SHILLER: Principal Must be Written Down for Economic Recovery

Posted on June 26, 2012 by Neil Garfield

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Editor’s Comment:  

We are looking into the abyss of economic failure. For economists, the people who know the facts, the ONLY answer left on the table is principal correction or principal reduction. We have tried everything else.

The reason is very simple. The Banks created a market where prices soared above values and like any other situation where there is a false spike in prices over values, the correction needs to be made. The free market has already arrived at the same conclusion —- nobody wants those mortgages even if they were valid and enforceable. The refusal to rush toward principal reduction is putting the banks in an all or nothing position. The market and the economists have spoken — if that is the choice the banks will get nothing.

But the word from the banks is that we can’t have principal reduction. The real reason is that their balance sheets will be wrecked by forcing them to admit that those assets they are reporting are pure fiction — an inevitable consequence of bank excess finally recognized by the rating agencies last week. But the banks are spinning the myth that if principal reduction (in other words REALITY) prevails then everyone will want to do it. Assuming that is true, why not?  Shouldn’t everyone want reality? The Banks have had their windfall, they have been paid enough to pay back the investor lenders, and they are driving the economy into a ditch with their unrelenting death grip on the purse strings. 

Americans must decide between the Iceland model in which their economy quickly recovered, and the American model where we continue to languish with no real prospects for recovery. The European attempt at austerity drove them further over the brink. In fact, every policy is now debunked that ignores the realities of the market place and the reality of the importance of the housing market in ANY economic recovery. There is only one thing left. It is the right thing to do.

We have exhausted every idea except for doing the right thing. Restore homes to people who were unlawfully and fraudulently induced into signing papers that never even recited the terms of repayment as it was recited to the real lenders and which never disclosed the multiple borrowers on each loan, most of whom were hidden from the borrowers. Write down the mortgages just as the banks have already done, as confirmed by trading in the marketplace. What is so difficult to accept here?

People get windfalls all the time when bullies take over markets. And yes many homeowners will want the benefits of a write-down that the rest of the world already accepts as true and necessary. The result will restore wealth and power to the middle class, revive the economy and restore our prospects. We will have the resources to repair our ailing infrastructure (an embarrassment to world traveling Americans), invest in education and job training, invest in innovation and get back some of that pride we once had in America.

The only people stopping this are those who are pandering to extremists who would rather see the Country collapse than to allow a “handout” to those undeserving deadbeat homeowners. The facts and reality leave them unpersuaded because fanning the flames of ideology is how many politicians achieve power and maintain it.

Like I said last week. It comes down to this: country or chaos. What is your choice?

Robert Shiller: Lenders Need To Write Down Mortgages To Solve America’s Housing Problem

By Mamta Badkar

Yale economist Robert Shiller says the housing crisis is a collective action problem.

This means, he argues in a New York Times editorial, that if all mortgage lenders were to act collectively and write down what was owed to them by individual homeowners everyone would be better off.

Shiller offers a few types of collective action to write down mortgage principles. One involves giving “community-based, government-appointed trustees a central role” in writing down mortgages, any idea proposed by Yale economist John Geanakoplos and Boston University law professor Susan P. Koniak.

Another proposed by Robert C. Hockett involves “eminent domain” which allows government to seize property with fair compensation to owners when it is done in public interest—and could apply to mortgages:

Professor Hockett argues that a government, whether federal, state or local, can start doing just this right now, using large databases of information about mortgage pools and homeowner credit scores. After a market analysis, it seizes the mortgages. Then it can pay them off at fair value, or a little over that, with money from new investors, issuing new mortgages with smaller balances to the homeowners. Taxpayers are not involved, and no government deficit is incurred. Since homeowners are no longer underwater and have good credit, they are unlikely to default, so the new investors can expect to be repaid.”

People are more likely to default on their mortgage when it is underwater i.e. when their homes are worth less than their mortgage. And  lenders lose money on foreclosures because of lower home values and legal costs. So it would be in everyone’s best interest according to Shiller if mortgage lenders were to take some such collective action.

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ALLONGES, ASSIGNMENTS AND ENDORSEMENTS: THE REAL DEAL

Posted on June 4, 2012 by Neil Garfield

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ALLONGES, ASSIGNMENTS AND INDORSEMENTS

Excerpt from 2nd Edition Attorney Workbook, Treatise and Practice Manual

AND Subject Matters to be Covered in July Workshop

ALLONGE: An allonge is variously defined by different courts and sources. But the one thing they all have in common is that it is a very specific type of writing whose validity is presumed to be invalid unless accompanied by proof that the allonge was executed by the Payor (not the Payee) at the time of or shortly after the execution of a negotiable instrument or a promissory note that is not a negotiable instrument. People add all sorts of writing to notes but the additions are often notes by the payee that are not binding on the Payor because that is not what the Payor signed. In the context of securitization, it is always something that a third party has done after the note was signed, sometimes years after the note was signed.

A Common Definition is “An allonge is generally an attachment to a legal document that can be used to insert language or signatures when the original document does not have sufficient space for the inserted material. It may be, for example, a piece of paper attached to a negotiable instrument or promissory note, on which endorsements can be written because there isn’t enough room on the instrument itself. The allonge must be firmly attached so as to become a part of the instrument.”

So the first thing to remember is that an allonge is not an assignment nor is it an indorsement (UCC spelling) or endorsement (common spelling). This distinction was relatively unimportant until claims of “securitization” were made asserting that loans were being transferred by way of an allonge. By definition that is impossible. An allonge is neither an amendment, nor an assignment nor an endorsement of a loan, note, mortgage or obligation. Lawyers who miss this point are conceding something that is basic to contract law, the UCC and property law in each state.

