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Source:
States Negotiate $26 Billion Agreement for Homeowners
NELSON D. SCHWARTZ and SHAILA DEWAN
NYT, February 8, 2012
http://www.nytimes.com/2012/02/09/business/states-negotiate-25-billion-deal-for-homeowners.html

Buying foreclosures to turn them into rental properties is tricky business. Mack Companies, a Chicago real-estate firm, invests in about one out of every 40 homes it inspects. MarketWatch’s Amy Hoak looks at why some make the cut and others don’t.

Feb. 3, 2012

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There is a absurd yet fascinating article in the Sunday Times by Gretchen Morgenson, titled A Mortgage Tornado Warning, Unheeded. It is is stirring and emotional.

What makes it fascinating is yet another story told about prescient warnings in advance not heeded about the coming mortgage crisis.

What makes it absurd is its complete lack of recognition of how large companies operate, how businesses interact with the public, how humans behave.

Consider the reality of how businesses operate in the world. No (bizarrely according to this column) huge corporations do not sift through an enormous volume of incoming communications, including emails, letters, and phone calls to pull out that one important warning from non-clients, and make major shifts in their business models and operations. This is not how firms whose goals are to profit maximize on behalf of their shareholders operate.

I speak from experience. I spent the better part of 2005-06 discussing the imminent housing collapse, warning about valuations, showing how the collapse would play out into the broader economy. These were with clients I had an existing relationship with, a good track record and an established degree of trust.

How did that work out? I ended up getting the following Hugh McLeod line printed on the back of my business card: “I can’t take this shit anymore, he said, mistakenly.” Its now a print hanging in my office.

They had their models, they thanked me for the color, but there was simply too much money to be made.

The thing to blame companies for is not that they ignored some outsider’s warnings; Rather, it is  that they themselves failed to recognize the many warning signs of the coming housing collapse. This is the true failure of the Mortgage Lenders, Wall Street Secritizers, GSEs, Real Estate Agents, Appraisers, and of course, Central Bankers. Their expertise should have alerted them to the obvious coming tornado. Or worse — and IMO criminally — they saw it all coming and went about running up risky exposure regardless. The massive smash and grab, break the bank, snatch huge IBGYBG bonuses, and split before anyone noticed was the order of the day.

It is not that they ignored the public warnings.  If the economy is dependent upon large companies recognizing broad warnings of economic danger coming from the public, we are all doomed. Rather, it is that they should have known better on their own. That was their massive failure.

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Previously:
Mistakenly (April 7th, 2011)

More Ignored Warnings About Bad Mortgages circa 2003 (October 11th, 2008)

Putting an end to Wall Street’s ‘I’ll be gone, you’ll be gone’ bonuses (March 12, 2011)

Source:
A Mortgage Tornado Warning, Unheeded
Gretchen Morgenson
NYT: February 4, 2012
http://www.nytimes.com/2012/02/05/business/mortgage-tornado-warning-unheeded.html

While perusing various articles on the Employment Situation Summary that was released yesterday (2/3/2012), I came across this transcript from the Rush Limbaugh radio show where Rush decides essentially that we shouldn’t bother with the seasonally adjusted numbers and only look at the raw (NSA) job creation number from the Establishment Survey (likely because this number is negative and thus “bad” for Obama). What Rush says is:

“That’s part of this two and half million fewer jobs. Are you hearing me on this, folks? It is corrupt as it can be. Well, now, the wait a minute, though. There’s nothing new here in the seasonal adjustment. Normally we never talk raw numbers. Nobody ever reports or talks about raw numbers. I happened to see today the raw numbers, and little red flags are going up, my curiosity is being piqued here. And then I see that the labor force participation rate, 1.2 million people dropped out of the labor force in one month, and it happens to be December to January.”

