Why the Fed Can’t Get it Right


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Editor’s Analysis and Comments: Bloomberg reports this morning that “Fed Flummoxed by Mortgage Yield Gap Refusing to Shrink.” (see link below)

In normal times lowering the Fed Funds rate and providing other incentives to banks always produced more lending and more economic activity. Bernanke doesn’t seem to understand the answer: these are not normal times and the cancerous fake securitization scheme that served as the platform for the largest PONZI scheme in human history is still metastasizing.

Why wouldn’t banks take advantage of a larger spread in the Fed funds rate versus the mortgage lending rates. Under the old school times that would automatically go to the bottom line of lending banks as increased profits. If we put aside the conspiracy theories that the banks are attempting to take down the country we are left with one inevitable conclusion: in the “new financial system” (sounds like the “new economy” of the 1990’s) the banks have concluded there would be no increase in profit. In fact one would be left to the probable conclusion that somehow they would face a loss or risk of loss that wasn’t present in the good old days.

Using conventional economic theory Bernanke is arriving at the conclusion that the spread is not large enough for banks to take on the business of lending in a dubious economic environment. But that is the point — conventional economic theory doesn’t work in the current financial environment. With housing prices at very low levels and the probability that they probably won’t decline much more, conventional risk management would provide more than enough profit for lending to be robust.

When Bernanke takes off the blinders, he will see that the markets are so interwoven with the false assumptions that the mortgage loans were securitized, that there is nothing the Fed can do in terms of fiscal policy that would even make a dent in our problems. $700 trillion+ in nominal derivatives are “out there” probably having no value at all if one were the legally trace the transactions. The real money in the U.S. (as opposed to these “cash equivalent” derivatives) is less than 5% of the total nominal value of the shadow banking system which out of sheer apparent size dwarfs the world banks including  the Fed.

As early as October of 2007 I said on these pages that this was outside the control of Fed fiscal policy because the amount of money affected by the Fed is a tiny fraction of the amount of apparent money generated by shadow banking.

Oddly the only place where this is going to be addressed is in the court system where people bear down on Deny and Discover and demand an accounting from the Master Servicer, Trustee and all related parties for all transactions affecting the loan receivable due to the investors (pension funds). The banks know full well that many or most of the assets they are reporting for reserve and capital requirements or completely false.

Just look at any investor lawsuit that says you promised us a mortgage backed bond that was triple A rated and insured. What you have given us are lies. We have no bonds that are worth anything because the bonds are not truly mortgage backed. The insurance and hedges you purchased with our money were made payable to you, Mr. Wall Street banker, instead of us. The market values and loan viability were completely false as reported, and even if you gave us the mortgages they are unenforceable.

The Banks are responding with “we are enforcing them, what are you talking about.” But the lawyers for most of the investors and some of the borrowers are beginning to see through this morass of lies. They know the notes and mortgages are not enforceable except by brute force and intimidation in and out of the courtroom.

If the deals were done straight up, the investor would have received a mortgage backed bond. The bond, issued by a pool of assets usually organized into a “trust” would have been the payee on the notes at origination and the secured party in the mortgages and deeds of trust. If the loan was acquired after origination by a real lender (not a table funded loan) then an assignment would have been immediately recorded with notice to the borrower that the pool owned his loan.

In a real securitization deal, the transaction in which the pool funded the origination or purchase of the loan would be able to to show proof of payment very easily — but in court, we find that when the Judge enters an order requiring the Banks to open up their books the cases settle “confidentially” for pennies on the dollar.

The entire TBTF (Too Big to Fail) doctrine is a false doctrine but nonetheless driving fiscal and economic policy in this country. Those banks are only too big if they are continued to be allowed to falsely report their assets as if they owned the bonds or loans.

Reinstate generally accepted accounting principles and the shadow banking assets deflate like a balloon with the air let out of it. $700 trillion becomes more like $13 trillion — and then the crap hits the fan for the big banks who are inundated with claims. 7,000 community banks, savings banks and credit union with the same access to electronic funds transfer and internet banking as any other bank, large or small, stand ready to pick up the pieces.

Homeowner relief through reduction of household debt would provide a gigantic financial stimulus to the economy bring back tax revenue that would completely alter the landscape of the deficit debate. The financial markets would return to free trading markets freed from the corner on “money” and corner on banking that the mega banks achieved only through lies, smoke and mirrors.

The fallout from the great recession will be with us for years to come no matter what we do. But the recovery will be far more robust if we dealt with the truth about the shadow banking system created out of exotic instruments based upon consumer debt that was falsified, illegally closed, deftly covered up with false assignments and endorsements.

While we wait for the shoe to drop when Bernanke and his associates can no longer ignore the short plain facts of this monster storm, we have no choice but to save homes, one home at a time, still fighting a battle in which the borrower is more often the losing party because of bad pleading, bad lawyering and bad judging. If you admit the debt, the note and the mortgage and then admit the default, no  amount of crafty arguments are going to give you the relief you need and to which you are entitled.

Fed Confused by Lack of Response from Banks on Yield Spread Offered

Foreclosure Strategists: Phx. Meeting Forcible Entry & Detainers

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Editor’s Comment:

Contact: Darrell Blomberg  Darrell@ForeclosureStrategists.com  602-686-7355

Meeting: Tuesday, May 29th, 2012, 7pm to 9pm

TOPIC: Forcible Entry & Detainers

Forcible Entry & Detainers (FED) supplemented by an in depth review of Trustee’s Deeds Upon Sale.  We’ll also look at how the Appellate courts are telling us to side-step the “can’t argue title” issue, removing a FED action to Federal Court, disclosures under A.R.S. §33-812 and the relationship of 1099s to Bona Fide Purchasers.

We meet every week!

Every Tuesday: 7:00pm to 9:00pm. Come early for dinner and socialization. (Food service is also available during meeting.)
Macayo’s Restaurant, 602-264-6141, 4001 N Central Ave, Phoenix, AZ 85012. (east side of Central Ave just south of Indian School Rd.)
COST: $10… and whatever you want to spend on yourself for dinner, helpings are generous so bring an appetite.
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(NOTE: There is a $2.49 charge for the Happy Hour Buffet unless you at least order a soft drink.)


I have set up a Facebook page. (I can’t believe it but it is necessary.) The page can be viewed at www.Facebook.com, look for and “friend” “Foreclosure Strategist.”

I’ll do my best to keep it updated with all of our events.

Please get the word out and send your friends and other homeowners the link.


I have set up a MeetUp page. The page can be viewed at www.MeetUp.com/ForeclosureStrategists. Please get the word out and send your friends and other homeowners the link.

May your opportunities be bountiful and your possibilities unlimited.

“Emissary of Observation”

Darrell Blomberg





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Connecting the dots... As third round of “quantitative easing” gets under way. When will the media, the Courts and frankly the BORROWERS finally get it? The Federal Reserve Bank has been buying Mortgage bonds using trillions of dollars, soon to be around $3.5 trillion, as reluctantly reported by the the FED (only after intense efforts by Bloomberg).

