Category Archives: mortgage crisis

>Bankers Behaving Badly

>Yesterday’s New York Times took a look at some of those risky municipal bond deals that were sold by Morgan Keegan to Tennessee cities and counties. Apparently the deals were highly complex, involving something called interest rate swaps, and some of the municipalities who took part are now complaining they were sold a lemon:

Officials in the small cities of Lewisburg and Mount Juliet, and in Claiborne County, have complained that Morgan Keegan’s bankers failed to warn them about the consequences if the bonds’ insurer, Ambac Financial Group, was downgraded. When that occurred, the bonds’ interest payments quadrupled and the pay-off time increased. The cost of terminating the interest-rate swaps was exorbitant.

Experts in municipal bonds have said that bond derivatives are inappropriate for small towns and rural counties, and that higher fees associated with the derivatives often eclipsed any savings the transactions had provided.

Even worse, the folks hawking these financial deals, Morgan Keegan, were the same folks leading “day-long seminars” designed to inform city and county officials about the risks of the transactions.

Here, y’all will like this:

Asked if it had been a conflict for Morgan Keegan to serve as adviser and underwriter of the bonds, the governor said, “I think that really is probably at the core of what went wrong here.”

Gee, ya think?

You know, it’s not just homeowners and clients of Bernie Madoff who were sold investment deals they either couldn’t understand or else were not fully informed about. It’s municipalities like Mount Juliet and Lewisburg (and possibly Cleveland, TN), too.

Meanwhile, Morgan Keegan Managing Director Joe Ayres told the Memphis Commercial Appeal that the New York Time’s article was “politically oriented,” and that

some people look for a scapegoat for the effects of the world economic troubles, which is beyond the reach of his investment bank.

You buying that? I’m not. Especially when you remember that Morgan Keegan has been ordered to repay investors over losses incurred in the subprime mess:

The award – which is the largest arbitration award against Morgan Keegan’s bond funds as of late – set a precedent for pending arbitration lawsuits against the company, Stoltmann said.

“There has been some nefarious stuff that (has) come out in the last two months that has changed the dynamics of these cases and made them better,” he said. “An award like that is a real clear sign that the arbitrators were upset with what they heard.”

Wow, nefarious stuff, huh? Where have we heard this before? Sounds an awful lot like the greedy, predatory lending behavior of the folks at Countrywide Financial.

The problem, as Paul Krugman noted in his column yesterday, is that deregulation opened a Pandora’s Box of funny money deals that no one can understand, certainly not the average first-time home buyer and not even a city or county commissioner. So you rely on an expert in the investment banking world, someone like a Morgan Keegan. But when the guy telling you all the risks and benefits of these convoluted arrangements is the same guy making money off of the deal, aren’t you just asking for trouble?

You know, there oughta be a law. I’m just sayin’ …

Krugman waxed nostalgic for the days of “boring banking,” which he called

an era of spectacular economic progress for most Americans.

After 1980, however, as the political winds shifted, many of the regulations on banks were lifted — and banking became exciting again. Debt began rising rapidly, eventually reaching just about the same level relative to G.D.P. as in 1929. And the financial industry exploded in size. By the middle of this decade, it accounted for a third of corporate profits.

I agree that boring is highly underrated these days. Boring banking is fine with me, and we get that way by implementing some serious regulation of the banking industry. Whether it will happen, however, I don’t know. Seems like a lot of folks have just accepted the fact that the financial world needs to be exciting and all Gordon Gekko-like because it’s been that way for 20 years and it’s all a lot of folks know.

Says Krugman

[…] boring banking would mean poorer bankers, and the financial industry still has a lot of friends in high places. But it’s also a matter of ideology: Despite everything that has happened, most people in positions of power still associate fancy finance with economic progress.

I suspect folks at some city and county governments across Tennessee feel likewise. But unless there are some serious changes, we’re going to be walking down this road again.

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Filed under Morgan Keegan, mortgage crisis, Tennessee

>Is Ellen Tauscher Trying To Undermine Obama?

