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Judge Painter Notice and Order.dcpdf

LETS COMPARE COMMENTS MADE ON BAC’S 3Q 2010 EARNINGS CALL YESTERDAY:

“…we execute repurchases on a loan by loan basis…”

“And as we learn more, and again, our perspective on this – we’re going to be quite diligent as I said in defending the interest of our shareholders.  This really gets down to a loan-by-loan determination and we have, we believe, the resources to deploy against that kind of a review.”

WITH DEVELOPMENTS IN COUNTRYWIDE/BAC LITIGATION:

To quote from actual court transcripts of the proceedings in MBIA v. Countrywide (the full transcript is attached) – June 16 2010:

Judge Bransten: “I think that it makes all the sense in the world that you can use a sample to prove the case because otherwise I can’t imagine a jury listening to 386 thousand cases. Even if you have that available, nevertheless you are not going to present that to a jury or even to a judge. I’m patient but not that patient. So therefore it is going to be a sample in the end…”

More silliness, and a PDF of the court proceedings, after the jump

Read the rest of this entry »

Helluva day I missed today!

I was out of the office at a board meeting that started at 10am, and I am just getting home now.

Back to normal tomorrow . . .

This chart, via (of all things) TurboTax, is not what I expected. California and Florida sure, but Texas? And where is Nevada?

According to GAO, through July 3, 2010, approximately one million claimants claimed $7.3 billion in interest-free loans through the Housing and Economic Recovery Act of 2008, which provided homebuyer assistance in the form of a refundable credit for homes bought after Apr. 8, 2008 and before Jan. 1, 2009; Another 1.7 million claimed $12.1 billion in homebuyer credits using provisions of the American Recovery and Reinvestment Act of 2009, and 600,000 claimed $4.1 billion in credits under the provisions of the Worker, Homeownership, and Business Assistance Act of 2009. GAO also provided a state-by-state ranking under three different statistics: the total dollar amount claimed; the dollar amount claimed per resident; and the average dollar amount claimed per tax credit claim.

So this is a total dollar chart, but where are the per capita charts — in which case the bigger more populous states would naturally have more applicants.

Despite the lovely colors, I am going to have to give this map a Fail.

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via TurboTax

A 9.6 percent unemployment rate is flat-out unacceptable.  That it has only come down 0.2 percent from last year’s 9.8 percent is also unacceptable (vs. Sept 2009).  The Fed’s mandate is to “maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”  Herewith a look at a couple of relevant factors and some comparisons to the historical record.

How Big Was The Hole?

Estimates generally coalesce around an unprecedented $1 trillion dollar output gap.  Best I can represent, that number is derived by simply subtracting Real Potential GDP from Real GDP.  It’s a larger hole, by some $600 billion, than the $479 billion we saw in 1982.  That trillion dollar hole is what the incoming administration faced in the early months of 2009 (it’s still just over $900 billion).

(Click through all charts for ginormous.)

Putting Unemployment in Context

Given the gaping hole that opened up between what our economy can produce and what it did produce, it’s hardly startling that the unemployment rate spiked.  Let’s have a closer look at the unemployment rate and put it in some historical context.  I reiterate, and cannot stress enough, that a 9.6% unemployment rate — ~15 million unemployed Americans — is wholly unacceptable.

The trajectory of the unemployment rate closely tracks that of the spread between GDP and Potential GDP, as shown below.  [NOTE:  I have inverted the Unemployment Rate to clearly show its correlation to the GDP/Potential GDP spread.  Consequently, the numbers on the right-side axis, 1/UNRATE, are not relevant; it's the correlation that is.]

It seems to have been forgotten that unemployment did not peak until 19 months after the November 2001 trough and 15 months after the 1991 trough.  In the current recovery, if we do not drift above the previous high of 10.1 percent (Oct. 2009), we will have peaked four months after the recession ended.  The table below tells the story:

*Remains to be seen, but is the current reality.

