BANKS HITTING THE WALL

TOP READER PICKS FOR SERVICES AND PRODUCTS

EDITOR’S NOTE: This is not just a paper crash, which old-timers like myself will remember from the Wall Street paper-crash of the late 1960’s. Simple logic leads to the inevitable conclusion that property rights and contracts, mortgages, notes and obligation are all about paperwork and recording. The trail is defective because it reflected the desire of the “securitization” intermediaries to have full control over every aspect of the MONEY. It reflected their total lack of concern with the actual documents. And in the end, the hedge transactions and exotic instruments they created were proof of fraud and negligence.

It was the money they were moving, not the paper. They avoided those pesky recording fees, and didn’t bother to report or pay taxes, fees or file returns on transactions in which trillions of dollars changed hands. Those deficits we are all worried about on the Federal and state level? They are all curable by simple enforcement of and collection of taxes that are due from these hidden transactions that can now be traced easily. Collection is easy and can be tied to settling the foreclosure mess and the title mess. It’s easier than you think.

Those insurance, credit default swap, and other credit enhancement techniques that were used destroyed the the nexus between the lending by the investor and the borrowing by the homeowner. They continue to try to stay in the middle keeping the investors away from direct collaboration with homeowners — because when the two sides of these transactions meet up, the numbers won’t add up and some very arrogant people whose names are well-known are going to face charges that were inconceivable as late as a month ago.

But don’t go celebrating just yet. You still need a lawyer and you still must plead and prove your claim. One thing is certain regardless of what they do, the pace of foreclosures is going to either cease or slow to a crawl.

October 8, 2010

Largest U.S. Bank Halts Foreclosures in All States

By DAVID STREITFELD and NELSON D. SCHWARTZ

Bank of America, the nation’s largest bank, said Friday that it was extending its suspension of foreclosures to all 50 states.

The plan swept states with some of the highest foreclosure levels, including California, Nevada and Arizona, into a swelling crisis over lenders’ flawed paperwork that had been mostly confined to 23 other states that require judicial review of foreclosures.

Bank of America instituted a partial freeze last week in those 23 states, and three other major mortgage lenders have done the same. The bank’s decision on Friday increased pressure on other lenders to extend their moratoriums nationwide as well.

An immediate effect of the action will be a temporary stay of execution for hundreds of thousands of borrowers in default. The bank said it would be brief, a mere pause while it made sure its methods were in order.

But as the furor grows over lenders’ attempts to bypass legal rules in their haste to reclaim houses from delinquent owners, there is a growing expectation that foreclosures will dwindle for months as the foreclosure system is reworked.

Stan Humphries, an economist with the housing site Zillow.com, said what was initially cast as a problem of sloppy record-keeping is rapidly evolving into one that suggests the banks’ procedures for recording loans might not have followed the law.

“The former scenario represents a hiccup for the market, maybe a 30- to 90-day slowdown in foreclosure initiations,” Mr. Humphries said. “The latter scenario is more like hitting a wall.”

The uncertainty is putting the housing market in turmoil and causing vast confusion. Bank of America, for example, said it was not halting sales of foreclosed properties to new owners, but Fannie Mae, the giant mortgage holding company, is doing exactly that with properties it bought from Bank of America.

One real estate agent in Florida said Friday that he had six deals involving former Bank of America properties that had been at least temporarily scuttled. Representatives for Fannie, which was taken over by federal regulators after it failed two years ago, did not return calls.

Real estate agents said the extent of any disruption depended on how long the moratorium lasted, how many lenders ultimately participated — and what people in default decided to do.

“If it’s still January, February, March, and they’re not foreclosing, you’ll see a big effect,” said Jim Klinge, an agent in San Diego. “It’ll be a banker’s holiday, free rent for everybody and a lawyers’ gold mine.”

As soon as Bank of America announced its freeze in a terse press release, Senate Majority Leader Harry Reid and Edolphus Towns, the New York Democrat who leads the House Committee on Oversight and Government Reform, both pointedly asked other lenders to follow suit.

Increased pressure also came from Christopher J. Dodd, the chairman of the Senate Banking Committee, who announced a Nov. 16 hearing on foreclosures.

The other lenders, however, did not seem to be swayed.

JPMorgan Chase, which has halted foreclosures in the 23 states where they need a judge’s permission, says it is putting hundreds of lawyers and executives to work addressing what it characterizes as a “technical” paperwork problem with 56,000 mortgages with improper documentation. Officials have no plans to halt foreclosures nationwide, and believe they can fix the problems within weeks, they said.