Think about it. The total amount on promissory notes signed by homeowners that the Banks say have gone into default is less than $3 trillion. So the FED is now the proud owner of mortgage bonds that at best represent ownership of failed mortgage loans and at worst —- nothing because the loans were never transferred to anyone, let alone the FED. The probability is that the FED is buying nothing at all – because it is the Banks that are “selling” the bonds. How could the Banks be selling the bonds when they already sold them to investors?
Think about it. If the Banks receive $3.5 trillion — that covers ALL of the notes that went into default. Yet those notes were “secured” by mortgage “liens” on what is now around $1.5 trillion worth of real property. So the “loss” is really only $2 trillion. NOTE: I do NOT concede that the “liens” were perfected nor do I concede that these were even mortgage transactions — as opposed to part of the issuance of securities in which the homeowners may have been unwitting “Issuers.”
Think about it. If the loss was $2 trillion, who lost that money? If the loss comes from ownership of mortgage bonds, then the loss belongs to pension fund and other institutional investors who “bought” the “mortgage-backed” bonds — unless there is some secret pact wherein the investors had purchased an OPTION rather than the mortgage bond itself. Either way it is not a loss for the Bank and it is a loss for investors.
Think about it. If the Banks did not lose money from the decline in value of mortgage bonds and if the banks did not lose money from so-called defaults on mortgage loans, and if the payment from the FED pays off the loss with 150 cents on the dollar, then the FED now has the loss and the Banks have a profit, by keeping the money rather than distributing it to investors. And the homeowner is left none the wiser that some allocable portion of that money should have reduced the amount due to his real creditor — the investor. And the taxpayer is left none the wiser that they have just given a subsidy to Banks who don’t deserve or need it, leaving future generations to figure it out.
Think about it. If the FED is taking the loss with no right of subrogation then the debts are retired. That means there is no payment due. If no payment is due one can hardly be forced to make the payment anyway. In fact, there can be no default on a payment that is not due. And THAT is why the Banks fight tooth and nail against discovery requests from homeowners in the form of qualified written requests, debt validation, or civil discovery procedures in court. The FULL accounting would trace ALL the money and reveal objects behind the curtain.
And THAT is why you need the FULL accounting of all financial transactions in which money exchanged before accepting the notion the mortgage is or ever was in default.
  • When it suits them, the Banks tell the investors “it’s your loss.”
  • When it suits them they tell the government or Federal Reserve “it’s your loss.”
  • When it suits them they tell the homeowner “it’s your loss.”
  • When it comes to taking losses on wild bets they tell their own shareholders “it’s your loss.”
  • But when it comes to taking proceeds of bailout, quantitative easing, insurance, credit default swaps they are perfectly willing to say anything to get that money — “it’s our loss.”
Think about it. The FED is paying the one party (intermediary Banks and brokers) that had no losses who are now getting the money on the sale of assets they don’t own based on defective mortgage loans that are probably worse than worthless because of exposure to liability for predatory and deceptive lending.

Dealers See Fed Buying $545 Billion Mortgage Bonds in QE3

Nov. 28 (Bloomberg) — The biggest bond dealers in the U.S. say the Federal Reserve is poised to start a new round of stimulus, injecting more money into the economy by purchasing mortgage securities instead of Treasuries.

Fed Chairman Ben S. Bernanke and his fellow policy makers, who bought $2.3 trillion of Treasury and mortgage-related bonds between 2008 and June, will start another program next quarter, 16 of the 21 primary dealers of U.S. government securities that trade with the central bank said in a Bloomberg News survey last week. The Fed may buy about $545 billion in home-loan debt, based on the median of the firms that provided estimates.

While mortgage rates are already at about record lows, housing continues to constrain the economy, with the National Association of Realtors saying in Washington last week that the median price of U.S. existing homes dropped 4.7 percent in October from a year ago. Borrowers with a 30-year conventional mortgage would save $40 billion to $50 billion annually in aggregate if they could all refinance into a new loan with a 3.75 percent rate, according to JPMorgan Chase & Co.

“We need to see a bottom in home prices,” said Shyam Rajan, an interest-rate strategist in New York at Bank of America Corp., a primary dealer, in a Nov. 22 telephone interview. “These are not numbers that are going to get down your unemployment rate,” which has held at or above 9 percent every month except two since May 2009, he said.

New Urgency

The company forecasts the Fed will buy $800 billion of securities, which may include Treasuries.

Efforts to bolster the economy are taking on new urgency with $1.2 trillion in automatic government spending cuts slated to begin in 2013. The Commerce Department said last week that gross domestic product expanded at a 2 percent annual rate in the third quarter, less than the 2.5 percent it originally projected, and Europe’s worsening debt crisis threatens to further curb global growth.

The Fed is taking the view that “even if U.S. fundamentals look to be relatively OK, we’ve got to keep our eye on any contagion from the European stresses,” Dominic Konstam, head of interest-rate strategy at the primary dealer Deutsche Bank AG in New York, said in a Nov. 22 telephone interview. “It’s in that context that they’re willing to do more.”

Treasuries rose last week on those concerns, with the 10-year yield dropping five basis points, or 0.05 percentage point, to 1.97 percent, according to Bloomberg Bond Trader prices. The yield rose 10 basis points to 2.06 percent today at 9:23 a.m. in New York. The 2 percent security due in November 2021 fell 7/8, or $8.75 per $1,000 face amount, to 99 13/32.

Inflation Outlook

Policy makers have scope to print more money to buy bonds in a third round of quantitative easing, or QE, as the outlook for inflation eases.

A measure of traders’ inflation expectations that the Fed uses to help determine monetary policy ended last week at 2.25 percent, down from this year’s high 3.23 percent on Aug. 1. The so-called five-year, five-year forward break-even rate, which projects what the pace of consumer-price increases will be for the five-year period starting in 2016, is below the 2.83 percent average since August 2007, the start of the credit crisis.

“There is a significant chance that QE3 will be deployed, especially in the form of MBS purchases, if inflation expectations fall enough,” Srini Ramaswamy and other debt strategists at JPMorgan in New York wrote in a Nov. 25 report.

Relative Growth

JPMorgan is one of the five dealers that don’t forecast the Fed will begin a third round of asset purchases to stimulate the economy. The others are UBS AG, Barclays Plc, Citigroup Inc. and Deutsche Bank.

After cutting its target interest rate for overnight loans between banks to a range of zero to 0.25 percent, the Fed bought about $1.7 trillion of government and mortgage debt during QE1 between December 2008 and March 2010, and purchased $600 billion of Treasuries between November 2010 and June through QE2.

The moves have helped. At 2.2 percent, U.S. GDP will expand more next year than any other Group of Seven nation except Japan, separate surveys of economists by Bloomberg show.

“Monetary policy is in part a confidence game,” said Chris Ahrens, head interest-rate strategist at UBS Securities LLC in Stamford, Connecticut. “At this point in time we don’t see the need for it, but if the situation were to evolve in a negative fashion they’re telling us they can come out and respond in a proactive fashion.”

‘Frustratingly Slow’

Minutes from the Nov. 1-2 meeting of the Fed’s Federal Open Market Committee showed some policy makers aren’t convinced the recovery will strengthen, saying the central bank should consider easing policy further.

“A few members indicated that they believed the economic outlook might warrant additional policy accommodation,” the Fed said in the minutes released Nov. 22 in Washington.

Bernanke, at a press conference after the meeting, said the “pace of progress is likely to be frustratingly slow,” while on Nov. 17 Fed Bank of New York President William C. Dudley said if the central bank opted to buy more bonds, “it might make sense” for much of those to consist of mortgage-backed securities to boost the housing market.

Mortgages were at the epicenter of the financial crisis that began in 2007 and resulted in more than $2 trillion in writedowns and losses at the world’s largest financial institutions based on data compiled by Bloomberg.

Sales of existing homes have averaged 4.97 million a month this year, little changed since 2008 and down from 6.52 million in 2007, according to the National Association of Realtors. The median price decreased to $162,500 in October from $170,600 a year earlier and from the record $230,300 in July 2006.

Housing Glut

At the current pace of sales it would take eight months to clear the inventory of available properties, compared with the average of 4.8 before 2007.

Fed purchases of mortgage bonds would dovetail with efforts by President Barack Obama, who has been promoting an initiative by the Federal Housing Finance Agency to let qualified homeowners refinance mortgages regardless of how much their houses have lost in value. The Home Affordable Refinance Program, or HARP, will eliminate some fees, trim others and waive some risk for lenders.

The difference between yields on Fannie Mae’s current-coupon 30-year fixed-rate securities, which influence loan rates, and 10-year Treasuries climbed to 121 basis points last week, from 84 basis points on Dec. 31, Bloomberg data show. The spread widened to 129 basis points in August, the most since March 2009.

‘Powerful Wildcard’

“The prospect of the Fed buying MBS under a QE3 program is a powerful wild card, and should limit the downside in the asset class,” the JPMorgan strategists wrote in their report last week. “Given attractive spreads currently, we recommend heading into 2012 with an overweight,” they said in reference to a strategy where investors own a greater percentage of a security or asset class than is contained in benchmark indexes.

Mortgage securities guaranteed by government-supported Fannie Mae and Freddie Mac or the federal agency Ginnie Mae have financed more than 90 percent of new home lending following the collapse of the non-agency market in 2007 and a retreat by banks. The agency mortgage-bond market accounts for $5.4 trillion of the $9.9 trillion in housing debt outstanding.

The Fed, which owns about $900 billion of the securities, said in September it will reinvest maturing housing debt into mortgage-backed bonds instead of Treasuries. MBS holdings represent about 40 percent of the Fed’s balance sheet, down from a peak of about 66 percent.

