Los Angeles Personal Injury Lawyer - indymac

L.A. Times: Real Estate Reality

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

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

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

JPMorgan Chase: 90 Day Foreclosure Moratorium

Paul Kiesel — Mon, 03 Nov 2008 20:10:08 GMT

JPMorgan Chase will not be putting any more homes into foreclosure over the next 90 days, as it comes up with a loan modification plan geared towards keeping borrowers in their homes.

In a press statement released on Friday, JPMorgan said that the modifications should impact as many as 400,000 borrowers, or approximately $70 billion in mortgages, and almost $55 billion will focus on option ARM loans that JPMorgan inherited after purchasing Washington Mutual and absorbing its "toxic loans."

JPMorgan will offer borrowers in payment option ARM loans alternatives such as 30-year, fixed-rate loans with affordable payments (principal deferral, interest-only payments for a specified period, etc.).

Even though it appears that JP Morgan Chase is: 1. Trying to mitigate its own losses by enacting this moratorium and 2. Wants to keep people in their homes, the company likely has ulterior motives; by going forward with this plan, at this current time, JPMorgan can avoid further market regulation surrounding its servicing practices. House Financial Services Committee chairman Barney Frank (D-MA) has been suggesting all throughout the mortgage crisis that lenders who fail to implement programs to modify loans or choose to ignore Congress' call to correct servicing practices will be subject to further regulation.

According to HousingWire.com, "With reports now surfacing that investors aren't willing to participate in the recently-legislated Hope for Homeowners -- as well as early reports suggesting that lenders are refusing to buy the loans, as well -- it's very possible that JPMorgan is trying to keep ahead of a potential political firestorm over the issue."

It's not clear if JPMorgan will be able to yield these proposed ambitious results (400,000 loan modifications within 90 days?), considering investors play a role in this whole process, but maybe they'll find more success than FDIC IndyMac, which, in comparison, has only modified about 4,500 loans or 1% of the total JPMorgan wants to help.

Originally posted at InjuryBoard by Paul Kiesel

NYT: FBI Joins the Mortgage Fraud Game Late and Now Doesn't Have Enough Players

Paul Kiesel — Tue, 21 Oct 2008 18:40:53 GMT

Here's an interesting New York Times article describing the problems the FBI has been having in handling mortgage fraud cases.

The FBI increased its efforts and resources over the spring to investigate cases of mortgage fraud, just before IndyMac failed and Fannie Mae and Freddie Mac needed to be bailed out, however, it appears that their pool of agents has been depleted (due to National Security risks/cases) and they're going to be moving forward with a greater caseload and limited task force.

From the New York Times:

The Federal Bureau of Investigation is struggling to find enough agents and resources to investigate criminal wrongdoing tied to the country’s economic crisis, The New York Times’s Eric Lichtblau, David Johnston and Ron Nixon reported, citing current and former bureau officials.

The bureau slashed its criminal investigative work force to expand its national security role after the Sept. 11 attacks, shifting more than 1,800 agents, or nearly one-third of all agents in criminal programs, to terrorism and intelligence duties. Current and former officials say the cutbacks have left the bureau seriously exposed in investigating areas like white-collar crime, which has taken on urgent importance in recent weeks because of the nation’s economic woes.

The pressure on the F.B.I. has recently increased with the disclosure of criminal investigations into some of the largest players in the financial collapse, including Fannie Mae and Freddie Mac. The F.B.I. is planning to double the number of agents working financial crimes by reassigning several hundred agents amid a mood of national alarm. But some people inside and out of the Justice Department wonder where the agents will come from and whether they will be enough.

So depleted are the ranks of the F.B.I.’s white-collar investigators that executives in the private sector say they have had difficulty attracting the bureau’s attention in cases involving possible frauds of millions of dollars.

Since 2004, F.B.I. officials have warned that mortgage fraud posed a looming threat, and the bureau has repeatedly asked the Bush administration for more money to replenish the ranks of agents handling nonterrorism investigations, according to records and interviews. But each year, the requests have been denied, with no new agents approved for financial crimes, as policy makers focused on counterterrorism.

According to previously undisclosed internal F.B.I. data, the cutbacks have been particularly severe in staffing for investigations into white-collar crimes like mortgage fraud, with a loss of 625 agents, or 36 percent of its 2001 levels.

