Los Angeles Personal Injury Lawyer - bailout

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

Obama Names Economic Dream Team

Paul Kiesel — Mon, 24 Nov 2008 15:28:02 GMT

Earlier today, at a press conference in Chicago, President-elect Barack Obama called for "sound judgment and fresh thinking" in addressing the nation's economic crisis, which he described as a situation of "historic proportions." He then named his top White House economic team, prompting many in the press, based on Obama's selections, to label the group that will push forward Obama's policies and vision, "The Obama Economic Dream Team."

Here is the list of players with some biographical information:

Timothy Geithner: Treasury Secretary (will need to be confirmed by the Senate)

Mr. Geithner is currently the president of the New York Federal Reserve who worked very closely with Treasury Secretary Hank Paulson and Fed Chairman Ben Bernanke to facilitate the Wall Street financial bailouts of the past year.

Larry Summers: Director of the National Economic Council.

Mr. Summers, a former Treasury Secretary (for the last year and a half of the Bill Clinton administration), is currently the Charles W. Eliot University Professor at Harvard University's Kennedy School of Government.

Christina Romer: Chairwoman of Obama's Council of Economic Advisers

Ms. Romer has been an economics professor at the University of California at Berkeley, since 1988. This selection might later on be hailed as one of the more important advisory appointments that Obama made in his days leading up to taking office. Why?

Ms. Romer's e early work focused on a comparison of macroeconomic volatility before and after World War II. Romer showed that much of what had appeared to be a decrease in volatility was due to better economic data collection.

She has also researched the causes of the Great Depression in the United States and how the US recovered from the depression.

This sort of erudite individual can make a substantial impact on Obama's economic policy and her background in and heavy research of the economics surrounding the Great Depression is very applicable to the current financial state in the country.

Melody Barnes: Director of Domestic Policy Council

Ms. Barnes, an attorney and Executive Vice President for Policy at the Center for American Progress, has been serving on the advisory board for President-elect Barack Obama's presidential transition team.

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

Interim Head of Government Bailouts, Neel Kashkari, Called a "Chump" by One Congressman, While Another Compares Him to Mel Gibson

Paul Kiesel — Fri, 14 Nov 2008 19:09:16 GMT

Neel Kashkari, the interim head of the Troubled Asset Relief Program (aka the Treasury Department's $700 billion financial rescue plan or TARP), came under heavy fire today at a House Oversight and Government Reform subcommittee hearing, after Maryland Democrat Elijah Cummings got his chance to ask Kashkari questions relating to an expanded $154 billion that was given to American International Group Inc. (AIG) this week, even though AIG still plans on setting aside $503 million in compensation for executives.

Cummings asked Kashkari, "I'm just wondering how you feel about an AIG giving $503 million worth of bonuses on the one hand, and accepting $154 billion from hard-working taxpayers? [And] what really bothers me is all these other people lining up. They say, well, is Kashkari a chump?"

Kashkari responded by telling the panel he was "outraged" that AIG will do this, but he then said he recently learned that AIG has set aside money in order to eliminate an incentive to leave the insurer.

"I'm not defending it," Kashkari said. But, in actuality, he had done just that.

After Cummings prodded Kashkari further, and laid a minor guilt-trip on him, explaining that families, due to the economic situations that many in the country currently face, will "probably be sitting under the Christmas tree with no presents" this year due to his decisions inadvertently determining consumer behavior, Dennis Kucinich, the chairman of this subcommittee, repeatedly interrupted the Treasury official during the more than two-hour session.

Kucinich harshly criticized Treasury Secretary Henry Paulson's decision this week to abandon the TARP's original intent of purchasing toxic mortgage assets from financial firms.

"The secretary just essentially took some scissors and cut it out and threw it away [. . .] Maybe this is some kind of game to some people in the administration," Kucinich said. "They're [Bush's Administration] on their way out of office and they just feel they can do whatever they want."

Is Kashkari a Chump

Kashkari reitterated to the subcommittee that his department isn't in charge of bank oversight, and that financial regulators are more concerned with bank using this capital to increase lending.

The top Republican on the subcommittee, Darell Issa (R-CA), chided Kashkari saying that his efforts have done little to help families stay in their homes. "It's very clear that the Treasury cannot and will not make the effort to keep people in their homes."