It is important to recognize the elements of an allonge:

  1. By definition it is on a separate piece of paper containing TERMS that could not fit on the instrument itself. Since the documents are prepared in advance of the “closing” with the borrower, I can conceive of no circumstances where the note or other instrument would be attached to an allonge when there was plenty of time to reprint the note with all the terms and conditions. The burden would then shift to the pretender lender to establish why it was necessary to put these “terms” on a separate piece of paper.
  2. The separate piece of paper must be affixed to the note in such a manner as to demonstrate that the allonge was always there and formed the basis of the agreement between all signatories intended to be bound by the instrument (note). The burden is on the pretender lender to prove that the allonge was always present — a burden that is particularly difficult without the signature or initials of the party sought to be bound by the “terms” expressed in the allonge.
  3. The attached paper must contain terms, conditions or provisions that are relevant to the duties and obligations of the parties to the original instrument — in this case the original instrument is a promissory note. The burden of proof in such cases might include foundation testimony from a live witness who can testify that the signor on the note knew the allonge existed and agreed to the terms.
  4. ERROR: An allonge is not just any piece of paper attached to the original instrument. If it is being offered as an allonge but it is actually meant to be used as an assignment or indorsement, then additional questions of fact arise, including but not limited to consideration. In the opinion of this writer, the reason transfers are often “documented” with instruments called an “allonge” is that by its appearance it gives the impression that (1) it was there since inception of the instrument and (2) that the borrower agreed to it. An additional reason is that the issue consideration for the transfer is avoided completely if the “allonge” is accepted as a document of transfer.
  5. As a practice pointer, if the document contains terms and conditions of the loan or repayment, then it is being offered as an allonge. But it is not a valid allonge unless the signor of the original instrument (the note) agreed to the contents expressed on the allonge, since the proponent of this evidence wishes the court to consider the allonge part of the note itself.
  6. If the instrument contains language of transfer then it is not an allonge in that it fails to meet the elements required for proffering evidence of the instrument as an allonge.

ASSIGNMENT: All contracts require an offer, acceptance and consideration to be enforced. An assignment is a contract. In the context of mortgage loans and litigation, an assignment is a document that recites the terms of a transaction in which the loan, note, obligation, mortgage or deed of trust is transferred and accepted by the assignee in exchange for consideration. Within the context of loans that are subject to securitization claims or claims of assignment the documents proffered by the pretender lender are missing two out of three components: consideration and acceptance. The assignment in this context is an offer that cannot and in fact must not be accepted without violating the authority of the manager or “trustee” of the SPV (REMIC) pool.

Like all contracts it must be supported by consideration. An assignment without consideration is probably void, almost certainly voidable and at the very least requires the proponent of this instrument as evidence to be admitted into the record to meet the burden of proof as to foundation.

The typical assignment offered in foreclosure litigation states that “for value received” the assignor, being the owner of the note described, hereby assigns, transfers and conveys all right, title and interest to the assignee. The problem is obvious — there was no value received if the loan was not funded by the assignee or was being purchased by the assignee at the time of the alleged transfer. A demand for records of the assignor and assignee would show how the parties actually treated the transaction from an accounting point of view.

In the same way as we look at the bookkeeping records of the “payee” on the original note to determine if the payee was in fact the “lender” as declared in the note and mortgage, we look to the books and records of the assignor and assignee to determine the treatment of the transaction on their own books and records.

The highest probability is that there will be no entry on either the balance sheet categories or the income statement categories because the parties were already paid a fee at the inception of the “loan” which was not disclosed to the borrower in violation of TILA. At most there might be the recording of an additional fee for “processing” the “assignment”. At no time will the assignor nor the assignee show the transaction as a loan receivable, the absence of which is powerful evidence that the assignor did not own the loan and therefore conveyed nothing, and that the assignee paid nothing in the assignment “transaction” because there was no transaction.

Any accountant (CPA) should be able to render a report on this limited aspect. Such an accountant could recite the same statements contained herein as the reason why you are in need of the discovery and what it will show. Such a statement should not say that the evidence will prove anything, but rather than this information will lead to the discovery of admissible evidence as to whether the party whose records are being produced was acting in the capacity of servicer, nominee, lender, real party in interest, assignee or assignor.

The foundation for the assignment instrument must be by way of testimony (I doubt that “business records” could suffice) explaining the transaction and validating the assignment and the facts showing consideration, offer and acceptance. Acceptance is difficult in the context of securitization because the assignment is usually prepared (a) long after the close out date in the pooling and servicing agreement and (b) after the assignor or its agents have declared the loan to be in default. Both points violate virtually all pooling and servicing agreements that require performing loans to be pooled, ownership of the loan to be established by the assignor, the assignment executed in recordable form and many PSA’s require actual recording — a point missed by most analysts.

If we assume for the moment that the origination of the loan met the requirements for perfecting a mortgage lien on the subject property, the party managing the “pool” (REMIC, Trust etc.) would be committing an ultra vires act on its face if they accepted the loan, debt, obligation, note, mortgage or deed of trust into the pool years after the cut-off date and after the loan was declared in default. Acceptance of the assignment is a key component here that is missed by most judges and lawyers. The assumption is that if the assignment was offered, why wouldn’t the loan be accepted. And the answer is that by accepting the loan the manager would be committing the pool to an immediate loss of principal and income or even the opportunity for income.