Now, a little while back I highlighted the fact that Private Payrolls (USPRIV at FRED) — indexed to 100 at economic troughs — has been tracking at a better pace than after the end of the last two recessions.  That post was a bit controversial, supported in some corners and criticized in others, presumably because it was perceived as pro-Obama.  (Facts have a well-known liberal bias?).

So, in that vein, here we go again with my new favorite FRED feature.  Let’s have a look at the Unemployment Rate — indexed to 100 at economic troughs — for the past four recessions:

What we see is perfectly consistent with the data in the table just above.  In 1982, the Unemployment Rate began to decline coincident with the end of the recession.  In 1991 and 2001, it continued to rise.  Since June of 2009, it continued to rise for a few months and then began to descend.

Now, to be crystal clear (again):  None of this is to say that a 9.6 percent unemployment rate is acceptable.  It is not.  And the Fed, the President, and Congress need to do all they possibly can to bring it down more quickly.  However, relatively speaking — after all, indexing lets us level the playing field and make apples-to-apples comparisons –  although we are struggling mightily, it would appear for the time being that we are at least holding our ground.  That’s a far cry from doing well — and we need to do better — but at the moment we’re not (yet) backsliding and there is some small amount of comfort to be taken from these comparisons.

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

Whenever I hear about how there wouldn’t be a problem with foreclosures if people just paid their mortgages on time, I’m reminded of Alan Grayson’s paraphrase of the Republican Health Care Plan: “Don’t Get Sick. If You Get Sick, Die Quickly.” Yes, the world would be an easier place if people never got sick, or credit risk didn’t exist, and people made payments perfectly all the time. But they don’t, and we need a system of rules and a process for collecting and presenting evidence in order to kick a family out of their home. And we need a system where this process sets the ground rules that in turn allow for lenders and borrowers coming together and negotiating a situation that is best for both of them.

Because the first rule of mortgage lending is that you don’t foreclose.  And the second rule of mortgage lending is that you don’t foreclose.  I’ll let Lewis Ranieri, who created the mortgage-backed security in the 1980s, tell you: “The cardinal principle in the mortgage crisis is a very old one. You are almost always better off restructuring a loan in a crisis with a borrower than going to a foreclosure. In the past that was never at issue because the loan was always in the hands of someone acting as a fudiciary. The bank, or someone like a bank owned them, and they always exercised their best judgement and their interest. The problem now with the size of securitization and so many loans are not in the hands of a portfolio lender but in a security where structurally nobody is acting as the fiduciary.”

In the past you had Jimmy Stewart banks. The mortgages were kept on the books of the bank. You had someone who you could go to and renegotiate your mortgage. With mortgage-backed securities, the handling of payments and working-out of troubles moved to servicers.  If you are learning about this crisis for the first time, understanding what is broken here is very important.

This is Not a New Problem With Servicing

Let’s get some quotes from bankruptcy judges in here:

“Fairbanks, in a shocking display of corporate irresponsibility, repeatedly fabricated the amount of the Debtor’s obligation to it out of thin air.” 53 Maxwell v. Fairbanks Capital Corp. (In re Maxwell), 281 B.R. 101, 114 (Bankr. D. Mass. 2002).

“[t]he poor quality of papers filed by Fleet to support its claim is a sad commentary on the record keeping of a large financial institution. Unfortunately, it is typical of record-keeping products generated by lenders and loan servicers in court proceedings.” In re Wines, 239 B.R. 703, 709 (Bankr. D.N.J. 1999).

“Is it too much to ask a consumer mortgage lender to provide the debtor with a clear and unambiguous statement of the debtor’s default prior to foreclosing on the debtor’s house?” In re Thompson, 350 B.R. 842, 844–45 (Bankr. E.D. Wis. 2006).

(Source.) Notice that consumer rights groups were flagging this as a major problem back in 1999 and 2002 because judges were noticing it was a major problem in their bankruptcy courts. If the late 1990s to 2006 period is a Renaissance period of servicer fraud then we can contrast it with the period we live in now, the Baroque period of servicer fraud.  Whatever unity there used to be between the forms and functions of the sloppy documentation and outright fraud in the art of servicing have become detached.

