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Posts Tagged ‘mortgage-backed securities

You want to fix the U.S. economy? Here’s a start…

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by Charles Hugh Smith
Posted July 19, 2011
on Of Two Minds 

A SIMPLE 8-POINT PLAN WOULD RESTORE BOTH THE BANKING and the real estate sectors, and end the political dominance of the parasitic “too big to fail” banks. Craven politicos and clueless Federal Reserve economists are always bleating about how they want to fix the U.S. economy and restore “aggregate demand.” OK, here’s how to start:

1. Force all banks to mark all their assets to market at the end of each trading day, including all derivatives of all types, including over-the-counter instruments.

2. Allow citizens to discharge all mortgage and student loan debt in bankruptcy court, just like any other debt.

3. Banks must mark all their real estate to market weekly as defined by “last sales of nearby properties” adjusted for square footage and other quantifiable measures (i.e. like Zillow.com).

4. Require mortgage servicers and all owners of mortgage-backed securities to mark every asset within each pool to market weekly.

5. Any mortgage, loan or note which was fraudulently originated, packaged and sold, including the misrepresentation of risk, the manipulation of risk ratings, fraudulent documentation by any party, etc., will be discharged as uncollectable and the full value wiped off the books and title records without recourse by any of the parties.

If a bank fraudulently originated a mortgage and the buyer misrepresented material facts on the mortgage documents, then both parties lose all claim to the note and the underlying asset, the house, which reverts to the FDIC for liquidation, with the proceeds going towards creditors’ claims against the bank.

6. Any bank which misrepresents marked-to-market asset values will be fined $10 million per incident.

7. Any bank which is insolvent at the end of a trading day will be closed and taken over by the FDIC the following day, and liquidated in an orderly manner via open-market auctions of all assets, including REO (real estate owned).

8. All derivative positions held by the insolvent bank will be unwound immediately, and counterparties who fail to make good on their claims will also be closed, given to the FDIC and liquidated.

You know what this is, of course: a return to trustworthy, transparent accounting.
And you know what the consequences would be, too: all five “too big to fail” banks would instantly be declared insolvent, and most of the other top-25 big banks would also be closed and liquidated.

At least $3 trillion in impaired residential mortgage debt would be written off, maybe more, and $1 trillion in impaired commercial real estate would also be written down. Derivative losses are unknown, but let’s estimate it’s at least $1 trillion and maybe much more.

If $5.8 trillion of fantasy “value” is wiped off the nation’s books, that’s only a 10% reduction in net household and non-profit assets, which total $58 trillion. Even an $11 trillion hit would only knock off 20%. If that’s reality, if that’s what the assets are really worth in the real world, then let’s get it over with. Once we’ve restored truthful accounting and stopped living a grand series of debilitating lies, then the path will finally be clear for renewed growth.

The net result would be the destruction of the political power of the “too big to fail” banks, the clearing of the nation’s bloated, diseased real estate market, and the restoration of trust in institutions which have been completely discredited.

Bank credit would flow again, and we could insist on a healthy competitive system of 250 small banks instead of a corrupting system of 5 insolvent parasitic monsters and 20 other bloated but equally insolvent financial parasites.

Those who lied would finally get fried. At long last, those who misprepresented income, risk, etc. would actually pay some price for their malfeasance. Criminal proceedings would be a nice icing on the cake, but simply ending the pretence of solvency would go a long way to restoring banking and real estate and ending regulatory capture by TBTF banks.

What’s the downside to such a simple action plan? Oh boo-hoo, the craven politicos would lose their key campaign contributors. On the plus side, the politicos could finally wipe that brown stuff off their noses.

Are the Fed’s honchos simpletons, or are they just taking orders?

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by Charles Hugh Smith
Posted originally November 1, 2010

Without exception the Fed’s policies are pernicious failures; either they are exceptionally thickheaded, or they are just taking orders.

At the risk of boring you with material you already know well, let’s quickly cover the Fed’s policies and stated goals since the Global Financial Meltdown of late 2008.

The Fed’s supposed goal is “get the economy on its feet again” by stabilizing employment and prices. At the risk of sounding naive, we can paraphrase all the Fed’s statements thusly: “We’re trying to help everyone in the U.S. by fighting this recession.”

