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

Previously:
Lowenstein: Walk Away From Your Mortgage! (January 11th, 2010)

Mortgage Bankers Association “Walks Away” from HQ (February 7th, 2010)

(This is a series giving a basic explanation of the current foreclosure fraud crisis from Mike Konczal; This is Part Five; you should also see Part One, Part Two, Part Three and Part Four)

Here’s a guess:  In one month, the large banks will conclude that there are no problems with its foreclosure processes.  The massive fraud that was committed on the courts was the result of a few bad apples, but those are now gone and it’s back to business as normal.

At this point, either as a citizen or as a financial market participant, would there be any reason to believe them?   Is there any reason to believe that the servicer and foreclosure mill fraud is over?  That securitizations actually have the proper legal documentation necessary?   That borrowers and lenders are actually getting a chance to come to mutually beneficials situations?    Is there any reason to believe they aren’t lying?

Because servicers aren’t currently regulated.  They have a patchwork of state regulators and the OCC may regulate their parent company if it is a bank or thrift, but there’s no current government agent to provide any accountability here.   So without action, there’s going to be no one to confirm or deny that anything has actually changed in the housing market.

In some ways this narrative already reminds me of the BP oil spill in the gulf.  The Obama administration largely left it to BP to tell the government and the public what was wrong, hire the contractors and then also to tell everyone what the environmental damages were.  It will surprise no one that the information BP sent out was wrong (see, for example, Kate Sheppard,“Not an Incidental Public Relations Problem”), but for better or worse, the Obama administration is now linked to whatever course and information BP chooses to pursue.

Why not choose a different course for this one?   One that emphasizes social justice through powerful banks having to follow the rule of law, corporate responsibility to not commit fraud, provides a space where those who are weak and poor get a fair say instead of being bulldozed over by the rich and strong, and actually starts to dig out of the mortgage crisis that we are in. Check out Mike Lux’s Exploding foreclosure fraud issue: An opportunity for Democrats to turn the tide. Not only is it relevant, but it demonstrates that there’s a good chance this is going to get worse before it gets better. Why not get in front of it, and change course from the disastrous path we’ve been taking?

What Just Went Wrong in the Government Response?

Because what we’ve done to this point hasn’t worked.  Shahien Nasiripour and Arthur Delaney wrote the definitive account of the failure of the HAMP program, Extend AND Pretend: The Obama Administration’s Failed Foreclosure Program. Instead of continuing HAMP, it’s time for a fresh response.

Pat Garofalo of the Center for American Progress has The Fix Is Over: Mortgage Foreclosure Scandal Offers New Hope for Homeowners which has a lot on what a new foreclosure relief program could look like:

allowing housing counselors and other public entities to approve mortgage modifications directly, and if the borrower’s servicer doesn’t challenge the modification in 90 days, it automatically becomes permanent. Such a step would go a long way toward streamlining the program and getting borrowers who qualify through the maze of bureaucracy in a timely, clear fashion without leaving them in limbo for months on end.

Mortgage mediation programs—in which a bank must meet with a borrower, in the presence of a judge and housing counselors, before finalizing a foreclosure—should also be expanded..

Another new favorite policy option everyone should start considering:  ”REMICs bestow enormous tax breaks to investors; these breaks should be revoked for any residential home mortgage loan holding entity that forecloses on more than a specified percentage of all of its mortgages.”

We have to remember what went wrong with HAMP: the servicers were in the driver’s seat. We need a process that is involuntary, government-run and is standardizable on both the modification and on the foreclosure end.  Between this and a clearing out of the current crisis to confirm change has actually happened we can start on a way out of this crisis.

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This is the first of a 5 part series from Mike Konczal, a former financial engineer, is a fellow with the Roosevelt Institute, who also blogs at New Deal 2.0, and is working on financial reform, the 21st century economy, structural unemployment, inequality, risk sharing, consumer access to financial services and more generally what it means to have a social contract in a financialized, post-industrial economy.

I am still modestly constructive on equities for the near term, but yesterday’s reversal was a potentially disturbing development.

Near term, directional volume is important — is it expanding on the up days or the down days?

For the technically minded out there, the S&P500 should form a Golden Cross today, as the 50-day MA crosses the 200-day MA from below. The last such cross was June 2009, and the market gained 22% int he year following (Not “since” as I originally wrote).

Matt Taibbi’s new book, Griftopia: Bubble Machines, Vampire Squids, and the Long Con That Is Breaking America, comes out next month. There is an excerpt at RollingStone.com that is well worth your time to read:

“America is quite literally for sale, at rock-bottom prices, and the buyers increasingly are the very people who scored big in the oil bubble. Thanks to Goldman Sachs and Morgan Stanley and the other investment banks that artificially jacked up the price of gasoline over the course of the last decade, Americans delivered a lot of their excess cash into the coffers of sovereign wealth funds like the Qatar Investment Authority, the Libyan Investment Authority, Saudi Arabia’s SAMA Foreign Holdings, and the UAE’s Abu Dhabi Investment Authority.