What exactly are are these “red flags” Rush? These is a very good reason we have seasonal adjustments and more importantly, there is very good data on just how big the January adjustments typically are. What follows is is the “raw data” for January job reports going back to 1983 (the first year of the recovery from the 81 recession to pick an arbitrary date):

Notice a pattern here Rush? You see, every January many people get laid off regardless of underlying economic conditions. It is a very predictable and very consistent pattern (not one year with fewer than 1.49 million job losses), hence the seasonal adjustment. The BLS adjusts most months (although some adjustments are larger than others). For instance, last year, the “raw numbers” for February were +821,000 jobs, for March were +913,000 jobs, and April were +1,179,000 jobs, but obviously the seasonal adjustments took those numbers down considerably. So Rush, I am going to issue a challenge to you. I am going to challenge you to quote only the “raw numbers” for job creation every month this year, right up to the election, since you don’t trust the seasonal adjustments. I am going to take a guess and say that you won’t take me up on the challenge and instead will likely just pick and choose which number to use based on what is worse for Obama, but maybe there is a hint of journalistic integrity somewhere in your body.

Also Rush, since you decided to quote Zero Hedge regarding the “1.2 million people that dropped out of the labor force in January” (you do realize that Tyler Durden isn’t a real person right?), I have decided to correct you on that point as well since I am already writing to you. That 1.2 million increase in those not in the labor force is an adjustment that the BLS applied based on actual data from the 2010 census. Essentially, since the census provides more exact numbers on the population statistics every 10 years, the BLS adjusts their estimates that were made in the intervening period (ie 2001-2010), but since the census doesn’t break down monthly changes, the BLS simply applies the adjustment in one month (ie this January), which they clearly pointed out in the report. Conveniently, the BLS also provided a very nice table that showed what the December 2011-January 2012 change in the adjusted categories would have been without the once a decade adjustment. The actual change (without the revisions) from December to January in those “not in the labor force” was only -75,000. I wrote a post on this yesterday to correct both Zero Hedge and Rick Santelli, who made the same reading comprehension mistake that you succumbed to. And in case you just don’t want my word on it, you can go to Calculated Risk for another take on it.

I hope this brief summation helped you understand a little bit more about the seasonal adjustment and the once a decade census adjustment, but if not, feel free to contact me, I’d be happy to have more discourse with you on the subject.

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SilverOz is an MPA specializing in local economic development and have worked in local economic development for a mid-sized midwestern county for over 10 years.  He has personally worked on/managed projects that have totaled over $500 million in direct investment into the county.

A.G. SCHNEIDERMAN ANNOUNCES MAJOR LAWSUIT AGAINST NATION’S LARGEST BANKS FOR DECEPTIVE & FRAUDULENT USE OF ELECTRONIC MORTGAGE REGISTRY

Complaint Charges Use Of MERS By Bank Of America, J.P. Morgan Chase, And Wells Fargo Resulted In Fraudulent Foreclosure Filings

Servicers And MERS Filed Improper Foreclosure Actions Where Authority To Sue Was Questionable

Schneiderman: MERS And Servicers Engaged In Deceptive and Fraudulent Practices That Harmed Homeowners And Undermined Judicial Foreclosure Process

NEW YORK – Attorney General Eric T. Schneiderman today filed a lawsuit against several of the nation’s largest banks charging that the creation and use of a private national mortgage electronic registry system known as MERS has resulted in a wide range of deceptive and fraudulent foreclosure filings in New York state and federal courts, harming homeowners and undermining the integrity of the judicial foreclosure process. The lawsuit asserts that employees and agents of Bank of America, J.P. Morgan Chase, and Wells Fargo, acting as “MERS certifying officers,” have repeatedly submitted court documents containing false and misleading information that made it appear that the foreclosing party had the authority to bring a case when in fact it may not have. The lawsuit names JPMorgan Chase Bank, N.A., Bank of America, N.A., Wells Fargo Bank, N.A., as well as Virginia-based MERSCORP, Inc. and its subsidiary, Mortgage Electronic Registration Systems, Inc.

The lawsuit further asserts that the MERS System has effectively eliminated homeowners’ and the public’s ability to track property transfers through the traditional public records system. Instead, this information is now stored only in a private database – which is plagued with inaccuracies and errors – over which MERS and its financial institution members exercise sole control. Additional defendants include BAC Home Loans Servicing, LP, Chase Home Finance LLC, EMC Mortgage Corporation, and Wells Fargo Home Mortgage, Inc.