Sounds noble enough, so let’s look at what the Fed has actually done in the real world.

1. The Fed has injected “liquidity” into the banking sector, enabling banks to borrow essentially unlimited sums at essentially zero interest – the infamous ZIRP (zero-interest rate policy).

2. The Fed has pushed down mortgage rates by buying over 10% of all outstanding mortgages in the U.S. – all the toxic garbage loans which the banks were desperate to get off their crippled balance sheets.

3. The Fed has pushed down yields on U.S. Treasury bonds (“monetizing” this newly issued debt) by buying hundreds of billions of dollars of bonds itself.

Here is what each program was intended to do:

1. ZIRP and unlimited liquidity was intended to enable the banks to “earn their way back to solvency” by giving them free money which they could then loan out at much higher rates. The difference between zero (their cost) and the interest rate they charged borrowers (such as those wonderful 19% credit cards) was pure profit, courtesy of the Federal Reserve.

2. The purchase of $1.2 trillion in mortgage-backed securities was intended to stabilize housing and real estate proces at far above their “natural” level set by “organic” supply and demand; in essence, the goal was to stop market prices from “reverting to the mean,” i.e. returning to historical trendlines which are roughly equivialent to pre-bubble valuations circa 1997-98.

This was intended to stop the implosion of banks’ balance sheets as their assets – all those mortgage-backed securities and derivatives they own – kept falling in value. It was also intended to stabilize real estate prices so banks could slowly sell off the millions of foreclosed (REO) and defaulted homes they hold in the “shadow inventory” at prices far above where organic supply and demand would let them settle. As a side benefit, keeping home prices inflated far above their real value would also allow the Fed to dump its own portfolio of $1.2 trillion mortgage-backed securities without suffering catastrophic losses.

Lastly, the goal was to lower the cost of mortgages to such ridiculously low levels that otherwise prudent citizens might be seduced into buying a house “because rates are so low.” (Never mind what happens if the house falls another 40% in value over the next few years.)

The idea was to encourage rampant home buying (for speculation or long-term ownership, it didn’t matter) to prop up the market with “demand,” even if that “demand” was driven by the low cost of borrowing rather than organic demand based on the need for shelter. (Please recall that there are 19 million vacant dwellings in the U.S. now.)

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Wall Street, too, a Sap for ‘Hope and Change’

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by Rick Ackerman
Posted originally November 3, 2010

[So much for going out on a limb.  Shortly before 1 a.m. Eastern, the rally in index futures has reversed and the market is now flat.  It’s possible this reflects a similar flattening of expectations arising from the election. Although the Republicans made spectacular gains in the House, their failure to capture the Senate is likely to impose gridlock on Capitol Hill for the remainder of Mr. Obama’s term. While this is arguably cause for true celebration, it seems unlikely to generate the burst of exuberance on Wall Street that we had expected in predicting a 175-point rally. RA]

The polls don’t close for another three hours, but we’ll go out on a limb with a prediction that the Dow will rally at least 175 points when stocks open on Wednesday morning. The exuberant reaction will be a variation on Barack Obama’s Hope and Change-inspired landslide in the 2008 election. Now as then, revelers will be so worked up about the very prospect of change, any kind of change, that they won’t much care about the details. But they’ll care about them soon enough, and that’s why we’re also predicting a Thursday morning hangover; for at the end of the day, it takes just as many Republicans and Tea Partiers to screw in a light bulb as it does Democrats.

Mind you, even though there isn’t ultimately much difference between the two major parties as far as how they govern, there are differences enough that we’ll be rooting, sight unseen, for anybody-but-the-Democrat in virtually all Congressional races. Running as a Socialist Worker? No Problem-o. Symbionese Liberation Army?  You can count on my vote. La Raza? Where can I find your name on the ballot? Tupamaros? Sure, but please don’t forget me when the repeal of Obamacare comes up for a vote.

Conserving Stupidity

Considering the stakes, traders showed relative restraint on Wall Street yesterday, presumably because they didn’t want to deplete their reserve of stupidity before the election results are out. They needn’t have worried, however, since no human trait save greed is in more abundant supply on the Street than stupidity. Assuming stocks rally sharply, the pundits will seize on this as implying that the mood of America had changed.