“If the Fed’s position in MBS grew under QE3 to half of its balance sheet, this would imply that they would have to purchase on the order of $500 billion,” the JPMorgan strategists wrote in their report. The Fed’s “decision to reinvest paydowns back into the mortgage market suggests a comfort level with owning mortgages that seems to have grown,” they wrote.

–With assistance from Jody Shenn and Susanne Walker in New York. Editors: Philip Revzin, Robert Burgess, Dennis Fitzgerald

To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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Is the New York Fed Making a Big Mistake?


You might think that getting rid of the FED is a good idea and if there are no changes in FED policy I might agree with you. I still maintain my optimistic and my hope.

Johnson, a well-known, well respected economist formerly with the IMF called the shots in advance, told us the consequences, told us the remedy and still we do nothing. Policy makers are tone deaf to the fact that we are still playing the same game with Wall Street,and that the “banks own the place.” (Senator Dick Durbin, Illinois). Johnson is joined by dozens of well-known and well respected economists and financial analysts who see us merrily speeding toward our doom. The average Joe and Jane on the street understands that we need to address the truth of this matter — we let Wall Street get out of hand and we are slow to put referees back on the field who understand the game.

The former home of our current Treasury secretary, the NY Federal Reserve, is leading the way on terms and data supplied strictly by Wall Street without regard to those of us who understand that things can get worse although it is difficult to imagine the scenario. Johnson is once again sounding the alarm. Is anyone listening? There is plenty to do including dismantling the behemoth monstrosities whose management doesn’t even possess the resources to track all the activities of any one, much less all, of the mega banks. If they are unmanageable they are clearly not regulatable (if that is a word). With “financial services” accounting for close to 50% of what we now count as our gross domestic product servicing an economy that seems to be doing less and less in real services and products, there is lot to do.

But instead of rolling our sleeves up and getting into the dirt to clean up the mess, the NY Federal Reserve continues the same path that led the FED and the country (along with the rest of the world) off a cliff. BOTTOM LINE: LIP SERVICE INSTEAD OF CORRECTIVE ACTION. PROGNOSIS: TERMINAL.

Like the famed Ostrich, our decision-makers are stuck in the sand examining one grain of sand at a time. The elephant in the living room is that proprietary currency, at the urging of Alan Greenspan while FED chairman, has out-paced genuine government currency 12:1, and the situation is getting worse.

Without tackling the challenging task of dismantling of the bank oligopoly, the amount of leverage the FED has on monetary, fiscal or economic policy is minimal. Do the math. Right now the Fed is busy supplying more money through purchases of Treasury bonds, made necessary because the government is out of money. The amount: $600 BILLION. Sounds like a lot of money, right? Wrong. The notional value of all proprietary currency is around one thousand times the size of the latest FED move, which places the effect at just around one-tenth of one percent.

Thus while Johnson and others cry out for reform that will do us some good, the FED is playing around with a few basis points like a $2 broker of yesteryear. In plain language we are still wandering off course without meaningful policy decisions being made by government. The “banks own the place” (Senator Durbin, Illinois) and we are sitting ducks in a zoo of animal analogies.


Today's Economist

Simon Johnson, the former chief economist at the International Monetary Fund, is the co-author of “13 Bankers.”

An uncomfortable dissonance is beginning to develop within the Federal Reserve.

On the one hand, current and former senior officials now generally agree with the proposition that our leading banks need more capital – that is, more equity relative to what they borrow. (The argument for this has been made most forcefully by Prof. Anat Admati and her distinguished colleagues.)

The language these officials use is vaguer than would be ideal, and they refuse to be drawn out on the precise numbers they have in mind. The Swiss National Bank, holding out for 19 percent capital, and the Bank of England, pushing for at least 20 percent capital, seem to be further ahead and much more confident of their case on this issue.

But an important split appears to be emerging within the Federal Reserve, with the Board of Governors (perhaps) and some regional Feds (definitely) tending to want higher capital levels, while the New York Fed is – incredibly – working hard to enable big banks actually to reduce their capital ratios (in the first instance by allowing them to pay increased dividends).

Officials at the New York Fed with whom I and others have spoken appear to be hardening their position against requiring big banks to maintain more capital (beyond the insufficient increases in the Basel III agreement), though no formal position has yet been taken. These officials will not speak on the record nor provide any details about their arguments or whatever evidence they have developed to support them.

So it is hard to know if any analytical basis exists for their evolving position. They have certainly put up no meaningful counterarguments to the powerful points made by Professor Admati and her colleagues – both in general and against allowing United States banks to increase their dividends now (see also this letter published in The Financial Times).

The single public document from the New York Fed on this issue is a working paper that appeared recently on its Web site. This paper simply assumes the answer it seeks: that higher capital requirements will lower growth, and it refuses to engage with the arguments and evidence to the contrary.

The empirical findings presented fall somewhere between weak and unbelievable. If this is the basis for policy making within the Federal Reserve System, I will be very surprised.

The key point is this. Given that the final capital requirements under Basel III remain to be set by the Fed – and top officials say they are still working on this – what’s the big rush to pay dividends? Retaining earnings (that is, not paying dividends) is the easiest way to build capital (shareholder equity) in the banks.

There is strong logic behind not paying dividends until capital is at or above the level needed for the future.

Without any substance on its side, the New York Fed is increasingly creating the perception that it is just doing what its key stakeholders – the big Wall Street banks – want.

Bankers traditionally dominate the boards of regional Feds. We can argue about whether this is a problem for most of them, but for the New York Fed the predominance of big Wall Street institutions has become a major concern.

At the bottom of the Web page listing its current board members, you can review who belonged to the board every year from 2000 to 2008. Note the presence of influential bankers in the past such as Richard Fuld (Lehman), Stephen Friedman (Goldman) and Sanford Weill (Citigroup). Their firm hand helped guide the New York Fed into the crisis of 2007-8.

The Dodd-Frank legislation reduced the power of big banks slightly in this context, so that the president of the New York Fed is no longer picked by Wall Street’s board representatives (as was Timothy F. Geithner, who was president of the New York Fed until being named Treasury secretary, and William Dudley, the current president and former Goldman Sachs executive).

But the current board of the New York Fed still includes Jamie Dimon, the head of JPMorgan Chase and an outspoken voice for allowing banks to operate with less capital by paying out dividends.

In fact, Mr. Dimon has a theory of “excess capital” in banks that is beyond bizarre – asserting that banks (or perhaps any companies) with strong equity financing will do “dumb things.” This is completely at odds with reality in the American economy, where many fast-growing and ultimately successful companies are financed entirely with equity.

If the New York Fed’s top thinkers have convincing reasons for not wanting to increase capital in our largest banks – if, for example, they agree with Mr. Dimon – they should come out and discuss this in public (and some evidence to support their thinking would be nice).

If the New York Fed were really pushing for higher dividends at this time — for example, by constructing a stress test to justify this action — it would be setting us up to mismanage credit, allowing the megabanks to misallocate resources during the good times and crash just as badly when the next downturn comes.

The top leadership of the New York Fed has a responsibility to engage constructively and openly in the technical debate. Yet some Federal Reserve officials act as if they have a constitutional right to run an independent central bank. This is not the case: Congress created the Fed, and Congress can amend how the Fed operates.

The legitimacy of the Federal Reserve System rests on its technical competence, its ability to remain above the political fray and the extent to which it can avoid being captured by special interests.

The danger that the New York Fed will fatally undermine the fragile credibility of the rest of the Federal Reserve System is very real.

Fed Policy Should Deal With Mortgages They Own

SOMEONE must see the absurdity here. Wall Street profits and bonuses are up “defying gravity.” Where is the money? I guess in the hands of Wall Street while the rest of the country languishes in debt and dim prospects of a recovery.  Show us the money. Where is it, Wall Street? what are you doing that is earning so much money? Or, as I suspect, are you simply ‘repatriating” money you stole during the mortgage run up when you stole part of the money you accepted from investors?

The FED bought mortgages. Or at least they bought mortgage securities which supposedly, according to pretender lenders in court, give them the right to foreclose. That sounds like the owner of a mortgage. The FED has already determined that those mortgages are bad in numerous ways, not the least of which is that the liens probably don’t exist. So the FED has demanded a refund from the banks who sold them this garbage on false pretenses. What a surprise, after lying to the investors, lying to the homeowners, they actually lied to the FED as well! Who would have thought?