“The banks created the MERS system as an end-run around the property recording system, to facilitate the rapid securitization and sale of mortgages. Once the mortgages went sour, these same banks brought foreclosure proceedings en masse based on deceptive and fraudulent court submissions, seeking to take homes away from people with little regard for basic legal requirements or the rule of law,” said Attorney General Schneiderman. “Our action demonstrates that there is one set of rules for all – no matter how big or powerful the institution may be – and that those rules will be enforced vigorously. Only through real accountability for the illegal and deceptive conduct in the foreclosure crisis will there be justice for New York’s homeowners.”

The financial industry created MERS in 1995 to allow financial institutions to evade local county recording fees, avoid the hassle and paperwork of publicly recording mortgage transfers, and facilitate the rapid sale and securitization of mortgages. MERS operates as a membership organization, and most large companies that participate in the mortgage industry – by originating loans, buying or investing in loans, or servicing loans – are members, including JPMorgan Chase, Bank of America, Wells Fargo, Fannie Mae, and Freddie Mac. Over 70 million loans nationally have been registered in MERS System, including about 30 million currently active loans.

Through their membership in MERS, these companies avoided publicly recording the purchase and sale of mortgages by designating MERS Inc. – a shell company with no economic interest in any mortgage loan – as the “nominal” mortgagee of the loan in the public records. Instead, MERS members were supposed to log mortgage transfers in the MERS private electronic registry. The basic theory behind MERS is that, because MERS Inc. serves as a “nominee” (or agent) for most major lenders, it remains the “mortgagee” in the public records regardless of how often the loan is sold or transferred among MERS members. Thus, although MERSCORP has only about 70 employees, MERS Inc. serves as the mortgagee of record for tens of millions of loans registered in the MERS System.

MERS has granted over 20,000 “certifying officers” the authority to act on its behalf, including the authority to assign mortgages, to execute paperwork necessary to foreclose, and to submit filings on behalf of MERS in bankruptcy proceedings. These certifying officers are not MERS employees, but instead are employed by MERS members, including JPMorgan Chase, Bank of America, and Wells Fargo.

MERS’ conduct, as well as the servicers’ use of the MERS System, has resulted in the filing of improper New York foreclosure proceedings, undermined the integrity of the judicial process, created confusion and uncertainty concerning property ownership interests, and potentially clouded titles on properties throughout the State of New York. In fact, several New York judges have questioned the standing of the foreclosing party in cases involving MERS loans and the validity of mortgage assignments executed by MERS certifying officers.

The lawsuit specifically charges that the defendants have engaged in the following fraudulent and deceptive practices:
• MERS has filed over 13,000 foreclosure actions against New York homeowners listing itself as the plaintiff, but in many instances, MERS lacked the legal authority to foreclose and did not own or hold the promissory note, despite saying otherwise in court submissions.
• MERS certifying officers, including employees and agents of JPMorgan Chase, Bank of America, and Wells Fargo, have repeatedly executed and submitted in court legal documents purporting to assign the mortgage and/or note to the foreclosing party. These documents contain numerous defects, including affirmative misrepresentations of fact, which render them false, deceptive, and/or invalid. These assignments were often automatically generated and “robosigned” by individuals who did not review the underlying property ownership records, confirm the documents’ accuracy, or even read the documents. These false and defective assignments often masked gaps in the chain of title and the foreclosing party’s inability to establish its authority to foreclose, and as a result have misled homeowners and the courts.
• MERS’ indiscriminate use of non-employee “certifying officers” to execute vital legal documents has confused, misled, and deceived homeowners and the courts and made it difficult to ascertain whether a party actually has the right to foreclose. MERS certifying officers have regularly executed and submitted in court mortgage assignments and other legal documents on behalf of MERS without disclosing that they are not MERS employees, but instead are employed by other entities, such as the mortgage servicer filing the case or its counsel. The signature line just indicates that the individual is an “Assistant Secretary,” “Vice President,” or other officer of MERS. Indeed, these documents often purport to assign the mortgage to the certifying officer’s own employer. Moreover, as a result of the defendants’ failure to track the designation of certifying officers and the scope of their authority to act, individuals have executed legal documents on behalf of MERS, such as mortgage assignments and loan modifications, when they were either not designated as a MERS certifying officer at the time or were not authorized to execute documents on behalf of MERS with respect to the subject loan.

