently discovered that it has far more foreclosed properties listed in its database, which the company compiles using courthouse records, than there are listed in the multiple listing services (MLS) maintained by real estate agents.

RealtyTrac looked at listings in four states, California, Maryland, Florida and Wisconsin, and found that they contained only a third of the foreclosures it has in its database.

The scope of the problem isn't clear, but it could be huge considering that RealtyTrac has a total of 1.5 million bank-owned properties on its site.

"Many properties that should be listed on the MLS are not listed on the MLS," said Lawrence Yun, chief economist for the National Association of Realtors (NAR).

Underestimating inventory

The National Association of Realtors calculates official housing inventory statistics using data from the multiple listing services. By that measure, there were 4.2 million existing homes for sale in November, an 11.2-month supply at the current sales pace, up from a 10.3-month supply in October.

But now it seems quite possible that these figures, which are already at record highs, are underestimating the situation. And if that's the case, it could take much longer for the housing market recovery than analysts currently expect.

Until supply can be brought down to a more normalized level of six to seven months, home prices will continue to come under pressure, according to Yun.

"It could be a worse problem than we think," he said.

L.J. Jennings, a real estate broker with Pyramid Real Estate and Investments in Oakland, Calif., sees plenty of evidence that it is.

"There are a number of properties in my area that have actually been taken back by the banks, but have not hit the market yet," he said. "Once a bank repossesses a property, in some cases, it can take more than six months to hit the market."

He cites a handful of examples offhand, including a single-family home in Richmond seized in early October, a condo in San Ramon taken back the same month and a four-family building in Oakland that was repossessed in July.

"Either lenders are overwhelmed and can't get these properties back on sale quickly" said RealtyTrac spokesman Rick Sharga, "or they're deliberately slowing down."

Why there's a delay

The chief problem is probably system overload: Lenders are just not prepared to handle the sheer numbers of foreclosures that they have on their books. Banks took back about 860,000 in 2008 - more than twice the number in 2007 - according to RealtyTrac. Before the housing crisis hit, it took only about a month to get a bank-owned foreclosure on the market.

Lenders still insist they try to act as swiftly as possible. According to Tom Kelly, a spokesman for Chase (JPM, Fortune 500) Mortgage, their goal is to cut their losses on these homes, which are expensive to maintain, as fast as possible.

But banks might hold back listings in areas where they already have lots of homes for sale in order to avoid flooding the market, according to Michael Youngblood, a financial analyst and founder of Five Bridges Capital, an asset management company.

"If lenders have a significant number of properties in a limited area, they may want to stagger putting them back on the market," he said.

Eve Alexander, a real estate broker with Buyers Broker of Florida in Orlando, attributes the delays to the general malaise that's overtaken the lending industry as it's imploded.

"I think banks are dragging their rears about doing just about everything," she said. "They have so much going on, and there's so much red tape and the people don't care, nothing gets done."

There are also batches of bank-owned homes that don't appear on the multiple listing services because lenders are trying to sell them via bulk and auction sales to investors as well as individuals, according to John Mechem, public affairs director for the Mortgage Bankers Association.

He adds that it's also taking much longer to get many foreclosed homes in decent enough shape to put on the market. (see This home for sale stinks.)

Bank-owned properties are in worse condition than ever because the foreclosure process is taking longer than ever. As much as a year can pass between the time a borrower first misses a payment and the final auction sale, according to Youngblood. During that time, houses often deteriorate because owners have neither the money nor the incentive to maintain them. Some disgruntled homeowners may even deliberately damage homes before they leave.

"According to our servicing folks, it's taking more time for lenders to get properties in saleable condition," said Mechem.

The phenomenon of a growing ghost inventory doesn't promise to get better anytime soon, as long as the rate of foreclosures continues to ravage the market. There were more than 3.1 million foreclosure filings in 2008, according to RealtyTrac.

Said Sharga: "I don't see how we can avoid another 3 million in 2009."

Originally posted at InjuryBoard by Paul Kiesel

WaMu in 2003: Five Years from Now You're Not Going to Call Us a Bank

Paul Kiesel — Mon, 05 Jan 2009 19:51:32 GMT

Last week, The New York Times concluded its series titled "The Reckoning," a behind-the-scenes expose of several mortgage industry companies, players and employees whose business plans and myopic philosophies would lead the industry to a calamitous and costly fall, throughout all of 2008.

One article from the series stood out in particular, because the company being examined, Washington Mutual (WaMu), acted as if it was above or exempt from previous, decades-old mortgage industry standards, like verifying a loan applicant's income. Other companies were keen to the avarice that WaMu displayed, too, but none showed the stark contrast between the steady growth of a company, like WaMu, over a hundred-year period (the smart decisions that were made between 1889 and 1999) and its precipitous decline over a two-year period (the bad decisions made from 1999-2004 and the really bad decisions made from 2005-2007).

Below is the first part of the article:

The Reckoning

Saying Yes, WaMu Built Empire on Shaky Loans

By PETER S. GOODMAN and GRETCHEN MORGENSON

“We hope to do to this industry what Wal-Mart did to theirs, Starbucks did to theirs, Costco did to theirs and Lowe’s-Home Depot did to their industry. And I think if we’ve done our job, five years from now you’re not going to call us a bank.”

— Kerry K. Killinger, chief executive of Washington Mutual, 2003

SAN DIEGO — As a supervisor at a Washington Mutual mortgage processing center, John D. Parsons was accustomed to seeing baby sitters claiming salaries worthy of college presidents, and schoolteachers with incomes rivaling stockbrokers’. He rarely questioned them. A real estate frenzy was under way and WaMu, as his bank was known, was all about saying yes.

Yet even by WaMu’s relaxed standards, one mortgage four years ago raised eyebrows. The borrower was claiming a six-figure income and an unusual profession: mariachi singer.

Mr. Parsons could not verify the singer’s income, so he had him photographed in front of his home dressed in his mariachi outfit. The photo went into a WaMu file. Approved.

“I’d lie if I said every piece of documentation was properly signed and dated,” said Mr. Parsons, speaking through wire-reinforced glass at a California prison near here, where he is serving 16 months for theft after his fourth arrest — all involving drugs.

While Mr. Parsons, whose incarceration is not related to his work for WaMu, oversaw a team screening mortgage applications, he was snorting methamphetamine daily, he said.

“In our world, it was tolerated,” said Sherri Zaback, who worked for Mr. Parsons and recalls seeing drug paraphernalia on his desk. “Everybody said, ‘He gets the job done.’ ”

At WaMu, getting the job done meant lending money to nearly anyone who asked for it — the force behind the bank’s meteoric rise and its precipitous collapse this year in the biggest bank failure in American history.

On a financial landscape littered with wreckage, WaMu, a Seattle-based bank that opened branches at a clip worthy of a fast-food chain, stands out as a singularly brazen case of lax lending. By the first half of this year, the value of its bad loans had reached $11.5 billion, nearly tripling from $4.2 billion a year earlier.

Interviews with two dozen former employees, mortgage brokers, real estate agents and appraisers reveal the relentless pressure to churn out loans that produced such results. While that sample may not fully represent a bank with tens of thousands of people, it does reflect the views of employees in WaMu mortgage operations in California, Florida, Illinois and Texas.