The forms of fraud have gone high art: serving documents on people who could never have been served, signing 10,000 affidavits a month, etc. They are all well covered, and we’ll list more later perhaps. Here are some of my favorites from last year, the reading list in Part One has even more. But what I want to focus on is the function of servicer fraud.

What Do Servicers Do?  A Case Study in Bad Design and Worse Incentives

Servicers in a mortgage-backed security have two businesses. The first is transaction processing. This means taking in your mortgage money on one end and walking it over to the crazy tranches and payment waterfalls on the other end. This is clean, efficient, largely automated, requires little discretion and works very well, and implicit in it is that it is most profitable when you can harness economies of scale.

It’s considered a “passive entity” in fact, so there are no taxes applied in this passthrough mechanism. If servicers went “active”, say by looking for mortgage notes not in the trust 90 days after the fact or mortgage notes that are not in the trust that have defaulted, which is what they’d likely have to do to get out of this foreclosure fraud crisis, they’d face very severe tax penalties.

Their other business is to handle default situations.  In addition to the fixed fee they get for servicing each individual mortgage they get paid from default fees like late charges. They get to retain most, if not all, of these fees.

So right away they have an incentive to not find ways to negotiate to get a mortgage to a good state. They also have a strong incentive to keep a steady stream of fees and charges going to their books rather than to investors.  So anything that puts servicers in charge of negotiating mortgages, say the Obama’s administration’s HAMP program, is designed to fail.

Because even without bad incentives, doing good work on modification is costly, time consuming, requires individual expertise and experience and doesn’t benefit from automation or economies of scale.  Which is to say it is the opposite structure of their normal business.

And there are additional worries. Many of the servicers work for the largest four banks – Wells Fargo, Bank of America, Citi, and JP Morgan – and these four banks have large exposures to junior liens. These are second or third mortgages or home equity lines of credit that would have to be wiped out before the first mortgage can be modified. The four banks have almost half a trillion dollars worth of these exposures and, from the stress test, are valuing them at something like 85 cents on the dollar. Keeping a homeowner struggling to pay the second lien would be more worthwhile to these middlemen banks than getting him or her into a solid first lien to the benefit of the bond investor.

So keep these in mind as you read about the servicers here. There have been worries that they, as a designed institution, were simply not qualified for this job going back a decade. They have massive conflicts with the investors they are supposed to be working for. They profit when homeowners collapse and lose money when they are brought up to a normal payment schedule (made current). And if the instruments don’t have the notes necessary to bring standing to carry out the foreclosures they have to take a massive tax hit in order to take the note into the trust. And regulation to handle this isn’t in place.

No Regulator

Because for all the talks of regulatory burden, there is no current federal government agency that regulates the servicers. Not the Federal Reserve. Not the Treasury. This is what happens when the financial industry writes the deregulation. Instead you have a patchwork of state regulators and attorney generals.  Notice how President Obama has nobody to turn to and tell the press that “So and So is on the case.” In theory the OCC regulates servicers if they are part of a bank or a thrift. This must fall to the new regulatory counsel and the Consumer Financial Protection Bureau to investigate, where it will properly belong.

(The Fair Debt Collections Act, which applies to debt collectors, doesn’t apply to servicers. Here might be a fun idea for an enterprising staffer – if there is no note producible, are servicers still legally servicers and thus exempt from the Fair Debt Collections Act? Just a thought….)

Is it any wonder that servicers are rushing these foreclosures and making a mockery of the courts and producing systemic risk in the process? There needs to be an investigation of what is being done and why, because this problem is not taking care of itself.

NPR:

In the financial markets, a lot rides on the word of a company’s top executives. If a CEO tells a lie, a lot of shareholders can get hurt.