• MERS and its members have deceived and misled borrowers about the importance and ramifications of MERS’ role with respect to their loan by providing inadequate disclosures.

• The MERS System is riddled with inaccuracies which make it difficult to verify the chain of title for a loan or the current note-holder, and creates confusion among stakeholders who rely on the information. In addition, as a result of these inaccuracies, MERS has filed mortgage satisfactions against the wrong property.

The lawsuit seeks a declaration that the alleged practices violate the law, as well as injunctive relief, damages for harmed homeowners, and civil penalties. The lawsuit also seeks a court order requiring defendants to take all actions necessary to cure any title defects and clear any improper liens resulting from their fraudulent and deceptive acts and practices.

The matter is being handled by Deputy Bureau Chief of the Bureau of Consumer Frauds & Protection Jeffrey K. Powell, Assistant Attorney General Clare Norins, and Assistant Solicitor General Steven C. Wu, under the supervision of First Deputy Attorney General Harlan Levy.

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Source: Barry Ritholtz: A Housing Bottom Is Nowhere In Sight

I have been very unequivocal about my view of Housing market — its not anywhere people should be expecting ordinary year over year price appreciation. As the recent  Case Shiller data shows, this is still a market where despite record low mortgage interest rates, prices are falling. A normalized market is probably many years away still.

So I find it encouraging when Robert Shiller states a similar view:

BLODGET: A lot of people have just called the bottom in the housing market in the United States, and there’s been some okay data recently. Is that your take? That finally housing prices are bottoming?

SHILLER: When people phrase is that way, they say ‘we’ve reached the bottom.’ That suggests that we have the expectation of a major turning point right now. But I don’t see that. I don’t see any reason to think that prices are going to start heading up dramatically now. We do have some good news. Permits are up. Notably, the National Association of Homebuilders Housing Market Index is up and that’s a forward looking index. But it’s not up very much. If you look at the rate of change it looks dramatic but it’s still at a low level.

- Siller: A Housing Bottom? What Are They Thinking?

As the charts below show, there is an enormous difference between a reversal and merely scraping along the bottom . . .

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See also Video: Barry Ritholtz: A Housing Bottom Is Nowhere In Sight

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Click to enlarge:

Source: Bianco Research

Through November 2011, the S&P/Case-Shiller1 Home Price Indices declined 1.3`% for both the 10- and 20-City Composites in November over October. For a second consecutive month, 19 of the 20 cities covered by the indices also saw home prices decrease.

For year over year data, the 10- and 20-City Composites posted losses of -3.6% and -3.7% versus November 2010. These are worse than the -3.2% and -3.4% respective rates reported for October.

Click to enlarge:

More charts after the jump

Read the rest of this entry »

“The reason capitalism has triumphed in the West and sputtered in the rest of the world is because most of the assets in Western nations have been integrated into one formal representational system . . . By transforming people with real property interests into accountable individuals, formal property created individuals from masses. People no longer needed to rely on neighborhood relationships or make local arrangements to protect their rights to assets. They were thus freed to explore how to generate surplus value from their own assets.”-Hernando de Soto, The Mystery of Capital

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In The Mystery of Capital, de Soto raised a fascinating thesis: That the West’s system of record keeping and property recording  is why Capitalism took hold here.

In other regions — namely, Asia, Africa and much of South America, the Peruvian born economist argued that the economic system was highly dependent on elders, neighbors, and recollections — rather than recorded deeds — for transferring property. This would, as you might imagine, stifle the willingness to invest in or lend against property.

Tonight, I want to ask you for actual anecdotes about this. What sort of stories or narratives is anyone familiar with that demonstrate the East’s problems with this, and why it may have stifled the spread of capitalism.