Thus we are left with a Hobson’s choice: either the origination documents were void or the assignments of the origination documents were void. If the origination documents were void for lack of consideration and false declarations of facts, there could not be any conditions under which the elements of a perfected mortgage lien would be present. If the origination was valid, but the assignments were void, then the record owner of the loan is party who is admitted to have been paid in full, thus releasing the property from the encumbrance of the mortgage lien. Note that releasing the original lien neither releases any obligation to whoever paid it off nor does it bar a judgment lien against the homeowner — but that must be foreclosed by judicial means (non-judicial process does not apply to judgment liens under any state law I have reviewed).

INDORSEMENTS OR ENDORSEMENTS: The spelling varies depending upon the source. The common law spelling and the one often used in the UCC begins with the letter “I”. They both mean the same thing and are used interchangeably.

An indorsement transfers rights represented by the instruments to another individual other than the payee or holder. Indorsements can be open, qualified, conditional, bearer, with recourse, without recourse, requiring a subsequent indorsement, as a bailment (collection), or transferring all right title and interest. The types of indorsements vary as much as human imagination which is why an indorsement, alone, it frequently insufficient to establish the rights of the parties without another evidence, such as a contract of assignment.

The typical definition starts with an overall concept: “An indorsement on a negotiable instrument, such as a check or a promissory note, has the effect of transferring all the rights represented by the instrument to another individual. The ordinary manner in which an individual endorses a check is by placing his or her signature on the back of it, but it is valid even if the signature is placed somewhere else, such as on a separate paper, known as an allonge, which provides a space for a signature.” Another definition often appearing in cases and treatises is “ the act of the owner or payee signing his/her name to the back of a check, bill of exchange, or other negotiable instrument so as to make it payable to another or cashable by any person. An endorsement may be made after a specific direction (“pay to Dolly Madison” or “for deposit only”), called a qualified endorsement, or with no qualifying language, thereby making it payable to the holder, called a blank endorsement. There are also other forms of endorsement which may give credit or restrict the use of the check.”

Entire books have been written about indorsements and they have not exhausted all the possible interpretations of the act or the words used to describe the writing dubbed an “indorsement” or the words contained within the words described as an indorsement. As a result, courts are justifiably reluctant to accept an indorsed instrument on its face with parole evidence — unless the other party makes the mistake of failing to object to the foundation, and in the case of the mortgage meltdown practices of fabrication, forgery and fraud, by failing to deny the indorsement was ever made except for the purposes of litigation and has no relation to any legitimate business transaction.

Once the indorsement is put in issue as a material fact that is disputed, then the discovery must proceed to determine when the indorsement was created, where it was done, the parties involved in its creation and the parties involved in the execution of the indorsement, as well as the circumstantial evidence causing the indorsement to be made. A blank indorsement is no substitute for an assignment nor is it evidence that any transaction took place win which consideration (money) exchanged hands. Further blank indorsements might be yet another violation of the PSA, in which the indorsement must be with recourse and be unqualified naming the assignee.

A “trustee” of an alleged SPV (REMIC) who accepts such a document would no doubt be acting ultra vires (acting outside of the authority vested in the person purported to have acted) and it is doubtful that any evidence exists where the trustee was informed that the proposed indorsement or assignment involved a loan and a pool which was five years past the cutoff, already declared in default and which failed to meet the formal terms of assignment set forth in the PSA. A deposition upon written questions or oral deposition might clear the matter up by directing the right questions to the right person designated to be the person who represents the entity that claims to manage the SPV (REMIC) pool. In order to accomplish that, prior questions must be asked and answered as to the identity of such individuals and entities “with sufficient specificity such that they can be identified in subsequent demands for discovery or the issuance of a subpoena.”

Throughout this process, the defender in foreclosure must be ever vigilant in maintaining control of the narrative lest the other side wrest control and redirect the Judge to the allegation (without any evidence in the record) that the debt exists (or worse, has been admitted), the default occurred (or worse, has been admitted) and that the pretender is the lender (or worse, has been admitted as such).

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We Are Drowning in False Debt While Realtors Push “Recovery”

Posted on May 28, 2012 by Neil Garfield

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Editor’s Comment:

The figures keep coming in while the words keep coming out the mouths of bankers and realtors. The figures don’t match the words. The net result is that the facts show that we are literally drowning in debt, and we see what happens as a result of such conditions with a mere glance at Europe. They are sinking like a stone, and while we look prettier to investors it is only when we are compared to other places — definitely not because we have a strong economy.

Iceland and other “players” crashed but stayed out of the EU and stayed away from the far flung central banking sleeping arrangements with Banks. Iceland knows that banks got us into this and that if there is any way out, it must be the banks that either lead their way out or get nationalized so their assets can take the hit of these losses. In Phoenix alone, we have $39 BILLION in negative equity. 

This negative equity was and remains illusory. Iceland cut the household debt in each home by 25% or more and is conitinuing to do so. The result? They are the only country with the only currency that is truly recovering and coming back to real values. What do we have? We have inflated property appraisals that STILL dominate the marketplace. 

The absence of any sense of reality is all around us in Arizona. I know of one case where Coldwell Banker, easily one of the most prestigious realtors, actually put lots up for sale asking $40,000 when the tax assessed value is barely one quarter of that amount and the area has now dried up — no natural water supply without drilling thousands of feet or hauling water in by truck. Residents in the area and realtors who are local say the property could fetch at most $10,000 and is unsalable until the water problem is solved. And here in Arizona we know the water problem is not only not going to get solved, it is going to get worse because of the “theory” of global climate change.