Over all, the number of criminal cases that the F.B.I. has brought to federal prosecutors — including a wide range of crimes like drug trafficking and violent crime — dropped 26 percent in the last seven years, going from 11,029 cases to 8,187, Justice Department data showed.

“Clearly, we have felt the effects of moving resources from criminal investigations to national security,” John Miller, an assistant director at the F.B.I, told the newspaper. “In white-collar crime, while we initiated fewer cases over all, we targeted the areas where we could have the biggest impact. We focused on multimillion-dollar corporate fraud, where we could make arrests but also recover money for the fraud victims.”

But Justice Department data, which include cases from other agencies, like the Secret Service and Postal Service, illustrate the impact. Prosecutions of frauds against financial institutions dropped 48 percent from 2000 to 2007, insurance fraud cases plummeted 75 percent, and securities fraud cases dropped 17 percent.

Statistics from a research group at Syracuse University, the Transactional Records Access Clearinghouse, using somewhat different methodology and looking only at the F.B.I., show an even steeper decline of nearly 50 percent in overall white-collar crime prosecutions in the same period.

In addition to the investigations into Fannie Mae and Freddie Mac, the F.B.I. is carrying out investigations of American International Group and Lehman Brothers, and it has opened more than 1,500 other mortgage-related investigations. Some F.B.I. officials worry privately that the trillion-dollar federal bailout of the financial industry may itself become a problem because it contains inadequate controls to deter fraud.

No one has suggested that a quicker response would have averted the mortgage meltdown, but some officials said a faster reaction might have deterred more of the early schemes that seized on loose federal lending regulations.

“They were very late to the game,” Representative Zoe Lofgren, a California Democrat who has quarreled with the F.B.I. over its financing priorities, told The Times of the bureau’s response to the mortgage crisis. “They were not on top of this, and they’re just now starting to really do something.”

Republicans and Democrats in Congress are pushing for a more aggressive response by the F.B.I. Representatives Mark S. Kirk, an Illinois Republican who sits on the House appropriations committee, and Chris P. Carney, a Pennsylvania Democrat, called on Congress to triple the F.B.I.’s financing for financial crimes investigations.

“To fix our system and prevent a repeat of the events we now see,” they wrote in a letter this month to Robert S. Mueller III, the F.B.I. director, “we have got to set an example by bringing the full might of federal law enforcement against the people who illegally profited or destroyed companies at the expense of our country.”

In public, Mr. Mueller has said that the bureau is doing more with less, when it comes to criminal prosecutions. And Justice Department officials have repeatedly asserted the administration’s commitment to fight violent and white-collar crime even as they have not provided the bureau additional resources.

But current and former officials say Mr. Mueller has lost a behind-the-scenes battle with the Justice Department and the Office of Management and Budget to replenish the criminal ranks.

Interviews and internal records show that F.B.I. officials realized the growing danger posed by financial fraud in the housing market beginning in 2003 and 2004 but were rebuffed by the Justice Department and the budget office in their efforts to acquire more resources.

“The administration’s top priority since the 9/11 attacks has been counterterrorism,” Peter Carr, a Justice Department spokesman, told The Times. “In part, that’s reflected by a significant investment of resources at the F.B.I. to answer the call from Congress and the American public to become a domestic intelligence agency in addition to a law enforcement agency.”

Originally posted at InjuryBoard by Paul Kiesel

If You Have an Option ARM Loan with FDIC IndyMac, Read This!

Paul Kiesel — Fri, 10 Oct 2008 21:47:57 GMT

Any Californian who has a Pay Option ARM loan from IndyMac (now FDIC IndyMac) that was originated between 2004 and 2007 and has faced or will be facing an interest rate reset (ballooned monthly payment), should contact the bank or seek legal counsel before next Friday, October 14.

According to the FDIC, Option ARM borrowers have 90 days to respond to the notice of IndyMac being taken over by the federal government, if they want to be able to modify their loan or take legal action against IndyMac. When does the 90 day period end? October 14. Where did the notice come from? The FDIC claims that when newspapers reported that the Office of Thrift Supervision transferred control of IndyMac to the FDIC, on July 11, the newspaper articles throughout the State of California served as a notice to the public.