This is for a wicked cool project that I cannot talk about yet . . .

Mitt Romney’s State of the Union Challenge on the Mortgage Crisis
by Eliot Spitzer and Dylan Ratigan

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Finally, a presidential candidate came out and honestly addressed the biggest problem in our economy, the enormous debt overhang in our mortgage market. A few days ago, Mitt Romney was at a forum in Florida talking about foreclosures, and his comments were actually refreshingly honest about our housing and banking situation and the need for a debt write-down.

We’re just so overleveraged, so much debt in our society, and some of the institutions that hold it aren’t willing to write it off and say they made a mistake, they loaned too much, we’re overextended, write those down and start over. They keep on trying to harangue and pretend what they have on their books is still what it’s worth.

Mitt Romney was pointing out that the banks are carrying debt on their books at inflated values. When was the last serious politician to make that point, openly? There’s more.

In some cases, if the debt is not in something you can service, it’s like you have to move on and start over away from those debts. It’s helpful if you get an institution that’s willing to work with you, but if you don’t you have no other option.

Romney is now saying that if you can’t pay your debts and your lending institution won’t work with you, walk away. Perhaps this isn’t so surprising, though, as Romney is an expert in debt restructuring. This is actually just common business sense.

And finally, he offered a real solution to the mortgage debt crisis.

The banks are scared to death, of course, because they think they’re going to go out of business… They’re afraid that if they write all these loans off, they’re going to go broke. And so they’re feeling the same thing you’re feeling. They just want to pretend all of this is going to get paid someday so they don’t have to write it off and potentially go out of business themselves.”
This is cascading throughout our system and in some respects government is trying to just hold things in place, hoping things get better… My own view is you recognize the distress, you take the loss and let people reset. Let people start over again, let the banks start over again. Those that are prudent will be able to restart, those that aren’t will go out of business. This effort to try and exact the burden of their mistakes on homeowners and commercial property owners, I think, is a mistake.

This is the right approach to the problem. If you force the banks to recognize losses on the mortgage debt they are holding, then all of a sudden they will have an incentive to write down debt. Otherwise, a bank will do anything it can to maintain the fiction that the debt is worth 100 cents on the dollar, including lie, harass, and robo-sign.

There are ample reasons for cynicism, the cup overfloweth with them, perhaps. Still, what’s shocking about these comments is how casual they are, as if it’s common knowledge that the banking system is still insolvent and that our debt loan cannot be paid back. Among financial elites, it in fact is common knowledge. Tim Geithner noted this when he talked about Lehman Brothers and the “air in marks” on the debt it was holding on its books. And Martin Feldstein on the Republican side and Alan Blinder on the Democratic side are both arguing for debt write-downs. Everyone knows this has to happen, that the accounting manipulation needs to stop. But Mitt Romney actually said it.

We’re pretty sure that Romney will walk these comments back if necessary, since he holds positions only insofar as they are convenient. Since at that same forum he called out for praise one of the most bank-friendly state officials in the country, Florida Attorney General Pam Bondi, we can probably measure his adherence to this common-sense approach in micro-seconds.

But what this episode shows is that the solutions to our crisis are understood. In the book Greedy Bastards, the question of restructuring debt is considered in detail. We need a debt deal, as Romney inadvertently noted. More fundamentally, getting rid of the accounting gamesmanship will lead to a healthier economy because it will align financial assets with real economic assets. As another example, credit default swaps are linking American banks excessively to an unstable Eurozone. Credit default swaps are in fact yet another accounting game designed to further balance sheet fictions. Dick Grasso offered his solution to this obvious problem. We can, according to Grasso, simply declare these contracts online gaming, and void them.

What Americans should be taking from this episode is that finance, while complex, is not conceptually hard. If it’s a lie on the balance sheet, it’s going to be destructive to ordinary people. If you stop the balance sheet lying, the economy will do better. But while Mitt Romney might have said this out loud, they all know it behind closed doors. Our question is, who will be the first to make this a policy reality?