Los Angeles Personal Injury Lawyer - wamu

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

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

Washington Mutual's Lending Operation: A Boiler Room Environment

Paul Kiesel — Tue, 04 Nov 2008 15:26:02 GMT

Yesterday, the New York Times reported on a senior mortgage underwriter who had, previous to the subprime and pay option ARM loan boom, been proud of her ability to spot fraud and other problems in loan applications.

Keysha Cooper said she found herself stuck between a rock and a hard place during the latter part of the mortgage boom, as brokers squeezed her from one side, her superiors, like the ones working under disgraced WaMu former CEO Kerry Killinger, pushing her from the other, with both sides pressuring her to approve loans, regardless.

Ms. Cooper told the Times, "At WaMu it wasn't about the quality of loans; it was about the numbers [. . .] They didn't care if we were giving loans to people that didn't qualify. Instead, it was how many loans did you guys close and fund?"

And what if Ms. Cooper didn't approve the loans that were coming through WaMu's doors? She and other mortgage underwriters were punished. The loan officers that were complicit with WaMu's irreverent regard to shareholders and whether or not borrowers could keep current with their payments: They received free trips to places like Hawaii and Jamaica... for a month!

Ms. Cooper was even placed on probation for a month for refusing to approve a loan, which she said was filled with so many discrepancies that is clearly was an example of mortgage fraud.

Why would Washington Mutual want to sell hundreds of thousands of these loans that mirrored or were explicitly deemed fraudulent to loan officers? Because surreptitiously placed throughout the loan documents were several hidden fees and/or penalties, which would result in $20,000 to $40,000 on a loan that was approximately $500,000. Thus, the more TILA violations in the loan, the more money WaMu could rake in.

Kerry Killinger, the recently ousted Chief Executive of this whole guerilla-like, Boiler Room environment, and the man who tops the list of defendants who are being sued by shareholders, should not only be held responsible in paying back the tens of millions of dollars he "pocketed" from Washington Mutual under his helm, but the topic of "prison" should also be thrown into the mix.

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

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

Bernanke, Greenspan and Paulson were Wrong on Fannie and Freddie, Housing Crisis

Paul Kiesel — Mon, 08 Sep 2008 17:38:06 GMT

On July 16, Federal Reserve Chairman Ben Bernanke told Congress that he believed Fannie Mae and Freddie Mac would be able to make it through the storm of the U.S housing crisis. In front of Representative Barney Frank's House Financial Services Committee, Bernanke also said that troubled Fannie Mae and Freddie Mac were adequately capitalized and "in no danger of failing."

Fast forward to last Friday evening, September 5, when reports started circulating over news wires that Fannie and Freddie were about to be taken over by the federal government, which, of course, ended up happening within 48 hours of that news breaking.

Did Bernanke really miss all of the troubles at Fannie and Freddie -- their inability to raise capital, amid a multifarious of other issues -- only seven weeks ago, and all of a sudden saw that the two GSEs needed the backing of the federal government? How did Alan Greenspan overlook or not understand the housing bubble that was taking place while chairman of the Fed, and warn the country of the potential ramifications from that bubble bursting? (Greenspan made several claims that the worst of the housing market's problems were over, towards the end of 2006.) Why did Treasury Secretary Henry Paulson assume that Hope Now would be the one and only answer to the flood of foreclosures and default notices hitting the most problematic housing markets, even though within a year of its creation President Bush would sign a sweeping housing bill into law, designed to do what Hope Now never could have done?

(When President Bush was days away from signing the housing bill into law -- a drastic change of heart considering just a week before he was adamantly opposed to a housing bailout package -- he made several comments on how it would shore up Fannie and Freddie's capital troubles, however, Wachovia economist Mark Vitter felt that housing bill would not successfully provide that relief, "[Won't] speed up or lessen the impact of the correction of the housing market [. . .] It's too late for that. There's nothing that can be done." Again, if Fannie and Freddie had capital troubles towards the end of July and that was Bush's definitive reason for signing the housing bill, then why did Bernanke tell Congress two weeks prior that the two GSEs were "adequately capitalized" and "in no danger of failing?")