MEMO TO FEDERAL RESERVE: If you need to supply the US Treasury with $600 billion then do it. But if you expect that to improve liquidity in the marketplace, stop kidding yourselves. You have made a demand for refund and they the banks are not going to do it. So, as owners of the mortgages, why doesn’t the FED settle the mortgages for what they are really worth. Go to the homeowners, using existing and new infrastructures to reach them, and if the mortgage lien is valid, make a deal. If the mortgage lien is not valid, make a deal. The resulting change in the homeowner’s net worth will be the same as a fiscal stimulus without the necessity of printing money.

If the mortgage liens are invalid, as I think they are, it is easy to prove by simply looking at the whatever REAL paperwork exists. Since the FED owns the mortgage bonds, there are no investors to settle with. Arriving at a new mortgage deal which the Fed can sell to Community Banks and Credit Unions, will more than offset the printing of new money. As was said in congressional hearings a couple of days ago we can either settle this mortgage mess rationally, or we can save the capital structure of the megabanks. We can’t do both. The validity of that comment seems to be unquestioned. THAT is an admission that the capital structure of the megabanks is vapor and sooner or later they will fall anyway.

Our society cannot withstand a 15 year recession. It can end now with three simple words: TELL THE TRUTH.

Allocating Bailout to YOUR LOAN

Editor’s Note: Here is the problem. As I explained to a Judge last week, if Aunt Alice pays off my obligation then the fact that someone still has the note is irrelevant. The note is unenforceable and should be returned as paid. That is because the note is EVIDENCE of the obligation, it isn’t THE obligation. And by the way the note is only one portion of the evidence of the obligation in a securitized loan. Using the note as the only evidence in a securitized loan is like paying for groceries with sea shells. They were once currency in some places, but they don’t go very far anymore.

The obligation rises when the money is funded to the borrower and extinguished when the creditor receives payment — regardless of who they receive the payment from (pardon the grammar).

The Judge agreed. (He had no choice, it is basic black letter law that is irrefutable). But his answer was that Aunt Alice wasn’t in the room saying she had paid the obligation. Yes, I said, that is right. And the reason is that we don’t know the name of Aunt Alice, but only that she exists and that she paid. And the reason that we don’t know is that the opposing side who DOES know Aunt Alice, won’t give us the information, even though the attorney for the borrower has been asking for it formally and informally through discovery for 9 months.

I should mention here that it was a motion for lift stay which is the equivalent of a motion for summary judgment. While Judges have discretion about evidence, they can’t make it up. And while legal presumptions apply the burden on the moving party in a motion to lift stay is to remove any conceivable doubt that they are the creditor, that the obligation is correctly stated and to do so through competent witnesses and authenticated business records, documents, recorded and otherwise. All motions for lift stay should be denied frankly because of thee existence of multiple stakeholders and the existence of multiple claims. Unless the motion for lift stay is predicated on proceeding with a judicial foreclosure, the motion for lift stay is the equivalent of circumventing due process and the right to be heard on the merits.

But I was able to say that the the PSA called for credit default swaps to be completed by the cutoff date and that obviously they have been paid in whole or in part. And I was able to say that AMBAC definitely made payments on this pool, but that the opposing side refused to allocate them to this loan. Now we have the FED hiding the payments it made on these pools enabling the opposing side (pretender lenders) to claim that they would like to give us the information but the Federal reserve won’t let them because there is an agreement not to disclose for 10 years notwithstanding the freedom of information act.

So we have Aunt Alice, Uncle Fred, Mom and Dad all paying the creditor thus reducing the obligation to nothing but the servicer, who has no knowledge of those payments, won’t credit them against the obligation because the servicer is only counting the payments from the debtor. And so the pretender lenders come in and foreclose on properties where they know third party payments have been made but not allocated and claim the loan is in default when some or all of the loan has been repaid.

Thus the loan is not in default, but borrowers and their lawyers are conceding the default. DON’T CONCEDE ANYTHING. ALLEGE PAYMENT EVEN THOUGH IT DIDN’T COME FROM THE DEBTOR.

This is why you need to demand an accounting and perhaps the appointment of a receiver. Because if the servicer says they can’t get the information then the servicer is admitting they can’t do the job. So appoint an accountant or some other receiver to do the job with subpoena power from the court.

Practice Hint: If you let them take control of the narrative and talk about the note, you have already lost. The note is not the obligation. Your position is that part or all of the obligation has been paid, that you have an expert declaration computing those payments as close as  possible using what information has been released, published or otherwise available, and that the pretender lenders either refuse or failed to credit the debtor with payments from third party sources —- credit default swaps, insurance and other guarantees paid for out of the proceeds of the loan transaction, PLUS the federal bailout from TARP, TALF, Maiden Lane deals, and the Federal reserve.

The Judge may get stuck on the idea of giving a free house, but how many times is he going to require the obligation to be paid off before the homeowner gets credit for the issuance that was was paid for out of the proceeds of the borrowers transaction with the creditor?

Fed Shouldn’t Reveal Crisis Loans, Banks Vow to Tell High Court

By Bob Ivry

April 14 (Bloomberg) — The biggest U.S. commercial banks will take their fight against disclosure of Federal Reserve lending in 2008 to the Supreme Court if necessary, the top lawyer for an industry-owned group said.

Continued legal appeals will delay or block the first public look at details of the central bank’s $2 trillion in emergency lending during the 2008 financial crisis. The Clearing House Association LLC, a group that includes Bank of America Corp. and JPMorgan Chase & Co., joined the Fed in defense of a lawsuit brought by Bloomberg LP, the parent company of Bloomberg News, seeking release of records related to four Fed lending programs.

The U.S. Court of Appeals in Manhattan ruled March 19 that the central bank must release the documents. A three-judge panel of the appellate court rejected the Fed’s argument that disclosure would stigmatize borrowers and discourage banks from seeking emergency help.

“Our member banks are very concerned about real-time disclosure of information that could cause a run on the banks,” said Paul Saltzman, the group’s general counsel, in an interview yesterday. “We’re not going to let the Second Circuit opinion stand without seeking a review.”

Regardless of whether the Fed appeals, the Clearing House will take the next legal step by asking for a review by the full appellate court, Saltzman, 49, said at his office in New York. If the ruling is unfavorable, the bank group will petition the Supreme Court, he said.

Joined Lawsuit

The 157-year-old, New York-based Clearing House Payments Co., which processes transactions among banks, is owned by its 20 members. They include Citigroup Inc., Bank of New York Mellon Corp., Deutsche Bank AG, HSBC Holdings Plc, PNC Financial Services Group Inc., UBS AG, U.S. Bancorp and Wells Fargo & Co.

The Clearing House Association, a lobbying group with the same members, joined the lawsuit in September 2009, after an initial ruling against the central bank in federal court in Manhattan.

The Fed is “reviewing the decision and considering our options,” said Fed spokesman David Skidmore in Washington. He had no comment on Saltzman’s plans.

Attorneys face a May 3 deadline to file their appeals.

“We’ll wait to see the motion papers,” said Thomas Golden, attorney for Bloomberg who is a partner at New York- based Willkie Farr & Gallagher LLP. “The judges’ decision was well-reasoned, and we doubt further appeals will yield a different result.”

Bloomberg sued in November 2008 under the U.S. Freedom of Information Act, after the Fed denied access to records of four Fed lending programs and a loan the central bank made in connection with New York-based JPMorgan Chase’s acquisition of Bear Stearns Cos. in March 2008.

231 Pages

The central bank contends that 231 pages of daily reports summarizing lending activity, which were prepared by the Federal Reserve Bank of New York for the Fed Board of Governors in Washington, aren’t covered by the FOIA. The statute obliges federal agencies to make government documents available to the press and the public. The suit doesn’t seek money damages.

The Fed released lists on March 31 of assets it acquired in the 2008 bailout of Bear Stearns.

The New York Times Co., the Associated Press and Dow Jones & Co., publisher of the Wall Street Journal, are among media companies that have signed up as friends of the court in support of Bloomberg.

The Fed Board of Governors’ “refusal to disclose the names of borrowers renders public oversight of its actions impossible — it prevents any assessment of the effectiveness of the Board’s actions and conceals any collusion, corruption, fraud or abuse that might have occurred,” the news organizations said in a letter to the appeals panel.

The case is Bloomberg LP v. Board of Governors of the Federal Reserve System, 09-04083, U.S. Court of Appeals for the Second Circuit (New York).

To contact the reporter on this story: Bob Ivry in New York at bivry@bloomberg.net.