Their accounts are consistent with those of 89 other former employees who are confidential witnesses in a class action filed against WaMu in federal court in Seattle by former shareholders.

According to these accounts, pressure to keep lending emanated from the top, where executives profited from the swift expansion — not least, Kerry K. Killinger, who was WaMu’s chief executive from 1990 until he was forced out in September.

Between 2001 and 2007, Mr. Killinger received compensation of $88 million, according to the Corporate Library, a research firm. He declined to respond to a list of questions, and his spokesman said he was unavailable for an interview.

During Mr. Killinger’s tenure, WaMu pressed sales agents to pump out loans while disregarding borrowers’ incomes and assets, according to former employees. The bank set up what insiders described as a system of dubious legality that enabled real estate agents to collect fees of more than $10,000 for bringing in borrowers, sometimes making the agents more beholden to WaMu than they were to their clients.

WaMu gave mortgage brokers handsome commissions for selling the riskiest loans, which carried higher fees, bolstering profits and ultimately the compensation of the bank’s executives. WaMu pressured appraisers to provide inflated property values that made loans appear less risky, enabling Wall Street to bundle them more easily for sale to investors.

“It was the Wild West,” said Steven M. Knobel, a founder of an appraisal company, Mitchell, Maxwell & Jackson, that did business with WaMu until 2007. “If you were alive, they would give you a loan. Actually, I think if you were dead, they would still give you a loan.”

JPMorgan Chase, which bought WaMu for $1.9 billion in September and received $25 billion a few weeks later as part of the taxpayer bailout of the financial services industry, declined to make former WaMu executives available for interviews.

JPMorgan also declined to comment on WaMu’s operations before it bought the company. “It is a different era for our customers and for the company,” a spokesman said.

For those who placed their faith and money in WaMu, the bank’s implosion came as a shock.

“I never had a clue about the amount of off-the-cliff activity that was going on at Washington Mutual, and I was in constant contact with the company,” said Vincent Au, president of Avalon Partners, an investment firm. “There were people at WaMu that orchestrated nothing more than a sham or charade. These people broke every fundamental rule of running a company.”

CLICK HERE FOR THE REST OF THE ARTICLE.Originally posted at InjuryBoard by Paul Kiesel

Bush and the Economy or Beating a Dead Horse

Paul Kiesel — Tue, 23 Dec 2008 19:20:47 GMT

The New York Times published an article Sunday that broadly examines President Bush's role in our current economic turmoil (how Mr. Bush and his administration held the country's hand and led us down this disatrous and failed economic path).

The article is well written and very informative, however, it oversimplifies the problem and fulfills the desire of providing a face to the problem, which, in many instances, the general population craves in order to "justifiably" place blame: Mr. Bush's and the Bush administration's failed domestic/economic policy brought us to the economic plights of 2008. There is more substance to the country's economic problem than that simplified thesis (and I may have even simplified the thesis of the Times article, incidentally), more because, as we'll shortly see, once Mr. Bush leaves office, the economic turmoil will persist well into 2010.

If one chooses to research the matter further (or has the time to browse through any one of my blogs from May-July, 2008, maybe even using the Times article as a jumping-off point), he or she will quickly discover that Mr. Bush and his administration's ignorance exacerbated the problem, but that it was propelled long ago in securities deregulation legislation.

Below is the aforementioned New York Times article:

The Reckoning

White House Philosophy Stoked Mortgage Bonfire

By JO BECKER, SHERYL GAY STOLBERG and STEPHEN LABATON

“We can put light where there’s darkness, and hope where there’s despondency in this country. And part of it is working together as a nation to encourage folks to own their own home.” — President Bush, Oct. 15, 2002

WASHINGTON — The global financial system was teetering on the edge of collapse when President Bush and his economics team huddled in the Roosevelt Room of the White House for a briefing that, in the words of one participant, “scared the hell out of everybody.”

It was Sept. 18. Lehman Brothers had just gone belly-up, overwhelmed by toxic mortgages. Bank of America had swallowed Merrill Lynch in a hastily arranged sale. Two days earlier, Mr. Bush had agreed to pump $85 billion into the failing insurance giant American International Group.

The president listened as Ben S. Bernanke, chairman of the Federal Reserve, laid out the latest terrifying news: The credit markets, gripped by panic, had frozen overnight, and banks were refusing to lend money.

Then his Treasury secretary, Henry M. Paulson Jr., told him that to stave off disaster, he would have to sign off on the biggest government bailout in history.

Mr. Bush, according to several people in the room, paused for a single, stunned moment to take it all in.

“How,” he wondered aloud, “did we get here?”

Eight years after arriving in Washington vowing to spread the dream of homeownership, Mr. Bush is leaving office, as he himself said recently, “faced with the prospect of a global meltdown” with roots in the housing sector he so ardently championed.

There are plenty of culprits, like lenders who peddled easy credit, consumers who took on mortgages they could not afford and Wall Street chieftains who loaded up on mortgage-backed securities without regard to the risk.

But the story of how we got here is partly one of Mr. Bush’s own making, according to a review of his tenure that included interviews with dozens of current and former administration officials.

From his earliest days in office, Mr. Bush paired his belief that Americans do best when they own their own home with his conviction that markets do best when let alone.

He pushed hard to expand homeownership, especially among minorities, an initiative that dovetailed with his ambition to expand the Republican tent — and with the business interests of some of his biggest donors. But his housing policies and hands-off approach to regulation encouraged lax lending standards.

Mr. Bush did foresee the danger posed by Fannie Mae and Freddie Mac, the government-sponsored mortgage finance giants. The president spent years pushing a recalcitrant Congress to toughen regulation of the companies, but was unwilling to compromise when his former Treasury secretary wanted to cut a deal. And the regulator Mr. Bush chose to oversee them — an old prep school buddy — pronounced the companies sound even as they headed toward insolvency.

As early as 2006, top advisers to Mr. Bush dismissed warnings from people inside and outside the White House that housing prices were inflated and that a foreclosure crisis was looming. And when the economy deteriorated, Mr. Bush and his team misdiagnosed the reasons and scope of the downturn; as recently as February, for example, Mr. Bush was still calling it a “rough patch.”

The result was a series of piecemeal policy prescriptions that lagged behind the escalating crisis.

“There is no question we did not recognize the severity of the problems,” said Al Hubbard, Mr. Bush’s former chief economics adviser, who left the White House in December 2007. “Had we, we would have attacked them.”

Looking back, Keith B. Hennessey, Mr. Bush’s current chief economics adviser, says he and his colleagues did the best they could “with the information we had at the time.” But Mr. Hennessey did say he regretted that the administration did not pay more heed to the dangers of easy lending practices. And both Mr. Paulson and his predecessor, John W. Snow, say the housing push went too far.

“The Bush administration took a lot of pride that homeownership had reached historic highs,” Mr. Snow said in an interview. “But what we forgot in the process was that it has to be done in the context of people being able to afford their house. We now realize there was a high cost.”

For much of the Bush presidency, the White House was preoccupied by terrorism and war; on the economic front, its pressing concerns were cutting taxes and privatizing Social Security. The housing market was a bright spot: ever-rising home values kept the economy humming, as owners drew down on their equity to buy consumer goods and pack their children off to college.