Now, after studying thousands of corporate earnings calls, two researchers from Stanford University think they’ve come up with a way to tell when senior executives are fibbing.

It’s a question that people have been wrestling with for as long as humans have been interacting with each other.

“I think since the Garden of Eden we’ve been trying to figure this out — who’s lying and who’s not lying,” says David Larcker, a professor of accounting at Stanford’s Graduate School of Business.

Source:
How Can You Tell When A CEO Is Lying?
Jim Zarroli
NPR , October 18, 2010
http://www.npr.org/templates/story/story.php?storyId=130544236

What is more important than survival?

On planet Earth, nothing. The most basic rule of life is SURVIVE. The Biological imperative of living things is to perpetuate their existence — survive, procreate, further the species. It is hardwired in the DNA of every living organism.

Those that do not succeed in satisfying these imperatives are described as maladaptive — not fit to survive or compete in the natural world. It is the most rudimentary law in biology, applicable from single cell protozoa to human beings.

And, it exists in the world of organizations. Entities that are maladaptive — corporations, nonprofits, governments — eventually succumb to their own mortality and collapse. This is as it should be, as there are no reasons dysfunctional corporations unable to perform their most basic function — survival — should be preserved.

This is especially true when it comes to financial firms — banks, insurers, investment houses — whose prime responsibility is identifying potential reward and managing risk. The failure of survival raises a compelling question: Why should firms that fail their most basic charge — survival — be bailed out? If on their own they are too incompetent to merely continue to exist, what other manner of disasters live within their balance sheets, legal obligations, managerial skill sets?

A firm that is so reckless and irresponsible as to have put its own survival at risk is not only maladaptive — it has failed its most basic duty. If a company’s management demonstrates an inability to perform that most basic of functions, we should not assume they managed to do anything else competently. Indeed, our assumption should be that they likely are unable to perform their other duties competently, and plan accordingly. Our working presumption should be that maladaptive corporations are not very competent at anything.

The events of the past year have demonstrated this to be all too factually correct. The firms that were unable to survive on their own without a government bailout — AIG, Bank of America, Bear Stearns, CitiGroup, etc. — were rife with incompetence. That is precisely what we have learned since the bailouts.

If I informed you that a corporate entity was so reckless and incompetent that they were unable to insure their own survival, would you bet the rest of their behaviors were responsible or reckless? Competent or incompetent? If they put their very survival at risk, why wouldn’t the rest of their behavior on issues that mattered less be performed at a higher standard?

As we have learned, they weren’t. The same managerial incompetency, shorttermism, inappropriate compensations schemes that led to these firms’ downfall was woven throughout their entire companies. From corporate culture to leadership to staffing to organizational procedures, failed companies turn out to fail in many, many other ways.

Below is a short list of colossal failures. Some of these maladaptive corporate behaviors led to their demise; others were inadequacies that were just below the surface, waiting to wreak more havoc following their bailouts. Consider these, and ask yourself if they were discharged in any more competent fashion than the behaviors that led to these firms insolvencies:

• Not just bad, but terrible loans: Banks created an assembly line to make substantial numbers of loans to unqualified borrowers. Not a tiny fraction of the trillions in mortgages written, but a number that was 10-20X historical averages. This was systemic failure at the most basic level.

• Haphazard Securitization: The process of assembling mortgages in RMBS and CDOs was done in a slipshod fashion as to now be under signficant challenge from major firms such as Blackrock, PIMCO, and even the NY Fed. Buyers of these products are now exercising their legal rights to put them back to the firms that fabricated them. The technical procedural warranties of the structured product are one basis of challenges; so to are the substance of what was sold. Not getting form or substance correct is (to say the least) maladaptive.

• False Affidavits, Perjury, Fraud: As the Fraudclosure debacle has unfolded, we have learned that bailed out firms have no respect for the Rule of Law or for fundamental Property Rights. This is as expected, for in managing to get bailed out, they learned that the most fundamental rule of all — the Darwin’s Law of the Survival — does not apply to them. Exempt from that, why would trivialities such as due process or property rights matter if that didn’t?