However, most borrowers of Option ARM loans never got a formal notice. Regarding this issue, the only notices that have been sent out are to named plaintiffs in class action lawsuits against IndyMac Bancorp. In fact, the FDIC has refused to notify other Californian consumers of Option ARM loans that their time to take action is running out, and this is a big problem because tens of thousands of Option ARM borrowers have been left in the dark and do not realize that the date is rapidly approaching for them to seek a fair remedy to their troubled mortgage situation (or pending situation).

The FDIC has a contact number listed on their website under the page titled: FDIC Loan Modification Program for Distressed IndyMac Mortgage Loans. On the bottom of this page it states: Borrowers who are delinquent or who are experiencing financial hardship and are falling behind on their IndyMac Federal mortgage should call 1-800-781-7399 to speak with an IndyMac Federal customer service representative.

Originally posted at InjuryBoard by Paul Kiesel

Democrats Calling for Foreclosure Freeze

Paul Kiesel — Thu, 11 Sep 2008 15:33:17 GMT

The Associated Press reports that four Democratic senators, Serrod Brown (D-OH), Bob Casey (D-PA), Bob Menedez (D-NJ), and Charles Schumer (D-NY), are urging Fannie Mae and Freddie Mac to freeze foreclosures for 90 days on loans they hold.

The lawmakers wrote to the new CEOs and federal regulator (James Lockhart) -- now running Freddie and Fannie -- that the struggling mortgage giants, which were seized by the federal government on Sunday, should help current troubled borrowers switch to more affordable loans, in order to keep them in their homes.

"Take whatever actions are necessary," the letter states, so more families, "do not have to suffer the economic and personal disaster of foreclosure."

The foreclosure freeze would not apply to all loans, but even if the freeze only apply to 25% of the loans Fannie and Freddie hold, that's still a significant numbers, as the two companies hold or guarantee more than $5 trillion in outstanding mortgages (or more than half of the nation's total).

The Bush administration seized control of the companies in hope of reversing the prolonged housing and credit crisis, even though most economists suggest that we're not even quite halfway through it (many predict 2010 as the year the markets rebound -- after the option ARM resets that will take place early next year, subsequently resulting in hundreds of billions more in losses).

Fannie CEO Daniel Mudd and Freddie CEO Richard Syron (the latter admittedly ignored the foreclosure crisis) were replaced with Herb Allison, a former vice chairman of Merrill Lynch, and David Moffett, a former vice chairman of U.S. Bancorp, respectively.

James Lockhart, the director of the Federal Housing Finance Agency, needs to ensure that Fannie and Freddie use their clout in the mortgage market to help homeowners caught in the housing crisis, and the letter from the four Democratic senators is the latest sign of mounting congressional pressure.

Representative Barney Frank (D-MA), chairman of the House Financial Services Committee, has made it clear that Fannie and Freddie need to do more to help homeowners now and to not sit on their hands and let this situation get worse.

Democrats have called for Lockhart to follow the example of the FDIC head, Sheila Bair, who has urged banks to modify loans that homeowners can no longer afford. After IndyMac failed, the FDIC temporarily froze foreclosures after taking it over, and later engineered a plan to allow most IndyMac borrowers who were seriously delinquent or in default on their mortgages to switch to loans capped at an interest rate of 6.5 percent.

Democrats and Republicans are also pushing Lockhart to slash the $24 million in compensation that Mudd and Syron stand to gain as they leave their posts. Frank's committee will examine how the foreclosure prevention law enacted in July is working, next week (not very good, if this is how the crisis has escalated in the last eight weeks). Hearings on the government's takeover of Fannie and Freddie will also be held soon by Frank and Chris Dodd (D-CT), chairman of the Senate Banking Committee.

Ultimately, if Lockhart is able to get the Bush administration's approval to suspend foreclosures, it will help put the breaks on a continuing declining housing market, homeowners (who meet applicable criteria) get into new and more affordable loans, and will allow borrowers that were victims of TILA fraud to take legal action, in order to seek an appropriate remedy.