After further accusations by some other members of the committee, California Republican Brian Bilbray, with an absurd veneration, compared Kashkari to Mel Gibson's character from Braveheart, "I guess you sort of got a taste of how Mel Gibson felt in the last scenes of 'Braveheart' [. . .] You're probably the best spokesman the administration has [and] you've come across with more credibility than anyone else that I've heard."

Originally posted at InjuryBoard by Paul Kiesel

Rep. Barney Frank: No "Free Rides" for People Facing Foreclosures

Paul Kiesel — Thu, 13 Nov 2008 16:22:00 GMT

House Committee on Financial Services Chairman Barney Frank noted yesterday that a bailout program for troubled homeowners is needed to prevent the foreclosure crisis from spinning out of control. However, he also emphasized that not all borrowers should be rescued.

"Diminishing foreclosures is an important part of getting out of this [crisis]," Rep. Frank said in an opening statement at a Congressional hearing focused on what banks were doing to modify loans and further assist borrowers facing foreclosure, while adding that taxpayer money should not provide a "free ride" to people facing foreclosure, and warned that aid should not go to homeowners who should have never been in a mortgage to begin with.

"There is, in my judgment, zero likelihood that taxpayer dollars will go to those who should have never have had loans in the first place," Rep. Frank said.

Banks, like Bank of America, Citigroup and JP Morgan Chase, have started programs to modify loans for borrowers that are in danger of being foreclosed on. However, all of the programs have certain criteria that need to be met in order for a borrower to qualify (i.e. being in default; which is problematic because it could encourage frustrated borrowers who are in underwater mortgages, and who are not behind on their payments, to default in order to receive a loan modification) and the loan modification programs also appear to be overly streamlined, so it remains to be seen if the loan modification programs being offered by the banks will provide desirable results.

And even with the banks tackling the foreclosure crisis with their own loan modification programs, Mark Zandi, chief economist for Moody's Economy.com, estimates that 1.6 million Americans will lose their homes this year through foreclosure or distressed sale. Zandi, who was not at Rep. Frank's hearing, has also stressed for the past year (at least since December 2007) that another 1.9 million families will their homes in 2009, regardless of wide-scale loan modification programs.

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

Need Money for a $6,000 Golf Outing? Just Ask the Government and Say You're Fannie Mae...

Paul Kiesel — Thu, 06 Nov 2008 15:27:26 GMT

...And then tell them that it's in order to keep you from going insolvent and to keep your business doors open.

That was basically the ridiculous acknowledgment made by Fannie Mae on Tuesday (interesting that they would acknowledge this on a day when everyone's attention was turned to the election, maybe hoping nobody would read about it...?), after a Dallas-Fort Worth-area television station KTVT reported on Monday that Fannie spent more than $6,000 on a golf outing after being seized by the government earlier this year. Of course, the now government owned Fannie went on to say that any similar company-sponsored events will be suspended immediately, but one has to think how much money would have been spent on vacation retreats, casino engagements, and other taxpayer-financed fun events.

The September 29 "outing" was attended by 20 golfers, including several company executives, at a Texas golf course. Fannie did not try disputing the report, but tried to excuse itself by describing the event as a "mortgage industry customer meeting," which, according to the company, is held twice annually.

"We do regret that the activities surrounding the customer meetings in Dallas may be perceived as excessive," company spokesman Brian Firth said in an e-mail message. "We have ceased all similar activities as those associated with this event, and we regret having not done so in this case."

$6,000 doesn't seem like that much money compared to the billions that Fannie Mae has needed from the government in order to keep operating as a mortgage company, servicer, etc., however, for someone struggling with a mortgage payment or student loan bills or medical bills, $6,000 could make or break a person's current financial situation, and I think this is another slap in the face to taxpayers, troubled homeowners, and everyone else who's been affected negatively due to the ongoing mortgage crisis.

As AIG spent $440,000 on a California retreat for its executives, Fannie Mae shows it can be just as irreverent when it comes to spending government money. These companies' actions, in situations like the golf outing or retreat, show how lenders who've taken financial bailouts from the Fed or Treasury, feel that they're entitled enough and given a green light to go do whatever they feel like doing, when they want to do it.

Clearly, if other lenders like Fannie Mae, Countrywide, IndyMac, WaMu, etc., were myopic enough to flood the mortgage market with loans filled with TILA violations, then should we have expected otherwise when it came to Fannie applying its "best judgment" of choosing to play golf with taxpayer money, instead of working to modify loans?