Here’s yet another diabolic cycle for ordinary Americans, engineered by the grifter class. A Pennsylvanian like Robert Lukens sees his business decline thanks to soaring oil prices that have been jacked up by a handful of banks that paid off a few politicians to hand them the right to manipulate the market. Lukens has no say in this; he pays what he has to pay. Some of that money of his goes into the pockets of the banks that disenfranchise him politically, and the rest of it goes increasingly into the pockets of Middle Eastern oil companies. And since he’s making less money now, Lukens is paying less in taxes to the state of Pennsylvania, leaving the state in a budget shortfall. Next thing you know, Governor Ed Rendell is traveling to the Middle East, trying to sell the Pennsylvania Turnpike to the same oil states who’ve been pocketing Bob Lukens’s gas dollars. It’s an almost frictionless machine for stripping wealth out of the heart of the country, one that perfectly encapsulates where we are as a nation.

When you’re trying to sell a highway that was once considered one of your nation’s great engineering marvels — 532 miles of hard-built road that required tons of dynamite, wood, and steel and the labor of thousands to bore seven mighty tunnels through the Allegheny Mountains — when you’re offering that up to petro-despots just so you can fight off a single-year budget shortfall, just so you can keep the lights on in the state house into the next fiscal year, you’ve entered a new stage in your societal development.

You know how you used to have a job, and a house, and a car, and a wife and a family, and there was food in the fridge — and now you’re six months into a drug habit and you’re carrying toasters and TVs out the front door every morning just to raise the cash to make it through that day? That’s where we are. While a lot of this book is about how American banks used bubble schemes to strip the last meat off the bones of America’s postwar golden years, the cruelest joke is that American banks now don’t even have the buying power needed to finish the job of stripping the country completely clean.

For that last stage we have to look overseas, to more cash-rich countries we now literally have to beg to take our national monuments off our hands at huge discounts, just so that our states don’t fall one by one in a domino rush of defaults and bankruptcies. In other words, we’re being colonized — of course it’s happening in a clever way, with very careful paperwork, so we have the option of pretending that it’s not actually happening, right up until the bitter end.”

Griftopia will be the last remaining post-crash books I can muster the strength to read, as I am suffering from post-bailout/recession/collapse fatigue.

I don’t always agree with Taibbi’s conclusions, but he manages to tap into the Zeitgeist of the nation’s angst better than anyone else.

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Sources:
Griftopia: Bubble Machines, Vampire Squids, and the Long Con That Is Breaking America

Exclusive Excerpt: America on Sale, From Matt Taibbi’s ‘Griftopia’
Matt Taibbi
Rolling Stone, Oct 18, 2010
http://www.rollingstone.com/politics/news/17390/222206#

Ahead of the G20 meeting beginning today where currency rates will be the front and center discussion, the $ index is flattish. While Geithner is seeking some sort of trade criteria relative to one’s GDP as a benchmark for FX moves, the entire weekend’s discussion on currencies will lead to nothing concrete as it’s the US Federal Reserve that is driving the global distortion with their extraordinary policy and debasement of the global reserve currency and Mr. Bernanke will not be attending. Following Bullard’s comments yesterday on his desired path for QE2, the 5yr5yr inflation expectations breakeven rate is rising to the highest level since May at 2.88%. Germany’s export dependent economy continues to show little angst over the rising Euro as their Oct IFO business confidence figure rose to the highest since May ’07 and was 1.1 pts above expectations.

Yes, its a parody (bajillionhits.biz) via Reformed Broker:

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Source:
The Stephen Colbert of New Media
by Ben Crair
Daily Beast

http://www.thedailybeast.com/blogs-and-stories/2010-10-21/alex-blagg-the-stephen-colbert-of-new-media/

Christopher Whalen, managing director of Institutional Risk Analytics, talks with Bloomberg’s Mark Crumpton about the impact of U.S. mortgage foreclosures on banks and the housing market and the outlook for the economy.

Whalen is author of the book “Inflated: How Money and Debt Built the American Dream.” (Source: Bloomberg)

These are the most interesting items I have come across on the current mayhem in the mortgage market. I do not expect this issue to pass very soon:

• Who’s Who in the Foreclosure Scandal: A Primer on the Players: This Pro Publica piece is a MUST READ that will get you up to speed quickly

• Blame The Victim – Or the Perp? The plain fact is that foreclosure law lays out a very specific series of steps intended to protect the rights of both the bank and the homeowner. This is critically important: mistakes or sloppiness in this process could easily (and grieviously) harm the homeowner or creditor. Accordingly, its vital that this process be followed to the letter of the law. Unless your a banker trying to evict people, apparently.