Originally posted at InjuryBoard by Paul Kiesel

McCain-Palin Economic Plan Lacks Transparency in Wall Street Journal Op-Ed

Paul Kiesel — Wed, 10 Sep 2008 19:03:12 GMT

John McCain and Sarah Palin gave their opinions on the federal government's takeover of Fannie Mae and Freddie Mac, yesterday, in the Wall Street Journal. Here are a few of the pair's stances: "The bailout of Fannie Mae and Freddie Mac is another outrageous, but sadly necessary, step for these two institutions [. . .] Treasury has broadly followed the McCain plan, outlined months ago, and gets at the short-term heart of the problem [. . .] [The federal bailout] terminates future lobbying, which was one of the primary contributors to this great debacle [. . .] Reforms are necessary now to make mortgage lending and banking organizations more transparent," (online.wsj.com, 9/9/08).

First, the bailout was necessary and it is unfortunate that it had to occur. Could it have been prevented? Maybe years ago, before deregulation bills laxed lending industry rules, like the Commodity Futures Modernization Act of 2000, thus, allowing the lending industry to act like a teenager whose parents were out of town for the weekend... Or several years. Economists, conservative or liberal, will agree on that.

However, when McCain and Palin suggest that the Treasury has "broadly followed the McCain plan, outlined months ago," is that the same McCain plan that the senator discussed with reporters back in March: "Some Americans bought homes they couldn’t afford, betting that rising prices would make it easier to refinance later at more affordable rates [. . .] Of those 80 million homeowners, only 55 million have a mortgage at all, and 51 million homeowners are doing what is necessary — working a second job, skipping a vacation and managing their budgets to make their payments on time [. . .] it is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers," (New York Times, 3/25/08).

I guess March would qualify as months ago. And it does seem like McCain is expressing his economic policies (or laying out "McCain's plan") and how he'd react to the mortgage/housing crisis as Commander-in-chief: that a bailout is a non-option, which is made clear when McCain said, "[. . .] what is not necessary is a multibillion dollar bailout for big banks and speculators, as Sens. Clinton and Obama have proposed. There is a tendency for liberals to seek big government programs that sock it to American taxpayers while failing to solve the very real problems we face." But, it doesn't appear that the Treasury department is using "the McCain plan," as Palin and he suggest. The plan the Treasury is following, not to a tee, but more closely than McCain's, is the plan that both senators Hillary Clinton and Barack Obama called for the same week that McCain was criticizing homeowners, many of who were suffering from mortgages littered with TILA violations.

As to the lobbyists that McCain attributes as being "one of the primary contributors to this great debacle," why is it that one of those lobbysists, former Texas senator Phil Gramm (a former lobbyist for UBS), was McCain's former economic adviser and co-chair, until he was forced to leave McCain's campaign in July after making some careless remarks? Why would McCain surround himself with Gramm, a long time political ally and personal friend, along with seven other lobbyists, and at least 20 other major McCain fundraisers who have lobbied on behalf of Fannie and Freddie in recent years?

Those seven lobbyists working on the McCain-Palin campaign, courtesy of CNN.com:

• One: Campaign manager Rick Davis is a major telecommunications lobbyist.

• Two: Senior foreign policy adviser Randy Scheunemann recently faced scrutiny over his foreign lobbying on behalf of the Republic of Georgia, which has been embroiled in a military conflict with Russia.

• Three: Senior adviser Charlie Black was a foreign lobbyist for dictators in Zaire and Angola in the 1980s, fodder for the liberal group MoveOn.org.

One of the group's recent ads charged, "Charlie Black said he didn't do anything wrong. John McCain should tell Black he did. Call John McCain and tell him to fire Charlie Black."

• Four: Frank Donatelli, the Republican National Committee's liaison to the McCain campaign, has had clients including Exxon Mobil.

• Five: Economic adviser Nancy Pfotenhauer has lobbied for corporate giants like Koch Industries.

"Both John McCain and Sarah Palin have challenged special interests, challenged their own party. That's the test of courage," Pfotenhauer has said.

• The final two lobbyists are McCain's congressional liaison, John Green, and national finance Co-chairman Wayne Berman. They both lobbied for Fannie Mae, the troubled mortgage giant.

So it's more than likely that the "lobbyists" McCain refers to as enablers in this mortgage crisis aren't leaving the political landscape anytime soon, especially if McCain becomes president.