Lawrence B. Lindsey, Mr. Bush’s first chief economics adviser, said there was little impetus to raise alarms about the proliferation of easy credit that was helping Mr. Bush meet housing goals.

“No one wanted to stop that bubble,” Mr. Lindsey said. “It would have conflicted with the president’s own policies.”

Today, millions of Americans are facing foreclosure, homeownership rates are virtually no higher than when Mr. Bush took office, Fannie and Freddie are in a government conservatorship, and the bailout cost to taxpayers could run in the trillions.

As the economy has shed jobs — 533,000 last month alone — and his party has been punished by irate voters, the weakened president has granted his Treasury secretary extraordinary leeway in managing the crisis.

Never once, Mr. Paulson said in a recent interview, has Mr. Bush overruled him. “I’ve got a boss,” he explained, who “understands that when you’re dealing with something as unprecedented and fast-moving as this we need to have a different operating style.”

Mr. Paulson and other senior advisers to Mr. Bush say the administration has responded well to the turmoil, demonstrating flexibility under difficult circumstances. “There is not any playbook,” Mr. Paulson said.

The president declined to be interviewed for this article. But in recent weeks Mr. Bush has shared his views of how the nation came to the brink of economic disaster. He cites corporate greed and market excesses fueled by a flood of foreign cash — “Wall Street got drunk,” he has said — and the policies of past administrations. He blames Congress for failing to reform Fannie and Freddie. Last week, Fox News asked Mr. Bush if he was worried about being the Herbert Hoover of the 21st century.

“No,” Mr. Bush replied. “I will be known as somebody who saw a problem and put the chips on the table to prevent the economy from collapsing.”

But in private moments, aides say, the president is looking inward. During a recent ride aboard Marine One, the presidential helicopter, Mr. Bush sounded a reflective note.

“We absolutely wanted to increase homeownership,” Tony Fratto, his deputy press secretary, recalled him saying. “But we never wanted lenders to make bad decisions.”

A Policy Gone Awry

Darrin West could not believe it. The president of the United States was standing in his living room.

It was June 17, 2002, a day Mr. West recalls as “the highlight of my life.” Mr. Bush, in Atlanta to unveil a plan to increase the number of minority homeowners by 5.5 million, was touring Park Place South, a development of starter homes in a neighborhood once marked by blight and crime.

Mr. West had patrolled there as a police officer, and now he was the proud owner of a $130,000 town house, bought with an adjustable-rate mortgage and a $20,000 government loan as his down payment — just the sort of creative public-private financing Mr. Bush was promoting.

“Part of economic security,” Mr. Bush declared that day, “is owning your own home.”

A lot has changed since then. Mr. West, beset by personal problems, left Atlanta. Unable to sell his home for what he owed, he said, he gave it back to the bank last year. Like other communities across America, Park Place South has been hit with a foreclosure crisis affecting at least 10 percent of its 232 homes, according to Masharn Wilson, a developer who led Mr. Bush’s tour.

“I just don’t think what he envisioned was actually carried out,” she said.

Park Place South is, in microcosm, the story of a well-intentioned policy gone awry. Advocating homeownership is hardly novel; the Clinton administration did it, too. For Mr. Bush, it was part of his vision of an “ownership society,” in which Americans would rely less on the government for health care, retirement and shelter. It was also good politics, a way to court black and Hispanic voters.

But for much of Mr. Bush’s tenure, government statistics show, incomes for most families remained relatively stagnant while housing prices skyrocketed. That put homeownership increasingly out of reach for first-time buyers like Mr. West.

So Mr. Bush had to, in his words, “use the mighty muscle of the federal government” to meet his goal. He proposed affordable housing tax incentives. He insisted that Fannie Mae and Freddie Mac meet ambitious new goals for low-income lending.

Concerned that down payments were a barrier, Mr. Bush persuaded Congress to spend up to $200 million a year to help first-time buyers with down payments and closing costs.

And he pushed to allow first-time buyers to qualify for federally insured mortgages with no money down. Republican Congressional leaders and some housing advocates balked, arguing that homeowners with no stake in their investments would be more prone to walk away, as Mr. West did. Many economic experts, including some in the White House, now share that view.

The president also leaned on mortgage brokers and lenders to devise their own innovations. “Corporate America,” he said, “has a responsibility to work to make America a compassionate place.”

And corporate America, eyeing a lucrative market, delivered in ways Mr. Bush might not have expected, with a proliferation of too-good-to-be-true teaser rates and interest-only loans that were sold to investors in a loosely regulated environment.

“This administration made decisions that allowed the free market to operate as a barroom brawl instead of a prize fight,” said L. William Seidman, who advised Republican presidents and led the savings and loan bailout in the 1990s. “To make the market work well, you have to have a lot of rules.”

But Mr. Bush populated the financial system’s alphabet soup of oversight agencies with people who, like him, wanted fewer rules, not more.

Like Minds on Laissez-Faire

The president’s first chairman of the Securities and Exchange Commission promised a “kinder, gentler” agency. The second was pushed out amid industry complaints that he was too aggressive. Under its current leader, the agency failed to police the catastrophic decisions that toppled the investment bank Bear Stearns and contributed to the current crisis, according to a recent inspector general’s report.

As for Mr. Bush’s banking regulators, they once brandished a chain saw over a 9,000-page pile of regulations as they promised to ease burdens on the industry. When states tried to use consumer protection laws to crack down on predatory lending, the comptroller of the currency blocked the effort, asserting that states had no authority over national banks.

The administration won that fight at the Supreme Court. But Roy Cooper, North Carolina’s attorney general, said, “They took 50 sheriffs off the beat at a time when lending was becoming the Wild West.”

The president did push rules aimed at forcing lenders to more clearly explain loan terms. But the White House shelved them in 2004, after industry-friendly members of Congress threatened to block confirmation of his new housing secretary.

In the 2004 election cycle, mortgage bankers and brokers poured nearly $847,000 into Mr. Bush’s re-election campaign, more than triple their contributions in 2000, according to the nonpartisan Center for Responsive Politics. The administration did not finalize the new rules until last month.

Among the Republican Party’s top 10 donors in 2004 was Roland Arnall. He founded Ameriquest, then the nation’s largest lender in the subprime market, which focuses on less creditworthy borrowers. In July 2005, the company agreed to set aside $325 million to settle allegations in 30 states that it had preyed on borrowers with hidden fees and ballooning payments. It was an early signal that deceptive lending practices, which would later set off a wave of foreclosures, were widespread.

Andrew H. Card Jr., Mr. Bush’s former chief of staff, said White House aides discussed Ameriquest’s troubles, though not what they might portend for the economy. Mr. Bush had just nominated Mr. Arnall as his ambassador to the Netherlands, and the White House was primarily concerned with making sure he would be confirmed.

“Maybe I was asleep at the switch,” Mr. Card said in an interview.

Brian Montgomery, the Federal Housing Administration commissioner, understood the significance. His agency insures home loans, traditionally for the same low-income minority borrowers Mr. Bush wanted to help. When he arrived in June 2005, he was shocked to find those customers had been lured away by the “fool’s gold” of subprime loans. The Ameriquest settlement, he said, reinforced his concern that the industry was exploiting borrowers.

