Flashback: A Foreclosure Mill Halloween Party

Posted on October 31, 2016 by Neil Garfield

2011 Halloween Flash Back from the New York Times.

On Friday, the law firm of Steven J. Baum threw a Halloween party. The firm, which is located near Buffalo, is what is commonly referred to as a “foreclosure mill” firm, meaning it represents banks and mortgage servicers as they attempt to foreclose on homeowners and evict them from their homes. Steven J. Baum is, in fact, the largest such firm in New York; it represents virtually all the giant mortgage lenders, including Citigroup, JPMorgan Chase, Bank of America and Wells Fargo.

The party is the firm’s big annual bash. Employees wear Halloween costumes to the office, where they party until around noon, and then return to work, still in costume. I can’t tell you how people dressed for this year’s party, but I can tell you about last year’s.

That’s because a former employee of Steven J. Baum recently sent me snapshots of last year’s party. In an e-mail, she said that she wanted me to see them because they showed an appalling lack of compassion toward the homeowners — invariably poor and down on their luck — that the Baum firm had brought foreclosure proceedings against.

When we spoke later, she added that the snapshots are an accurate representation of the firm’s mind-set. “There is this really cavalier attitude,” she said. “It doesn’t matter that people are going to lose their homes.” Nor does the firm try to help people get mortgage modifications; the pressure, always, is to foreclose. I told her I wanted to post the photos on The Times’s Web site so that readers could see them. She agreed, but asked to remain anonymous because she said she fears retaliation.

Let me describe a few of the photos. In one, two Baum employees are dressed like homeless people. One is holding a bottle of liquor. The other has a sign around her neck that reads: “3rd party squatter. I lost my home and I was never served.” My source said that “I was never served” is meant to mock “the typical excuse” of the homeowner trying to evade a foreclosure proceeding.

A second picture shows a coffin with a picture of a woman whose eyes have been cut out. A sign on the coffin reads: “Rest in Peace. Crazy Susie.” The reference is to Susan Chana Lask, a lawyer who had filed a class-action suit against Steven J. Baum — and had posted a YouTube video denouncing the firm’s foreclosure practices. “She was a thorn in their side,” said my source.

A third photograph shows a corner of Baum’s office decorated to look like a row of foreclosed homes. Another shows a sign that reads, “Baum Estates” — needless to say, it’s also full of foreclosed houses. Most of the other pictures show either mock homeless camps or mock foreclosure signs — or both. My source told me that not every Baum department used the party to make fun of the troubled homeowners they made their living suing. But some clearly did. The adjective she’d used when she sent them to me — “appalling” — struck me as exactly right.

These pictures are hardly the first piece of evidence that the Baum firm treats homeowners shabbily — or that it uses dubious legal practices to do so. It is under investigation by the New York attorney general, Eric Schneiderman. It recently agreed to pay $2 million to resolve an investigation by the Department of Justice into whether the firm had “filed misleading pleadings, affidavits, and mortgage assignments in the state and federal courts in New York.” (In the press release announcing the settlement, Baum acknowledged only that “it occasionally made inadvertent errors.”)

MFY Legal Services, which defends homeowners, and Harwood Feffer, a large class-action firm, have filed a class-action suit claiming that Steven J. Baum has consistently failed to file certain papers that are necessary to allow for a state-mandated settlement conference that can lead to a modification. Judge Arthur Schack of the State Supreme Court in Brooklyn once described Baum’s foreclosure filings as “operating in a parallel mortgage universe, unrelated to the real universe.” (My source told me that one Baum employee dressed up as Judge Schack at a previous Halloween party.)

I saw the firm operate up close when I wrote several columns about Lilla Roberts, a 73-year-old homeowner who had spent three years in foreclosure hell. Although she had a steady income and was a good candidate for a modification, the Baum firm treated her mercilessly.

When I called a press spokesman for Steven J. Baum to ask about the photographs, he sent me a statement a few hours later. “It has been suggested that some employees dress in … attire that mocks or attempts to belittle the plight of those who have lost their homes,” the statement read. “Nothing could be further from the truth.” It described this column as “another attempt by The New York Times to attack our firm and our work.”

I encourage you to look at the photographs with this column on the Web. Then judge for yourself the veracity of Steven J. Baum’s denial.

Filed under: foreclosure | Tagged: foreclosure fraud, Ny Times, steven baum foreclosure halloween | 3 Comments »

It’s the title, Stupid!

