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Foreclosure Crisis: Before a Subprime Problem, Now an Everybody Problem

Paul Kiesel — Fri, 12 Sep 2008 15:44:18 GMT

August foreclosures hit an all-time high: 304,000 homes were in some stage of default and 91,000 families lost their homes. The hardest hit housing markets continue to be in Arizona, California, and Nevada.

Nevada once again had the highest rate of filings in the nation (one in every 91 households), as more than 101,000 Californians received foreclosure notices (one in every 130 households), and another 35,000 people lost their homes.

Fannie Mae chief economist Doug Duncan said, "It's been my view for a long time that foreclosures won't peak until the last three months of 2008," (CNNMoney.com, 9/12/08). And that might even be an optimistic outlook.

Take into account that foreclosures or default notices continue to rise steadily at a monthly rate that's 10% greater from the previous month, throughout all of 2008. Even if you compare August 2008 numbers from August 2007, when the foreclosure crisis was already underway, the numbers from last month are still 27% higher than August of last year. The two variables that weren't present last year that are now a growing concern for economists: the unemployment rate and option ARM loan resets. The latter will increase sharply towards the end of this year, into early next year. There are too many of those teaser rate payment loans out in the market that are about to reset to ballooned monthly payments, and too many filled with several TILA violations (which allowed this subsequent problem to occur), to not have a dramatic impact on the recovery of the economy in the short term.

Since last August, over 3/4 of a million homes have been repossessed and we're not even halfway through the meltdown yet. Lehman Brothers is going to be bought by another bank (with or without the help of the government; it expects to post $3.9 billion in losses for the third quarter), and Washington Mutual has been contacted by (or is contacting, according to some reports) JPMorgan Chase to broker some type of deal.

As the presidential candidates discuss fixing the economy and a couple touch upon restoring "small town values," ultimately, the former has to be the more pressing issue for the next president and vice president when it comes to dealing with and pulling us out of this financial quagmire. "Small town values" might sound like a good talking point on the campaign stump, but in order to compete in a global economy and allow Americans to bounce back from cash-strapped times and a Wall Street that was negligent and running wild with mortgage-backed securities, we need the next president to absorb this dilemma and consider the urgency and value of restoring order, regulation and confidence back into the financial markets. It'll help small towns and big cities alike.

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

Douglas Holtz-Eakin, McCain's Economic Adviser, Confused on Fannie and Freddie?

Paul Kiesel — Tue, 09 Sep 2008 23:02:17 GMT

I wouldn't say that Douglas Holt-Eakin is confused on what Fannie and Freddie do operationally, about the origins of the two mortgage giants, nor what transpired over at Fannie and Freddie over that last five years that required the federal government's takeover this weekend, but I think he's confused on or ignoring who was providing strong economic advice to John McCain until just recently: Phil Gramm. And it was Phil Gramm who helped orchestrate our current mortgage and, subsequently, housing crisis due to deregulation bills passed when he was a Texas senator.

Holtz-Eakin, McCain's economic adviser, said yesterday that if the Arizona senator wins the race, he’ll privatize the two government sponsored mortgage companies once economic conditions stabilize.

“The financial problems at these institutions are a legacy of crony capitalism, the absence of transparency and accountability, and the implied backing of the taxpayer,” said Holtz-Eakin. “If elected, they will continue the crusade for the right reform of the institutions.”

Crony capitalism? The absence of transparency? Has he not read the Commodity Futures Modernization Act of 2000? Phil Gramm, who had Holtz-Eakin's job before he was let go this summer for making insensitive comments about economic conditions/complaints that are all too much of a reality for many Americans, authored that bill (snuck it into Because of Gramm's bill, cronies were able to run loose and trick mostly unsuspecting borrowers into loans that the lenders themselves knew couldn't be fulfilled by the mortgagor.

If what was coming out of the McCain camp was true (that McCain wants to reform the two mortgage giants and clean up transparency issues among lenders), it'd be admirable, but since McCain and Gramm were such great personal and political buddies (I'm sure anyone could Google: McCain & Gramm, hit images, and find photos of the two men looking like longtime pals), I highly doubt McCain has had a change of heart overnight. McCain, it's safe to assume since he promotes his campaign as being the "Straight Talk Express," was very clear on the mortgage crisis back in March:

[. . .] just three months ago, McCain suggested that it's the borrowers' fault for why we're in this mortgage mess and that he couldn't understand how such a small percentage of foreclosures and/or troubled mortgages are causing this much financial turmoil, "[Americans] bought homes they couldn't afford [. . .] Only 55 million [homeowners] have a mortgage at all and 51 million are doing what is necessary [. . .] to make their payments on time. That leaves us with a puzzling situation: How could 4 million mortgages cause this much trouble for us all?" (New York Times, 3/25/08). He also said in March that government intervention is unnecessary and he wouldn't support it, but clearly his statements today contradict his former ones.
LosAngeles.InjuryBoard.com, 7/10/08

Originally posted at InjuryBoard by Paul Kiesel

Obama, Biden, McCain and Palin on the Federal Government's Takeover of Fannie & Freddie

Paul Kiesel — Mon, 08 Sep 2008 20:06:03 GMT

Both presidential candidates Barack Obama and John McCain said on Sunday that they see the federal takeover of mortgage finance companies Fannie Mae and Freddie Mac as necessary.