In December 2005, Mr. Montgomery drafted a memo and brought it to the White House. “I don’t think this is what the president had in mind here,” he recalled telling Ryan Streeter, then the president’s chief housing policy analyst.

It was an opportunity to address the risky subprime lending practices head on. But that was never seriously discussed. More senior aides, like Karl Rove, Mr. Bush’s chief political strategist, were wary of overly regulating an industry that, Mr. Rove said in an interview, provided “a valuable service to people who could not otherwise get credit.” While he had some concerns about the industry’s practices, he said, “it did provide an opportunity for people, a lot of whom are still in their houses today.”

The White House pursued a narrower plan offered by Mr. Montgomery that would have allowed the F.H.A. to loosen standards so it could lure back subprime borrowers by insuring similar, but safer, loans. It passed the House but died in the Senate, where Republican senators feared that the agency would merely be mimicking the private sector’s risky practices — a view Mr. Rove said he shared.

Looking back at the episode, Mr. Montgomery broke down in tears. While he acknowledged that the bill did not get to the root of the problem, he said he would “go to my grave believing” that at least some homeowners might have been spared foreclosure.

Today, administration officials say it is fair to ask whether Mr. Bush’s ownership push backfired. Mr. Paulson said the administration, like others before it, “over-incented housing.” Mr. Hennessey put it this way: “I would not say too much emphasis on expanding homeownership. I would say not enough early focus on easy lending practices.”

‘We Told You So’

Armando Falcon Jr. was preparing to take on a couple of giants.

A soft-spoken Texan, Mr. Falcon ran the Office of Federal Housing Enterprise Oversight, a tiny government agency that oversaw Fannie Mae and Freddie Mac, two pillars of the American housing industry. In February 2003, he was finishing a blockbuster report that warned the pillars could crumble.

Created by Congress, Fannie and Freddie — called G.S.E.’s, for government-sponsored entities — bought trillions of dollars’ worth of mortgages to hold or sell to investors as guaranteed securities. The companies were also Washington powerhouses, stuffing lawmakers’ campaign coffers and hiring bare-knuckled lobbyists.

Mr. Falcon’s report outlined a worst-case situation in which Fannie and Freddie could default on debt, setting off “contagious illiquidity in the market” — in other words, a financial meltdown. He also raised red flags about the companies’ soaring use of derivatives, the complex financial instruments that economic experts now blame for spreading the housing collapse.

Today, the White House cites that report — and its subsequent effort to better regulate Fannie and Freddie — as evidence that it foresaw the crisis and tried to avert it. Bush officials recently wrote up a talking points memo headlined “G.S.E.’s — We Told You So.”

But the back story is more complicated. To begin with, on the day Mr. Falcon issued his report, the White House tried to fire him.

At the time, Fannie and Freddie were allies in the president’s quest to drive up homeownership rates; Franklin D. Raines, then Fannie’s chief executive, has fond memories of visiting Mr. Bush in the Oval Office and flying aboard Air Force One to a housing event. “They loved us,” he said.

So when Mr. Falcon refused to deep-six his report, Mr. Raines took his complaints to top Treasury officials and the White House. “I’m going to do what I need to do to defend my company and my position,” Mr. Raines told Mr. Falcon.

Days later, as Mr. Falcon was in New York preparing to deliver a speech about his findings, his cellphone rang. It was the White House personnel office, he said, telling him he was about to be unemployed.

His warnings were buried in the next day’s news coverage, trumped by the White House announcement that Mr. Bush would replace Mr. Falcon, a Democrat appointed by Bill Clinton, with Mark C. Brickell, a leader in the derivatives industry that Mr. Falcon’s report had flagged.

It was not until 2003, when Freddie became embroiled in an accounting scandal, that the White House took on the companies in earnest. Mr. Bush decided to quit the long-standing practice of rewarding supporters with high-paying appointments to the companies’ boards — “political plums,” in Mr. Rove’s words. He also withdrew Mr. Brickell’s nomination and threw his support behind Mr. Falcon, beginning an intense effort to give his little regulatory agency more power.

Mr. Falcon lacked explicit authority to limit the size of the companies’ mammoth investment portfolios, or tell them how much capital they needed to guard against losses. White House officials wanted that to change. They also wanted the power to put the companies into receivership, hoping that would end what Mr. Card, the former chief of staff, called “the myth of government backing,” which gave the companies a competitive edge because investors assumed the government would not let them fail.

By the spring of 2005 a deal with Congress seemed within reach, Mr. Snow, the former Treasury secretary, said in an interview.

Michael G. Oxley, an Ohio Republican and then-chairman of the House Financial Services Committee, had produced what Mr. Snow viewed as “a pretty darned good bill,” a watered-down version of what the president sought. But at the urging of Mr. Card and the White House economics team, the president decided to hold out for a tougher bill in the Senate.

Mr. Card said he feared that Mr. Snow was “more interested in the deal than the result.” When the bill passed the House, the president issued a statement opposing it, effectively killing any chance of compromise. Mr. Oxley was furious.

“The problem with those guys at the White House, they had all the answers and they didn’t think they had to listen to anyone, including the Treasury secretary,” Mr. Oxley said in a recent interview. “They were driving the ideological train. He was in the caboose, and they were in the engine room.”

Mr. Card and Mr. Hennessey said they had no regrets. They are convinced, Mr. Hennessey said, that the Oxley bill would have produced “the worst of all possible outcomes,” the illusion of reform without the substance.

Still, some former White House and Treasury officials continue to debate whether Mr. Bush’s all-or-nothing approach scuttled a measure that, while imperfect, might have given an aggressive regulator enough power to keep the companies from failing.

Mr. Snow, for one, calls Mr. Oxley “a hero,” adding, “He saw the need to move. It didn’t get done. And it’s too bad, because I think if it had, I think we could well have avoided a big contributor to the current crisis.”

Unheeded Warnings

Jason Thomas had a nagging feeling.

The New Century Financial Corporation, a huge subprime lender whose mortgages were bundled into securities sold around the world, was headed for bankruptcy in March 2007. Mr. Thomas, an economic analyst for President Bush, was responsible for determining whether it was a hint of things to come.

At 29, Mr. Thomas had followed a fast-track career path that took him from a Buffalo meatpacking plant, where he worked as a statistician, to the White House. He was seen as a whiz kid, “a brilliant guy,” his former boss, Mr. Hubbard, says.

As Mr. Thomas began digging into New Century’s failure that spring, he became fixated on a particular statistic, the rent-to-own ratio.

Typically, as home prices increase, rental costs rise proportionally. But Mr. Thomas sent charts to top White House and Treasury officials showing that the monthly cost of owning far outpaced the cost to rent. To Mr. Thomas, it was a sign that housing prices were wildly inflated and bound to plunge, a condition that could set off a foreclosure crisis as conventional and subprime borrowers with little equity found they owed more than their houses were worth.