Last Updated: April 14, 2010 00:01 EDT

Obama Considers Ban on Foreclosures

the obligation created when the debtor entered the transaction may well be satisfied in whole or in part by the U.S. Taxpayer, insurers, or counterparties in credit default swaps. Wall Street attempts to frame the argument as giving a free house to the unworthy homeowner. The TRUE argument is what to do with all the excess undisclosed profits that paid the obligations of the homeowners many times over.

If the foreclosures were done in the name of entities that never advanced any money toward the funding of the loan, directly or indirectly, then all of the sales are improper, all of them create defective title and all of them will produce a torrent of unmarketable transactions in the coming years as buyers and lenders discover they cannot get title insurance.
Editor’s Note: Obama’s incremental approach is maddening but it seems that he is “getting it” step by step. First reported by Bloomberg news. this article from the NY Times summarizes the progress.
The problem remains that the administration is not addressing the issue of clear title and legal authority. Mr. Frey from Greenwich Financial highlights the point in his lawsuit against Bank of America accusing them of negotiating loans that the servicer does not own. This problem is not going away, and is getting worse with each new foreclosure sale at the steps of courthouses across the country.

If the foreclosures were done in the name of entities that never advanced any money toward the funding of the loan, directly or indirectly, then all of the sales are improper, all of them create defective title and all of them will produce a torrent of unmarketable transactions in the coming years as buyers and lenders discover they cannot get title insurance.
If money is being paid to servicers who lack authority to collect, then the debtor (borrower/homeowner) is in financial double jeopardy when the real creditor makes a claim. What will happen when Greenwich Financial or some other holder of mortgage backed securities makes their claim for repayment of the money they forked over allegedly to fund mortgages? What will happen when Greenwich Financial realizes that only a fraction of the money they paid went to fund mortgages and that the rest went to fees, profits, commissions and kickbacks? And where are the other investors, who incidentally are the only real creditors in this scenario?
An inconvenient and inescapable truth is that the servicers, whose fees rise as the loan becomes troubled and progresses from performing to delinquent, to default, to foreclosure and sale, are still getting paid on non-performing loans. If the loans are non-performing, where is the money coming from? It can only be coming from the payments made under performing loans, which directs our attention to the essential defect in the securitization of residential mortgage loans: the simplest of terms in every note that require the payments be allocated to the interest and principal on the note is being breached regularly and universally. This is the unethical and illegal result of cross collateralization and over-collateralization.
Wall Street blithely assumed they could disregard the terms of the note (use of proceeds) and mortgage when they securitized these “assets.” And there is the nub of the problem. The transaction starts out simple — money advanced by investors to fund mortgage loans to homeowners (debtors). But in order to make virtually ALL the money turn into fees and profits for Wall Street, the participants in the securitization chain ignored basic contract law, property law, lending laws, rules and regulations. The result was a tangle of claims from intermediaries who have no legal nor equitable interest in the revenue stream, principal or interest derived from those loans — all at the expense of the only two real parties to the transaction, to wit: the investor (creditor) and the homeowner (debtor).
A ban on foreclosures pending mandatory modification procedures is an imperfect step, but definitely in the right direction. It’s going to be a big pill to swallow when we finally come to terms with the fact that the parties at mediation or discussing modification only include one side (the debtor). It means coming to accept that all that TARP money went to the brokers instead of the principals. It means unraveling the now secret AIG documents that would show where the money went. It means performing an audit to determine where the money should be allocated.
And all of THAT means the obligation created when the debtor entered the transaction may well be satisfied in whole or in part by the U.S. Taxpayer, insurers, or counterparties in credit default swaps. Wall Street attempts to frame the argument as giving a free house to the unworthy homeowner.

The TRUE argument is what to do with all the excess undisclosed profits that paid the obligations of the homeowners many times over. Federal and State laws generally agree — failure to disclose the real parties and the real fees paid to all the participants in the transaction results in a liability to the homeowner for those undisclosed fees. The real answer is NOT to give more money to the intermediaries who never advanced a dime to fund these loans but rather, how to claw back the money and put the investors and the homeowners back in the position they were in before this huge fraud began.
Existing laws seem to address all of this in both lending and the issuance of securities. It’s payback time. The only question is whether anyone with the power to do so, will enforce the laws as they are already written. As of this writing, complaints to the FTC, OTC, FDIC, FED etc. produce nothing but an acknowledgment of receipt. The power is there. Where is the will?
February 26, 2010

U.S. Weighs Requiring Lenders to Consider Changes Before Foreclosures

The Obama administration, under intense pressure to help millions of people in danger of losing their homes, is considering a ban on foreclosures unless they have first been examined for potential modification, according to a set of draft proposals.

That would raise the stakes from the current practice, which strongly encourages lenders to evaluate defaulting borrowers for a modification but does not make it mandatory.

Meg Reilly, a Treasury Department spokeswoman, said Thursday that the proposed foreclosure ban was “one of the many ideas under consideration in the administration’s ongoing housing stabilization efforts.” The proposal was first reported by Bloomberg News.

Laurie Goodman, a senior managing director at the Amherst Securities Group who has been highly critical of the government’s modification program, said even if the proposal came to pass, it would not be “a major change. We think there is a large public relations element to this.”

The government could use some favorable public relations for its modification program, which has been deemed disappointing.

Begun a year ago, the program was meant to help as many as four million homeowners but has fallen considerably short of those goals. The Treasury Department has said 116,297 loans have been permanently modified and more than 800,000 more are in trial programs.

The Mortgage Bankers Association said its members were already doing what the administration was considering.

“Lenders generally go to foreclosure as a measure of last resort, after all other options, including loan modification, are exhausted,” said John Mechem, the trade group’s vice president for public affairs.

Any enhancements the government made to the modification program would be unlikely to stem many foreclosures, said Howard Glaser, a prominent housing consultant.

The modification program was designed for people who had subprime loans, he said, not for borrowers with high-quality loans who are unemployed. Tweaking the interest rate for an unemployed family does not provide enough help.

The Mortgage Bankers Association announced this week their own plan for reducing foreclosures: Lenders and loan servicers would reduce unemployed borrowers’ payments for up to nine months while they looked for new jobs.

The banking group said the servicers would need special loans from the Treasury to pay for the program. The administration has not commented publicly on the proposal.

“The real strategy in Washington now is to pray for an improving economy so these issues will resolve themselves,” Mr. Glaser said. “At the end of the day, a strong jobs market will prevent the generation of new foreclosures.”

There was some positive news in that regard last week, when the mortgage bankers said the number of borrowers entering default unexpectedly declined in the fourth quarter. But on Thursday, the government reported that home prices sank 1.6 percent in December, a fresh sign that the real estate market is nowhere near healed.

You Are Not the Bad Guy



First of all if you look up the collections firm, mortgage servicer, or other party you will find dozens of entries on most firms about behavior that easily crosses the line from legal to illegal. Second of all they might have the wrong person (see article below). Third of all they probably have the wrong information even if they have the right information. So don’t be so scared of them.
Fourth — and this probably ought to be first — in a culture created by endless ads and product placement, where our consciousness has been switched from savings and prudence to credit and spending, where 30% interest is not usury, where $35 fees apply to $2 overdrafts, I challenge the core notion that the debt is or ever was valid. In plain language I know what the law says, but I also know what is right and wrong.
It is YOU who are the victim and it is THEM who are the predators and tricksters. I know the media, politicians and pundits say otherwise. They are wrong. So the point of this blog is to get you to give up the myth that this was somehow mostly your fault and see yourself as one of tens of millions of victims who seek justice. The laws say you have rights  — like usury where most states have a legal limit of interest which if violated invalidates the debt and entitles the debtor to treble damages. Yes there are exceptions but not these creditors and collectors do not qualify under the exceptions. They only win in collection or foreclosure if you don’t fight it out with them.

In most cases (actually nearly all cases) the creditor does not have the resources to do anything other than maintain a phone bank with people who have a script in front of them containing key words and phrases designed to scare the crap out of you. The credit card companies, the mortgage pretender lenders and servicers lack resources to sue everyone at once.

As you have seen on these pages there are a number of offensive and defensive strategies that can put the “collector” in hot water with fines and payment of damages to you for using improper tactics, withholding information (like the fact that your mortgage was paid several times over but they still want YOU to pay it again). Use the Debt validation Letter, the Qualified  Written request, complaints to FTC, FED, OTC etc. Send letters to consumer protection divisions of your state attorney general. report them to the economic crimes division of local police, sheriff and U.S. Attorney’s office. GO ON THE OFFENSIVE.