Originally posted at InjuryBoard by Paul Kiesel

It Could Happen to Anybody...

Paul Kiesel — Thu, 30 Oct 2008 21:02:36 GMT

Here's an excellent piece written by Mike Cassidy of the San Jose Mercury News on the realities of the foreclosure crisis, which has yet to be abated by the government or lenders.

Mr. Cassidy's thesis is: It's futile to blame ALL homeowners who are facing foreclosure because it could have happened to anybody, and it very well could still happen for people who are in Pay Option ARM loans that have not had interest rate resets.

On top of all this, many different borrowers, from multifarious economic backgrounds, took out loans that appeared to be "good loans," when in fact the loans had several TILA violations. Some of these violations were surreptitiously placed; sometimes information, like the loan being a negative amortizing loan (which, according to the Truth in Lending Act, needs to be stated in the loan, if it's that type of loan), was left out all together. Therefore, lenders and certain mortgage brokers willingly advertised and sold these loans to customers, when they had no business of being sold from the onset.

Here's a link to a blog I wrote a couple weeks ago that briefly explains part of the nascent stages of the economic crisis that allowed for this mortgage mess to precipitate as it did, and how government regulators, according to Senate Banking Chairman Chris Dodd (D-CT), including the Fed, failed to adequately police the mortgage lending markets, resulting in the "creative mortgage" boom and its fallout.

From MercuryNews.com:

SAN JOSE—We are a nation of blamers.

When something goes terribly wrong — like the current economic collapse — we desperately want to blame someone and if at all possible punish them, too.

For months now, as the economy and our notions of it have unraveled, we've been doing a good job pointing fingers. Democrats blame the Republicans. Republicans blame the Democrats. Greedy Wall Street operators are high on the list of suspects. Bumbling, or worse, Washington regulators have taken their punches, too.

The truth is, they all share in contributing to the stunning chain of events that has taken down world financial markets and national economies.

But the finger-pointing that has surprised me the most is the chorus of complaint directed at those who have recently lost their homes or who are in imminent danger of doing so.

You hear it on talk radio and see it in newspaper commenting sections now that the Treasury Department is exploring ways to use some of the $700 billion Wall Street bailout to help struggling homeowners hang onto their homes.

Readers and radio listeners describe those who are losing their homes as shiftless and lazy. Those foreclosed upon are chiselers who tried to get away with something, or they're irresponsible buyers who wanted a nice house whether they could afford it or not. In short, this thinking goes, they got what they deserved.

Along with the condemnation comes a smug superiority: I worked hard and found a home within my means. I pay my bills. Why can't those who are losing their homes do what I did? Using my tax money to help those in trouble is simply not fair.

But you know what? Life isn't fair. Ask those about to lose their homes.

No doubt there have been some bad operators taking loans as well as making them. But what the rants lack is any acknowledgment that sometimes events are beyond our control. I wonder whether those of you who are scolding struggling homeowners believe you are immune from the unforeseen and unfortunate events that can derail a comfortable life.

Maybe you bought your home years ago and have enough equity to cover the balance if you have to sell. Maybe you have a fixed-rate loan that has insulated you from climbing monthly payments. Maybe you dealt with an upstanding broker instead of a mortgage shark who sold you a loan that not only balloons, but blows up in your face.

Could be you didn't get sick or divorced, or lose your job. Maybe your spouse didn't lose his or hers.

Maybe you're not like the school teacher and mother from Union City who wrote to me recently. She'd just lost the house she owned for eight years. She said she refinanced after a divorce, so she could buy out her husband and lower her monthly payment. Then she lost the second job she worked to hold it all together.

Or maybe you're not like the retired couple in San Jose whose kids wrote to me. The couple's biggest crime apparently was trusting the wrong people — first an accountant who swindled them, and then a series of predatory loan brokers who relatives say falsified the couple's income and stuck them with a $6,000-a-month mortgage that they have no way to pay.

The angriest ranters out there will point out that the school teacher and the retired couple made their choices. Now they must live with the consequences.

When bad things happen, it's so simple to invoke the canon of personal responsibility. It's cut and dried. Tough people take responsibility. Wimps ask for help. The problem is that by relying solely on the rule of personal responsibility we risk absolving ourselves of our social responsibility.

It's something to think about as we head into economic hard times likely to be unlike any most of us have seen. Because the truth is, if we hope to survive what's coming we're going to have to do a lot better by each other.