>Via Braisted, I’ve learned that former Wall Street Banker Rep. Ellen Tauscher, D-CA has re-filed her bill to repeal the military’s “Don’t Ask, Don’t Tell” policy.

As one might expect, the media has jumped all over this story, prodded by Republicans delighted at the prospect of a fresh culture war battle, since they seem to be losing the one about economic policy. This is the kind of red meat that folks like Rush Limbaugh love to chew on.

The timing struck me as unusual, however. The bill was first filed way back in 2007. Back in January, while saying President Obama opposed “Don’t Ask, Don’t Tell,” an aide stated fixing the economy was the president’s first priority and repeal of the anti-gay policy would have to wait.

So why would Rep. Tauscher make an issue out of it now? With the economy in a death-spiral and the Republicans fighting the economic stimulus at every turn?

Maybe it’s because of what’s in this post at Firedoglake:

On Saturday I wrote a post about the efforts of former Wall Street investment banker Ellen Tauscher to gut legislation that would allow bankruptcy judges to write down mortgages, something that would stop 20% of foreclosures at no cost to the taxpayers. But banks and banking lobbyists are holding out hope that they can unload their bad loans on taxpayers, and are working through people like Tauscher to oppose the legislation so they never have to take responsibility for their mistakes.

I’m wondering if there’s a connection here.

This seems like an awfully bizarre time to focus on gays in the military, unless you’re trying to pressure the president and the House Speaker on behalf of banks while they are trying to solve our credit crisis.

I dunno, peeps … tell me I’m crazy.

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Filed under Don't Ask Don't Tell, mortgage crisis, Rep. Ellen Tauscher

>The End Of Libertarianism

>Yesterday Slate asked: did the financial collapse kill Libertarianism?

God, I hope so.

Let’s face it, most Libertarians these days are really just Republicans embarrassed by the social conservatives who have hijacked their party. At least, that describes most of the Libertarians I know. These are people who seem almost apologetic about their political views, qualifying their position with “I’m really more of a Libertarian”–in other words, a Republican who likes to screw, smoke pot, gamble and doesn’t need to be in church three days a week.

Slate’s Jacob Weisberg writes:

Utopians of the right, libertarians are just as convinced that their ideas have yet to be tried, and that they would work beautifully if we could only just have a do-over of human history. Like all true ideologues, they find a way to interpret mounting evidence of error as proof that they were right all along.

To which the rest of us can only respond, Haven’t you people done enough harm already?

Amen to that. I find Libertarians especially tiresome in that regard. We really have never tried a truly market-driven economy, blabbedy blah. Yeah, well, there’s a reason for that. There’s simply no such thing, it’s a total fantasy. The free hand of the market is a myth because it will always be controlled by the system that created it: human greed.

Anyway, Weisberg concedes that there’s plenty of blame to go around, but he calls out former Fed chairman Alan Greenspan, former Senate banking committee chair (and McCain adivsor) Phil Gramm, and SEC chairman Christopher Cox for causing the global economy to spiral down the drain. And, says Weisberg, they’re all either actual Libertarians (as in Greenspan’s case) or enacted disastrous Libertarian policies which got us into this mess:

Blame Greenspan for making the case that the exploding trade in derivatives was a benign way of hedging against risk. Blame Gramm for making sure derivatives weren’t covered by the Commodity Futures Modernization Act, a bill he shepherded through Congress in 2000. Blame Cox for championing Bush’s policy of “voluntary” regulation of investment banks at the SEC.

Cox and Gramm, in particular, are often accused of being in the pocket of the securities industry. That’s not entirely fair; these men took the hands-off positions they did because of their political philosophy, which holds that markets are always right and governments always wrong to interfere.

By the way, let me point my finger and hold my gut while laughing uproariously at Republicans now spouting mealy-mouthed “now is not the time to place blame” dodges, before they slouch off to a corner to suck their thumbs.

Ever notice how it’s never time for the blame game when it’s primarily their fault?

I do agree that Democrats could have been more forceful in demanding oversight and regulations. Flush with cash and greed, they were drugged by the “let the markets run free and unfettered across the land” opium the Libertarians were selling, too.