The vice presidential nominees, Joe Biden and Sarah Palin, had different views on the situation, with Palin leaving many scratching their heads after a few misstatements on the issue.

Barack Obama

"Given the substantial role that Fannie Mae and Freddie Mac play in our housing system, I believe that some form of intervention is necessary to prevent a larger and deeper crisis throughout our entire economy"

Obama also said that the plan for Fannie Mae and Freddie Mac needed to focus on strengthening the economy and helping struggling homeowners rather than focusing on "the whims of lobbyists and special interests."

John McCain

"The long-term reforms are to scale down Fannie and Freddie so their size is no longer a threat. And then to privatize them. Get them off the taxpayer's books entirely," said McCain's chief economic adviser, Douglas Holtz-Eakin, who replaced Phil Gramm after he stepped down as McCain's co-chair over the summer.

Holtz-Eakin went on to say, in a telephone interview with Reuters, "The next steps would be to have credit market conditions stabilize and have the ability, as a result, for firms to access capital again so that they can scale down their portfolio holdings."

*It's important to note that McCain's former economic adviser, Phil Gramm, whom he recognizes as the savior of his campaign's financial struggles from a summer ago, was the author of the Commodity Futures Modernization Act of 2000, which, incidentally, allowed for the mortgage crisis to precipitate in the manner it did. The bill helped deregulate many sectors, including lending and energy (Enron), and provided private companies the luxury of not having to be completely, if at all, transparent in their accounting (nor accountable), as governmental oversight waned.

Joe Biden

Joe Biden says the government's rescue of the big mortgage companies Freddie Mac and Fannie Mae should not mean bailing out shareholders at the expense of taxpayers.

Biden feels it's important to help homeowners and make sure the two companies still are in a position to keep making loans.

On Sunday, Biden told NBC's "Meet the Press" that he had spoken to Treasury Secretary Henry Paulson on Saturday night, and that he thought the plan had a good chance of succeeding. "It’s not an official reorganization. It will be left to the next administration and the Congress to make those judgments," Mr. Biden said.

Sarah Palin

Speaking before voters in Colorado Springs over the weekend, the Republican vice presidential nominee claimed, after omitting economic policy from her acceptance speech at the RNC last Wednesday, that lending giants Fannie Mae and Freddie Mac had "gotten too big and too expensive to the taxpayers." However, the companies aren't taxpayer funded. They operate as private companies. The takeover may result in a taxpayer bailout during reorganization.

The Huffington Post jumped on this gaffe earlier today and so did several economists, conservative and liberal, who were concerned with the misstatement.

"You would like to think that someone who is going to be vice president and conceivable president would know what Fannie and Freddie do," said Dean Baker, co-director of the Center for Economic and Policy Research. "These are huge institutions and they are absolutely central to our country's mortgage debt. To not have a clue what they do doesn't speak well for her, I'd say."

"Heretofore, if the treasury had a balance sheet there would have been a liability but there was never a taxpayer payment before [the bailout]," said Gerald P. O'Driscoll, an economist with the Cato Institute. "[Fannie and Freddie] were not taxpayer funded. They had taxpayer guarantee, which is worth something, especially in the stock market..."

Maybe Palin assumed that the two former private entities were taxpayer funded because in July they were being offered low market interest rates by the Fed, at the taxpayers expense. Or the fact that there was always an implicit guarantee that Fannie and Freddie would be backed by the government if they failed, again, at taxpayers expense. However, before today, Fannie and Freddie had not drawn down any of the credit line given to them by the Treasury, so her assessment still wouldn't make sense.

Originally posted at InjuryBoard by Paul Kiesel

On Wall Street: McCain vs. Obama

Paul Kiesel — Thu, 04 Sep 2008 20:45:05 GMT

Barack Obama and John McCain have both stressed the need for greater transparency and imposing capital requirements on financial institutions since the debacles at Bear Stearns, IndyMac and Fannie & Freddie.

Also, considering that the economy is one if not the main concern for most voters, it's interesting that during the Republican Convention that many speakers, including former New York Mayor Rudolph Giuliani and Alaskan Governor Sarah Palin, have omitted economic policy from their speeches: fixing the housing crisis, credit crunch, improving the unemployment rate (tomorrow morning, over 75,000 more jobs lost in Q3 are expected to be announced) and curbing inflation.

