The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

It seems to be Real Estate Monday, as a series of intriguing articles have broken recently.

First and foremost, the Seattle Times has a fascinating two parter, that you must not miss:  A series of interviews with former WaMu executives and employees, as well as a survey of internal company documents, reveals that management plotted a “reckless course that doomed the bank.”

I always find it instructive to note the people who try to shift blame elsewhere, when it disagrees with their prior world view. Regarding WAMU, the facts are rather damning:

• In its headlong pursuit of growth, WaMu systematically dismantled or weakened the internal controls meant to prevent the bank from taking on too much risk — the very standards and practices that had helped it grow in the first place.

• WaMu’s riskiest loans raked in money from high fees, but because the bank skimped on making sure borrowers could repay them, they eventually failed at disastrously high rates. As loans went bad, they sucked massive amounts of cash that WaMu needed to stay in business.

• WaMu’s subprime home loans failed at the highest rates in nation. Foreclosure rates for subprime loans made from 2005 to 2007 — the peak of the boom — were calamitous. In the 10 hardest-hit cities, more than a third of WaMu subprime loans went into foreclosure.

By the summer of 2004, nearly 60 percent of the loans WaMu was making were the riskiest sort — option ARMs, subprime mortgages and home-equity loans.”

Both parts of the series are well worth your time . . .

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Source:
Reckless strategies doomed WaMu (Part one)
Execs say WaMu fell victim to the economy &emp; but WaMu caused its demise by embracing risky loans and dismantling safeguards.
Drew DeSilver
Seattle Times, October 25, 2009 at 12:10 AM

http://seattletimes.nwsource.com/html/businesstechnology/2010131911_wamu25.html

WaMu: Hometown bank turned predatory (Part two)
David Heath
Seattle Times, October 26, 2009

http://seattletimes.nwsource.com/html/businesstechnology/2010136506_wamu26.html

Ooops! This is not good:

“Bank of America and Countrywide Home Loans destroyed mortgage documents, and “recreate” them by “insert(ing) data as they see fit,” to cover up their own failure to keep records – or their fraud – according to a federal RICO class action.

“To cover up the servicing mistakes and fraud and misrepresentation in the servicing of a consumer escrow, Defendants ‘recreate’ letters, insert data as they see fit, and fail to produce the entire HUD complaint form. This way, a consumer is left in the dark about the fraud that occurred to them,” the complaint states.

Lead plaintiff Kim Gorham says that when she sent a letter seeking information about her escrow account, she was informed that it had been “destroyed by a letter opener.” She says that getting a “clear and concise” statement from the defendants has been an “impossible task.”

My assumption is this is primarily via Countrywide prior to BofA’s acquisition (anyone know?)

Corporate Ethics: An apparent contradiction in terms . . .

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Source:
Class Claims Lender Destroyed Records
JONATHAN PERLOW
CourtHouse News, October 22, 2009

http://www.courthousenews.com/2009/10/22/Class_Claims_Lender_Destroyed_Records.htm

U.S. Week Ahead 10/23/2009

More earnings news, an update on GDP growth and key developments in Washington’s health-care debate will dominate investor attention in the week to come. MarketWatch’s Chris Noble reports from San Francisco.

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Asia’s Week Ahead: Awaiting Data Flood 10/23/2009

Asian markets face a massive data and earnings deluge next week as evidence builds that the worst is over for region. (Oct. 23)

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Europe Week Ahead: Oil Majors and SAP in Focus 10/23/2009

BP, Shell, Lufthansa and SAP are among a raft of companies reporting results.

David R. Kotok co-founded Cumberland Advisors in 1973 and has been its Chief Investment Officer since inception. He holds a B.S. in Economics from The Wharton School of the University of Pennsylvania, an M.S. in Organizational Dynamics from The School of Arts and Sciences at the University of Pennsylvania, and a Masters in Philosophy from the University of Pennsylvania.  Mr. Kotok is also a member of the National Business Economics Issues Council (NBEIC), the National Association for Business Economics (NABE), the Philadelphia Council for Business Economics (PCBE), and the Philadelphia Financial Economists Group (PFEG).

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October 23, 2009

The $80 oil price is starting to worry me a little. Translate it into gasoline and you get somewhere around $2.50 per gallon or a little higher, depending on where in the US you fill up your tank. Add to that a little cold weather and expanding crack spreads in refineries, and the price will edge toward $3.