Hey, people, “Atlas Shrugged” is fiction. As a writer, let me tell you something I know about fiction: you can always make the story turn out the way you want.

Sheesh.

Anyway, because of the failure of Libertarianism, we may be getting a nice little dose of Socialism in this country. But if we had to give some socialist ideas a try, I sure as hell wish it were socialized medicine, not nationalized banks. I don’t need a piece of a bank. I do need healthcare.

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Filed under economy, Libertarians, mortgage crisis

>Blame Game

>Yesterday blog trolls started touting the expected line that our mortgage crisis is the fault of a) Bill Clinton, and b) black people.

Gee, what took them so long?

This particular line of reasoning, spread by the usual suspects over at The National Review, Townhall.com, and the like, is that the Jimmy Carter-initiated, Bill Clinton-pushed Community Reinvestment Act caused the mortgage crisis by forcing political correctness on the banking industry. The big, bad government forced banks to lend money to poor blacks in the projects, and, well, you know how those people are. Of course they defaulted on these loans and spent the money on Air Jordans and crack instead. Voila, the entire economy is crumbling as a result.

Besides being racist, blaming the Community Reinvestment Act is just flat-out wrong. For those who don’t know, the CRA mandates that federally-insured banks and thrifts make loans in the communities from which they receive deposits. So a bank taking money from a low-income community has a duty to reinvest in that community.

However, the law does not apply to independent mortgage companies like Countrywide. As the American Prospect pointed out when this line of bullshit first appeared back in the spring,

it is hard to blame CRA for the mortgage meltdown when CRA doesn’t even apply to most of the loans that are behind it. As the University of Michigan’s Michael Barr points out, half of sub-prime loans came from those mortgage companies beyond the reach of CRA. A further 25 to 30 percent came from bank subsidiaries and affiliates, which come under CRA to varying degrees but not as fully as banks themselves. (With affiliates, banks can choose whether to count the loans.) Perhaps one in four sub-prime loans were made by the institutions fully governed by CRA.

Most important, the lenders subject to CRA have engaged in less, not more, of the most dangerous lending. Janet Yellen, president of the San Francisco Federal Reserve, offers the killer statistic: Independent mortgage companies, which are not covered by CRA, made high-priced loans at more than twice the rate of the banks and thrifts. With this in mind, Yellen specifically rejects the “tendency to conflate the current problems in the sub-prime market with CRA-motivated lending.? CRA, Yellen says, “has increased the volume of responsible lending to low- and moderate-income households.”

The “blame CRA” line of reasoning first appeared back in the spring, and I’m not surprised to see it being floated again. But the facts show this argument to be flawed, racist, and designed solely to propagate the tried-and-true conservative myth that government regulations are always bad. But lack of regulation and lack of oversight allowed greed to run amok through our financial system. It is this, not the regulated Community Reinvestment Act, that caused our economic meltdown. It’s a textbook case of what happens when you put Ayn Rand-style philosophy into practice.

As the Prospect wrote last April:

And the worst offenders, the independent mortgage companies, were never subject to CRA — or any federal regulator. Law didn’t make them lend. The profit motive did.

Profits over people: not a winning economic model.

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Filed under Community Reinvestment Act, mortgage crisis

>The Irony & The Ecstasy

>Honestly, the jokes just write themselves these days:

A year ago, the Mortgage Bankers Association was thrilled to sign a contract to buy a fancy new headquarters building in downtown Washington. Interest rates were low, the group’s revenues were steady and the prospects for quickly renting out part of the structure were strong.

But since then, the association has fallen on tough times as many of the subprime mortgages dispensed by some of its members proved dicey. Borrowers discovered the loans were more costly than they had anticipated. Foreclosures soared, and cheap, inexpensive credit dried up, slowing the economy.

The result: The trade group is about to find it harder than it imagined to pay its own mortgage.

Scheduled to close on the building in the coming weeks, the association will have to pay millions of dollars more than it would have a year ago when it contracted to buy the 160,000-square-foot structure — millions of dollars it is now less able to afford.

No one could have anticipated that the predatory lending practices of folks like Countrywide would have industry-wide repercussions! No one expected those chickens to come home to roost.