THE WALK AWAY STRATEGY: There are many reports of lawyers and other advisers suggesting that you simply walk away from the mountain of debt, move to another residence (the rent is bound to be far less expensive than the old carrying charges on the inflated value of the old house), and start over. They recommend that you maintain your phone number by switching services and that you pull the plug. So the collector only gets voice mail and confirmation that this is still your phone number. They recommend that you get a new unlisted number even under another person’s name if that is possible. And then start the march toward saving money, getting prepaid credit and debit cards and re-establishing a high credit score. It’s a lot less expensive than bankruptcy. After the statute of limitations has run they have no right to go after you even if it was a valid debt. This is the advice given by others. Livinglies has no comment.
November 29, 2009
About New York

Hello, Collections? The Worm Has Turned

The phone rang. A woman from a law firm representing a collection agency wanted to know if Mark Hoyte was Mark Hoyte, and he said he was. They were calling to collect $919 on a Sears-Citi card.

Mr. Hoyte said he never had that credit card.

Then the woman wanted to know if his Social Security number ended in 92, and Mr. Hoyte said no, it ended in 33.

“She says to me, ‘Your date of birth is in 1972,’ ” Mr. Hoyte, 46, recalled in an interview.

Clearly, they had the wrong Mark Hoyte. But that did not stop the lawyers at Pressler & Pressler from suing him. They swore out a complaint and sent a summons to Mr. Hoyte, ordering him to be in court last Monday.

Then things took a rare turn.

Every day of the year, 1,000 cases on average are added to the civil court dockets in New York City over credit card debt — a high-volume, low-accuracy moment of reckoning. The suits are usually brought by collection companies that purchase the debt for pennies on the dollar from card issuers and then work with a cadre of law firms that specialize in collection work.

Conducting a digital dragnet, they troll through commercial databases searching for debtors. Because of the vast sloppiness and fraud involved, Attorney General Andrew M. Cuomo has shut down two of the collection firms and is suing 35 law firms tied to the business.

A person who blows off a civil court summons — even if wrongly identified — faces a default judgment and frozen bank accounts. But to date, there have been few penalties against collectors for dragging the wrong people into court.

Until Mr. Hoyte turned up last week in Brooklyn.

After trying to settle the case in the hallway — the 11th floor of 141 Livingston Street is an open bazaar of haggling — the collections lawyer realized he had the wrong man. He got Mr. Hoyte to sign an agreement that would end the case against him, but not against the Mark Hoyte who actually owed the $919.

In front of the judge, the lawyer, T. Andy Wang, announced that the parties had reached a stipulation dismissing this Mr. Hoyte from the suit.

Not so fast, said the judge, Noach Dear.

“Why didn’t you check these things out before you take out a summons and a complaint?” Judge Dear asked. “Why don’t you check out who you’re going after?”

Mr. Wang said that Pressler & Pressler used an online database called AnyWho to hunt for debtors.

“So you just shoot in the dark against names; if there’s 16 Mark Hoytes, you go after without exactly knowing who, what, when and where?” Judge Dear asked.

Mr. Wang replied, “That’s why the plaintiff is making an application to discontinue.”

The judge turned to Mr. Hoyte, who works as a building superintendent, and asked him how much a day of lost pay would cost. Mr. Hoyte said $115.

“Do you think that’s fair?” Judge Dear asked Mr. Wang. “That he should lose a day’s pay?”

“My personal opinion,” Mr. Wang said, “would not be relevant to the application being sought.”

The judge said he was prepared to dismiss the case and wanted Mr. Hoyte compensated for lost wages.

“Your honor,” Mr. Wang said, “I’m personally not willing to compensate him.”

No, the judge said; he meant that the law firm, Pressler & Pressler — one of the biggest in the collection industry — should pay the $115. He would hold a sanctions hearing, a formal process of penalizing the law firm for suing the wrong man.

Under questioning by the judge, Mr. Hoyte recounted being called about the debt, providing his Social Security number and date of birth, and being summoned to court anyhow.

The collections lawyer then began to interrogate Mr. Hoyte.

“You claim you told Pressler & Pressler it wasn’t you,” Mr. Wang said to Mr. Hoyte. “Did you send them proof, as in a copy of your Social Security number with only the last four digits visible?”

“No,” Mr. Hoyte said. “They didn’t ask for it.”

“But you didn’t send any written proof of the claim that it was not you?” Mr. Wang said.

“I told them on the phone it’s not me,” Mr. Hoyte said.

Mr. Wang appeared outraged.

“So without any written proof that it’s not you, you would expect someone just, you know, to go on say-so?” he demanded. “Is that correct?”

Alice had reached Wonderland: The lawyer who had sued the wrong man was blaming the wrong man for getting sued.

Judge Dear cut off the questioning. He told Mr. Wang and Mr. Hoyte to come back to court in January.

“If, somehow, counsel, you decide that you’re going to compensate him for his time off,” Judge Dear said, “I will reconsider sanctions.”

E-mail: dwyer@nytimes.com

Traveling on Empty for 35 Years, U.S. Government Traps Itself Into Teaser Rates Now Ready for Reset


SEE calhoun_testimony LITANY of MORTGAGE LENDING ABUSES AND OTHER BANK ABUSES Admitted by Responsible Lending Association

Isn’t it interesting, frustrating, maddening that not only did Wall Street do it to 20 million homeowners in one form or another, they did it to the Federal Government too, which means they spread their pillage to all the taxpayers, not just the ones with mortgages.

By the way go get a copy of Nomi Prins, ex-director of Goldman Sachs, It Takes a Pillage. I saw her on C-Span “Afterwords” interviewed by Senator Bernie Sanders of Vermont (I). She’s brilliant and (2) knows the ins and outs not only of the structure of mortgage derivatives but the math too.

What annoys me and should annoy ALL taxpayers is that we have been tricked by Wall Street AND Government into accepting the losses of Wall Street’s wild ride. Teaser rates for the Federal Government on bailouts that should never have occurred, FED rates that charge banks nothing for loans so they can go out and speculate (since Glass Steagel) while the taxpayer is on the hook. At the same time the FED is paying the “banks” a little extra to make them healthier.

Why doesn’t anybody get the fact that now these monsters of financial chicanery have unfettered access to your bank deposits to go and play with it as they wish. And not only are your deposits at the “bank” being used in this way, you are also guaranteeing this behavior if ANY bank fails! Where do you think this is leading folks? Competition is in worse shape than it was over a year ago. There is MORE RISK IN THE FINANCIAL MARKETPLACE than there was over a year ago.

Economists are warning us in despondent tones that the worst is yet to come but absent from the scene is the outrage from the public which is needed to force change and break the claims and power of the incestuous relationship between Washington and Wall Street.

The following is the lead article in NY Times Today. Some snippets from it as follows:

“The government is on teaser rates,” said Robert Bixby, executive director of the Concord Coalition, a nonpartisan group that advocates lower deficits. “We’re taking out a huge mortgage right now, but we won’t feel the pain until later.”

Treasury officials now face a trifecta of headaches: a mountain of new debt, a balloon of short-term borrowings that come due in the months ahead, and interest rates that are sure to climb back to normal as soon as the Federal Reserve decides that the emergency has passed.

Americans now have to climb out of two deep holes: as debt-loaded consumers, whose personal wealth sank along with housing and stock prices; and as taxpayers, whose government debt has almost doubled in the last two years alone, just as costs tied to benefits for retiring baby boomers are set to explode.

Global investors are shifting money into riskier investments like stocks and corporate bonds, and they have been pouring money into fast-growing countries like Brazil and China.

November 23, 2009

Payback Time

Wave of Debt Payments Facing U.S. Government

WASHINGTON — The United States government is financing its more than trillion-dollar-a-year borrowing with i.o.u.’s on terms that seem too good to be true.

But that happy situation, aided by ultralow interest rates, may not last much longer.

Treasury officials now face a trifecta of headaches: a mountain of new debt, a balloon of short-term borrowings that come due in the months ahead, and interest rates that are sure to climb back to normal as soon as the Federal Reserve decides that the emergency has passed.

Even as Treasury officials are racing to lock in today’s low rates by exchanging short-term borrowings for long-term bonds, the government faces a payment shock similar to those that sent legions of overstretched homeowners into default on their mortgages.

With the national debt now topping $12 trillion, the White House estimates that the government’s tab for servicing the debt will exceed $700 billion a year in 2019, up from $202 billion this year, even if annual budget deficits shrink drastically. Other forecasters say the figure could be much higher.