Chase officials acknowledge they had a flawed process, but they say they have not mistakenly foreclosed on any homeowners, because the underlying information is accurate. People close to the bank say that about one-third of the properties tied to mortgages under scrutiny are vacant, in line with their assessment of the overall industry.

The average borrower that Chase has foreclosed on, these people added, has not made a payment on the mortgage for about one and a half years — a figure that they say is also consistent with the industry.

Inside Citigroup, which has not suspended foreclosures, officials said they were breathing a sigh of relief. Sanjiv Das, the head of CitiMortgage, began a review of loan servicing processes about 18 months ago in anticipation of a groundswell of foreclosures.

At that time, Citi stepped up its employee training and tightened its documentation processes, giving officials there confidence that they have sidestepped the document issue. But given the huge number of mortgages it processed and its sprawling operations, Citi — which has faced one embarrassment after another — is not publicly declaring victory.

On Friday, Wells Fargo, another big lender that has not halted foreclosures, continued to maintain that its foreclosure processes were accurate and said it was not planning to initiate a nationwide moratorium.

“As a standard business practice, we continually review and reinforce our policies and procedures,” said Vickee Adams, a Wells Fargo spokeswoman. “If we find an error or if an improvement is needed, we take action.”

Bank of America’s chief executive, Brian T. Moynihan, speaking at the National Press Club in Washington, said he did not believe the bank’s action would disrupt the housing market.

“We haven’t found any problems with the foreclosure process and what we’re saying is that we’ll go back and check our work one more time,” he said.

Not only is Bank of America watched more closely as the nation’s largest bank, it also finds itself deeper in the subprime mortgage mess. It holds $102 billion in subprime loans on its balance sheet from the period when lending standards were most lax — 2005 to 2007 — more than JPMorgan Chase, Citigroup or Wells Fargo, according to a report by Christopher Kotowski, an analyst with Oppenheimer.

Bank of America’s troubled mortgage portfolio is a legacy of its July 2009 acquisition of Countrywide, a subprime specialist that was among the financial institutions with the most troubled loans, as well as its January 2009 merger with Merrill Lynch, which was a major player in the business of taking mortgages and transforming them into securities to be sold to investors.

In addition, as the beneficiary of two capital infusions by Washington under the federal bailout, Bank of America was among the banks most dependent on Washington to help survive the financial crisis, receiving $45 billion from taxpayers. Of that, $20 billion came in emergency aid after Merrill’s losses were revealed.

That money has been paid back, but several analysts said the company was eager to maintain good relations with the government, and emphasized that restoring the bank’s public image was a crucial factor in the action on Friday.

“What prompted Bank of America is they see the political writing on the wall, and this has clearly become a political issue,” said Guy D. Cecala, the editor of Inside Mortgage Finance. “Almost every lawmaker is calling for a national mortgage foreclosure moratorium, and given the momentum out there, they wanted to deal with it on their own terms.”

In fact, earlier this year, with a government ban on automatic overdraft fees for debit cards looming, Bank of America actually went further than its rivals and pre-emptively eliminated the overdraft option entirely. Other banks allow customers to now opt in to the program, which can result in huge charges for small overdrafts.

Another reason for Bank of America’s broader action, suggested Richard X. Bove, an analyst with Rochdale Securities, is that the attorney general of the state where it is based, North Carolina, has called on the bank to halt foreclosures there.

“It’s a pre-emptive strike,” he said. “The smartest thing to do is to get ahead of the attorneys general around the country on this.”

Eric Dash and Binyamin Appelbaum contributed reporting.

Payback TimeMany See the VAT Option as a Cure for Deficits

The value added tax (VAT) has been around for decades in other countries. It is predicated on the  idea that ALL people should share in the cost of government. The way it works (see below) is that the government picks up 10% (for example) of each stepof the production and sales process. It is normally reserved for hard goods instead of services.

I think that is is the only good idea around topay down the deficit IF it is applied to Wall Street. In addition to raising money it would force all intermediaries to report every transaction and their profit on it. It would force them todeclare the profit (VAT) and pay the income taxes from the fees and profits.

Let’s look at the way this would work in the derivative market. Better yet let’s look at the derivative market over the last 10 years. Maybe you’ll fee outrage when you read this somewhat over simplified version of the way things REALLY work. 