• This Fortune article gets my nomination for the single most clueless MSM piece so far: It’s time to stop blaming the lenders I guess the securitizers, servicers, underwriters, lawyers and banksters for sure — but not the lenders.

• NY to Hold Lawyers Accountable on Foreclosures: NY State’s highest judge is starting to get angry (Front page NYT) See also Chicago sheriff says no to enforcing foreclosures

• Fed Wants Banks to Buy Back Some Bad Mortgages but see New York Fed Faces ‘Conflict’ in Mortgage Buybacks

• Mortgage Mess: Shredding the Dream: Street’s unspoken strategy has been to kick mortgage losses down the road until an economic recovery reinflates the housing market. The faulty-foreclosure crisis has forced the issue back into the present tense, triggering a fight over who will bear the brunt of those losses. The combatants—all of whom are trying to minimize their share of the damage—include homeowners, lenders and mortgage brokers, loan servicers and the underwriters of mortgage-backed securities, the buyers of those securities, title insurers, rating firms, and the federally controlled mortgage buyers Fannie Mae (FNM) and Freddie Mac (FRD).

• Fidelity National Will Require Foreclosure Warranty but see also Fidelity National’s Role in the Cover-Up

• Florida activists read between the lines on foreclosure paperwork:  While meeting for the first time in November at an old one-story law office in this city, the four strangers compared notes and began to piece together the scope of the problem: All over the United States, big financial firms might have been using fraudulent paperwork to evict struggling borrowers from their homes. Now tight-knit, the group is largely responsible for setting off the growing firestorm over foreclosures

• Foreclosure freeze could put security clearances at risk

• Regulator Says Fannie, Freddie Cost at Mercy of Economy To be filed under Duh!

• Firm says foreclosure letters ‘mistake’ An East Bay law firm says it mistakenly sent out thousands of letters to San Francisco homeowners earlier this month warning them that their houses were in default — even though the loans weren’t delinquent. The letters were sent out by Provident & Associates, a Pleasanton-based law firm that is attempting to help people with loan modifications. Provident sent out what it estimated to be 2,000 letters to people telling them that they faced foreclosure on their mortgage. The letters went primarily to homeowners in San Francisco.

• Regulator for Fannie Set to Get Litigious• Simon Johnson: Time for Some New Stress Tests for Banks

• And Who Pays for the Laws? DJMT puts all this into a bigger context

• The Foreclosure Mess: The Start of Another Bank Bailout? The foreclosure mess suddenly turned messier yesterday when a group of heavyweight investors, including the Federal Reserve Bank of New York, demanded that Bank of America buy back toxic mortgages that a subsidiary had sold them during the housing bubble. BlackRock, the world’s largest investment company, and Pimco, the world’s largest bond manager, joined the New York Fed in arguing that shoddy record keeping and other missteps by Bank of America subsidiary Countrywide Financial amount to a breach of their contract. Such a breach would allow the investors to sell the mortgages back to the bank at full price. The investors’ claims, which became public yesterday, probably marks the opening shot in a long legal battle that could cost B of A billions and possibly push it into insolvency.

• Foreclosure Crisis + Higher Rates = Fewer Mortgage Applications

• FBI looking at foreclosure mess Updated version of Tuesday’s article

• Clueless or putting up a good front? Banks Clueless About Foreclosure Mess Severity The biggest U.S. mortgage lenders and servicers say they’re putting the foreclosure mess behind them, and that it never was a major problem. The reality is these companies are so big and unmanageable, the people in charge of running them have no way to know if that is true. One thing that remains unknowable is how many flawed home- mortgage records and foreclosure proceedings are out there waiting to be unearthed. Dozens of federal and state agencies are investigating. It’s anyone’s guess what they might turn up.

• One nation, under fraud

• Here’s why the government should not own stock: Treasury on Foreclosuregate: “This is a problem for the banks and servicers to fix. They can fix it as fast as they feel like it.” (HuffPo)• WH Foreclosure probe: Problems aren’t ‘systemic’ Man, is this White House politically tone deaf or what?

Did I miss anything worthwhile . . . ?

Now that we seem to be past the talk of IF we’ll get another round of QE2 from the Fed, what’s left is HOW it will be conducted and WHAT size. Voting member Bullard is specifying his choice of process in conducting Plan C of their policy in a chat with reporters. He said he is for buying $100b to start after the Nov 2-3 meeting and see how it goes thereafter. He doesn’t seem to want to put a cap on what will be ultimately spent and wants to play it meeting to meeting. He is for “small increments” in terms of the purchases and is not for a “big bang” of buying. Bullard thinks this process would give them the most amount of flexibility. On the discussion of targeting some level of inflation that others have mentioned, he believes it would “erode Fed credibility.” The curtain on the next set of their Grand Experiment is just 13 days from being lifted and the rest of us await with hope, optimism, fear, and dread.