Posted on September 5, 2012 by Neil Garfield

“What is surprising is the fresh evidence these cases are turning up of cockeyed mortgage practices, during both the boom and the bust. As these matters are adjudicated, perhaps we will finally learn whether these practices were intended or accidental.” — Gretchen Morgenson, NY Times

Editor’s Analysis: Gretchen Morgenson has latched onto the key element of the “securitization” of home loans that was faked to cover a Ponzi scheme in which the largest financial players in the world were pulling all the strings.

While the propaganda would have us believe that the situation is improving, the looming number of decisions from now alerted Judges may well produce a tidal change in the outcome of foreclosure litigation, the value of the bogus mortgage bonds which appear to be worthless from start to finish, and the balance owed on any of the debt issued under the guise of securitization.

Romney and the Republicans, taking their talking points from Wall Street are saying let’s wait until the market “bottoms out.” What people want and could have is a market where prices are going up, not “bottoming out.” Voters do not want to hear that because each year the predictions are the same: the market is finally hit bottom and is recovering, only to be bashed by news of ever-decreasing prices on homes.

The judicial system is where it all happening, albeit at the usual frustrating snails pace that the courts are known for, some of which is caused by the sheer volume through which the banks and servicers, masquerading as note holders push good-looking documents with not a single word of truth recited.

Judges are starting to realize that the issue of the identity of the creditor is important if any of these cases are going to settle or where a modification is the final result.

Under HAMP the servicers and “owners” of the mortgages are required to consider the mortgage modification proposal from borrowers. But they are not doing that, complaining that it is straining their resources and infrastructure since they are not set up for that. Whose fault is that? They took the TARP money and they agreed to modify where appropriate and even get paid for it.

The borrower is left in purgatory with no knowledge of the proper party to whom they can submit a proper proposal for modification, with principal loan r eduction or actually principal loan correction since the original appraisal was false and procured by the bank. Judges like settlements. But they can’t get it if they keep siding with the banks that the identity of the lender and the actual accounting for all money paid in or paid out of the loan receivable account is irrelevant.

The problem is MERS and the entire origination process where the rented name of a payee on the note, the rented name of the lender described in the note and mortgage, and the rented name of the mortgagee or beneficiary was used instead of the actual source of funds.

The second problem is the balance due, on which the servicers and attorneys have piled illegal fees.

The answer is the strategy of deny and discover which is being pursued by alliance partners of livinglies and the garfieldfirm.com. By the way, we are especially ready in South Florida. Call our customer service number 520-405-1688 for details on getting legal representation.

The banks and servicers are pretending that the report from the most recent sub-servicer is sufficient for the foreclosure. That has never been the case. Historically, if a lender felt it needed to foreclose it came to court with the entire loan receivable account starting with the funding and origination of the loan and continuing without breaks, up to and including the date of filing.

The banks and servicers have been steadfast in their stonewalling to prevent the homeowner from knowing the true status of their account, the true identity of the creditor, all of which can be gleaned not from the the records of the subservicer but from the records of the Master Servicer and the “Trustee” of the supposed common law trust which was “qualified” as a REMIC for tax purposes.

An accounting from the Master Servicer and Trustee would lead to the discovery of admissible evidence as to what the real creditor was owed after receipt of all payments, and who the current real creditor might be. After all, they looking for foreclosure and they are taking these properties by “credit bids” instead of paying cash at the auction. Only a creditor whose debt was secured by the mortgage or deed of trust can submit a credit bid.

The truth is that virtually all credit bids that have been submitted are invalid because they were not submitted by a secured creditor. And that leads to an even larger problem for the banks. Those “assets” they are holding on their balance sheet are not just fake, worth zero, they are also offset by a liability to those whose money was taken by the same investment banks that sold bogus mortgage bonds to the investors.

Since those sales were made through elaborate CDOs, CDS and other devices, we have known since 2007, that the reported “leverage” (using investor money) was as much as 42 times the amount of the average loan in the portfolio.

So that loan for $300,000 resulted in a 100 cents on the dollar payoff to banks who had neither funded nor purchased the loans but were representing themselves as the legal holder of the note and thus the obligation.

If the mortgage was invalid, the note was unenforceable because it wasn’t funded by the parties named on the note, and the “assignment,” or other transfer or sale of the “note” were all equally null and void, then the bank that has picked one end of the stick saying the assets on their balance sheet are real, should also have put a contingent liability on their balance sheet for as much as $12 million on the $300,000 loan.

Each time foreclosure is completed, or appears to be completed, that huge liability is wiped out arguably. Then the banks keep the $12 million, and dump the loss on the individual loan on the investors, which is usually some 50%-65% of the loan amount.