It was not the Bush team’s first warning. The previous year, Mr. Lindsey, the former chief economics adviser, returned to the White House to tell his old colleagues that housing prices were headed for a crash. But housing values are hard to evaluate, and Mr. Lindsey had a reputation as a market pessimist, said Mr. Hubbard, adding, “I thought, ‘He’s always a bear.’ ”

In retrospect, Mr. Hubbard said, Mr. Lindsey was “absolutely right,” and Mr. Thomas’s charts “should have been a signal.”

Instead, the prevailing view at the White House was that the problems in the housing market were limited to subprime borrowers unable to make their payments as their adjustable mortgages reset to higher rates. That belief was shared by Mr. Bush’s new Treasury secretary, Mr. Paulson.

Mr. Paulson, a former chairman of the Wall Street firm Goldman Sachs, had been given unusual power; he had accepted the job only after the president guaranteed him that Treasury, not the White House, would have the dominant role in shaping economic policy. That shift merely continued an imbalance of power that stifled robust policy debate, several former Bush aides say.

Throughout the spring of 2007, Mr. Paulson declared that “the housing market is at or near the bottom,” with the problem “largely contained.” That position underscored nearly every action the Bush administration took in the ensuing months as it offered one limited response after another.

By that August, the problems had spread beyond New Century. Credit was tightening, amid questions about how heavily banks were invested in securities linked to mortgages. Still, Mr. Bush predicted that the turmoil would resolve itself with a “soft landing.”

The plan Mr. Bush announced on Aug. 31 reflected that belief. Called “F.H.A. Secure,” it aimed to help about 80,000 homeowners refinance their loans. Mr. Montgomery, the housing commissioner, said that he knew the modest program was not enough — the White House later expanded the agency’s rescue role — and that he would be “flying the plane and fixing it at the same time.”

That fall, Representative Rahm Emanuel, a leading Democrat, former investment banker and now the incoming chief of staff to President-elect Barack Obama, warned the White House it was not doing enough. He said he told Joshua B. Bolten, Mr. Bush’s chief of staff, and Mr. Paulson in a series of phone calls that the credit crisis would get “deep and serious” and that the only answer was big, internationally coordinated government intervention.

“You got to strangle this thing and suffocate it,” he recalled saying.

Instead, Mr. Bush developed Hope Now, a voluntary public-private partnership to help struggling homeowners refinance loans. And he worked with Congress to pass a stimulus package that sent taxpayers $150 billion in tax rebates.

In a speech to the Economic Club of New York in March 2008, he cautioned against Washington’s temptation “to say that anything short of a massive government intervention in the housing market amounts to inaction,” adding that government action could make it harder for the markets to recover.

Dominoes Start to Fall

Within days, Bear Sterns collapsed, prompting the Federal Reserve to engineer a hasty sale. Some economic experts, including Timothy F. Geithner, the president of the New York Federal Reserve Bank (and Mr. Obama’s choice for Treasury secretary) feared that Fannie Mae and Freddie Mac could be the next to fall.

Mr. Bush was still leaning on Congress to revamp the tiny agency that oversaw the two companies, and had acceded to Mr. Paulson’s request for the negotiating room that he had denied Mr. Snow. Still, there was no deal.

Over the previous two years, the White House had effectively set the agency adrift. Mr. Falcon left in 2005 and was replaced by a temporary director, who was in turn replaced by James B. Lockhart, a friend of Mr. Bush from their days at Andover, and a former deputy commissioner of the Social Security Administration who had once run a software company.

On Mr. Lockhart’s watch, both Freddie and Fannie had plunged into the riskiest part of the market, gobbling up more than $400 billion in subprime and other alternative mortgages. With the companies on precarious footing, Mr. Geithner had been advocating that the administration seize them or take other steps to reassure the market that the government would back their debt, according to two people with direct knowledge of his views.

In an Oval Office meeting on March 17, however, Mr. Paulson barely mentioned the idea, according to several people present. He wanted to use the troubled companies to unlock the frozen credit market by allowing Fannie and Freddie to buy more mortgage-backed securities from overburdened banks. To that end, Mr. Lockhart’s office planned to lift restraints on the companies’ huge portfolios — a decision derided by former White House and Treasury officials who had worked so hard to limit them.

But Mr. Paulson told Mr. Bush the companies would shore themselves up later by raising more capital.

“Can they?” Mr. Bush asked.

“We’re hoping so,” the Treasury secretary replied.

That turned out to be incorrect, and did not surprise Mr. Thomas, the Bush economic adviser. Throughout that spring and summer, he warned the White House and Treasury that, in the stark words of one e-mail message, “Freddie Mac is in trouble.” And Mr. Lockhart, he charged, was allowing the company to cover up its insolvency with dubious accounting maneuvers.

But Mr. Lockhart continued to offer reassurances. In a July appearance on CNBC, he declared that the companies were well managed and “worsts were not coming to worst.” An infuriated Mr. Thomas sent a fresh round of e-mail messages accusing Mr. Lockhart of “pimping for the stock prices of the undercapitalized firms he regulates.”

Mr. Lockhart defended himself, insisting in an interview that he was aware of the companies’ vulnerabilities, but did not want to rattle markets.

“A regulator,” he said, “does not air dirty laundry in public.”

Soon afterward, the companies’ stocks lost half their value in a single day, prompting Congress to quickly give Mr. Paulson the power to spend $200 billion to prop them up and to finally pass Mr. Bush’s long-sought reform bill, but it was too late. In September, the government seized control of Freddie Mac and Fannie Mae.

In an interview, Mr. Paulson said the administration had no justification to take over the companies any sooner. But Mr. Falcon disagreed: “They absolutely could have if they had thought there was a real danger.”

By Sept. 18, when Mr. Bush and his team had their fateful meeting in the Roosevelt Room after the failure of Lehman Brothers and the emergency rescue of A.I.G., Mr. Paulson was warning of an economic calamity greater than the Great Depression. Suddenly, historic government intervention seemed the only option. When Mr. Paulson spelled out what would become a $700 billion plan to rescue the nation’s banking system, the president did not hesitate.

“Is that enough?” Mr. Bush asked.

“It’s a lot,” the Treasury secretary recalled replying. “It will make a difference.” And in any event, he told Mr. Bush, “I don’t think we can get more.”

As the meeting wrapped up, a handful of aides retreated to the White House Situation Room to call Vice President Dick Cheney in Florida, where he was attending a fund-raiser. Mr. Cheney had long played a leading role in economic policy, though housing was not a primary interest, and like Mr. Bush he had a deep aversion to government intervention in the market. Nonetheless, he backed the bailout, convinced that too many Americans would suffer if Washington did nothing.

Mr. Bush typically darts out of such meetings quickly. But this time, he lingered, patting people on the back and trying to soothe his downcast staff. “During times of adversity, he bucks everybody up,” Mr. Paulson said.

It was not the end of the failures or government interventions; the administration has since stepped in to rescue Citigroup and, just last week, the Detroit automakers. With 31 days left in office, Mr. Bush says he will leave it to historians to analyze “what went right and what went wrong,” as he put it in a speech last week to the American Enterprise Institute.

Mr. Bush said he was too focused on the present to do much looking back.

“It turns out,” he said, “this isn’t one of the presidencies where you ride off into the sunset, you know, kind of waving goodbye.”

