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In the car on the way home from the studio last night, I had a conversation with a long experienced retail manager at a big shop/bank. He was frustrated with banking half of his bulge bracket shop.

The conversation was astonishing to me, in that it did not reveal any systemic fraud or illegalities, but rather, how some incredibly poorly trained, not-very-bright people who are still working in the loan departments of major banks.

And while I am aware that this is merely anecdotal, it may be revealing as to how the major banks’ training and the compensation system remain are the weak link in the chain.

Our story begins when an existing brokerage client contacts their financial institution. The client has had an account with this firm over many years, despite mergers and buyouts and the like.

They own their primary residence which is valued at $1 million dollars. There is an an outstanding mortgage balance of under $10,000 (current LTV <1%).  They are an entrepreneur — their income fluctuates much more than the typical salaried Joe — but they make a very handsome living.

Out of concern for this income volatility, they wanted to open a just-in-case rainy day backup, on the off chance that their professional career takes a downturn.

So our big firm broker (who has a very respectable track record of managing assets) takes the info down and refers it to a BANKSTER in their banking division; The client requested access to $400,000 (40% LTV).

Here’s where things get interesting: Since this is a second mortgage/Home Equity Line of Credit, it is variable. The BANKSTER calculates the maximum the rate could rise to — 12.99% — and comes up with a number of $4421.67. That is nearly 50% of the applicant’s average monthly take home pay of the past 2 years, and so they reject the application.

I am dumbfounded by the innumeracy of this dolt.

This should not be a second mortgage with a ARM, it is a new mortgage — at 4.25%! Payoff the < $10k mortgage with proceeds at closing, make this a first mortgage (eejit!) Monthly payments are under $2000 a month.

Why on earth, with rates at record lows, would anyone at a bank suggest an ARM adjustable? I wonder: Is there a greater vig to the BANKSTER, or is this simply innumeracy in action?

If this is who is staffing the loan desks at the biggest banks of America, no wonder they are in such terrible shape.

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UPDATE October 19, 2010 3:57pm:

After lunch, I spoke with the B/D adviser.  She reminded me that 5 years ago, you could get a 120% HELOC.

She told me the client said they wanted the $400k  “for emergencies” more than anything else.

Sorry, but I don’t buy what the client claims. No one asks for nearly $1/2 mill credit line for shits & giggles.

My solution: Take a $100k first mortgage (paying off the $9k), and buy CDs or Treasuries. The 2% spread is your cost of having that cash. If you really feel you need for an additional line of credit, wait 6 months than apply for another $100k HELOC.

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Chris & I appear at the 3 minute mark:

Airtime: Mon. Oct. 18 2010 | :43:0 10 ET

Discussing whether the banks are headed for disaster with a new round of government intervention, with Barry Ritholtz, Fusion IQ; Chris Whalen, Institutional Risk Analytics and CNBC’s Jane Wells.

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Back on the Kudlow Report at 7:00 pm this evening with Chris Whalen. We are discussing the hosuing debacle, issues, from MERS to Reps & Warranties, to REOS to Fraudclosure.

For a primer, you can review:

•  Foreclosure Fraud: “Systemic, Industrywide, Pervasive”

•  The Impact of Error From Securitization to Foreclosure

• Time for Criminal Charges To Be Filed . . .

• Legal Impossibilities & Foreclosure Errors

As always, it should be fun.

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Update: Video is here

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.

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This is a series giving a basic explanation of the current foreclosure fraud crisis: This is Part One. Parts Two, Three, Four, and Five. will all be posted the each day rest of the week at The Big Picture.

The current wave of foreclosure fraud and the consequences for the economy are difficult to follow. As such, I’m going to write a few posts to simplify what is going on so you can follow stories as they unfold.  This is very 101 level, and will include a reading list of blog posts and articles at each stage to help provide depth.   (Special thanks to Yves Smith and Tom Adams for walking me through much of this.)  Let’s make three charts of the chains involved in the process. The first is what is currently going on with foreclosure fraud (click through for larger).

As you can see, in judicial review states like Florida the courts require that servicers, or those who administer the bonds that are full of mortgages (securitization, residential mortgage backed securities, RMBS, are all phrases for them), say that they have everything necessary in order to have standing to bring a foreclosure. They need to have the note for a mortgage, which is supposed to be in the trust – part of the mortgage backed securities – that they administer.