It’s not like the Mortgage Bankers Assn. didn’t try to keep foisting their higher cost, dirty-dog subprime mortgages off on an unsuspecting public, even after the collapse of Big Shitpile, or force borrowers into foreclosure. Oh, wait. They did:

Indeed, under pressure from the lobby, the House already gutted some of the better parts of the Frank bill. For example, the Mortgage Bankers Association and the American Banking Association lobbyists persuaded legislators to allow lenders to continue the insidious practice of paying an increased fee to brokers for steering borrowers into higher cost sub-prime mortgages. It also bars borrowers whose predatory loans have been sold on Wall Street from suing investors for relief until the homeowners are facing foreclosure. In effect, it forces borrowers into foreclosure as a condition for asserting their rights. Wall Street and the big players in the mortgage market won’t be held accountable for buying abusive loans.

Well, there is a God: apparently the Mortgage Bankers Assn. has hit on some hard times. According to the Washington Post, the lobbying group’s membership is down 17% and its revenue will be down 15%.

Not the same as a family being tossed out of their home, of course. But I won’t be crying for the Mortgage Bankers Association if they have to eat it on their new HQ.

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Filed under lobbyists, Mortgage Bankers Assn., mortgage crisis

>Desperate People Doing Desperate Things

>Attaturk has this post up about these innocent victims of the subprime crisis:

CHICAGO (AFP) – Forget about the lost furnishings and finances, the most pitiful victims of the subprime mortgage crisis rocking the United States are the family pets.

Shelters across the country have seen sharp upticks in the number of people giving up their pets in recent months because they have been forced out of their homes.

And — more tragically — neighbors, police and foreclosure agents are finding increasing numbers of pets left to fend for themselves in abandoned homes.

“We’re finding too many animals who have starved to death,” said Stephanie Shain, director of outreach for the Human Society of the United States.

While some people dump their pets on the street, others go so far as to lock the animal in a closet where their cries for help are harder to hear, she said.

It can take weeks for an animal to starve to death and desperate scratch and bite marks are usually found on doors and windows.

“They will eat anything — furniture, or carpet or wallboard — to try to ingest something,” Shain said in a telephone interview.

There’s nothing like an animal cruelty charge to go along with your foreclosure.

I tried to put myself in the shoes of someone who locks their pet in a closet to muffle its cries before leaving the house for good. I can’t get there, except I know that desperate people do desperate things, and this is definitely an act of desperation. And I don’t think a check for $600 $800 can make a dent in this level of desperation.

Check out these anecdotal “statistics” from just one animal shelter in Chicago:

About 15-20 foreclosed families are now coming into the shelter every week with their pets, and police bring in two or three pets a week found abandoned in foreclosed homes.

That’s one shelter in one city. Now wrap your head around those numbers multiplied across every shelter in every city in America.

Compounding the problem is the sorry state of most animal shelters in this country, which are ill-equipped to handle the upsurge in abandoned and rescued pets that a crisis like this causes. (Tennessee should be ashamed of itself for the pathetic state of most of its county shelters, a few of which have made the news lately).

People can argue about whether this country is technically in a recession or not. But according to RealtyTrac , “one out of every 63 households nationwide” is in foreclosure. Anyone who doesn’t think this country is already in an economic mess is delusional.

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Filed under animal cruelty, mortgage crisis

>They’re Bad, They’re Countrywide

>For those folks who would like to place blame for the mortgage meltdown on irresponsible, greedy borrowers who just couldn’t control their wild spending, the look at Countrywide Financial in Sunday’s New York Times is a dose of cold water on that fairy tale.

While I’m sure there were a few greedy, irresponsible borrowers (human nature being what it is), there were also greedy, irresponsible lenders:

… [P]otential borrowers were often led to high-cost and sometimes unfavorable loans that resulted in richer commissions for Countrywide’s smooth-talking sales force, outsize fees to company affiliates providing services on the loans, and a roaring stock price that made Countrywide executives among the highest paid in America.