When the rally sputters out shortly thereafter and reverses with a vengeance, however, the talking heads probably won’t know what to say, so we’ll say it for them: The Republican landslide is not going to change much of anything, particularly the irresistible strength of a credit deflation that has gripped the economy like a noose. To those who believe that a Republican majority, even in both Houses, can turn the economy around, we say, Wake us when we can sell our home for its appraisal value.


Now What?

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by James Howard Kunstler
Originally posted October 31, 2010

ON TUESDAY, WHEN THE REPUBLICAN PARTY AND ITS TEA-PARTY CHUMP PROXIES re-conquer the sin-drenched bizarro universe of the US congress, they’ll have to re-assume ownership of the stickiest web of frauds and swindles ever run in human history – and chances are the victory will blow up in their supernaturally suntanned, Botox-smoothed faces.

But don’t cry for John Boehner, Barack Obama.

The President and his Democrats may have inherited this clusterfuck from the feckless George Bush but they flubbed every chance to mitigate any part of it, ranging from their failure to restore the rule of law in banking (by prosecuting the executives of major banks who oversaw the systematic swindle), to mis-directing our dwindling resources toward ends (such as “shovel-ready” new super-highways) that won’t promote a credible future for this society, to misleading the public in the fantasy that alt-energy will offset the disruptions of peak oil (and allow us to keep running suburbia, the US Military, and WalMart by other means).

It’s really too late for both parties. They’re unreformable. They’ve squandered their legitimacy just as the US enters the fat heart of the long emergency. Neither of them have a plan, or even a single idea that isn’t a dodge or a grift. Both parties tout a “recovery” that is just a cover story for accounting chicanery and statistical lies aimed at concealing the criminally-engineered national bankruptcy that they presided over in split shifts. Both parties are overwhelmingly made up of bagmen for the companies that looted America.

Alas, the damage is now so pervasive in money matters that the federal government could be toast as a viable enterprise, even if a new party or two spontaneously rose up out of the ruins of a plundered democracy. Anyway, one of them will not be the Tea Party, with its incoherent agenda and moron cadres who seek to put Jesus back in the US constitution, where he never was in the first place – though they don’t know that.

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No Mr. President, Larry Summers did not resolve the financial crisis for a pittance, he just papered over the problem

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by William K. Black
Assoc. Professor, Univ. of Missouri, Kansas City; Sr. regulator during S&L debacle

Originally posted October 28, 2010

I PASSED UP THE OBVIOUS TITLE: “HECKAVA JOB, LARRY!” THAT WAS THE MOMENT OF PRESIDENT OBAMA’S appearance on The Daily Show with Jon Stewart that set all Americans cringing. Yes, he really said that Summers “did a heckuva job.” The candidate that was gifted the opportunity to run against the legacy of one of the worst presidents in U.S. history has, as president, used Bush as his role model to continue many disastrous policies. It was strangely fitting that he would channel Bush’s infamous praise (“Heckuva job Brownie”) for the FEMA chief who failed New Orleans so badly in the hurricane.

President Obama understandably wishes to focus attention on the economic disaster he inherited from President Bush. But Jon Stewart’s question to him, which led to the president’s gaffe, correctly asked about the message that Summers’ appointment sent about the administration’s commitment to fundamental change.

Summers had financial red ink on his hands at the time he was appointed. He was Rubin’s chief minion in the successful effort to defeat effective financial regulation and supervision. (Yes, the effort was bipartisan and the Republican leadership shares in the guilt.) Summers was not simply wrong, but also arrogant and brutal, in blocking effective regulation at the SEC and the Commodity Futures Trading Commission. Summers was made rich by Wall Street in one of those sordid consulting arrangements designed to buy influence and reward past and future favors.

President Obama’s appointment of Summers as his chief economic advisor made the administration’s overall response to the crisis predictable. (Robert Kuttner gives a detailed explanation of the policies that Rubin’s protégés championed in his new book, A Presidency in Peril.) The response would follow the disastrous Japanese model that has harmed their economy and damaged their integrity.