This “underwater” mess is political not financial. It wouldn’t exist but for the willingness of the government to stay in bed with banks. The appraisals they used to grant the loan were intentionally  falsified to “get rid of” as much money as possible in the shortest time possible, to complete deals and justify taking trillions of dollars from investors. The appraisals at closing were impossibly high by any normal industry accepted standard and appraisers admit it and even predicted it it in 2005. Banks coerced appraisers into inflating appraisers by giving them a choice — either come in with appraisals $20,000 over the contract price or they will never get work again.

The borrower relied upon this appaisal, believing that the property value was so hot that he or she couldn’t lose and that in fact, with values going so high, it would be foolish not to get in on the market before it went all the way out of reach. And of course there were the banks who like the cavalry came in and provided the apparently cheap money for people to buy or refinance their homes. The cavalry was in a movie somewhere, certainly not in the marketplace. It was more like the hordes of invaders in ancient Europe chopping off the heads of men, women and children and as they lie dying they were unaware of what had happened to them and that they were as good as dead.

So many people have chosen death. They see the writing on the wall that once was their own, and they cannot cope with the loss of home, lifestyle and dignity. They take their own lives and the lives of those around them. Citi contributes a few million to a suicide hotline as a PR stunt while they are causing the distress through foreclosure and collection procedures that are illegal, fraudlent, and based upon forged, robosigned documents with robo-notarized attestations  that the recording offices still won’t reject and the judges still accept.

There is no real real economic recovery without reality in housing. Values never went up — but prices did. Now the prices are returning back to the values left in the dust during the big bank push to “get rid of” money advanced by investors. It’s a game to the banks where the homeowner is the lowly deadbeat, the bottom of the ladder, a person who doesn’t deserve dignity or relief like the bank bailouts. When a person gets financial relief from the government it is a “handout.” When big banks and big business get relief and subsidies in industries that were already profitable, it is called economic policy. REALITY CHECK: They are both getting a “handout” and economic policy is driven by politics instead of common sense. French arisocrats found that out too late as their heads rolled off the guillotine platforms.  

But Iceland and other places in the world have taught us that in reality those regarded as deadbeats are atually people who were herded into middle class debt traps created by the banks and that if they follow the simple precept of restoring victims to their previous state, by giving restitution to these victims, the entire economy recovers, housing recovers and everything resumes normal activity that is dominated by normal market forces instead of the force of huge banks coercing society and government by myths like too big too fail. The Banks are doing just fine in Iceland, the financial system is intact and the government policy is based upon the good of the society as a whole rather the banks who might destroy us. Appeasement is not a policy it is a surrender to the banks.

Cities with the Most Homes Underwater

Michael B. Sauter

Mortgage debt continues to be a major issue in the United States, nearly six years after home prices peaked, according to a report released Thursday by online real estate site Zillow. Americans continue to owe more on their homes than they are worth. Nearly one in three mortgages are underwater, amounting to more than 15 million homes and a total negative equity of $1.19 trillion.

In some of America’s largest metropolitan regions, however, the housing crash dealt a far worse blow. In these areas — most of which are in California, Florida and the southwest — home values were cut in half, unemployment skyrocketed, and 50% to 70% of borrowers now find themselves with a home worth less than the value of their mortgage. 24/7 Wall St. reviewed the 100 largest housing markets and identified the 10 with the highest percentage of homes with underwater mortgages. Svenja Gudell, senior economist at Zillow, explained in an interview with 24/7 Wall St. that the markets with the highest rates of underwater borrowers are in trouble now because of the rampant growth seen in these cities prior to the recession. Once home prices peaked, which was primarily in late 2005 through 2006, all but one of these 10 housing markets lost at least 50% of their median home value.

Making matters worse for families with high negative equity in these markets is the increased unemployment. “If you have a whole lot of unemployment in an area, you’re more likely to see home values continue to decline in the area as well,” says Gudell. While in 2007 many of these markets had average or below average unemployment rates, the recession took a heavy toll on their economies. By 2011, eight of the 10 markets had unemployment rates above 10%, and three — all in California — had unemployment rates of above 16%, nearly double the national average.

24/7 Wall St. used Zillow’s first-quarter 2012 negative equity report to identify the 10 housing markets — out of the 100 largest metropolitan statistical areas in the country — with the highest percentage of underwater mortgages. Zillow also provided us with the decline in home values in these markets from prerecession peak values, the total negative equity value in these markets and the percentage of homes underwater that have been delinquent on payments for 90 days or more.

These are the cities with the most homes underwater.

10. Orlando, Fla.
> Pct. homes w/underwater mortgages: 53.9%
> Number of mortgages underwater: 205,369
> Median home value: 113,800
> Decline from prerecession peak: -55.9%
> Unemployment rate: 10.4% (25th highest)

In 2012, Orlando moved into the top 10 underwater housing markets, bumping Fresno, Calif., to number 11. From its prerecession peak in June 2006, home prices fell 55.9% to $113,800, a loss of roughly $90,000. In 2007, the unemployment rate in the region was just 3.7%, the 17th-lowest rate among the 100 largest metros. By 2011, that rate had increased to 10.4%, the 25th highest. As of the first quarter of this year, there were more than 205,000 underwater mortgages in the region, with total negative equity of $16.7 billion.