Originally posted at InjuryBoard by Paul Kiesel

Reuters: Microsoft Warns of Financial Crisis E-mail Scams

Paul Kiesel — Wed, 29 Oct 2008 15:58:47 GMT

Loan modification scams are becoming more prevalent as most of the nation, along with nefarious scam artists, is aware of the $700 billion financial bailout that was passed weeks ago. Congress and other consumer advocate organizations have also been urging lenders, as part of the recommendations of the bailout package, to modify loans in order to protect themselves against further financial damage and to abate the strength of the foreclosure crisis.

Also, check out my blog from yesterday which discusses other loan modification scams that aren't as sophisticated as e-mail scams, however, they can be implemented just as effectively.

From UK Reuters: LONDON, Oct 29 (Reuters) - Internet fraudsters will try to exploit the global financial crisis by sending fraudulent emails purporting to offer cash-strapped consumers new mortgages, loans or money from failed banks, a Microsoft executive said on Wednesday.

Tim Cranton, an Internet safety expert at Microsoft, said there are early signs that criminals have already begun trying to cash in on the economic turmoil.

"It's especially troubling right now with the financial crisis," he told Reuters in a telephone interview. "There are more and more people who are maybe in a more desperate or vulnerable situation.

"We have seen an increase in some mortgage refinance type of scams. We are anticipating that they'll become more sophisticated.

"We have seen that with Hurricane Katrina, the (2004 Asian) tsunami and other natural disasters where the scammers immediately jump."

Fraudsters may send spam emails to consumers that ask them to pay a fee related to the collapse of a bank or financial institution, he added.

"They will allege it is associated with the refinancing -- so because of this bailout you'll get a much better deal on your mortgage and all you have to do is pay this fee."

Online criminals have long used promises of easy money to try to defraud unsuspecting victims.

Common scams include requests to help move money out of a developing country. People are offered a cut of the fortune if they first pay a release fee.

Or they are told they have won a lottery in a foreign country and will receive a huge jackpot once they pay an administration fee.

A poll for Microsoft on Wednesday found more than a quarter of computer users thought it was likely they would fall victim to an online scam that would cost them money.

Half said the scams made them more wary of shopping online, while more than a third said it led to them being more reluctant to use the Internet at all.

However, the poll suggested that the actual chances of becoming a victim are far lower than the perceived risk.

Of 5,000 people polled across Europe, only 113 had lost money to an Internet fraudster in the last year. That equates to one in 44 of those questioned.

Microsoft said it has formed a coalition with Yahoo!, Western Union and the African Development Bank to help spread the message about hoax emails.

"What we'd like to do is raise awareness so that people feel more confident about using the Internet," Cranton said. "We don't want to see a reduction in e-commerce."

Originally posted at InjuryBoard by Paul Kiesel

Two Foreclosure Relief Plans that Don't Require a Government Bailout?

Paul Kiesel — Mon, 27 Oct 2008 17:22:49 GMT

As noted last week, the FDIC and Congress both have foreclosure bailout plan proposals that would require the government to buy "under water" mortgages and place those borrowers into government backed mortgages at a fixed interest rate. The main problem with both the FDIC's and Congress' plans is they continue to bailout the lenders and place all of the risk on taxpayer money (the FDIC plan and Congressional plan are uniquely different, but for the sake of your time we'll move on).

There are two alternative plans, amongst maybe a hundred more, to the two government-sponsored plans that take into consideration the next wave of foreclosures. At some point next year, hundreds of thousands of pay option arm loans will have interest rate resets causing mortgage payments to balloon to unaffordable levels for many borrowers. This unavoidable circumstance (unless the lenders are willing to modify the loans beforehand, which looks doubtful based on their current track record) is not addressed in either the FDIC or Congressional foreclosure relief plans.

Below are two alternate foreclosure relief plans. Each plan takes a different approach than the other; however, both plans apply practical solutions to 1. Curb foreclosures and keep people in their homes and 2. Neither requires a government bailout package in order to execute them. Plan 1 includes the dynamic of the investor/shareholder variable to solving the foreclosure crisis. Plan 2 is idealistically clever, but doesn't take into account the fact that investors will have to agree to have their mortgage related investments frozen for almost five years in order to effectively implement this strategy, and it also assumes that the investor will recoup his or her original investment in five years.

Of course after reading the plans, any ideas, thoughts, questions or dissenting views are appreciated in the comments section.