  1. Mortgage Bonds are sold  to investors by a “seller.” Who gets the selling fee? How much was it? Where did it go? Even under current rules most of this money went untaxed for income tax because by playing the shell game cleverly you can create a question of tax jurisdiction and end up paying no tax and  not even reporting it.
  2. The Seller of the mortgage bonds (and a percentage interest in the underlying notes and mortgages) received a stack of certificates from the Special Purpose Vehicle (SPV/Trust)at a cost of  less than what the certificates were sold for. The great thing for the seller is that the Selling Agent is allowed to “sell forward” to investors, thus knowing exactly6 what his profit is going to be when he takes the stack of bond certificates. The VAT tax would apply here and perhaps result, heaven forbid, in a double tax of VAT and income taxes. Criminal law enforcement could beeefed up on the VAT so that the intermediary parties in the securitization chain have nowhere to hide — if the government does its job in enforcement which would mean training special VAT agents who can understand the workings of securities transfers on Wall Street and can enforce the jurisdicitional issue thaty has been the favorite tool of investment banks working both sides of the Atlantic and Pacific.
  3. The SPV has received an assignment (of dubious legality) from an aggregator pool. It is paying a huge premium over the true value fhe pool, and thus, so are the investors who buy the bonds. In the presence of a government doing its job to enforce tax liability —VAT and Income Tax — the fraud of the entire mortgage meltdown wouldhave been exposed, the government would have taken possession of the investment banks running these pools, and taxpayers would have received in their coffers huge amounts of money paid in taxes from this yield spread premium. But alas,Wall Street continues to get its way and this is considered no a profit or a fee but instead it is either not shown at all as this yield spread profit from sale of ggregator to SPV or it is actually shown as an expense. On an average basis the YSP on the sale from aggregator to SPV was about 80% of the mortgage funding amount. This is where the toxicity of the mortgages and notes was hidden.
  4. And then you continue down the line with the usual undisclosed YSP between mortgage broker and”lender” (actually a straw man through whom the transaction passes etc.

If you put pencil to paper you’ll see that Wall Street didn’t  just dodge responsibility for the mess they created, they dodged the taxes too. If the government was enforcing our existing tax laws through this process, the entire stimulus and other lines of credit from the Federal government would have been paid by the culprits who did this to us.