What is breaking down here? In Florida, a judicial review state, it was found that one person was notarizing documents far faster than anyone could reasonably have. Forged documents necessary for the foreclosure process like the note were found. A separate court system was set up to resolve these foreclosures faster at the expense of allowing serious challenges to the documents. Here’s Smith on how kangaroo these courts look up close. Here’s WaPo on one individual and the nightmare of trying to challenge an invalid foreclosure. Keep him in mind when you hear about deadbeats and whatnot: the current system is designed to make it difficult for anyone to challenge their case.

Meet the robo-signer who kicked it off here at this WaPo story. I almost feel bad for this patsy; the real battle here is between junior and senior tranche holders, and this doofus could end up in jail in order to keep John Paulson rich. After reading about this guy I’m asking our elites to take care of their patsies better. (Can we get a Financial Patsy Fordism social contract movement going? If you are going to be a patsy for GMAC, you should be paid enough able to be able to buy GMAC’s services or something.)

Read the rest of this entry »

Will It Work? How Will We Know?: Josh Rosner from Roosevelt Institute on Vimeo.

Hat tip Rorty Bomb

Goldman Sach’s David Kostin created this chart comparing earnings peaks with market action.

In addition to showing how overpriced the market was in 1999/2000, it suggests an SPX peak relative to current ( estimate of a near term peak) his earnings:

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click for bigger chart

Goldman Sachs chart via ZeroHedge

The Oct NAHB home builder index was 16, up 3 pts from Sept, was 2 pts above expectations and is at a 4 month high. To put into perspective though, 50 is the breakeven line between expansion and contraction so we’re just talking about the degree of weakness at these levels. Both the Present and Future expectations components rose as did Prospective Buyers Traffic. The NAHB chairman said “builders are starting to see some flickers of interest among potential buyers, and are hopeful that this interest will translate to more sales in the coming months. However, because most builders still have no access to credit for building homes, there is a real concern that we will not be able to meet the pent up demand when consumers are ready to get back in the market.” With the foreclosure process now a mess, we’ll have to see what benefit, if any, new home builders get, as foreclosures have been huge competition for the builders.

Hat tip Jim B

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The MSM article of the day is a NYT takedown of JP Morgan’s raping and pillaging of various cities and pension funds. The accusation: Shared profits, client’s losses. When hedge funds do this, the private placement memorandum covers the terms. It is less clear that a brokerage firm can do this legally.

This follows Matt Taibbi’s March 2010 takedown of similar JPM misdeeds, Looting Main Street.

NYT Excerpt:

Here is the deal: Funds lend some of their stocks and bonds to Wall Street, in return for cash that banks like JPMorgan then invest. If the trades do well, the bank takes a cut of the profits. If the trades do poorly, the funds absorb all of the losses.

The strategy is called securities lending, a practice that is thriving even though some investments linked to it were virtually wiped out during the financial panic of 2008. These trades were supposed to be safe enough to make a little extra money at little risk.

JPMorgan customers, including public or corporate pension funds of I.B.M., New York State and the American Federation of Television and Radio Artists, ended up owing JPMorgan more than $500 million to cover the losses. But JPMorgan protected itself on some of these investments and kept millions of dollars in profit, before the trades went awry.

How JPMorgan won while its customers lost provides a glimpse into the ways Wall Street banks can, and often do, gain advantages over their customers. Today’s giant banks not only create and sell investment products, but also bet on those products, and sometimes against them, putting the banks’ interests at odds with those of their customers. The banks and their lobbyists also help fashion financial rules and regulations. And banks’ traders know what their customers are buying and selling, giving them a valuable edge.

Some of JPMorgan’s customers say they are disappointed with the bank. “They took 40 percent of our profits, and even that was O.K.,” said Jerry D. Davis, the chairman of the municipal employee pension fund in New Orleans, which lost about $340,000, enough to wipe out years of profits that it had earned through securities lending. “But then we started losing money, and they didn’t lose along with us.”

How did an industry that began by servicing their clients end up as an industry that only robs them? When I was coming up, financial services were a noble way to help people save for retirement; it appears to have morphed into something entirely different . . .

See related video here.

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Source:
Banks Shared Clients’ Profits, but Not Losses
LOUISE STORY
NYT, October 17, 2010
http://www.nytimes.com/2010/10/18/business/18advantage.html

click for ginormous graphic

generic via boingboing