Finally, in regards to McCain's and Palin's call for reforming the two mortgage giants and providing better oversight to the lending industry as a whole, why is it that Phil Gramm's name continues to be mentioned as a possible Treasury Secretary in a McCain-Palin administration? Gramm is the author of the Commodity Futures Modernization Act passed in 2000. There is no coincidence that his energy and lending deregulation bill, among several other deregulation bills like Newt Gingrich's Home Ownership and Equity Protection Act of 1994 (which was written to protect consumers against predatory loans, but it instead helped spark the subprime boom), opened the door for a lot of the problems seen throughout the subprime crisis (i.e. see what happened or is happening at Bear Stearns, Countrywide, IndyMac, WaMu, etc.).

It was through Gramm’s deregulation (as a senator) that helped set the stage for an explosion of banks slicing up subprime mortgages, bundling them with other mortgage slices, to hide the credit risks (and not being transparent about how the mortgages were written as millions of option ARM mortgages violated the Truth in Lending Act), and selling mortgage stew to other investment firms. And as a lobbyist, just as recently as December 31, 2007, Gramm was lobbying for Swiss bankers to help kill the Helping Families Save Their Home and Bankruptcy Act, a bill that would have let bankruptcy judges adjust mortgage terms so American families facing foreclosure could repay their loans and keep their homes.

Is this the reform that McCain potentially plans to bring with him to the White House, if he's elected? Is this the "promise [to] the American people that our administration will be different?"

People change their minds all the time. Both Democrats and Republicans do this constantly in Congress (McCain was initially against the Bush tax cuts and then favored them; Palin was for the "Bridge to Nowhere" and then, after becoming Governor of Alaska, she wasn't for it). President Bush has done this, too, as he signed a housing bill in late-July that he adamantly stated a week earlier he would veto. But on the issues brought up in the Wall Street Journal Op-Ed by the two self-proclaimed mavericks, with McCain and Palin calling for reform to the lending industry, more transparency amongst lenders and less future risk of a taxpayer bailout (issues that McCain has said he's not too sharp on and relies on his economic advisers opinions to make up for his lack of experience, "The issue of economics is not something I’ve understood as well as I should [. . .] I would rely on the circle that I have developed over many years of people like Jack Kemp, Phil Gramm [. . .]”), it seems like there's just too much old "Washington" and lobbyist baggage to fit on the "Straight Talk Express" plane.

People change all the time, however, as the old adage goes: You can't teach an old dog new tricks. An old maverick is likely the same.

Originally posted at InjuryBoard by Paul Kiesel

The New Republic: Economic Innovation and Mortgage Fraud

Paul Kiesel — Fri, 05 Sep 2008 19:47:13 GMT

Transparency. This word gets thrown around a lot when describing how banks and mortgage brokers were able to sell the some of the dubious mortgages (mortgages that were filled with TILA violations) that have crushed parts of the U.S. economy and that have depressed the housing market. It was a lack of transparency that allowed for this to occur.

Had banks and lenders been more transparent in their fee structure, terms, etc., we wouldn't be in the credit/mortgage/housing crisis we're currently stuck in.

Below is the last half of an article that will be published in next week's issue of The New Republic. It is further evidence to a thesis that is consistent with most of my blogs: A major lack of transparency led to the types of economic innovation amongst banks and lenders (option ARM loans; continuous refinancing by banks), thus, allowing for banks to get richer in the short term (year after year, until housing prices began to drop), but in the long term it would be its innovation that would lead to its demise (housing bubble popping; Bear Stearns; IndyMac failure; etc.).

[. . .] The task of unraveling all that went wrong in our financial system is a difficult one, but in essence the financial system's latest innovation was to devise fee structures that were often far from transparent and that allowed it to generate enormous profits--private rewards that were not commensurate with social benefits. The imperfections of information (resulting from the non-transparency) led to imperfections in competition, helping to explain why the usual maxim that competition drives profits to zero seemed not to hold. One should have suspected that something was wrong when bank after bank made so much money year after year. One should have suspected that something was wrong with the economic system when millions of Americans owed billions to credit card companies and banks in "late fees," "penalties," and a variety of other charges, transforming a high annual interest rate of 20 percent into a truly usurious effective interest rate of 100 percent or more for those who fell behind in their payments.