The dominant characteristics can be summarized quickly: (1) the government would act for the benefit of the largest financial firms and their CEOs, even when they directed massive frauds, by (2) engineering a cover up of the banks’ losses and the CEO’s misconduct; (3) the administration would use the fictional reports generated to conduct the cover up to declare victory (due to their brilliance); and (4) the same strategy would impair the recovery.

The strategy was also an assault on integrity, the rule of law, and the core precepts of the Obama campaign for president. This is why we warned from the beginning that the cover up could enrage the nation and make him a one-term president.

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The Perfect No-Prosecution Crime

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by Greg Hunter
Posted originally 25 October 2010

DID YOU KNOW THAT IN THE AFTERMATH OF THE SAVINGS AND LOAN (Thrifts) scandal there were more than a thousand felony convictions of financial elites? The cost of the wrongdoing associated with the rip-off and closure of nearly 800 Thrifts cost taxpayers more than $160 billion. The current sub-prime/mortgage-backed security scandal is 40 times bigger according to Economics professor William Black. That means the size of the crime is $6.4 trillion by my calculation. Can you guess how many indictments there have been on financial elites who created this enormous mess?  Zero, none, nada, zip. Yes, not one single prosecution or conviction has been started or achieved.

That is simply outrageous considering the width and breadth of the many crimes committed. There was “rampant” mortgage fraud in the loan application process according to the FBI as far back as 2004. There was real estate document fraud when the original Promissory Notes and loan documents were “lost.” The Promissory Notes were required to create tens of thousands of mortgage-backed securities (MBS). No “note,” no security. That is security fraud. No security means the special IRS tax treatments for the MBS’s were fraudulently obtained. That is IRS tax fraud. Because there were no documents, the rating agencies fraudulently made up triple “A” ratings for the securities. When the whole mess blew up, big banks hired foreclosure mill law firms to create forged documents. That phony paperwork was and is being used to wrongfully remove homeowners from their property. That is foreclosure fraud.

It appears to me the entire mortgage/securitization industry is one giant criminal enterprise. And yet, last Wednesday, Housing and Urban Development Secretary Shaun Donovan said, “We have not found any evidence at this point of systemic issues in the underlying legal or other documents that have been reviewed”. What! Well, look a little harder Mr. HUD Secretary. Donovan did say the foreclosure fiasco is “shameful” but that is not the same as a criminal prosecution now is it? Where is U.S. Attorney General Eric Holder in all of this? I guess he’s busy planning a lawsuit to stop California from making pot smoking a misdemeanor. Holder is probably also very busy with continuing legal actions against Arizona’s immigration law. I guess trillions of dollars in mortgage and securities fraud is just not enough of a legal priority for America!

All 50 State Attorneys General are looking into what is now being called “Foreclosuregate.”  Iowa AG, Tom Miller, is leading the investigation for the 50 states.  His focus, according to a recent Washington Post story, is “preventable foreclosures ones in which small changes might keep the homeowners in their home – benefits all parties involved. The borrower keeps the house. The servicer continues to collect fees, and the investors receive more income than a foreclosure would bring. The community has one less deserted home”. Miller’s office also says, “This is a public policy issue”.

When did State AG’s become public policy negotiators for the banks? Where are the criminal prosecutions? This is a sham and an outrage perpetrated by state governments. Who are they protecting? I say it’s really the banks’ and investors’ income stream.

It sure doesn’t look like the FBI is going to prosecute any of the “rampant” mortgage fraud any time soon, according to Professor Black. At the end of September on the Dylan Ratigan Show, he said, We know that the FBI has formed what it calls a partnership with the Mortgage Bankers Association. Now, that’s a trade association of the perps, and guess what the trade association said: ‘Hey we’re the victims. You know none of the bad stuff happened because the lenders wanted to engage in this fraud,’ and the FBI believed them if you can believe that!

Black is not just some angry academic. Besides being a Professor of Economics at the University of Missouri KC, he is also a former bank regulator and an expert in crimes committed by CEO’s. He thinks Treasury Secretary Tim Geithner and Attorney General Eric Holder should be fired so real regulators can get to work on prosecutions of crime throughout the entire industry. And get this, just last week, Black adamantly claimed that “major frauds continue” at all the big banks.