9. Atlanta, Ga.
> Pct. homes w/underwater mortgages: 55.5%
> Number of mortgages underwater: 581,831
> Median home value: $107,500
> Decline from prerecession peak: 38.8%
> Unemployment rate: 9.6% (37th highest)

Atlanta is the largest city on this list and the eighth-largest metropolitan area in the U.S. But of all the cities with the most underwater mortgages, it has the lowest median home value. In the area, 55.5% of homes have a negative equity value. With more than 500,000 homes with underwater mortgages, the city’s total negative home equity is in excess of $38 billion. Over 48,000 of these underwater homeowners, or nearly 10%, are delinquent by at least 90 days in their payments, which is also especially troubling. With home prices down 38.8% since June, 2007, the Atlanta area certainly qualifies as one of the cities hit hardest by the 2008 housing crisis.

8. Phoenix, Ariz.
> Pct. homes w/underwater mortgages: 55.5%
> Number of mortgages underwater: 430,527
> Median home value: $128,000
> Decline from prerecession peak: 54.2%
> Unemployment rate: 8.6% (44th lowest)

At 55.5%, Phoenix has the same percentage of borrowers with underwater mortgages as Atlanta. Though Phoenix’s median home value is $21,500 greater than Atlanta’s, it experienced a far-greater decline in home prices from their prerecession peak in June 2007 of 54.2%. This has led to a total negative equity value of almost $39 billion. The unemployment rate also has skyrocketed in the Phoenix area from 3.2% in 2007 to 8.6% in 2011.

7. Visalia, Calif.
> Pct. homes w/underwater mortgages: 57.7%
> Number of mortgages underwater: 33,220
> Median home value: $110,500
> Decline from prerecession peak: 51.7%
> Unemployment rate: 16.6% (3rd highest)

Visalia is far smaller than Atlanta or Phoenix and has less than a 10th the number of homes with underwater mortgages. Nonetheless, the city has been especially damaged by a poor housing market. Home values have fallen dramatically since before the recession, and the unemployment rate, at 16.6% in the first quarter of 2012, is third-highest among the 100 largest metropolitan statistical areas, behind only Stockton and Modesto. Presently, almost 58% of homes are underwater, with these homes carrying a total negative equity of $2.6 billion dollars.

6. Vallejo, Calif.
> Pct. homes w/underwater mortgages: 60.3%
> Number of mortgages underwater: 44,526
> Median home value: $186,200
> Decline from prerecession peak: 60.6%
> Unemployment rate: 11.4% (16th highest)

In the Vallejo metropolitan area, more than 60% of the region’s 73,800 homeowners are underwater. This is largely due to a 60.6% decline in home values in the region from prerecession highs. Through the first quarter of this year, homes in the region fell from a median value of more than $300,000 to just $186,200. Of those homes with underwater mortgages, more than 10% have been delinquent on mortgage payments for 90 days or more.

5. Stockton, Calif.
> Pct. homes w/underwater mortgages: 60.3%
> Number of mortgages underwater: 60,349
> Median home value: $146,500
> Decline from prerecession peak: 64.3%
> Unemployment rate: 16.8% (tied for highest)

With an unemployment rate of 16.8%, Stockton is tied for the highest rate among the 100 largest metropolitan areas. Few cities have been hit harder by the sinking of the housing market than Stockton, where 60.3% of home mortgages are underwater. Though there are only 100,014 houses with mortgages in Stockton, 60,348 of these are underwater and have a total negative home equity of slightly more than $6.9 billion. Meaning, on average, homeowners in Stockton owe at least $100,000 more than their homes are worth.

4. Modesto, Calif.
> Pct. homes w/underwater mortgages: 60.3%
> Number of mortgages underwater: 46,598
> Median home value: $130,600
> Decline from prerecession peak: 64.5%
> Unemployment rate: 16.8% (tied for highest)

Since peaking in December 2005, home prices in Modesto have plunged 64.5%. This is the largest collapse in prices of any large metro area examined. As a result, 46,598 of 77,222 home mortgages in Modesto are underwater. Meanwhile, the unemployment rate rose to 16.8% in 2011. This number was 7.9 percentage points above the national average of 8.9% and almost double Modesto’s 2007 unemployment rate of 8.7%.

3. Bakersfield, Calif.
> Pct. homes w/underwater mortgages: 60.5%
> Number of mortgages underwater: 70,947
> Median home value: $116,700
> Decline from prerecession peak: 57.0%
> Unemployment rate: 14.9% (5th highest)

From its peak in May 2006, the median home value in Bakersfield has plummeted from more than $200,000 to just $116,700, or a 57% loss of value. From 2007 through 2011, the unemployment rate increased from 8.2% to 14.9% — the fifth-highest rate in the country. To date, more than 70,000 homes in the region have underwater mortgages, with total negative equity of just over $6 billion.

2. Reno, Nev.
> Pct. homes w/underwater mortgages: 61.7%
> Number of mortgages underwater: 46,115
> Median home value: $150,600
> Decline from prerecession peak: 58.3%
> Unemployment rate: 13.1%

There are fewer than 75,000 households in Reno, Nevada. Yet 46,115 home mortgages in the city are underwater, accounting for 61.7% of mortgaged homes. From January 2006 through the first quarter of 2012, home prices were more than halved, and negative home equity reached $4.39 billion. Additionally, the unemployment rate almost tripled in rising from 4.5% in 2007 to 13.1% by 2011. In 2007, Reno had the 54th-worst unemployment rate among the 100 largest metros. By 2007, Reno had the eighth-worst unemployment rate.