In concrete terms, an additional $500 billion a year in interest expense would total more than the combined federal budgets this year for education, energy, homeland security and the wars in Iraq and Afghanistan.

The potential for rapidly escalating interest payouts is just one of the wrenching challenges facing the United States after decades of living beyond its means.

The surge in borrowing over the last year or two is widely judged to have been a necessary response to the financial crisis and the deep recession, and there is still a raging debate over how aggressively to bring down deficits over the next few years. But there is little doubt that the United States’ long-term budget crisis is becoming too big to postpone.

Americans now have to climb out of two deep holes: as debt-loaded consumers, whose personal wealth sank along with housing and stock prices; and as taxpayers, whose government debt has almost doubled in the last two years alone, just as costs tied to benefits for retiring baby boomers are set to explode.

The competing demands could deepen political battles over the size and role of the government, the trade-offs between taxes and spending, the choices between helping older generations versus younger ones, and the bottom-line questions about who should ultimately shoulder the burden.

“The government is on teaser rates,” said Robert Bixby, executive director of the Concord Coalition, a nonpartisan group that advocates lower deficits. “We’re taking out a huge mortgage right now, but we won’t feel the pain until later.”

So far, the demand for Treasury securities from investors and other governments around the world has remained strong enough to hold down the interest rates that the United States must offer to sell them. Indeed, the government paid less interest on its debt this year than in 2008, even though it added almost $2 trillion in debt.

The government’s average interest rate on new borrowing last year fell below 1 percent. For short-term i.o.u.’s like one-month Treasury bills, its average rate was only sixteen-hundredths of a percent.

“All of the auction results have been solid,” said Matthew Rutherford, the Treasury’s deputy assistant secretary in charge of finance operations. “Investor demand has been very broad, and it’s been increasing in the last couple of years.”

The problem, many analysts say, is that record government deficits have arrived just as the long-feared explosion begins in spending on benefits under Medicare and Social Security. The nation’s oldest baby boomers are approaching 65, setting off what experts have warned for years will be a fiscal nightmare for the government.

“What a good country or a good squirrel should be doing is stashing away nuts for the winter,” said William H. Gross, managing director of the Pimco Group, the giant bond-management firm. “The United States is not only not saving nuts, it’s eating the ones left over from the last winter.”

The current low rates on the country’s debt were caused by temporary factors that are already beginning to fade. One factor was the economic crisis itself, which caused panicked investors around the world to plow their money into the comparative safety of Treasury bills and notes. Even though the United States was the epicenter of the global crisis, investors viewed Treasury securities as the least dangerous place to park their money.

On top of that, the Fed used almost every tool in its arsenal to push interest rates down even further. It cut the overnight federal funds rate, the rate at which banks lend reserves to one another, to almost zero. And to reduce longer-term rates, it bought more than $1.5 trillion worth of Treasury bonds and government-guaranteed securities linked to mortgages.

Those conditions are already beginning to change. Global investors are shifting money into riskier investments like stocks and corporate bonds, and they have been pouring money into fast-growing countries like Brazil and China.

The Fed, meanwhile, is already halting its efforts at tamping down long-term interest rates. Fed officials ended their $300 billion program to buy up Treasury bonds last month, and they have announced plans to stop buying mortgage-backed securities by the end of next March.

Eventually, though probably not until at least mid-2010, the Fed will also start raising its benchmark interest rate back to more historically normal levels.

The United States will not be the only government competing to refinance huge debt. Japan, Germany, Britain and other industrialized countries have even higher government debt loads, measured as a share of their gross domestic product, and they too borrowed heavily to combat the financial crisis and economic downturn. As the global economy recovers and businesses raise capital to finance their growth, all that new government debt is likely to put more upward pressure on interest rates.

Even a small increase in interest rates has a big impact. An increase of one percentage point in the Treasury’s average cost of borrowing would cost American taxpayers an extra $80 billion this year — about equal to the combined budgets of the Department of Energy and the Department of Education.

But that could seem like a relatively modest pinch. Alan Levenson, chief economist at T. Rowe Price, estimated that the Treasury’s tab for debt service this year would have been $221 billion higher if it had faced the same interest rates as it did last year.

The White House estimates that the government will have to borrow about $3.5 trillion more over the next three years. On top of that, the Treasury has to refinance, or roll over, a huge amount of short-term debt that was issued during the financial crisis. Treasury officials estimate that about 36 percent of the government’s marketable debt — about $1.6 trillion — is coming due in the months ahead.

To lock in low interest rates in the years ahead, Treasury officials are trying to replace one-month and three-month bills with 10-year and 30-year Treasury securities. That strategy will save taxpayers money in the long run. But it pushes up costs drastically in the short run, because interest rates are higher for long-term debt.

Adding to the pressure, the Fed is set to begin reversing some of the policies it has been using to prop up the economy. Wall Street firms advising the Treasury recently estimated that the Fed’s purchases of Treasury bonds and mortgage-backed securities pushed down long-term interest rates by about one-half of a percentage point. Removing that support could in itself add $40 billion to the government’s annual tab for debt service.

This month, the Treasury Department’s private-sector advisory committee on debt management warned of the risks ahead.

“Inflation, higher interest rate and rollover risk should be the primary concerns,” declared the Treasury Borrowing Advisory Committee, a group of market experts that provide guidance to the government, on Nov. 4.

“Clever debt management strategy,” the group said, “can’t completely substitute for prudent fiscal policy.”

Mortgage Meltdown: Fed Lacker Says “Moral Hazard Ahead”


Insider Joins Critics of the Fed, 
Faulting Credit-Crisis Programs

Richmond’s Lacker 
Amplifies Volcker; 
Moral Hazard Fears
June 6, 2008; Page A3

In a striking insider’s critique, a Federal Reserve policy maker said lending programs the central bank has created to combat the credit crisis distort private markets, encourage risky behavior and could endanger the Fed’s independence.

Federal Reserve Bank of Richmond President Jeffrey Lacker’s remarks, made Thursday in a speech in London and amplified in an interview, show that concerns that outsiders, including former Fed Chairman Paul Volcker, have raised about the Fed’s actions — in particular its rescue of the investment bank Bear Stearns Cos. — are shared by some inside the Fed.

[Jeffrey Lacker]

Those people, including presidents of some of the 12 regional Fed banks, remain a minority. Nonetheless, their views will matter in the months ahead as the Fed, the Bush administration and Congress grapple with the implications of the Fed’s unprecedented actions.

“The danger is that the effect of recent credit extension on the incentives of financial-market participants might induce greater risk taking,” a phenomenon called moral hazard, “which in turn could give rise to more frequent crises, in which case it might be difficult to resist further expanding the scope of central-bank lending,” Mr. Lacker said, according to a text of his remarks. (Read the full speech.1)

In an interview, Mr. Lacker said that “before this recent episode, there [were] well-understood and well-articulated boundaries around when we would lend”: to manage short-term interest rates, to help banks deal with temporary shortages of cash, or to facilitate the closure of a bank taken over by regulators.

“The innovative credit programs and other things we’ve done have gone beyond previously accepted boundaries. We’ll be wrestling with the consequences.” The new program could put the Fed’s independence at risk, he said. “It crosses a line into what is essentially fiscal policy to direct credit to particular sectors, creating expectations of similar treatment.”

Fed officials are debating how quickly, if at all, they should withdraw some of the lending programs they have created to stabilize markets. If some of those programs become permanent, they might entail the Fed expanding its oversight of the financial system. Federal Reserve Bank of New York President Timothy Geithner, who helped arrange the Bear Stearns rescue, is to address its implications for the country’s regulatory structure in a speech Monday.

Since August, the Fed has taken numerous unconventional steps to improve conditions in credit markets, including vastly expanding loans to banks. Separately, it has temporarily lent safe Treasurys from its own portfolio to investment banks in exchange for their riskier securities. Most controversially, it lent $29 billion to Bear Stearns and opened its discount window to investment banks for the first time.

In a separate Thursday speech, Charles Plosser, president of the Federal Reserve Bank of Philadelphia, made points similar to Mr. Lacker’s, highlighting to the possibility that a central bank’s actions can distort markets and prices and “effectively subsidize risk-taking by systemically important financial institutions.”