All of these questions will be asked long after the housing market, credit markets and Wall Street have rebounded (sometime in 2010?), but ultimately, three of the nation's supposed most erudite individuals on macro- and microeconomics ended up disastrously wrong in their observations and predictions. If Bernanke, Greenspan and Paulson truly didn't know what was going on and what was going to be outcome of mistaken ignorance, then the housing/mortgage crisis is further evidence that banks and lenders lacked oversight and regulation, thus, subsequently allowing banks and lenders to be more inconspicuous in their lending practices (TELA violations). Or maybe all three knew, and chose not to tell the public in fear of expediting a problem that appears, after all of the deregulation that took place in the banking industry in the late-90s and early-2000s, to have been inevitable.

Academic economists, like Yale economist Robert Shiller and NYU economist Nouriel Roubini (a.k.a. Dr. Doom), were more perspicacious to the housing and mortgage fallout, so it's not as if the signs weren't there. The writing had been on the wall for awhile. (I wrote a blog back in May, "A Trillion Dollar Risk," that examined Fannie's and Freddie's financial problems.) These two men based their economic theories off empirical data suggesting that the fallout would be in greater losses and more impacting to the economy than any information given to us from an economic surrogate of the Bush administration or CEOs on Wall Street (speaking of which, 18 year veteran CEO of WAMU, Kerry Killinger, was ousted earlier this morning).

For instance, The New York Times' Irving Fisher gives a compelling argument as to why Fannie and Freddie needed to be bailed out -- one of many opinions on the matter and proof that market observers and financial journalists were keen to the mortgage industry's dilemma -- and that the two GSEs should have been financially backed at an earlier date, in hopes of circumventing a lot of the chaos that's recently taken place among other financial institutions. The reason: debt deflation. Fisher does argue, however, that the government take over of the two mortgage giants will prove beneficial to future mortgage borrowers.

As the economist Irving Fisher observed way back in 1933, when highly indebted individuals and businesses get into financial trouble, they usually sell assets and use the proceeds to pay down their debt. What Fisher pointed out, however, was that such selloffs are self-defeating when everyone does it: if everyone tries to sell assets at the same time, the resulting plunge in market prices undermines debtors’ financial positions faster than debt can be paid off. So deflation in asset prices can turn into a vicious circle. And one consequence of what he called a “stampede to liquidate” is a severe economic slump.

That’s what’s happening now, with debt deflation made especially ugly by the fact that key financial players are highly leveraged — their assets were mainly bought with borrowed money. As Paul McCulley of Pimco, the bond investor, put it in a recent essay titled “The Paradox of Deleveraging,” lately just about every financial institution has been trying to reduce its leverage — but the plunge in asset values has nonetheless left these institutions with more debt relative to their assets than before.

And the numbers keep getting worse. In July 2007 Ben Bernanke suggested that subprime losses would be less than $100 billion. Well, last month write-downs by banks and other financial institutions passed the $500 billion mark — and the hits keep coming.

Which brings us to Fannie and Freddie. They’re the only big financial institutions that haven’t joined in the rush to deleverage, which is why they now account for about 70 percent of new mortgage loans. But their financial foundations have been undermined by debt deflation, even though their lending was more responsible than average. (A subprime borrower is basically someone whose credit wasn’t good enough to qualify for a Fannie- or Freddie-backed mortgage.)

So Fannie and Freddie had to be rescued — otherwise debt deflation would have gotten much worse. Indeed, their financial troubles have already caused problems for would-be home buyers: mortgage rates are up sharply since earlier this year. With the federal takeover, which removes the pressure on the lenders’ balance sheets, we should see mortgage rates drop again — which is definitely good news.
The New York Times, 9/7/08

How we're able to prevent a future financial crisis like the one that's been taking place, and that will still continue well into 2010, can only be answered when we're able to understand its initial causes. Until then, we'll be wondering what else was overlooked by our bank regulators during the build up to the mortgage crisis, and when/how that will hit the U.S. economy.

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

California's Ticking Option ARM Time Bomb

Paul Kiesel — Tue, 19 Aug 2008 15:29:12 GMT

"Optimists, look away now." This is the first sentence of a very brief article in last week's The Economist. The subhead reads "A nasty mortgage product promises yet more misery," and the title of the article is "Ticking time bomb." However, it's not until the fourth sentence of the first paragraph that the reader has any idea what The Economist is actually describing: Option ARM loans. And it is these type of loans that will precipitate another huge hit to the already fragile mortgage/housing market over the next 12-18 months.