Plan 1:

However, the declining foreclosure statistics do not necessarily prove that the end is near per the foreclosure crisis or credit crisis. It just means that all of the adjustable rate loans that were taken out in 2005 and 2006 have had interest rate resets, and caused this "first wave" of foreclosures. There are still hundreds of thousands if not millions of adjustable rate loans from 2007 that will reset in the coming 12-18 months.

Further action needs to be taken in order to mitigate the next wave of default notices and foreclosures. The FDIC's plan has not worked to the extent it could, contrary to media reports, as they have only successfully modified 4,000 loans and all of those loan modifications were made to people who had not been served with a default notice or were not in the foreclosure process.

Shareholders and regulators need to understand where the value is at in this predicament, and squeeze what they can out of a situation that is not favorable. It'd be better to let a homeowner modify his or her loan at 89% of the original principal balance (not the current negative amortized balance) and wait till the market rebounds in three to five years (remember, these cycles of economic prosperity and recessions are "cycles"), subsequently, the home could then be sold at a price that's equitable or more than the modified loan. The homeowner would not get to walk away with any profits unless the remaining original balance (the 11% that was pared off to help the borrower stay in the home) was recovered by the lender, thus, the investor/shareholder would be able to recoup most if not all of their original investment. (InjuryBoard.com, 10/24/06)

Plan 2:

[. . .] Recently a proposal came across my desk that I believe is so smart, and so sensible, that I hope our nation’s policy makers will give it a serious look. It comes from Daniel Alpert, a founding partner of Westwood Capital, a small investment bank. I have quoted Mr. Alpert frequently in recent columns, because he has been both thoughtful and prescient on the subject of the financial crisis.

Here’s his idea: Pass a law that encourages homeowners with impaired mortgages to forfeit the deed to their lenders but allows them to stay in the homes for five years, paying prevailing market rent. Under the law Mr. Alpert envisions, the lender would be forced to accept the deed, and the rent. After five years, the homeowner-turned-renter would have the right to buy the home back, at fair market value, from the lender.

There are so many things I like about this idea that I hardly know where to begin. Let’s start with the fact that it doesn’t require a large infusion of taxpayers’ money. Indeed, it doesn’t require any government money at all. It also doesn’t let either homeowners or lenders off the hook, as many other plans would. The homeowner loses the deed to his home, which will be painful. The lending institution, in accepting prevailing market rent, will get maybe 60 or 70 percent of what it would have gotten from a healthy mortgage-payer. (Rents are considerably lower than mortgage payments right now.) That will be painful too. Moral hazard will not be an issue.

As Mr. Alpert told me the other day, his proposal “admits the truth: the homeowner doesn’t have equity, and the lender has taken a loss. They should exchange interest, but not in a way that throws the homeowner out in the street.”

Which is the other key part of his plan. It has the best chance of preventing, as he puts it, “the massive disruption of the economy and the social dislocation” that will come from large numbers of foreclosures. And it is the continuing foreclosures that are likely to cause housing prices to fall so hard that they will drop below the real value of the shelter.

That, of course, is exactly what happened during the bubble, albeit in reverse — prices wildly overshot the true value of the home — and it has to be prevented on the way down. Otherwise we face further economic calamity.

Why did Mr. Alpert choose five years? Two reasons. First, he feels confident that housing prices will have stabilized by then. “We continue to have a growing population,” he said. “And there is zero chance there will be a material increase in housing stock over the next five years that will exceed demand. Those two factors alone will cause housing to stabilize.”

Second, he says five years will give the renters enough time to get their financial affairs in order — to pay down their various debts and save enough to make the 10 percent down payment an F.H.A. loan requires. (Many of the homeowners affected by this plan would be eligible for F.H.A. loans, Mr. Alpert believes.)

If they don’t have enough for a down payment, they would have to leave, of course, but it would be far less disruptive to the economy than it would be right now, in the middle of the crisis.

Does the plan have stumbling blocks? Sure it does. One obvious one is that ideologues will view its being mandatory as an improper “taking” of homeowners’ property rights and a violation of the mortgage contract. But, as Mr. Alpert puts it, “the homes involved are economically without value to the existing homeowners.” He adds, “What the plan buys is time to heal for both sides in a fairly equitable and controlled manner.”

(New York Times, 10/18/06)

Originally posted at InjuryBoard by Paul Kiesel