Perhaps the worst problems--like those in the subprime mortgage market--occurred when non-transparent fee structures interacted with incentives for excessive risk-taking in which financial managers got to keep high returns made one year, even if those returns were more than offset by losses the next. Behind the subprime crisis were mortgages designed to encourage repeated refinancing of homes--a pyramid scheme that generated billions of dollars in fees for the mortgage company as long as home prices continued to soar. It was inevitable that the bubble would break. But, by then, the profits that had been pocketed would make these financial wizards secure for life--or, at least, that was their hope.

To put it another way, had those in the financial sector allocated capital and risk in a way that fueled the economy, they would have had handsome profits. But they wanted more, and so established incentive structures that encouraged gambling. If they gambled and won, they could walk away with a share of the profits. If they gambled and lost, the investors would bear the consequences. It was almost as if the entire financial system was converted into a giant casino in which the system was rigged to guarantee those running the games huge returns, at the expense of the players. But in Las Vegas and Atlantic City, the games are near zero-sum: The gains of the casino owners approximately equal the losses of the players. The financial-system-as-casino, on the other hand, is a negative-sum game. Those on Wall Street may have walked off with billions, but those billions are dwarfed by the costs to be paid by the rest of us. Some have lost their homes and life savings--to say nothing of their dreams for their own futures and those of their children. Others are innocent bystanders who resisted the false promises of the mortgage brokers and the credit card companies, but now find themselves out of jobs as the economy weakens. And the poor are hurt as state revenues plummet, forcing cutbacks in public services.

The current woes in America's financial system are not an isolated accident--a rare, once-in-a-century event. Indeed, there have been more than one hundred financial crises worldwide in the last 30 years or so. Here in the United States alone, we have had the S&L crisis in 1989, the dot-com/WorldCom/Enron problems of the early years of this decade, and now the subprime-morphing-into-the-beyond-subprime collapse. In addition to these national problems, there were regional troubles--real-estate crises fed by excessive lending in Texas and the Southwest in the mid-'80s, and in California and New England in the early '90s. In each of these instances, financial markets failed to do what they were supposed to do in allocating capital and managing risk. In the late '90s, for instance, so much capital was allocated to fiber optics that, by the time of the crash, it was estimated that 97 percent of fiber optics had seen no light.

In short, the problem with the U.S. economy is not that we have allocated too many resources to the "soft" areas and too few to the "hard." It is not necessarily that we have allocated too many resources to the financial sector and rewarded it too generously--though a strong argument could be put forward to that effect. It is that too little effort was devoted to managing real risks that are important--enabling ordinary Americans to stay in their homes in the face of economic vicissitudes--and that too much effort went into creating financial products that enhanced risk. Too much energy has been spent trying to make an easy buck; too much effort has been devoted to increasing profits and not enough to increasing real wealth, whether that wealth comes from manufacturing or new ideas. We have learned a painful lesson, both in the 1930s and today: The invisible hand often seems invisible because it's not there. At best, it's more than a little palsied. At worst, the pursuit of self-interest--corporate greed--can lead to the kind of predicament confronting the country today.

Joseph Stiglitz is University Professor at Columbia University, winner of the 2001 Nobel Memorial Prize in Economics, and co-author of The Three Trillion Dollar War.

Originally posted at InjuryBoard by Paul Kiesel

Prime Borrowers Foreclosing at a Higher Rate than Subprime Borrowers

Paul Kiesel — Thu, 28 Aug 2008 20:25:53 GMT

The Hope Now coalition released information yesterday that finds prime foreclosure starts have finally moved ahead of subprime foreclosure starts for the first time since the industry coalition began (Hope Now originated last July). And, likely, for the first time in a much longer timeframe, according to HousingWire.com.

Since the media's attention has recently been focused squarely on the Democratic Convention, Republicans' reactions to it, and the upcoming Republican Convention, most housing news (good or bad; and most of it's been bad) has gone unnoticed.

Prime borrowers do have the potential of being helped by the housing rescue bill that was passed last month, but the problem is that some of these borrowers were put into "creative mortgages" like option ARM loans with teaser interest rate payment options, and those loans have been more difficult to reform under new lending rules. (Plus, lenders don't want to modify the loans quite yet; they're still hoping they won't have to absorb such large losses that they technically brought on themselves when they decided to recklessly flood the marketplace with so many porous loans.) It's also unfortunate that prime borrowers who were sold "creative mortgages," were largely unaware that throughout the promissory notes, especially in states like Arizona, California, and Florida, were several TILA violations.