THAT is why the banks and servicers are in the business of foreclosure, not modification or settlement. They have no choice. They could owe back all that money they received. It isn’t the loss of $300,000 or some part thereof they are worried about, it is the liability of $12 million on that loan that they are avoiding.

The political impact of this will be devastating to incumbents not in 2012 but in 2014 when the pension funds, who have already reported they are “underfunded” start slashing pension benefits, thus requiring another round of Federal Bailouts because the government so far has refused to claw back all of the money that was made by the banks and distribute it to the investors and reduce the borrowers balance owed on the “loan.”

Given the above scenario and the widespread use of nominees in lieu of real lenders and real sources of funding, it is highly probable that the title to potentially tens of millions of properties have clouds either because the foreclosure was wrongful or because the wrong party executed the satisfaction of mortgage or both.

And as stated in the previous post, this is not a gift to homeowners. They will owe tax on the elimination of the mortgages and loans because the loans were paid, not forgiven.

It is left-handed way of providing huge principal reductions because of PAYMENT (not forgiveness). With the balance paid, the borrowers must report the claim as a gain paid by co-obligors they never knew existed. With a top tax rate of 35% currently, soon to be 38%, the homeowner will have a tax obligation for no more than the tax rate applied against the balance due on the loan — the equivalent of a loan reduction of 65%-75%, which would satisfy anyone.

Modification proposals from homeowners are much higher than that. The only reason they are rejected is because each modification would transform each loan into the class of “performing” and would materially change the balance sheet of each of the mega banks with adverse consequences for the mega banks and a bonanza for the 7,000 community banks sand credit unions in this country.

But in order to determine the balance due, the accounting must be a total accounting starting from the original funding of the loan right up to the present. When Judges realize that the would-be foreclosers can’t or won’t provide that they will start making the opposite presumption — that it is the banks and servicers that are the deadbeats.

Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud | Tagged: accounting, balance sheet, credit bid, Gretechen Morgenson, MERS, modification, Ny Times, payment, Ponzi, taxes on cancellation of mortgage and note | 283 Comments »

NY Times: AG Settlement Without Investigation a Sham: $700 billion in negative equity

Posted on November 9, 2011 by Neil Garfield

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EDITOR’S COMMENT: The Times is finally getting it. They haven’t gone all the way yet, but they are moving in the right direction. There are bumper stickers around saying “Honk if I’m paying your mortgage.” Sounds crazy, doesn’t it? But it raises the truth and reality of this situation.With $700 billion in negative equity reported, which is a very conservative estimate of the real amount, we need to ask ourselves who received the benefit of that crash? The answer is clearly the Banks.

If the loans were real and the terms were proper, and the Banks had their own money at risk, they would not have that benefit. If the crash was real and the downturn was normal, then then recession would not have been nearly as severe, the Banks would not have been able to cry wolf and we wouldn’t have given TARP and other bailouts totaling $16 Trillion — $3 Trillion more than the total of all mortgages during the mortgage meltdown.

Many States, without any investigation or with minimal investigation are looking to enter into a settlement with the banks that would absolve them of responsibility except for the money in the deal — now set at $25 Billion — all while the Banks are still raking in huge “trading profits” representing the money they skimmed from investors during the mortgage meltdown. Trillions are at stake and the AGs are considering a tiny fraction of 1%. Why?

Politics. In virtually every AG there is a burning desire for higher office. Contributions from the financial sector, representing approximately half of the nation’s GDP as we currently measure it, are needed for any political campaign to succeed. Being kind to the Banks at the expense of their state and at the larger expense of their country seems like a good idea, especially if you can say we just had this huge settlement with the Banks that provides relief to homeowners and will put a dent in foreclosures.

We don’t need a dent. We need a recovery. And if you and your neighbor are paying on those mortgages through your taxes, then the Banks shouldn’t get the money from the alleged borrowers, assuming there is even a balance left after the payments made by government and insurers. If you don’t like the borrowers getting a “gift” of principal reduction, consider this: you are again giving another gift to the Banks who used investor money to fund the loans, not their own money.

And consider the fact that without reducing the principal the number of foreclosures will be gargantuan bringing housing prices and the economy down even further. Do you want to stop homeowners from getting relief or do you want to continue giving gifts to the Banks? Check the news — FANNIE and FREDDIE are asking for more of your money. When do YOU want that to stop?

Letting the Banks Off Easy

NY Times Editorial

The banks want California, and the Obama administration hopes they can get it.