• Hiring Grossly Incompetent or Criminal Third Parties: Same as above. Why should they hire law firms to prosecute foreclosures properly — Hey, that’s expensive! — when they can hire criminal foreclosure mills to do at 10 cents on the dollar. Hire qualified people and train them properly? Not when we can get burger flippers on the cheap! And if a few of the wrong people lose their homes, we will write them checks — its the Ford Pinto approach to foreclosures!

• MERS: Fabricating a Shadow Legal System: Even worse then above, an entire group of (subsequently bailed out) banks got together to conspire to circumvent legal protections. To quote U.S. Representative Alan Grayson of Florida “MERS is the central device by which the banks have tried to opt out of the legal system and the real-property record system. They have taken it upon themselves, with the supposed consent of the borrowers, to violate a system of property record-keeping that we’ve had going back centuries.” If you are surprised by this, you have not been paying attention.

• God-Awful Acquisitions: In making significant acquisitions, management eschewed full due diligence in order to grab an asset quickly. Some people have defended BofA’s Merrill purchase as patriotic, but how do you explain the Countrywide buy? (If Exxon bought Enron, would we have bailed them out after Enron collapsed also?)

We could continue with this exercise, but the point is clear: When you save a failed institution, when you bail out a bank whose own behavior led to its demise, you are also saving a parade of horribles within that firm. The passage of time merely reveals the rest of the incompetency of these firms that is below the surface.

What is the next bailed out corporate failure to be revealed . . . ?

The Asian market response to the unexpected timing of the PBOC rate hike was mixed and interestingly, the Shanghai index closed a touch higher, up for a 9th trading day in the past 10 and the Yuan fell (China may be less inclined to accommodate a Yuan rise of substance if they’re raising rates at the same time). While Hong Kong, Australia and Japan sold off, Taiwan and South Korea rallied. Goldilocks is the hope for China and ahead of a possible 3.5%+ y/o/y CPI print tonight, they did the right thing. Remember, the annual per capita income of China is just $6,800 so inflation is much more of a bite there than it is in the more developed world.

Even with historically low mortgage rates, the MBA said purchases for the week ended Friday fell 6.7%, down for a 2nd week and lower by 14.6% over this time frame. It’s at a two month low and just 4% off the lowest since 1996. After a sharp 21% jump last week, refi’s dropped 11.2%. ABC confidence fell 1 pt to -46 and puts it right in line with the 12 month average but the State of the Economy component matched the lowest level since Dec ’09. II: Bulls 45.1 v 47.2 Bears 22 v 24.7 with the balance being those expecting a correction.

In the comments of my recent Hey, Big Spender post, some readers took me to task because “Congress controls the purse strings” and it was therefore unfair to look at spending by President.

Bruman:

It may make more sense to break this down into rates of spending increases by congressional (2-year) intervals. Fortunately, these divide evenly into presidencies.

Jmccas:

I think it would be even more powerful to break out periods of time where power was split i.e. where a Republican was in the white house but the democrats controlled Congress.

It’s a fair enough point, and we here at The Big Picture are nothing if not intellectually curious and reader-centric.  So here is a chart addressing that point (FRED version is here).  I’ve indexed Nondefense Spending to 100 at each change in control of the White House or either house of congress.

Sources:  St. Louis Fed, About.com

My takeaway from this is fairly straightforward:  Democrats have never much claimed the mantle of fiscal responsibility.  And they don’t deserve it.  Republicans have made that claim, and they’re making it again now.  But they don’t deserve it, either.

Interestingly, just a scant couple of hours before this post was to go live, I could not help but laugh when I saw the following headline at the NY Times website: ”As G.O.P. Seeks Spending Cuts, Details Are Scarce.”  Scarce indeed.  One look at the chart will tell you it just ain’t gonna happen.

ADDING: Bruman has done a really nice job taking this one step further here.  Thanks.