Bank executives have already been beating the drum that evidence of prime borrowers going into foreclosure shows that fiscally smart borrowers tried to manipulate the system, but if one is to believe that logic 1. It's a swipe at subprime borrowers (It assumes they're not intelligent) 2. Excuses lenders of taking advantage of any and all borrowers and 3. Assumes that TILA violations did not occur or, if they did, it was in such minuscule numbers.

The point is that option ARM loans were so cunningly crafted, and were promoted vigorously through print, television and mail advertising, that borrowers with good credit and bad credit, found themselves facing lenders whose best interests were in their own short-term profit and had such a myopic view of what economic hardships could precipitate throughout the country via irresponsible lending, that it was an unfair fight for any potential homeowner from the moment Phil Gramm was able to slide his Future Commodity Modernization Act of 2000 into law.

Bear Stearns, Countrywide, IndyMac and dozens of other banks are proof that the lending industry not only loaned money irreverently and had no concern for a borrowers ability to repay the loan, but that almost all of the lenders and Wall Street enablers were also willing to eat their own.

Originally posted at InjuryBoard by Paul Kiesel

FDIC's Worst-Case Scenario for IndyMac and Other Banks: Even Worse than Expected

Paul Kiesel — Wed, 27 Aug 2008 20:35:27 GMT

As Joe Biden said last year during the Democratic presidential primary debates, and will likely reiterate tonight in Denver, the main source for our current credit crisis lies in mysterious lending practices of banks over the last six years (TILA violations; other mortgage & securities fraud, etc.) and a lack of transparency; allowing for bank losses to spiral out of control and for the FDIC to underestimate the economic damage that has already occurred and will grow larger.

Yesterday, federal regulators boosted previous estimated costs of IndyMac Bank's failure to $8.9 billion and prepared the public for more collapses, reporting that the number of troubled banks shot up 30% in just the last three months.

FDIC Chairwoman Sheila Bair said at a news conference, "Quite frankly, the results were pretty dismal." With the exception of bank earnings reported from the fourth quarter of 2007, bank earning for 2008 were at their lowest since 1991, when another Bush was in the White House. Bair also stated that, "We don't think this credit cycle's bottomed out yet."

Bair is most likely right; the credit crunch isn't over and most conservative and liberal economists will at least agree on the fact that the U.S. economy has some months (12-18 possibly?) before it begins to recover from the damage drowning credit markets over the past 18 months.

A problem for the FDIC: If they can't estimate or are underestimating the cost of bank failures, how will they be able to come up with the funds to cover those losses in the future (i.e. see WAMU, and Wachovia)? There have already been reports today that the FDIC might have to borrow money from the Treasury department, who's already loaning more money than it should to help support a copious amount of Wall Street mergers and struggling financial firms that have been suffering the pangs of the mortgage mess (JP Morgan-Bear Stearns deal, Fannie Mae and Freddie Mac's blank check, etc.).

The original estimated loss for IndyMac by the FDIC: $4 billion. Two weeks later it got revised to $4-8 billion. Now it's almost at $9 billion. And the only reason why the figure (estimated loss) rose $5 billion from its initial "guesstimate" is because the FDIC finally performed its own evaluation of IndyMac's assets and, according to the Los Angeles Times, it also discovered more deposits than initially estimated were covered by insurance. Conclusion: IndyMac was not as transparent as it should have been, and suffered the consequences. Let's hope Americans won't have to suffer for it, too.

And now because of the IndyMac failure, and as we get closer to seeing two other major banks' possible implosions, the deposit insurance fund has dropped below its mandated level, which is a very troubling sign. How will they be able to cover funds, if they don't have enough money?

Joe Biden was right back in late-2007. The wave of foreclosures, brought on largely due to mortgage fraud and TILA violations, and U.S. credit markets tightening, due to a lack of transparency in its business practices (CDO's, hedge fund managers defrauding investors, etc.) over the previous five years, were the result of lax regulation and oversight from federal regulators. The FDIC, the Fed, and the FBI have no idea how deep the problems run. "We need more transparency," Biden said, "particularly with regard to hedge funds. They are the ones that are causing this thing to go under. And there's no transparency, no accountability. We don't know how deep this problem is."

Originally posted at InjuryBoard by Paul Kiesel