Countrywide’s entire operation, from its computer system to its incentive pay structure and financing arrangements, is intended to wring maximum profits out of the mortgage lending boom no matter what it costs borrowers, according to interviews with former employees and brokers who worked in different units of the company and internal documents they provided. One document, for instance, shows that until last September the computer system in the company’s subprime unit excluded borrowers’ cash reserves, which had the effect of steering them away from lower-cost loans to those that were more expensive to homeowners and more profitable to Countrywide.

So excuse me if I don’t cry a river for Countrywide as it teeters on the brink of bankruptcy.

Sadly, nearly one-fourth of those with Countrywide subprime loans are delinquent–10% are behind 90 days or more. Meanwhile, Countrywide founder and chief executive Angelo R. Mozilo has made $129 million from Countrywide stock sales during the last 12 months. No, I don’t feel sorry at all.

There are those who claim that Countrywide is an innocent bystander in this trainwreck, having the misfortunte to purchase subprime lenders who had made these bad loans. Uh-uh, I ain’t buying it:

“In terms of being unresponsive to what was happening, to sticking it out the longest, and continuing to justify the garbage they were selling, Countrywide was the worst lender,” said Ira Rheingold, executive director of the National Association of Consumer Advocates. “And anytime states tried to pass responsible lending laws, Countrywide was fighting it tooth and nail.”

As recently as July 27, Countrywide’s product list showed that it would lend $500,000 to a borrower rated C-minus, the second-riskiest grade. As long as the loan represented no more than 70 percent of the underlying property’s value, Countrywide would lend to a borrower even if the person had a credit score as low as 500. (The top score is 850.)

The company would lend even if the borrower had been 90 days late on a current mortgage payment twice in the last 12 months, if the borrower had filed for personal bankruptcy protection, or if the borrower had faced foreclosure or default notices on his or her property.

Why would Countrywide do this? Because, silly, these subprime loans are so much more profitable than the regular kind.

Countrywide even avoided offering eligible borrowers less-risky FHA loans because they are less profitable:

The monthly payment on the F.H.A. loan would have been $1,829, while Countrywide’s subprime loan generated a $2,387 monthly payment. That amounts to a difference of $558 a month, or $6,696 a year — no small sum for a low-income homeowner.

“F.H.A. loans are the best source of financing for low-income borrowers,” the former sales representative said. So Countrywide’s subprime lending program “is not living up to the promise of providing the best loan programs to its clients,” he said.

Er, no. That’s the understatement of the year.

The article also reveals Countrywide’s usurious practice of overcharging for things like credit checks and flood certifications. Perhaps the most outrageous fees: e-mailing documents ($100) and overnighting documents ($45). Free hand of the market will screw you every time.

What I don’t understand is why it takes something like the collapse of the mortgage industry for the predatory behavior of companies like Countrywide Financial to come to light.

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Filed under Countrywide Financial, mortgage crisis

>Mortgage Meltdown Mugs Mitt

>Whoopsie-daisy:

The victims of the latest hedge-fund meltdown on Wall Street include at least one well-known name: Republican presidential candidate Mitt Romney.

The former Massachusetts governor, who wrapped up a victory in Iowa’s symbolic GOP “straw poll” over the weekend, is among the investors hit by the crisis at the Goldman Sachs Global Equity Opportunities fund. That fund needed a $3 billion emergency cash injection to stay afloat this week after losing more than one-third of its value in the market turmoil after the subprime mortgage collapse.

Romney’s financial-disclosure form for his presidential run reveals he has a substantial stake in the fund.
[…]
The precise size of Romney’s investment in the Goldman fund isn’t revealed in his filings because the form gives just a range of values and not exact amounts. Based on the range, Romney’s investment in the fund is at least $1 million and could be much higher.

The article also points out that presidential candidates have “come to depend on the largesse of Wall Street and the real estate industry,” which leaves me to wonder what if any impact this financial crisis will have on presidential campaigns.

I’d also like to remind everyone that as the stock market continues to sink, there were some people–not me–who advocated investing people’s Social Security in this volatile place. And all I can say is, thank God we don’t have a bunch of retirees who just lost everything in a stock market crash.

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Filed under Mitt Romney, mortgage crisis