“Policy interventions in financial markets run the risks of increasing moral hazard and inhibiting efficient price discovery,” he told the Society for Financial Econometrics in New York. “Moreover, interventions intended to quell instability can, by creating moral hazard, actually make instability more severe in the long run.” Mr. Plosser suggested policymakers outline in advance conditions under which they would lend to financial institutions and commit “to act in a systematic way” consistent with those guidelines. Mr. Plosser, former dean of the William E. Simon Graduate School of Business Administration at the University of Rochester, became president of the Philadelphia Fed in August.

In a speech scheduled for delivery to the European Economics and Financial Center in London, Mr. Lacker said the Fed should lend more when a sudden demand for, or shortfall of, cash drives short-term rates higher. But he said the past year’s credit crisis results from something different: Investors are fundamentally reassessing the creditworthiness and appeal of many types of securities and institutions.

When a central bank makes loans to such institutions or accepts their debt as collateral, it “distorts economic allocations by artificially supporting the prices of some assets and the liabilities of some market participants.”

Mr. Bernanke considers concerns raised by Mr. Lacker to be valid, but he has argued that the problems involved in the Bear Stearns loan were preferable to the chaos and disorder that would have resulted from the firm’s bankruptcy.

As for the Fed’s other steps, officials have argued that they represent a more effective use of the Fed’s existing authority rather than an expansion of that authority and that they are similar to tools in use by the European Central Bank.

Asked if he approved of the Bear Stearns deal, Mr. Lacker said: “It was an excruciating choice. I wasn’t close to all the data they had…so I’m not going to second-guess it.”

Still, he said that because of the Fed’s $29 billion loan to Bear, it is “going to be natural for firms to ask for what they view as similar accommodation.”

Mr. Lacker said the Fed has already “gotten questions from firms saying, ‘I’d like to take over this other firm. Can you help like you helped with Bear?'” He declined to name or describe the firms, adding, “We’ve turned them down” because helping them “wasn’t appropriate.”

To convince the markets that it won’t routinely prop up troubled firms, the Fed eventually will have to let fail some institutions that lie beyond its stated boundaries for intervention, Mr. Lacker said.

Those boundaries “are going to be more credible if we take actions, and those actions are going to be more credible the more costly they are” in terms of disruptions to the market.

Mr. Lacker, who holds a doctorate in economics from the University of Wisconsin, joined the staff of the Richmond Fed in 1989 and has been its president since August 2004. He regularly dissented in votes on interest-rate decisions in 2006, favoring higher rates. He isn’t currently one of the five regional Fed bank presidents with a vote on rates.

Write to Greg Ip at greg.ip@wsj.com2

Foreclosure Defense and Mortgage Meltdown: Credit Crisis Leaves Financial Markets in extremely Volatile Position

People ask me, will they really settle? Of course the question is from borrowers and they are asking if they can actually do something about the millions of foreclosures, default cases and upside down equity cases totaling more than 10 million homes in the U.S. alone. The answer is yes, especially now — because the financial institutions are doing everything they can to make it LOOK like it is business as usual. But the markets are far more fragile than they are letting on. So in order to avoid a plethora of lawsuits in which the truth comes out on the front pages of every newspaper, they are seeking various settlement opportunities with the victims of these mortgages and notes. 

Be sure, in your settlement to make sure you have no deficiency judgment exposure and make doubly sure that whoever you re dealing with proves beyond any doubt that they actually have title to the mortgage and note. I have been personally apprised of large situations where the “lender” “bought back” the loan. I was the messenger bearing bad tidings:  



Fed might accept foreign collateral: Kohn

Should broker-dealers have regular access to funds, or only in crises?

WASHINGTON (MarketWatch) — The Federal Reserve is actively considering creation of a lending facility that would accept “very safe” foreign collateral from “sound” global banks in case of a widespread liquidity crisis, Fed Vice Chairman Donald Kohn said Thursday.
A new global discount window is “under active study,” Kohn said. “It is possible that over time, major central banks could perhaps agree to accept a common pool of very safe collateral, facilitating the liquidity management of global banks,” he said, stipulating that such loans only be made to sound institutions.
Kohn’s suggestion came in prepared remarks wrapping up a special conference in New York on liquidity in money markets that was sponsored by the New York Fed and the Columbia Business School. Read his prepared remarks
“Market functioning remains far from normal,” Kohn said, pointing in particular to large spreads between overnight bank rates such as Libor and other short-term rates. Such large spreads indicate that markets still are in shock.
Kohn argued that the Fed and other central banks had prevented a global run on Bear Stearns and possibly other major financial institutions in March, but the emphasis of his talk was on what lessons central banks and the financial system should take from the liquidity crisis that spread like topsy from subprime mortgages to asset-backed securities to the collapse of one of the world’s biggest investment banks. See latest story on Bear Stearns
“One of the things we have learned over recent months is that broker-dealers, like banks, are subject to destructive runs when markets aren’t functioning well,” Kohn said.
The biggest question is: What to do about the broker-dealers and investment banks that, since the run on Bear Stearns, have now been given unprecedented access to the Fed’s lending facilities? Should that access be continued on a permanent basis? Or should it be provided only in emergencies?
Kohn had no simple answer to that question: “Unquestionably, regulation needs to respond to what we have learned,” he said. “Whether broader regulatory changes for broker-dealers are necessary is a difficult question that deserves further study.”
Permanent access to the Fed’s balance sheet at attractive rates would distort markets without well-designed and well-executed supervision. On the other hand, everyone in the markets knows that the Fed will step in with funds in an emergency, so in some sense the markets have been irredeemably distorted already.
Kohn suggested that the term auction facility, which was created in December and expanded in early May, should be retained on a permanent basis after the crisis is over. The TAF allows banks to bid to borrow funds from the Fed’s discount window for 28 days.
“The Fed’s auction facilities have been an important innovation that we should not lose,” he said. “They have been successful at reducing the stigma that can impede borrowing at the discount window in a crisis environment and might be very useful in dealing with future episodes of illiquidity in money markets.” End of Story
Rex Nutting is Washington bureau chief of MarketWatch.

Mortgage Meltdown: A New Bubble: Fraud Redux

Hold everything!!: Second Bubble on the Way!!!????

Interest rates dropping, Fed lowering its rates, and incoming capital from China like it was water. We now see the strategy to prevent the world from marking the Bush administration down as the most foolish, stupidest in history. 

The plan is to create a second bubble. They will say that the pundits were wrong, that economy is strong after all and that this proves Bush and his fellow republicans were right on with their strategy . Sure there might have been “isolated instances of fraud” but basically these were free market forces at play. And it will look just like that until we wake up from the mania revisited and into the nightmare worsened.

What all this means is that there is going to be an interesting dynamic going on. We know we have a burst of the asset bubble and that prices have come tumbling down. Federal officials have been minimizing the damage assessment while scrambling for a plan that will cover up the worst case of economic fraud in human history. 

The Fed and the Bush administration are determined to minimize its appearance. So money is likely to get ridiculously cheap by mid year. Thus despite downward price pressure from the bubble burst, there will be upward price pressure for the same reason as we had the bust in the first place — free money. In short, it looks like instead of correcting the problem they intend to compound it — as long as possible — hoping that something else will happen that will soften the blow or at least make it look like it wasn’t GW’s fault. 

It would therefore seem that a few things are true. By dropping interest rates, a freeze at teaser rates becomes less costly and less offensive— which will diminish the rate of foreclosures — which will diminish the number of houses dumped on the market. We could be looking at the creation of a second bubble to cover up the first. 

The devaluation of the dollar combined with apparently rising prices and diminishing inventories of empty homes, is likely to lure foreign investors into buying US real estate. US Sellers will be getting more for their houses than is currently predicted. This will make the sellers more flexible buyers on the domestic scene. 

Thus around summer time or perhaps a little later, one might get a higher price for a house than anyone is currently predicting. And one might be able to make a deal for those feint-hearted sellers that are not willing to wait for the higher price AND the interest rate on a fixed rate mortgage might just be very low. 

So anyone considering a move in the next 3 years, or who is negotiating with their lenders for better terms to avoid foreclosures, might just want to stretch things out time wise. In fact, in a couple of months, I would suggest that anyone holding a mortgage from 2003-2006 contact their lender and ask for relief whether they need it or not. 

Of course the risk here is that the Fed and Wall Street smoke and mirrors trick won’t work. That would leave things in the same bleak state. But from what we are seeing, the Chinese are going to play a very large part in helping the next bubble along while they buy still more time to overwhelm American economic, political and military superiority. 

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