Below are the two candidates' stances on "Wall Street." To see the candidates' other economic policies, click here: CNNMoney.com.

McCain

· Increase capital requirements on financial institutions.

· Remove some of the regulatory, accounting and tax impediments to raising capital.

· Examine how banks and other firms value assets that exacerbated the credit crunch.

· Increase transparency of complex financial instruments.

"Capital markets work best when there is both accountability and transparency. In the case of our current [credit] crisis, both were lacking." -- McCain

Obama

· Impose liquidity and capital requirements on investment banks.

· Streamline regulatory framework of the financial services sector.

· Create an oversight commission that would advise the president, Congress and regulators on the health of and risks facing financial markets.

· Give Federal Reserve supervisory power over any bank that borrows from it.

"Let me be clear: the American economy does not stand still, and neither should the rules that govern it. The evolution of industries often warrants regulatory reform..." -- Obama

Originally posted at InjuryBoard by Paul Kiesel

On Mortgage Fraud: McCain vs. Obama

Paul Kiesel — Thu, 04 Sep 2008 20:13:19 GMT

Senators Barack Obama and John McCain want to go after predatory lenders. Senator Obama, contrary to Alaskan Governor Sarah Palin's claims about his Senate record in her acceptance speech at the Republican National Convention (RNC) last night, introduced the STOP FRAUD Act in the Senate with Senator Dick Durbin, and now it is a major part of the Illinois senator's platform. Senator McCain called for creating a task force to investigate criminal wrongdoing in the mortgage lending and securitization industry, which, incidentally, had already been created by the FBI long before McCain urged its formation. (The task force was created in 2005, and McCain didn't call for one until this year, just a few months ago; however, certain states ramped up the effort in the last half of 2007 and the first half of 2008, like California, which created an FBI task force named SCAM in May 2008.)

Below are the two candidates' stances on "Mortgage Fraud." To see the candidates' other economic policies, click here: CNNMoney.com.

McCain

· Create a Justice Department task force that punishes individuals or firms that defrauded innocent homeowners or forged loan application documents.

· Task force would also assist state attorneys general investigating abusive lending practices.

· Improve transparency in the lending process so that borrowers know exactly what they are agreeing to.

"Lenders who initiate loans should be held accountable for the quality and performance of those loans and strict standards should be required in the lending process." -- McCain

Obama

· Boost funding for law enforcement programs aimed at housing fraud by $40 million.

· Establish new federal criminal penalties for mortgage professionals found guilty of fraud.

· Require lending professionals to report suspicious or fraudulent activity.

· Establish a database of censured or debarred mortgage professionals, so borrowers can easily check the credentials of lenders.

· Establish a standardized estimate of the total annualized cost of a mortgage loan to make it easier for borrowers to compare different loans.

"We must establish stiff penalties to deter fraud and protect consumers against abusive lending practices."-- Obama

Originally posted at InjuryBoard by Paul Kiesel

GMAC Home Loan Unit: The Past Year has been Horrible, No Improvements on the Horizon

Paul Kiesel — Wed, 03 Sep 2008 15:53:40 GMT

Reuters and Bloomberg both reported today that GMAC's Home Loan Unit will fire 5,000 employees, or 60 percent of its staff, and close all 200 GMAC Mortgage retail offices because of "weak real estate markets."

Mirko Mikelic, senior portfolio manager at Fifth Third Asset Management, said, " This gives you a full flavor of how terrible the mortgage market is [. . .] The past year has been horrible and it doesn't look like there is any improvement on the horizon with continuing declines in home values and rising delinquencies."

GMAC will also stop offering home loans through its GMAC Home Services and noncore mortgage servicing businesses.

This is further evidence that we're not anywhere near the end of the mortgage crisis or recovering, because, if we were, GMAC would have been able to weather the storm. The U.S. has still not felt the effects of the Option ARM resets that will take place next year, and until that period is over (2010 maybe?), we won't see any indications that the economy and housing markets are recovering.

What is interesting to note is the contrast between the two Party Conventions that have been taking place over the last ten days. The Democrats harped extensively on how down the economy is -- particularly the middle class, who've been affected most by the mortgage crisis -- and offered solutions to fix a broken bank regulatory system, however, the Republicans, in two days of their convention, have yet to mention plans to revitalize the economy, or how they would go about fixing the housing crisis. We'll have to wait and see what is discussed tonight and tomorrow as Governor Sarah Palin and Senator John McCain will speak on consecutive nights. McCain's former economic adviser was Phil Gramm.

Originally posted at InjuryBoard by Paul Kiesel