Originally posted at InjuryBoard by Paul Kiesel

Home Loans Past Due or in Foreclosure in California: 1-in-9

Paul Kiesel — Fri, 05 Dec 2008 17:58:01 GMT

The biggest economic news of the day had to be America's economy shedding over 500,000 jobs last month, a number that has not been exceeded in one month in 34 years. However, below are two statistics that show other troubling news (and a sign that the economy, because of continued job loss and distressed homeowners, will continue on its declivitous path for several more months) that was largely overlooked due to the former news and building political tensions surrounding the possibility of an "auto bailout."

Home loans past due or in the foreclosure process in the U.S.: 1 in 10.
Home loans past due or in foreclosure in California: 1 in 9.

California has had more homes in the foreclosure process throughout all of 2008. According to the Mortgage Bankers Association, 3.9% of all homes in the state face foreclosure, compared with 2.97% of homes nationally.

MBA economist Jay Brinkmann said the national trends still reflected intense problems with adjustable-rate subprime mortgages in California and Florida.

"Prime and subprime ARMs continue to have the highest share of foreclosures, and California and Florida have about 54% and 41% of the prime and subprime ARM foreclosure starts, respectively. Until those two markets turn around, they will continue to drive the national numbers,” Brinkmann said.

Naturally, the MBA blamed the sagging economy and rising unemployment for worsening the crisis that began with the abandonment of traditional lending standards during the housing boom. The group said its survey covered more than 80% of the home loans in the country.

With half a million more people out of work, the mortgage meltdown will get its exacerbated push into the second round, where we'll see the prime "Pick-a-Payment" Option ARM loans (which were littered with TILA violations) have interest rate resets, forcing hundreds of thousands of homeowners to default or go into foreclosure.

Originally posted at InjuryBoard by Paul Kiesel

NYT: Former SEC Lawyer, "Phil Gramm is the Single Most Important Reason for the Current Financial Crisis"

Paul Kiesel — Mon, 17 Nov 2008 21:06:05 GMT

If there's no such thing as bad publicity, why is it that 2008, for former Republican senator Phil Gramm, has been nothing but bad publicity for the man who John McCain once credited with saving his sagging presidential campaign back in the summer of 2007. However, when has Phil Gramm ever received good publicity? Even when he ran for president in 1996, he was panned by both left and right political pundits:

"When he ran for president in 1996 and finished fifth in Iowa, all the profiles written of him included the line 'Even his friends don’t like him.' Self-righteous and strident, Gramm demonized his opponents and used bitter, polarizing rhetoric. During a Senate debate over Social Security, a member pointed out that the proposal under consideration would hurt 80-year-old retirees. 'Most people don’t have the luxury of living to be 80 years old,' Gramm scoffed, 'so it’s hard for me to feel sorry for them.'" (New York Times, 1/22/08)

Anyway, today's New York Times had an excellent article that expands upon a lot of what I've discussed in my blog for the past eight months. And, yet, Phil Gramm has no remorse per the country's economic health and still feels that everything he did as a senator was great for the economy and had nothing to do with the current financial crisis. Mr. Gramm, in a very ironic posit, at least ironic based on what almost every economist knows (i.e. his deregulation legislation from the late-90s, says that, "They [his critics] are saying there was 15 years of massive deregulation and that’s what caused the problem [. . .] I just don’t see any evidence of it.” This would be true, Mr. Gramm, if your name wasn't on two of the greatest legislative overhauls to the banking industry since the Great Depression, the Gramm-Leach-Bliley Act and Commodity Futures Modernization Act.

From the New York Times, 11/17/08:

WASHINGTON — Back in 1950 in Columbus, Ga., a young nurse working double shifts to support her three children and disabled husband managed to buy a modest bungalow on a street called Dogwood Avenue.

Phil Gramm, the former United States senator, often told that story of how his mother acquired his childhood home. Considered something of a risk, she took out a mortgage with relatively high interest rates that he likened to today’s subprime loans.

A fierce opponent of government intervention in the marketplace, Mr. Gramm, a Republican from Texas, recalled the episode during a 2001 Senate debate over a measure to curb predatory lending. What some view as exploitive, he argued, others see as a gift.

“Some people look at subprime lending and see evil. I look at subprime lending and I see the American dream in action,” he said. “My mother lived it as a result of a finance company making a mortgage loan that a bank would not make.”

On Capitol Hill, Mr. Gramm became the most effective proponent of deregulation in a generation, by dint of his expertise (a Ph.D in economics), free-market ideology, perch on the Senate banking committee and force of personality (a writer in Texas once called him “a snapping turtle”). And in one remarkable stretch from 1999 to 2001, he pushed laws and promoted policies that he says unshackled businesses from needless restraints but his critics charge significantly contributed to the financial crisis that has rattled the nation.

He led the effort to block measures curtailing deceptive or predatory lending, which was just beginning to result in a jump in home foreclosures that would undermine the financial markets. He advanced legislation that fractured oversight of Wall Street while knocking down Depression-era barriers that restricted the rise and reach of financial conglomerates.

And he pushed through a provision that ensured virtually no regulation of the complex financial instruments known as derivatives, including credit swaps, contracts that would encourage risky investment practices at Wall Street’s most venerable institutions and spread the risks, like a virus, around the world.

Many of his deregulation efforts were backed by the Clinton administration. Other members of Congress — who collectively received hundreds of millions of dollars in campaign contributions from financial industry donors over the last decade — also played roles.

Many lawmakers, for example, insisted that Fannie Mae and Freddie Mac, the nation’s largest mortgage finance companies, take on riskier mortgages in an effort to aid poor families. Several Republicans resisted efforts to address lending abuses. And Congressional committees failed to address early symptoms of the coming illness.

But, until he left Capitol Hill in 2002 to work as an investment banker and lobbyist for UBS, a Swiss bank that has been hard hit by the market downturn, it was Mr. Gramm who most effectively took up the fight against more government intervention in the markets.

“Phil Gramm was the great spokesman and leader of the view that market forces should drive the economy without regulation,” said James D. Cox, a corporate law scholar at Duke University. “The movement he helped to lead contributed mightily to our problems.”

In two recent interviews, Mr. Gramm described the current turmoil as “an incredible trauma,” but said he was proud of his record.

He blamed others for the crisis: Democrats who dropped barriers to borrowing in order to promote homeownership; what he once termed “predatory borrowers” who took out mortgages they could not afford; banks that took on too much risk; and large financial institutions that did not set aside enough capital to cover their bad bets.

But looser regulation played virtually no role, he argued, saying that is simply an emerging myth.

“There is this idea afloat that if you had more regulation you would have fewer mistakes,” he said. “I don’t see any evidence in our history or anybody else’s to substantiate it.” He added, “The markets have worked better than you might have thought.”

Rejecting Common Wisdom

Mr. Gramm sees himself as a myth buster, and has long argued that economic events are misunderstood.

Before entering politics in the 1970s, he taught at Texas A & M University. He studied the Great Depression, producing research rejecting the conventional wisdom that suicides surged after the market crashed. He examined financial panics of the 19th century, concluding that policy makers and economists had repeatedly misread events to justify burdensome regulation.