In September, the attorney general of California, Kamala Harris, withdrew from settlement talks between the banks and federal and state officials over mortgage abuses. Ms. Harris said California was being asked to excuse bank conduct that has not been adequately investigated and to grant the banks an unacceptably broad release from legal liability for the mortgage mess.

Those grave reservations have also been raised by other state attorneys general — including Eric Schneiderman of New York and Joseph Beau Biden III of Delaware. The administration, however, wants a deal. As pressure builds to get on board, Ms. Harris and her like-minded peers should stand their ground and avoid letting the banks off easy.

The administration says a settlement today would quickly deliver relief to needy borrowers. That’s true as far as it goes, but it doesn’t go far enough. Early word of the proposed settlement indicates that banks would reduce the balances on a million or so underwater loans by $17 billion to $20 billion. They would put up $5 billion to $8 billion to help pay for refinancings, counseling, legal services and other aid to homeowners. And they would have to adhere to tougher standards for loan servicing and foreclosures. That would be better than now but paltry compared with the potential extent of bank misconduct and with the scale of the mortgage debacle. At present, 14.5 million borrowers — and the broader economy — are drowning in some $700 billion of negative equity.

The administration also believes federal and state officials could effectively pursue investigations of unexamined issues after a settlement. We doubt that. The government’s history on challenging banks and holding them accountable does not inspire confidence. And for banks — threatened by crushing legal challenges for their conduct — the whole point of settling is to restrict legal claims.

The proposed settlement reportedly would prevent the states from pursuing claims against banks relating to fraud or abuse in the origination of loans during the bubble. (In some states, the statute of limitations has expired for bringing challenges for faulty originations but not on all loans in all states.) It would also prevent states from pursuing claims for foreclosure abuses, like improper denial of loan modifications. And it would prevent them from pursuing banks’ misconduct in their dealings with the Mortgage Electronic Registration Systems database, or MERS, a land registry system implicated in bubble-era violations of tax, trust and property law.

The proposal would not preclude the states from pursuing the banks for wrongdoing in the repackaging and marketing of loans as mortgage-backed securities. But, as a practical matter, the ability to fully press such claims — and to achieve significant redress — could be impeded or blocked by the other constraints. Once one avenue of inquiry is closed off, it can be difficult to ascertain what happened along other points in the mortgage chain.

In effect, the legal waivers being contemplated would let the banks pay up to sweep wrongdoing under the rug.

For the settlement to be fair and meaningful, the redress from the banks must be far greater than the $25 billion that has been floated, or the release from legal liability far narrower. The best outcome would be for government officials to do what they should have done all along: develop the strongest possible legal case by fully investigating the banks’ conduct during the bubble and since the crash and then — and only then — talk settlement. In the meantime, the public is being well served by attorneys general who are willing to say that the deal currently on the table is not nearly good enough.

Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud | Tagged: AG settlement, bankruptcy, borrower, countrywide, disclosure, foreclosure, foreclosure defense, foreclosure offense, foreclosures, fraud, LOAN MODIFICATION, modification, Ny Times, quiet title, rescission, RESPA, securitization, TILA audit, trustee, WEISBAND | 31 Comments »

NY TIMES: LOUSY JOBS, NO JOBS, NO GOOD PROSPECTS

Posted on October 8, 2011 by Neil Garfield

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EDITOR’S NOTE: The Times Editorial hits the nail on the head, but uses the wrong hammer. Jobs and growth of the middle class is the only thing that will stand between us sustaining ourselves as a world power or becoming a banana republic. Jobs and growth are not magical concepts that suddenly happen when you waive a wand.

Jobs are created when businesses start and grow. Businesses start and grow with capital. Wall Street, directly or indirectly is holding $3.5 TRILLION hostage in its effort to force Obama from office while it starves the economy and literally takes food of the plates of tens of millions of Americans. The capital held by Wall Street is NOT the capital of Wall Street, it is the money stolen from other people that Wall Street is holding.

That money was stolen in the world’s largest financial fraud of all time — something that will remain unequaled for decades, perhaps hundreds of years. They did it with the sale of exotic instruments to investors, betting against those investments because they knew they had the power to torpedo the investments, and the tools of destruction were exotic mortgages where even the simplest looking transaction was based upon fraudulent appraisals, non-disclosure of important information required by law, and in particular using conduits as though they were lenders, thus achieving insulation from charges of predatory and fraudulent lending practices. In fact the entire mortgage mess was really just part of the larger scheme of the issuance of unregulated securities in fraudulent schemes to deprive investors, pension funds and homeowners of what little they had left to survive.