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December 11, 2009 Payback TimeMany See the VAT Option as a Cure for Deficits By CATHERINE RAMPELL Runaway federal deficits have thrust a politically unsavory savior into the spotlight: a nationwide tax on goods and services. Members of Congress, like their constituents, are squeamish about such ideas, instead suggesting spending cuts or higher taxes on the rich. But with a lack of political will to do the former, and a practical ceiling to how much revenue can be milked from the latter, economists across the political spectrum say a consumption tax may be inevitable once the economy fully recovers. “We have to start paying our bills eventually,” said Charles E. McLure, a tax economist who worked in the Reagan administration. “This strikes me as the best and most obvious way of doing it.” The favored route of economists is known as a value-added tax, which is a tax on goods and services that is collected at every step along the production chain, from raw material to a consumer’s shopping bag. Similar to a sales tax, it generally results in consumers paying more for the things they buy. The revenues could be used to pay for health care or other social programs, or just to pay down existing debt. Like universal health care, every other industrialized country in the world already has a value-added tax (as do about 100 emerging countries). And also like universal health care, this once-taboo policy option has recently been invoked, at times begrudgingly, by many prominent Washingtonians, including the House speaker, Nancy Pelosi; John Podesta, who was co-chairman of President Obama’s transition team; and two former Federal Reserve chairmen, Alan Greenspan and Paul A. Volcker Introducing such a tax would probably require an overhaul of the entire federal tax code, no small order, and something the government last did in 1986. At the time the goal was to simplify the tax system, to raise money more efficiently and with fewer headaches for taxpayers. Since then, federal spending has ballooned, while the government’s ability to raise taxes has become increasingly inefficient. Consider the page length of the tax code and tax regulations, which has expanded by more than 70 percent, according to Thomson Reuters Tax and Accounting. (There are more words crammed onto each page, too.) The tax system is now a compendium of lobbied-for ifs, ands and buts. As the tax code has been embellished and then Swiss-cheesed, the portion of Americans footing the nation’s income tax bill has shrunk. “There are many more deductions and credits, which can often encourage inefficient behavior such as tax shelters,” said Leonard E. Burman, a public affairs professor at Syracuse University, about the changes to the tax system since the 1986 reform. “The ideal tax system has a broad base — few deductions or exemptions — and low rates.” Most of the rest of the industrialized world — including, most recently, Australia — has already taken this lesson to heart by imposing value-added taxes. Unlike income taxes, which are often front-loaded on the rich, then subsequently diluted, a value-added tax is paid by almost everybody. That broad base is one of its major advantages, and why the International Monetary Fund frequently recommends it to countries that need to raise money quickly. What is good for economic purposes, however, can be bad politics, especially since Mr. Obama pledged not to raise taxes on the bottom 95 percent of Americans. (And many Republicans have pledged not to raise taxes on the bottom 100 percent of Americans.) The value-added tax is also the darling of many economists for its bounce-a-quarter-off-its-abs efficiency. Its administrative costs to the government are generally low. It is also considered less of a drag on the economy over the long run than raising income taxes, which discourage people from saving money and thereby making capital available to businesses. To understand why a value-added tax is considered so efficient, you have to understand how it usually works. Imagine the production of a new dress, in three steps: ¶A fabric store sells a tailor enough silk to make one dress, at a total price of $10 before taxes; ¶The tailor sews a dress and sells it to Macy’s for $30 before taxes; ¶Macy’s then sells the dress to a shopper for $50, before taxes. Let’s say the value-added tax is 10 percent. The government will collect some tax revenue in each step of the production process, from roll of fabric to cocktail-party scene-stealer, but each business in the chain gets credit for the tax already paid by other suppliers. When selling the cloth to the tailor, the fabric store adds a tax of 10 percent, or $1 on the $10 of supplies the tailor purchases. The tailor pays the fabric store $11, and the store remits $1 to the government. When the tailor sells his dress to Macy’s, he calculates the value-added tax as $3, or 10 percent of his $30 pretax price. Macy’s pays the tailor $33. But instead of sending the full $3 to the government, the tailor gets to subtract the $1 of taxes he had already paid to the fabric store. So he sends $2 to the government. When Macy’s sells the dress to a shopper, it adds another 10 percent, so the shopper pays $55, or $50 plus $5 in tax. That would be in addition to any state or local sales taxes consumers have to pay, depending on the locale. Macy’s checks to see how much the previous companies in the supply chain — the fabric store and the tailor — have already paid the government in value-added taxes, and subtracts that from the $5. Macy’s ends up remitting just $2 to the government. The government receives $5 total, or 10 percent of the final purchase price, but from three different businesses. Although more complicated, value-added taxes are considered better than equivalent sales taxes — where the tax is levied only when the consumer buys a product — for two main reasons. First, if a single business evades the value-added tax, the government does not lose a large portion of money, because it will collect taxes at other stages of production. Since companies usually get credit for taxes already paid by their suppliers, companies will pressure other businesses in the production chain to prove they paid their taxes. That means the system is somewhat self-policing. To some foes of big government, though, the efficiency of the tax is also its fatal flaw. Conservatives worry that it enables the government to raise money with such little effort that it will encourage Washington to spend even more. On the other hand, liberals are wary of value-added taxes because they are regressive. Poor people spend a higher portion of their income buying things than the rich, meaning lower-income people would be disproportionately hurt. That is why countries often make other major changes to their tax code at the same time. In Australia, the government imposed a value-added tax in the middle of an overhaul of the system in 2000, which included making the income tax system more progressive. “Many countries with VATs have income taxes that start out at higher income thresholds,” said James Poterba, an economics professor at M.I.T. Combining a broad-based VAT with a steeply progressive income tax, he said, avoids affecting the poor too much. But just as the income tax has been hollowed out by countless loopholes, so could a value-added tax. Many European countries, for example, have counteracted the regressive qualities of the tax by exempting broad categories of goods, like groceries and children’s clothing. This always creates problems, economists say. Companies are tempted to mislabel their products so they can avoid the tax. “What really is the difference between prepared food versus nonprepared food?” said Alan J. Auerbach, an economics professor at the University of California, Berkeley. “You start having to split hairs, and that can become quite complicated.” Besides cheating the government of revenue, this sort of behavior also distorts what people choose to buy, causing a drag on economic development, Mr. Auerbach said. Moreover, in some industries — like financial services — it is difficult to evaluate how much value is added because of the way they make their money. The solution in many places, like New Zealand, is to exempt the financial services industry. But that might not go over well in a country whose federal debt has recently swelled precisely because of a major banking crisis. Such political hurdles, along with a still-tentative economic recovery, make a consumption tax — or a tax increase of any kind — unlikely in the immediate future. But with economists like Kenneth Rogoff of Harvard predicting that federal tax revenues will need to rise by 20 to 30 percent in the next few years, politicians may hold their noses and decide this tax is the least worst option. “Of course, we want to take down the health care cost, that’s one part of it,” Ms. Pelosi told Charlie Rose of PBS. “But in the scheme of things, I think it’s fair to look at a value-added tax as well.” Kitty Bennett contributed reporting.

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