History-derived economic models show that the US consumer starts to change behavior as the price of gas approaches $3, and then goes into a more pronounced state of shock when it ranges higher, in the $3 to $4 corridor. The reaction is to cut spending and retrench if the consumer thinks the price is going to stay at the new higher level for a while. When the consumer thinks the price will not stay higher, he keeps on spending and buying on credit.

BUT –

That history is derived, and has been modeled, from a time period when household balance sheets were relatively solid and when credit was flowing easily and when the unemployment rate was close to 5%, not 10%. So that is why I am starting to worry.

There are no solid models of rising gas prices that I can find which give good estimates of what happens to consumers when the unemployment rate is 10% instead of 5% and when many household balance sheets are wrecked, and when the credit mechanism is damaged.

SO –

The issue now is what gasoline price change it takes to impact consumer’s behavior. Does the price have to go as high as previously to hurt? Some retail experts I consulted say yes and that there will be no change in the relationship. Others disagree and say there is a new lower level, but they have insufficient experience to estimate what it is.

SO –

We asked some fellow economists if they thought the relationship was linear or something else. There was consistent disagreement. Five two-handed economists had ten opinions. Some said yes to linear and others said no. Most thought that the impact of a change in gas price is much more severe in the current environment. No one said it was milder.

SO –

If a rising gas price is going to crunch the consumer more than normally, the fragile economic recovery may be about to be derailed. Remember that every penny on the gasoline price acts as a $1-billion direct tax on the consumer. This rule-of-thumb estimate is used to guess at the normal effect. But if this time is not normal and if the effect is magnified and more severe, who knows what the new rule of thumb should be? We don’t.

AND –

We worry that this issue is not being discussed by the policy makers, who are still wringing their hands over inflation fear. And we see an energy policy coming from the Obama administration that will only serve to raise the price of gasoline and tax the extraction industries. That explains why the drill rig count is down even as the oil price is going up.

Energy and oil may be the next “sleeper” to awaken and jolt markets. However, we think it is more likely to slow down the fragile recovery. When it does, oil and gasoline demand will shrink, not grow. That will put downward pressure on the oil price, even if the dollar is weak. This will be even more pronounced if the dollar rallies

Oil is now $80. We may just see $60 sooner than we see $100. I will take the “under” on this trade as long as there is no outbreak of war in the Middle East, no rumbling from Russia, and I will hope there is no tax policy in the US that hits the energy consumer in the middle of a recession that features a 10% unemployment rate. We already have a no-exploration policy in all but four of these United States.

The first two risks are geopolitical. The last one is just political, no “geo” needed. As my friend Loren Scott likes to say in his speeches, “All the oil in America is in four states: Texas, Louisiana, Mississippi and Alabama, and the dipsticks are in Washington.”

David R. Kotok, Chairman and Chief Investment Officer, email: david.kotok@cumber.com

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Copyright 2009, Cumberland Advisors. All rights reserved.

Archived Commentaries: http://www.cumber.com/comments/archiveindex.htm

Bruce Bartlett — yes THAT Bruce Bartlett — takes the usual suspects to school. He immolates the phony deficit hawks on the actual causes of the Federal shortfall (hint: Do unfunded tax cuts ring any bells?):

According to the Congressional Budget Office’s January 2009 estimate for fiscal year 2009, outlays were projected to be $3,543 billion and revenues were projected to be $2,357 billion, leaving a deficit of $1,186 billion. Keep in mind that these estimates were made before Obama took office, based on existing law and policy, and did not take into account any actions that Obama might implement.

Therefore, unless one thinks that McCain would have somehow or other raised taxes and cut spending (with a Democratic Congress), rather than enacting a stimulus of his own, then a deficit of $1.2 trillion was baked in the cake the day Obama took office. Any suggestion that McCain would have brought in a lower deficit is simply fanciful.

Now let’s fast forward to the end of fiscal year 2009, which ended on September 30. According to CBO, it ended with spending at $3,515 billion and revenues of $2,106 billion for a deficit of $1,409 billion.

To recap, the deficit came in $223 billion higher than projected, but spending was $28 billion and revenues were $251 billion less than expected. Thus we can conclude that more than 100 percent of the increase in the deficit since January is accounted for by lower revenues. Not one penny is due to higher spending.

Wow, when this guy burns bridges, he sure doesn’t fuck around!

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Hat tip Scotta!

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Source:
Why the Economy Needs Spending, Not Tax Cuts
Bruce Bartlett
Oct 24, 2009

http://capitalgainsandgames.com/blog/bruce-bartlett/1200/why-economy-needs-spending-not-tax-cuts

I guess if you look at starts in a certain way — and ignore the obvious seasonality — they may appear to be up, but . . .