“There is always a revisionist history that tries to claim that the system has failed and what we need to do is have government run things,” he said.

From the start of his career in Washington, Mr. Gramm aggressively promoted his conservative ideology and free-market beliefs. (He was so insistent about having his way that one House speaker joked that if Mr. Gramm had been around when Moses brought the Ten Commandments down from Mount Sinai, the Texan would have substituted his own.)

He could be impolitic. Over the years, he has urged that food stamps be cut because “all our poor people are fat,” said it was hard for him “to feel sorry” for Social Security recipients and, as the economy soured last summer, called America “a nation of whiners.”

His economic views — and seat on the Senate banking committee — quickly won him support from the nation’s major financial institutions. From 1989 to 2002, federal records show, he was the top recipient of campaign contributions from commercial banks and in the top five for donations from Wall Street. He and his staff often appeared at industry-sponsored speaking events around the country.

From 1999 to 2001, Congress first considered steps to curb predatory loans — those that typically had high fees, significant prepayment penalties and ballooning monthly payments and were often issued to low-income borrowers. Foreclosures on such loans were on the rise, setting off a wave of personal bankruptcies.

But Mr. Gramm did everything he could to block the measures. In 2000, he refused to have his banking committee consider the proposals, an intervention hailed by the National Association of Mortgage Brokers as a “huge, huge step for us.”

A year later, he objected again when Democrats tried to stop lenders from being able to pursue claims in bankruptcy court against borrowers who had defaulted on predatory loans.

While acknowledging some abuses, Mr. Gramm argued that the measure would drive thousands of reputable lenders out of the housing market. And he told fellow senators the story of his mother and her mortgage.

“What incredible exploitation,” he said sarcastically. “As a result of that loan, at a 50 percent premium, so far as I am aware, she was the first person in her family, from Adam and Eve, ever to own her own home.”

Once again, he succeeded in putting off consideration of lending restrictions. His opposition infuriated consumer advocates. “He wouldn’t listen to reason,” said Margot Saunders of the National Consumer Law Center. “He would not allow himself to be persuaded that the free market would not be working.”

Speaking at a bankers’ conference that month, Mr. Gramm said the problem of predatory loans was not of the banks’ making. Instead, he faulted “predatory borrowers.” The American Banker, a trade publication, later reported that he was greeted “like a conquering hero.”

At the Altar of Wall Street

Mr. Gramm would sometimes speak with reverence about the nation’s financial markets, the trading and deal making that churn out wealth.

“When I am on Wall Street and I realize that that’s the very nerve center of American capitalism and I realize what capitalism has done for the working people of America, to me that’s a holy place,” he said at an April 2000 Senate hearing after a visit to New York.

That viewpoint — and concerns that Wall Street’s dominance was threatened by global competition and outdated regulations — shaped his agenda.

In late 1999, Mr. Gramm played a central role in what would be the most significant financial services legislation since the Depression. The Gramm-Leach-Bliley Act, as the measure was called, removed barriers between commercial and investment banks that had been instituted to reduce the risk of economic catastrophes. Long sought by the industry, the law would let commercial banks, securities firms and insurers become financial supermarkets offering an array of services.

The measure, which Mr. Gramm helped write and move through the Senate, also split up oversight of conglomerates among government agencies. The Securities and Exchange Commission, for example, would oversee the brokerage arm of a company. Bank regulators would supervise its banking operation. State insurance commissioners would examine the insurance business. But no single agency would have authority over the entire company.

“There was no attention given to how these regulators would interact with one another,” said Professor Cox of Duke. “Nobody was looking at the holes of the regulatory structure.”

The arrangement was a compromise required to get the law adopted. When the law was signed in November 1999, he proudly declared it “a deregulatory bill,” and added, “We have learned government is not the answer.”

In the final days of the Clinton administration a year later, Mr. Gramm celebrated another triumph. Determined to close the door on any future regulation of the emerging market of derivatives and swaps, he helped pushed through legislation that accomplished that goal.

Created to help companies and investors limit risk, swaps are contracts that typically work like a form of insurance. A bank concerned about rises in interest rates, for instance, can buy a derivatives instrument that would protect it from rate swings. Credit-default swaps, one type of derivative, could protect the holder of a mortgage security against a possible default.

Earlier laws had left the regulation issue sufficiently ambiguous, worrying Wall Street, the Clinton administration and lawmakers of both parties, who argued that too many restrictions would hurt financial activity and spur traders to take their business overseas. And while the Commodity Futures Trading Commission — under the leadership of Mr. Gramm’s wife, Wendy — had approved rules in 1989 and 1993 exempting some swaps and derivatives from regulation, there was still concern that step was not enough.

After Mrs. Gramm left the commission in 1993, several lawmakers proposed regulating derivatives. By spreading risks, they and other critics believed, such contracts made the system prone to cascading failures. Their proposals, though, went nowhere.

But late in the Clinton administration, Brooksley E. Born, who took over the agency Mrs. Gramm once led, raised the issue anew. Her suggestion for government regulations alarmed the markets and drew fierce opposition.

In November 1999, senior Clinton administration officials, including Treasury Secretary Lawrence H. Summers, joined by the Federal Reserve chairman, Alan Greenspan, and Arthur Levitt Jr., the head of the Securities and Exchange Commission, issued a report that instead recommended legislation exempting many kinds of derivatives from federal oversight.

Mr. Gramm helped lead the charge in Congress. Demanding even more freedom from regulators than the financial industry had sought, he persuaded colleagues and negotiated with senior administration officials, pushing so hard that he nearly scuttled the deal. “When I get in the red zone, I like to score,” Mr. Gramm told reporters at the time.

Finally, he had extracted enough. In December 2000, the Commodity Futures Modernization Act was passed as part of a larger bill by unanimous consent after Mr. Gramm dominated the Senate debate.

“This legislation is important to every American investor,” he said at the time. “It will keep our markets modern, efficient and innovative, and it guarantees that the United States will maintain its global dominance of financial markets.”

But some critics worried that the lack of oversight would allow abuses that could threaten the economy.

Frank Partnoy, a law professor at the University of San Diego and an expert on derivatives, said, “No one, including regulators, could get an accurate picture of this market. The consequences of that is that it left us in the dark for the last eight years.” And, he added, “Bad things happen when it’s dark.”

In 2002, Mr. Gramm left Congress, joining UBS as a senior investment banker and head of the company’s lobbying operation.

But he would not be abandoning Washington.

Lobbying From the Outside

Soon, he was helping persuade lawmakers to block Congressional Democrats’ efforts to combat predatory lending. He arranged meetings with executives and top Washington officials. He turned over his $1 million political action committee to a former aide to make donations to like-minded lawmakers.

Mr. Gramm, now 66, who declined to discuss his compensation at UBS, picked an opportune moment to move to Wall Street. Major financial institutions, including UBS, were growing, partly as a result of the Gramm-Leach-Bliley Act.

Increasingly, institutions were trading the derivatives instruments that Mr. Gramm had helped escape the scrutiny of regulators. UBS was collecting hundreds of millions of dollars from credit-default swaps. (Mr. Gramm said he was not involved in that activity at the bank.) In 2001, a year after passage of the commodities law, the derivatives market insured about $900 billion worth of credit; by last year, the number hadswelled to $62 trillion.