1. Las Vegas, Nev.
> Pct. homes w/underwater mortgages: 71%
> Number of mortgages underwater: 236,817
> Median home value: $111,600
> Decline from prerecession peak: 63.2%
> Unemployment rate: 13.9%

At 71%, no city has a greater percentage of homes with underwater mortgages than Las Vegas. The area with the second-worst percentage of underwater mortgages, Reno, has less than 62% mortgages with negative. The corrosive effects the housing crisis had on Las Vegas are evident in the more than 200,000 home mortgages that are underwater, 14.3% of which are at least 90 days delinquent on payments. Additionally, home values have dropped 63.2% from their prerecession peak, the third-greatest decline among the nation’s 100 largest metropolitan areas. Largely because of the collapse of the area’s housing market, unemployment in the Las Vegas area has soared. In 2007, the unemployment rate was 4.7%, only marginally different from the nation’s 4.6% rate. Yet by 2011, the unemployment rate had increased to 13.9%, considerably higher than the nationwide 8.9% unemployment rat.e.


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Whose Risk Is It Anyway?

Posted on May 9, 2012 by Neil Garfield

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Editor’s Comment:

Now that securities analysts are looking at investments the way I was trained to see them, it is now possible to see the way the mortgage bond market should have operated, why it didn’t operate according to industry standards and why it is continuing to drain the economies of the U.S. Economy and the economies and societies of the western world.

There are two general types of risk in any investment. The first type is return of principal and the second type is the rate of return. The rate of return is the amount of money paid to the investor in addition to the principal. In today’s markets the two main contenders for investment money are equities (stocks) and liabilities (bonds). The price of an investment depends upon risk more than anything else: “is this price worth the risk that I will get my money back along with the targeted rate of return (interest in the case of bonds).

The inescapable rule has always been and always will be that if an issuer is seeking investment capital they must pay higher and higher interest rates for every degree of increased risk. If the risk is return of capital they are junk bonds. If the risk is that the rate of return (interest) on bonds may vary from the stated or targeted return, that too will increase the cost of capital to those issuers seeking investment capital.

My conclusion is that mortgage bonds have so destabilised the markets and confidence in the bond markets, that they are difficult to evaluate using common sense industry standards. Sure enough we see here that the slightest move away from the bonds with the absolute lowest risk of return of principal results in huge jumps in the cost of capital. And if the issuer of that bond is downgraded to a higher risk, their bonds will take a beating. Each beating amounts to a reduction in the open Market price paid for the bond — which means that the investor who bought at or near par value is now considered likely to receive less of his principal back and most probably will take a “haircut” on both principal and interest.

The obvious solution is to remove mortgage bonds from the bond Market through whatever means are necessary and to show the world that such bogus bonds will not be tolerated in the U.S. Or anywhere else. Yet we continue to kick the can down the road. Not only have we failed to give recognition to what world bankers have understood for four years — that mortgage bonds are worthless — we compound the problem by having government entities sell these “securities” under circumstances that ought to land any issuer or broker in jail.

The U.S. Government and the U.S. treasury have become co-conspirators in the largest economic crime in human history and to add insult to injury they think we are all too stupid to see it. Francois Hollander as the new president of France stands as living testimony that the people will neither be apathetic nor stupid on the issue of the Banks and finance. As leader of the socialist party, the election if this marginalised candidate sent Sarkozy packing for Hollande’s arrival on May 16, 2012, which is less time than the ordinary eviction takes in the United States.

Pretending the mortgage bonds have value is hurting us. Failing to get restitution to the victims of this fraud is hurting us even worse because it is retarding our efforts at economic recovery. And the failure of all three branches of government to assure that this fraud will end, that stolen property and money will be returned, and that criminal perpetrators will go to jail is perpetuating a widening income inequality that often presages social upheaval. If we keep going like this, the United States of America might become a confederation of regions. China will become the next bully on the block and we will all be learning mandarin whether we want to or not.

How to Play the Bond Market Now

Many pros are bracing for higher interest rates but are willing to shoulder some risk of defaults

By MICHAEL A. POLLOCK

Bond investors, pick your poison.

Interest rates are pitifully low for old standbys like Treasurys and highly rated corporate bonds. But the risk factor increases so rapidly the more one tries to reach for higher returns that it is hard these days to know how to allocate fixed-income dollars. Before investing, one has to carefully weigh and compare risks including rising rates, possible defaults, currency swings and liquidity.

To get the best balance of risk and return, the answer may be mixing various types of taxable and municipal bonds for maximum diversification.

In the current climate, many pros also suggest that investors say yes to moderate credit risk but limit their exposure to an eventual rise in rates.

Here’s how to strike a good balance between risk and reward in today’s bond market:

Know the two basic types of bond risk and how those risks compare

Many people mistakenly believe bonds are entirely safe. Actually, bondholders continually face two major threats to the value of their investments: interest-rate risk and credit risk.

The first stems from expectations that stronger economic activity will fan inflation, eroding returns on securities that pay fixed rates of interest—as most bonds do. Such worries can spark selling. And as prices fall, that pushes up yields, which move the opposite way. You might not be affected if you hold individual bonds and don’t sell before maturity, although rising yields do entail an opportunity cost: You’re stuck with low rates while newer securities would offer better returns. But if you own a bond fund, the risk is greater: Funds don’t have a final maturity and lose value as long as rates are rising.

The other key concern, credit risk, results from fears that a bond issuer can’t make interest payments or repay principal at maturity. The trade-off is higher-risk issuers have to pay higher interest to lure bond buyers, boosting investors’ income if the bond doesn’t go bad.

Robert Hall, a fixed-income fund manager at Boston-based MFS Investment Management, is among those who say it makes sense now to base bond-investment decisions more on credit risk than on rate risk.