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Hat tip Rob

What happens when mortgage lenders lose proof of a mortgage?

That question gets addressed in a must read article in the Sunday NYT by Gretchen Morgenson:  If Lenders Say ‘The Dog Ate Your Mortgage’.

Gretchen begins with a little history: Over the past decades, the banks and their lawyers have held the cards in litigation. Even with the institutional advantages they held, Banks were given the benefit of the doubt against the “deadbeat mortgage delinquents.”

More recently, we have learned that the bank was undeserving of that. And, we have also learned that a goodly percentage of the “deadbeats” had been defrauded — by mortgage brokers, by real estate agents, and by extension, the banks themselves.

Throw in the securitization process, rife with legal shortcuts that made attempts by good faith borrowers to work out of their delinquency problems all but impossible. Hence, you end up with a judiciary that has become increasingly infuriated with bankers.

There is usually the tendency for judges to have a hands off approach to business issues, and to leave things to the legislature to either modify or pass new laws to resolve dramatic injustices.

At a certain point, the Judiciary will act as a check against excesses and insane outcomes, and “in the furtherance of Justice” step in to correct absurdities. After a few years, a few million foreclosures, and some truly insane claims by securitized investors, courts are now forcing lenders to demonstrate they actually own the mortgages they claim in foreclsoure actions.

The bankers’ benefit of the doubt has been lost, and hilarity ensued:

“Even so, banks and borrowers still do battle over foreclosures on an unlevel playing field that exists in far too many courtrooms. But some judges are starting to scrutinize the rules-don’t-matter methods used by lenders and their lawyers in the recent foreclosure wave. On occasion, lenders are even getting slapped around a bit.

One surprising smackdown occurred on Oct. 9 in federal bankruptcy court in the Southern District of New York. Ruling that a lender, PHH Mortgage, hadn’t proved its claim to a delinquent borrower’s home in White Plains, Judge Robert D. Drain wiped out a $461,263 mortgage debt on the property. That’s right: the mortgage debt disappeared, via a court order.

So the ruling may put a new dynamic in play in the foreclosure mess: If the lender can’t come forward with proof of ownership, and judges don’t look kindly on that, then borrowers may have a stronger hand to play in court and, apparently, may even be able to stay in their homes mortgage-free.

The reason that notes have gone missing is the huge mass of mortgage securitizations that occurred during the housing boom. Securitizations allowed for large pools of bank loans to be bundled and sold to legions of investors, but some of the nuts and bolts of the mortgage game — notes, for example — were never adequately tracked or recorded during the boom. In some cases, that means nobody truly knows who owns what.

In the case discussed above, the lawyer for the homeowner filed bankruptcy hoping to “persuade PHH to modify his client’s loan.” But after PHH jerked him around for a few months, he got pissed, and asked for proof of PHH’s standing in the case. They failed to produce it, and the judge kicked their asses to the curb.

There is an obvious unjust enrichment claim by the homeowner — If I were the bank, I would offer to reissue a new $200k mortgage to the owner, remove any marks on their credit record, and move forward. Otherwise, a precedent gets set that the banks and securitizers will rue.

The last of the “landed gentry” in America are trial judges — smart litigants learn never to piss them off . . .

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Previously:
Mortgage Electronic Registration Systems Loses Legal Shield (September 23rd, 2009)

http://www.ritholtz.com/blog/2009/09/mortgage-electronic-registration-systems-loses-legal-shield/

The Mortgage Netherworld (April 2009)

http://www.ritholtz.com/blog/2009/04/the-mortgage-netherworld

Source:
If Lenders Say ‘The Dog Ate Your Mortgage’
Gretchen Morgenson
NYT, October 24, 2009

http://www.nytimes.com/2009/10/25/business/economy/25gret.html

Perfect for a Saturday Night!

I posted this when there were 50 views — lets see how many this thing cranks up to . . .

Hat tip Mike!

Ella ja Aleksi is a Finnish musical group featuring two four-year-old rappers .

This video for the song “Yöjuna Rovaniemelle” is adorable:

hat tip boingboing

I did an interesting interview with Marketplace Radio on why mortgage mods fail so often.

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Audio clip: Adobe Flash Player (version 9 or above) is required to play this audio clip. Download the latest version here. You also need to have JavaScript enabled in your browser.

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click for Interview text

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Source:
How to get off the mortgage treadmill
Marketplace Public Radio, October 23, 2009

http://marketplace.publicradio.org/display/web/2009/10/23/mm-mortgagemods/

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