But as housing prices began to fall last year, foreclosure rates began to rise, particularly in regions where there had been heavy use of subprime loans. That set off a calamitous chain of events. The weak housing markets would create strains that eventually would have financial institutions around the world on the edge of collapse.

UBS was among them. The bank has declared nearly $50 billion in credit losses and write-downs since the start of last year, prompting a bailout of up to $60 billion by the Swiss government.

As Mr. Gramm’s record in Congress has come under attack amid all the turmoil, some former colleagues have come to his defense.

“He is a true dyed-in-the-wool free-market guy. He is very much a purist, an idealist, as he has a set of principles and he has never abandoned them,” said Peter G. Fitzgerald, a Republican and former senator from Illinois. “This notion of blaming the economic collapse on Phil Gramm is absurd to me.”

But Michael D. Donovan, a former S.E.C. lawyer, faulted Mr. Gramm for his insistence on deregulating the derivatives market.

“He was the architect, advocate and the most knowledgeable person in Congress on these topics,” Mr. Donovan said. “To me, Phil Gramm is the single most important reason for the current financial crisis.”

Mr. Gramm, ever the economics professor, disputes his critics’ analysis of the causes of the upheaval. He asserts that swaps, by enabling companies to insure themselves against defaults, have diminished, not increased, the effects of the declining housing markets.

“This is part of this myth of deregulation,” he said in the interview. “By and large, credit-default swaps have distributed the risks. They didn’t create it. The only reason people have focused on them is that some politicians don’t know a credit-default swap from a turnip.”

But many experts disagree, including some of Mr. Gramm’s former allies in Congress. They say the lack of oversight left the system vulnerable.

“The virtually unregulated over-the-counter market in credit-default swaps has played a significant role in the credit crisis, including the now $167 billion taxpayer rescue of A.I.G.,” Christopher Cox, the chairman of the S.E.C. and a former congressman, said Friday.

Mr. Gramm says that, given what has happened, there are modest regulatory changes he would favor, including requiring issuers of credit-default swaps to demonstrate that they have enough capital to back up their pledges. But his belief that government should intervene only minimally in markets is unshaken.

“They are saying there was 15 years of massive deregulation and that’s what caused the problem,” Mr. Gramm said of his critics. “I just don’t see any evidence of it.”

Originally posted at InjuryBoard by Paul Kiesel

Downey Savings: We Need a Cash Infusion

Paul Kiesel — Wed, 12 Nov 2008 20:58:22 GMT

Downey Savings might be the next bank to require government intervention (i.e. see FDIC IndyMac), as its most recent quarterly filing cites a "significant risk that the bank will not be able to raise sufficient additional capital to ensure compliance with the capital requirements of the bank consent order by yearend." Meaning: if Downey does indeed fail, it'll be put into federal receivership (what the FDIC did on July 11, 2008 to IndyMac).

The main reason Downey Savings finds itself in this predicament: "Of the bank’s $12.8 billion in total assets, $5.7 billion were in the form of option ARMs held in portfolio at the end of the third quarter; deposits totaled just $9.6 billion at quarter end, down $1 billion from one year ago, as depositors withdrew funds over concerns about the bank’s future," (HousingWire.com, 11/12/08).

And if Downey is struggling that badly in its current financial state due to the amount of toxic option ARM loans it has on its balance sheet, wait till the other batch of option ARMs that were originated in 2007 have interest rate resets. These interest rate resets are predicated on: 1. The loans being negative amortizing; 2. The interest that's not being paid is compounded (this is typical of Pick-a-Pay Option ARM Loans; Downey carelessly sold many of these loans to Californians), which forces the loan to reset its interest rate the moment the principal balance reaches 110% of the original amount (sometimes 115%); 3. The next wave of interest rate resets are taking slightly longer to occur then the first wave, because the fed has been lowering interest rates, thus, the second set of option ARM loan interest rate resets might not occur till mid-2009.

However, if banks like Downey are able to modify a borrower's loan terms, and take a short-term hit, in hopes of preventing a potentially worse sequel to the current mortgage mess, then they might be able to make it out of this with their heads above water. If not, banks like Downey will continue to struggle with satisfying regulator-mandated capital requirements, with the exception of a cash infusion from another party.

Downey has yet to announce plans of a loan modification program, thereby finding itself ostensibly driving down the same bumpy road that IndyMac was recklessly swerving down back in the spring.

Originally posted at InjuryBoard by Paul Kiesel

HUD Requiring Lenders to Provide "Good Faith Estimate" Forms to Borrowers -- Will It Work to Prevent TILA Violations?

Paul Kiesel — Wed, 12 Nov 2008 15:03:37 GMT

From the Los Angeles Times' L.A. Land Blog; SEE BOLD CAPS for commentary:

Past attempts to disclose mortgage information to homebuyers have resulted in thick stacks of documents dropped like bricks on the table as the sale is completed. (WHICH ALLOWED FOR RAMPANT TILA VIOLATIONS: KEY LOAN INFORMATION WAS AMBIGUOUSLY DISCLOSED AND LACKED TRANSPARENCY PUTTING THE BORROWER AT A HUGE DISADVANTAGE AND/OR INFORMATION -- LIKE THE LOAN BEING A NEGATIVE AMORTIZING LOAN -- WAS OMITTED ALL TOGETHER.)

All too often, consumer advocates say, borrowers simply grab the pen and start signing with little regard to what's in the documents, especially in states such as California where lawyers aren't required at closing. That, the advocates say, has contributed to the fraud that seemed especially prevalent in the market for subprime and complex nontraditional mortgages (E.G. PICK A PAYMENT OPTION ARM LOANS.)

Attempts continue to make mortgages terms clearer, the latest coming today from the U.S. Department of Housing and Urban Development, which is requiring lenders and mortgage brokers to provide a standardized three-page good faith estimate to borrowers. Key aspects of the loan, including settlement costs, are on lines replicated on the final settlement document known as HUD-1, to make any changes apparent. (THE PROBLEM WITH THIS THREE (3) PAGE FORM IS THAT IT DOES NOT ADDRESS ONE OF THE MAIN THE INADEQUACIES UNDERLYING THE SUBPRIME AND OPTION ARM LOAN MESS: UNEQUIVICALLY DISCLOSING LOAN INFORMATION BASED ON THE TRUTH IN LENDING ACT.)

The new regulations, in the works since March, take effect on Jan. 1. HUD estimated they would save consumers nearly $700 on average. (BUT WILL THAT KEEP BORROWERS FROM GETTING TRICKED INTO BAD LOANS IN THE FUTURE?)

HUD Assistant Secretary Brian Montgomery said in a statement that the agency considered opinions "from every corner of the mortgage market" while developing the new rule. "None of us can lose sight of the fact that millions of Americans simply don't understand the fine print of their mortgages and this, in many respects, is at the heart of today's mortgage crisis," Montgomery said.

HUD Secretary Steve Preston also issued remarks saying changes in the housing markets and the epidemic of foreclosures demanded action.

WHAT ARE YOUR THOUGHTS?

Originally posted at InjuryBoard by Paul Kiesel