Most bond professionals believe rates are going to climb eventually. But “trying to anticipate rates has been a losing game,” says Mr. Hall. During the economic recovery so far, U.S. rates have remained near historic lows because of strong global demand for lower-risk investments and central-bank actions to keep rates low in order to spark growth.

Assessing an issuer’s credit risk is an easier exercise, by comparison. “You can get your hands around credit risk” by scrutinizing an issuer’s financial reports, Mr. Hall says.

Some investors have been taking more credit risk this year. According to fund tracker Morningstar Inc., MORN -0.66% high-yield funds—which hold below-investment-grade, or “junk,” bonds—attracted nearly $15 billion through March. Tax-exempt and emerging-markets funds, where credit risk also plays a big role, saw good inflows, too.

To temper rate risk, climb lower on the corporate credit ladder.

Corporate bonds are rated according to perceived default risk. And the more default risk a bond carries, the less it tends to trade in sync with U.S. Treasurys. That means a portfolio of lower-rated bonds isn’t as vulnerable to any broad rise in rates.

Currently, 10-year investment-grade corporate bonds yield around 3%, or about one percentage point over 10-year Treasurys. That yield premium doesn’t adequately compensate for the principal loss they could suffer if rates were to spike, says Mr. Hall of MFS.

He arrives at this conclusion by doing some basic bond math. This involves computing a bond’s so-called duration, or interest-rate sensitivity, which is determined by its yield and time left until maturation. For a highly rated 10-year corporate bond, the sensitivity measure is about 7. If you multiply 7 by a hypothetical percentage-point increase in yields, you get the amount by which the bond’s price is likely to fall in response.

So, for the 10-year corporate in question, if rates rose by one percentage point, the impact would be a 7% decline in the value of your investment before any interest is paid.

But if you move lower on the ratings ladder to double B, the top tier for high-yield, below-investment-grade bonds, you’ll get around 6% to 7% in yield and a rate sensitivity around 4. If yields rose one percentage point, such bonds might still have a positive return after interest.

Another reason to own lower-rated corporate issues is that default risk has been falling, says Sabur Moini, a high-yield bond manager at Payden & Rygel, Los Angeles. As more investors have warmed to lower-rated bonds, their issuers “have done a very good job at reducing debt, keeping costs low and building up cash balances,” he says.

Mix in some municipals for possible tax savings.

Last year, muni prices plummeted as investors fled the sector amid fears of surging defaults by financially strapped local governments. Now, although prices have recovered somewhat, munis still offer very good value, says Dan Genter, who heads RNC Genter Capital Management in Los Angeles.

The interest that munis pay is exempt from federal income tax, and generally also from state tax in the state of issuance, so munis historically have yielded only about three-fourths as much as taxable Treasurys. But in an unusual situation, munis now yield about the same as Treasurys. That makes them cheap—not only to people in the top tax bracket, but to everyone, says Mr. Genter.

At around 2.5%, the current yield of top-quality, intermediate-maturity munis is the after-tax equivalent of nearly 4% on a taxable bond for an investor with a 33% marginal federal tax rate. The after-tax equivalent could be higher if federal tax rates increase next year, as scheduled under current law.

As muni investors have been focusing more on credit risk, the market has been trading less in sync with Treasurys. That means munis other than those with long maturities could offer some protection against any broad rise in Treasury yields, says John Miller, co-head of global fixed income at Chicago-based Nuveen Asset Management.

Illustrating the divergence, Nuveen All-American Municipal Bond returned 5.1% in the first four months of 2012, even after Treasury rates blipped higher in March. In contrast, the iShares Barclays 7-10 Year Treasury IEF -0.02% ETF returned just 0.6%, according to Morningstar.

Own emerging-markets bonds for yield and diversification.

Bonds of emerging-markets nations such as Brazil and Malaysia have yields five percentage points or more above those of government bonds in developed countries. And owning such bonds essentially means you are lending money to governments that are in a stronger position to repay it than governments of many developed countries, says Robert Stewart, a managing director and emerging-markets specialist at J.P. Morgan Funds in London.

The chief downside to these bonds is their volatility. These nations may have stronger growth prospects and smaller debt burdens than the U.S., for example. But at times of financial uncertainty, investors tend to rush back to the perceived safety of U.S. Treasurys.

Last September, as Europe’s financial woes prompted a flight to safety, the average emerging-markets bond fund tracked by Morningstar posted a negative 7.5% return for the month.

The answer for many investors is to add a modest helping of emerging-markets bonds to your plate—perhaps around 5% to 10% of your overall bond allocation, says Mr. Stewart.

Volatility-averse investors should choose a fund that invests mostly in U.S. dollar-denominated bonds because in uncertain times, bonds denominated in local currencies may be hurt more by flight to safety than those issued in U.S. dollars.

For instance, about 90% of the bonds owned by TCW Emerging Markets Income are denominated in dollars. The fund, which yields 6.5%, has large holdings of bonds issued in Brazil, Mexico and Russia.

To simplify things, consider funds with a diverse mix of securities.

Because institutional players dominate the credit markets, people with less money to invest who want credit exposure are usually better off owning mutual funds than individual bonds. Funds offer much better liquidity than individual corporate bonds, meaning that it is easier to buy and sell a position.

You could get moderate credit exposure through a fund in Morningstar’s multisector bond-fund grouping. Such funds invest in a mix of U.S. government, corporate and high-yield securities and periodically adjust holdings based on market conditions and manager expectations. Multisector funds also may have some holdings of non-U.S. bonds.

