Los Angeles Personal Injury Lawyer - mortgage crisis

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

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

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

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

Below is the first part of the article:

The Reckoning

Saying Yes, WaMu Built Empire on Shaky Loans

By PETER S. GOODMAN and GRETCHEN MORGENSON

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Bush and the Economy or Beating a Dead Horse

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

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

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

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

Below is the aforementioned New York Times article:

The Reckoning

White House Philosophy Stoked Mortgage Bonfire

By JO BECKER, SHERYL GAY STOLBERG and STEPHEN LABATON

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A Policy Gone Awry

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Like Minds on Laissez-Faire

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

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

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

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

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

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

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

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

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

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

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

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

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

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

‘We Told You So’

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Unheeded Warnings

Jason Thomas had a nagging feeling.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Dominoes Start to Fall

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

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

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

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

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

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

“Can they?” Mr. Bush asked.

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

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

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

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

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

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

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

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

“Is that enough?” Mr. Bush asked.

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

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

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

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

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

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

Originally posted at InjuryBoard by Paul Kiesel

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

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

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

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

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

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

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

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

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

Originally posted at InjuryBoard by Paul Kiesel

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

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

NYT: The Most "Underwater" Community in America

Paul Kiesel — Tue, 11 Nov 2008 13:37:51 GMT

The New York Times published an article today on a struggling California community, Mountain House, where 90% of homeowners owe more money on their mortgages than the their houses are worth: it has the highest concentration of underwater mortgages in the country.

In Mountain House, the average homeowner finds him or herself in about $122,000 of negative home equity. Granted, Mountain House is an extreme case of what's taking place across the country, but if readers of this blog take note, these stories haven't stopped: new ones are written weekly if not daily.

Therefore, when some analysts say, like Redfin CEO Glenn Kelman, that the housing market is close to bottoming out, at least in Los Angeles, and that home prices should stabilize or go up at some point in 2009, I'm a little dubious: we have yet to face the fallout from interest rate resets on pay option ARM loans from late-2006 and 2007. However, Mr. Kelman is less optimistic when it comes to other markets outside of California (markets he wouldn't name), where he thinks 2009, for those unidentified markets, will be a lot like 2008 was for several California housing markets.

California had some of the more grossly inflated housing markets in the country, which led to the housing bubble and its subsequent loud burst, so naturally the state has had one of the hardest falls during the mortgage crisis. Nonetheless, what's taking place in Mountain House, California is hard to imagine: almost the entire town has been swallowed by the mortgage crisis.

Click here for the New York Times story: "A Town Drowns in Debt as Home Values Plunge"

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

Schwarzenegger Unveils Part of California Economic Stimulus Package: 90-Day Freeze on Pending Home Foreclosures

Paul Kiesel — Thu, 06 Nov 2008 14:47:11 GMT

Yesterday, Governor Schwarzenegger proposed a 90-day freeze on pending home foreclosures to provide needed relief to a squeezed California economy and to provide more time for homeowners to seek a loan modification.

This proposal is part of a larger economic stimulus package for the state that he anticipates will be put in front of lawmakers in a special session of the Legislature that is supposed to begin today.

However, the governor's plan for "loan modifications," another component to his economic stimulus plan, would be based on FDIC chairwoman Sheila Bair's approach to rewriting loans at IndyMac, which has had mixed results thus far.

Schwarzenegger's 90-day freeze is fortunately paired with his loan modification tactic, allowing homeowners to seek an FDIC-like loan modification from their lender (based on the FDIC IndyMac blueprint) or seek one on their own (legal representation, loan modification counseling, etc).

Schwarzenegger said, "The single most powerful action our state can take to shore up its economy is to help Californians stay in their homes [. . .] Curtailing foreclosures will stop the downward spiral of home prices, free up needed cash for homeowners, help save jobs and make an immediate positive impact on our economy."

Even Assemblyman Ted Lieu (D-Torrance), who has been dubious about the governor's stance on the mortgage crisis for months now, is pleased with this idea. "What the governor has proposed is a good first step [. . .] I'm pleased that the governor recognizes that banks and mortgage are not capable of regulating themselves. California has the responsibility and the obligation of raising the standards."

And California SHOULD raise "the standards" when it comes to attacking the mortgage crisis, considering the State has some of the highest condensed foreclosure areas throughout the country. Leaders of the state Senate agreed that Sacramento needed to do more to help strapped homeowners, but there are still a lot of question marks as to which approach will be the best for everyone involved.

Originally posted at InjuryBoard by Paul Kiesel