The Economist does a well enough job, considering the article is only four paragraphs, of giving a remedial understanding as to what's still at stake in the mortgage crisis. The Option ARM loan, which I've mentioned at least a dozen times during the last few months, is a type of loan that allows borrowers to pay some of the interest rate monthly, leaving the principal balance unpaid and the remaining unpaid interest to compound each month, resulting in a negative amortizing loan. Typically, an Option ARM loan allows for a three or five year teaser rate payment period (introduction period that allows for a partial interest rate payment) and then the loan recasts at a new interest rate (7-9%) or the loan recasts prior to that period because the loan, as it negatively amortizes, balloons and once it exceeds the principal balance by 10-15%, it automatically recasts. Meaning one month a payment could be $1200, and the next month it could be $3200, regardless if the three or five year introductory payment period has ended or not.

Originally, banks like Washington Mutual and World Savings thought that as housing prices rose, the product made all the more sense, because when the loan hit its recast point, the borrower could refinance into a better loan, with the equity gained in the home. Since home prices have plummeted in recent months, that plan has backfired.

Now it looks like about 1.4 million households currently carry a teaser rate payment loan, most of them in California, and the interest rates have yet to recast. At stake is about $500 billion, about half of the subprime loan losses, but these loans, when they begin to rise in defaults, will be economically more severe, as the wave of recasts will fall within a much narrower window of months (6-12 months), and when property values are already low, at prices that haven't been seen since 2003 in some markets (subprime defaults helped burst the housing bubble and push home prices lower; what happens when home prices are already low?).

"When house prices are falling and refinancing is difficult, as is now the case, the option ARM is the financial equivalent of a bikini in winter. Homeowners end up owing more on a property that is worth less. Delinquencies are already rising fast. Write-offs for option ARMs at Washington Mutual, a stumbling thrift, have zoomed from .49% in the last quarter of 2007 to 3.91% in the second quarter [. . .] The biggest wave of recasts is due to happen in 2010 and 2011 [. . .] borrowers' monthly payments will then surge by 60-80%," (The Economist, 8/14/08).

Other than Wells Fargo, no bank is impervious to the looming option-ARM storm. Wachovia, for instance, sold an option-ARM product called Pick-a-Pay and it accounts for 45% of its consumer lending. Pick-a-Pay loans were used often by predatory lenders.

Banks will also be suffering further economic and legal ramifications because of these option ARM loans, as they misled borrowers and investors, the former through TILA violations, by manipulating TILA forms, thus, allowing for the amount of option ARM loans to penetrate the market. It's only a matter of time, regardless of the most optimistic economic predictions, until the option ARMs explode into unaffordable payments, ushering in another wave of foreclosures, a second declivity in home values and more failed banks.

Originally posted at InjuryBoard by Paul Kiesel

California Foreclosure Crush Continues

Paul Kiesel — Tue, 22 Jul 2008 21:46:27 GMT

CNN and the AP reported today that foreclosures in the state of California rose in the second quater to the "highest level in at least 20 years."

DataQuick Information Systems also says in its report Tuesday that the number of default notices sent to homeowners has hit an all-time high.

Over 63,000 homes were lost to foreclosure between April and June - the most in any quarter since 1988, when the firm began tracking foreclosures. That is an unfortunate, staggering and surprising number, even when considering how bad the mortgage/credit market is right now.

That means hundreds of thousands of people (if you consider how many people could potentially occupy a home) were subjected to severe pangs of the mortgage mess (i.e. TILA fraud) and/or the real estate slump (people who found themselves unable to sell their homes before it was foreclosed on). Imagine filling Dodger Stadium's seats four times over and that would be the equivalent of people directly affected by the foreclosure data released by DataQuick Information Systems. The 63,000 homes foreclosed on doesn't even represent the neighboring homes (or the people indirectly affected) that have and continue to lose value, as a foreclosed home suppresses surrounding homes' value; the longer a foreclosed home sits on the market, the homes within a reasonable distance depreciate further.

Based on this information and comparing it to last year's foreclosure rate, foreclosures in the second quarter of 2008 increased 33% from the previous quarter and 261% from the same quarter last year.

On top of all of this news, Wachovia and Washington Mutual posted over $12 billion worth of losses today. Both banks cite risks in the subprime market and payment-option mortgages as primary contributors to their massive losses.

It doesn't feel as if this credit crisis is ending anytime soon.

Originally posted at InjuryBoard by Paul Kiesel