Among strongly performing multisector funds, Loomis Sayles Bond recently had about 60% of its holdings in corporate debt securities for an average portfolio credit rating of double-B and a moderate interest-rate sensitivity of 5.5. The fund also had about a third of its portfolio in non-U.S. securities. Over the 10 years through April, it ranks in the top 6% of Morningstar’s multisector group, with an average annual total return of 10%.

Michael Collins, who oversees multisector fund strategies at Prudential Investments, believes it is unclear whether U.S. rates will rise significantly in the near future. Still, in the funds he helps manage, Mr. Collins has been loading up on high-yield bonds because of the cushion they can provide against rising rates. Says Mr. Collins, “High-quality bonds don’t pay much, and you potentially have a lot of downside there.”

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LIQUIDITY TRAP CONTINUES TO STALL RECOVERY

Posted on March 16, 2011 by Neil Garfield

COMBO Title and Securitization Search, Report, Documents, Analysis & Commentary SEE LIVINGLIES LITIGATION SUPPORT AT LUMINAQ.COM

SEE Liquidity_trap

“This is a call for application of existing law, not for the ideological shifting of wealth. If people get their cars and houses back that were taken illegally, we will have the capacity to invest, to restart commerce, and prosper. If we keep people enslaved in fictitious debt, we will have succeeded in destroying the promise of the American democratic experiment. Our system is based upon the ultimate power being with the people who are governed, not with the people who do the governing. Somehow we lost that and instead of the government being fearful of public reaction, the people are fearful of government reaction. We need to “man-up” or “citizen-up”, take back that power, and apply existing laws without malice or ideological agendas that change our constitution.”

“The liquidity trap, in Keynesian economics, is a situation where monetary policy is unable to stimulate an economy, either through lowering interest rates or increasing the money supply. Liquidity traps typically occur when expectations of adverse events (e.g., deflation, insufficient aggregate demand, or civil or international war) make persons with liquid assets unwilling to invest.” Wikipedia

EDITOR’S COMMENT: In plain language our status quo is that nobody is investing in the economy to the degree necessary to stimulate an economic recovery. Fiscal or monetary policy from the Federal Reserve and U.S. Treasury can’t do anything about it because their control over monetary supply and the financial industry has been all but eliminated. Allowing the fake mortgage bonds and fake mortgages to be treated as though they had real value grants a 10:1 advantage to Wall Street over government. The nominal value and market value, as traded currently, of derivatives based upon the receivables or value derived from loans supposedly backed by mortgages is up to ten times more than the current monetary supply coming from government. Wall Street has issued more currency than the government, so THEY control monetary and fiscal policy.

In short, Wall Street is running the show because we let them create “currency” out of the bogus notes and mortgages, the derivatives, the mortgage bonds, and all the other contracts and hedge products — all based upon a fictitious scheme of “securitization” where there were no actual transfers and where there were no actual binding contracts between the real lenders and the real borrowers.

Yet the myth persists and is nearly universally accepted that if we let those false instruments fall back to earth, the entire financial system will crash. Scare tactics. This is no longer a contest between people with conflicting projections. The reality is upon us. Wall Street has all the investment capital  to rebuild infrastructure, create jobs, educate our workers, stimulate innovation, and put America back on track actually making physical objects you can touch or performing services that people want. Wall Street has it because we let them have it even though they achieved this status by violating every law of, federal and state imaginable, even though they lied, cheated and continue to steal in the “foreclosure” market.

Our system lacks credibility — otherwise those with money would be investing in it. They are not investing and they are not lending for one simple reason — they are doing better trading paper amongst themselves and creating fictitious profits which is increasing the fictitious wealth of the top2,000 people in America. We lack credibility because we are not telling the truth and we are not owning up to the fact that we were captured in a coup d’etat that was quietly achieved by Wall Street, our new government.

We lack credibility because as long as that condition persists, we won’t have a real economy of manufacturing and services. It’s not longer a prediction. It’s now a fact. And the people we call our “government” are merely cogs in a wheel taking orders from a “higher power” than the constitution. They take their orders from Wall Street.

No, this is not a call for socialism. It isn’t socialism or communism to take away a stolen car and return it to its rightful owner — but it it IS redistribution of wealth. That is why government exists — to make sure the bully in the school yard doesn’t grab everyone’s lunch and scream “Mine!”

This is a call for application of existing law, not for the ideological shifting of wealth. If people get their cars and houses back that were taken illegally, we will have the capacity to invest, to restart commerce, and prosper. If we keep people enslaved in fictitious debt, we will have succeeded in destroying the promise of the American democratic experiment. Our system is based upon the ultimate power being with the people who are governed, not with the people who do the governing. Somehow we lost that and instead of the government being fearful of public reaction, the people are fearful of government reaction. We need to “man-up” or “citizen-up”, take back that power, and apply existing laws without malice or ideological agendas that change our constitution.

LLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLL

Yes, We’re In A Liquidity Trap

Some comments on various blog posts ask what evidence we have that liquidity trap economics is any different from normal economics. Um, the answer is staring us in the face: the failure of interest rates to rise despite very large budget deficits:

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If you had told most people, back in 2007, that the federal government would soon be running budget deficits in the vicinity of 10 percent of GDP, most of them would have predicted soaring interest rates. In fact, quite a few people did predict just that — and in some cases lost a lot of money for their investors.

But it hasn’t happened. Short rates have stayed near zero; long rates have fluctuated with changing views about the prospects for recovery, but stayed consistently below historical norms. That’s exactly what those of us who understood liquidity-trap economics predicted, right from the beginning.

I don’t know what more evidence you could ask for. After all, interest rates are what the liquidity trap is all about.

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