Again, Black said, “80% of the loans were fraudulent.” He also said in this segment (but wasn’t included in the clip) that, securitized mortgage instruments are all fraudulent”. That means trillions of dollars in MBS’s are worthless!  Foreclosuregate is a gargantuan financial mess, and federal and state regulators have not found a single crime in all of this to prosecute? Clearly, the U.S. government and both political parties are shielding the perpetrators. Oh wait!  The SEC did fine Angelo Mozilo, the former head of Countrywide Financial Corp., $67.5 million in penalties to settle civil fraud and insider-trading charges. Mozilo ripped-off hundreds of millions of dollars, and he pays a fine that amounts to a parking ticket for a man of his wealth? Is that the same as a criminal prosecution? I don’t think so!!

So, if you are or have been committing document, tax, security, rating or foreclosure fraud, you don’t have a thing to worry about. Keep doing what you’ve been doing because you are committing “the perfect no prosecution crime.” According to the financial elites, these crimes are essential to keep the American economy running smoothly.

The Second Leg Down of America’s Death Spiral

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by Gonzalo Lira
Originally posted October 12, 2010


I swear to God Almighty: Mortgage Backed Securities are America’s Herpes — the gift that keeps on oozing.

LAST FRIDAY, BANK OF AMERICA ANNOUNCED THAT IT WAS SUSPENDING ALL FORECLOSURE PROCEEDINGS, presumably until further notice. Other banks have already suspended foreclosures in a whole truckload of states. A nationwide moratorium on foreclosures might soon happen— which would be a big deal: Global Financial Crisis, Part II— Longer, Wider and Uncut.

But the mainstream media—surprise-surprise—has downplayed the whole shebang. They’re throwing terms out there into the ether, but devoid of context or explanation: “Robo-signings”, “foreclosure mills”, forged signatures, “double booking”, MERS—it’s confusing as all get-out.

So the mainstream media just mentions it casually—“and in other news tonight…”— like it’s no big deal: A couple-three lines, lots of complicated, unfamiliar terms, an attitude like it’s a brouhaha over paperwork of all things!— and then zappo-presto-change-o!: They’re showing video footage of a cute koala nursing in the arms of a San Diego zookeeper. But even the koalas know that something awful is heading America’s way. Smart little critters, they’re heading for the treetops, to get away from this mess.

So what the hell is going on with the God-forsaken mortgage mess in the United States?

It’s got a lot of bells and whistles, but it’s basically quite simple: It’s all about the fucking Mortgage Backed Securities (MBS). Again.

So this is what happened, more or less— the short version:

In the crazed frenzy to get as many mortgages securitized during the Oughts, banks took shortcuts with the paperwork necessary for the Mortgage Backed Securities. The reason was because everyone in the chain of this securitization mania got a little piece of the action — a little slice of the MBS pie in the shape of commissions.

So in the name of “improved efficiencies” (and how many horror stories are we finding out, carried out in the name of “improved efficiencies”), banks digitized the mortgage notes—they didn’t physically endorse them, like they were supposed to by the various state and Federal laws.

Plus — once the wave of foreclosures broke, and the holes in this bureaucratic paperwork became evident and relevant — some of the big law firms handling the foreclosures for the banks started doing some document fabrication and signature forgery, in order to cover up the mistakes—which is definitely illegal.

Long story short (since this is the short version): A lot of the foreclosed properties might not have been foreclosed legally. The people evicted might still have a right to their old houses. The new buyers might not actually own the REO’s they bought off the banks. The banks could be on the hook for trillions of dollars, and in the sights of literally millions of lawsuits.

In short: This could become another massive oozing sore, complete with yellow-green pus drip-drip-dripping out of some unmentionable places on the Body Economic.

Now— the long version:

Homeowners can only be foreclosed and evicted from their homes by the person or institution who actually has the loan paper—only the note-holder has legal standing to ask a court to foreclose and evict. Not the mortgage—the note, which is the actual IOU that people sign, promising to pay back the mortgage loan.

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