As with all crimes against society the only way to cover them up is with more fraud. More deception and more intimidation. So the paperwork is mostly fabricated, forged and unduly notarized documents pretending to attest to the authority and knowledge of signors. But the paperwork is a distraction from the fact that the the “mortgage” transactions were really part of the securities issuance. This actually makes the signing of the mortgage documents an integral part of the issuance of the mortgage bonds. That changes the character of the transaction and probably the laws that apply.

Applying existing laws without any changes to substantive law, procedure or the rules of evidence, the banks will lose, pure and simple. Every time a Judge takes a close look at some piece of paper that is

signed by “John Jones, as authorized signor (it doesn’t even say agent) [without any document showing agency authority],

on behalf of XYZ corporation, as attorney in fact (same defect),

as successor to ABC, as servicer (under a PSA in which the loan transfer requirements were never satisfied and therefore never completed),

for the DEF Trust (a non-existent trust that is actually a general partnership),

on behalf of JKL Corp. Trustee (a trustee of a Trust that never existed because it lacked the elements under New York State law to create a common law trust, and in which the powers of the trustee actually amount to nothing once you read the whole document purporting to describe the “trustee”)”

all out of the chain of title using some private system of keeping track of the owners thus depriving anyone of the knowledge as to who can sign a satisfaction of a mortgage that was obviously never perfected into a valid lien, even though ti was recorded —

every time the Judge really looks —- he/she decides this smells to high heaven and that the entire process is defective.

There is no lending institution in existence that would accept such a signature from an agent for a borrower.

That they accept it from each other as they treat the loan was though it was transferred even though it wasn’t is just a game without risk because nobody is paying anything for the loan and nobody funded the loan except the hapless pension fund whose money was taken for fees first and mortgage later.

Housing drives the economy directly and indirectly. So if we want to see a change we must bring the banks and big business to task, force them to act like good citizens and return the favor of special tax treatment and subsidies with growth money, start-up money and easier credit for consumers, who drive 70% of the economy. Ignore housing and you abandon hope of a solution. Ignore consumers and their jobs and earnings, and you have disrupted 70% of the economy with no prospects for improvement.

Somehow the banks continue to be heard on their spin that it is better to let them keep the proceeds from stealing the purse than to give it back to the consumers from whom they stole it. That is ending now with Occupy Wall Street. The OWLS are wise beyond their years.

More Bleak Job Numbers

It would take a lot of optimism to put a positive spin on the jobs report for September, released on Friday by the Labor Department.

Employers added 103,000 jobs last month, allaying fears, for now, of a double-dip recession. But even if the economy avoids another contraction, the numbers confirm that the job market is in a deep rut that is, for all purposes, indistinguishable from recession. There are still 14 million people officially unemployed, and nearly 12 million more who have given up actively looking for work or who are working part time but need full-time jobs.

Earlier this week, President Obama and the Federal Reserve chairman, Ben Bernanke, delivered bleak economic assessments, which demand a government response. The economy, already at a crawl, could well slow down further in response to economic setbacks in Europe and China or to homegrown problems like political gridlock that delay spending on job-creation efforts.

The economy is not producing enough jobs, and many of the ones created are lousy. Much of last month’s job growth came as 45,000 striking Verizon employees returned to work. Without that one-time boost, the economy added only 58,000 new positions in September, roughly in line with the slow pace of job creation over the past several months.

That is not nearly enough to lower the unemployment rate, which is at 9.1 percent and is almost certain to rise in the months ahead, barring an unexpected upsurge in economic activity.

The new jobs are generally in lower-paying fields, like home health care, and in part-time and temporary employment. These kinds of employment may be better than no work, but they are generally not the types of jobs that allow workers to get ahead.

The September report also shows the permanent scars caused by persistent joblessness. The share of workers who have been unemployed for more than six months increased from 42.9 percent to 44.6 percent, near its record high from early last year. That is likely to translate into irreversible reductions in the standard of living for millions of Americans because the longer one is unemployed, the harder it becomes to find new work, especially at previous pay levels.

Children will be among those most harmed by the jobs crisis. The Economic Policy Institute, using data from the September report, has calculated that 278,000 teachers and other public school employees have lost their jobs since the recession began in December 2007. Over the same period, 48,000 new teaching jobs were needed to keep up with the increased enrollments but were never created. In all, public schools are now short 326,000 jobs.

At a time when more and better education is seen as crucial to economic dynamism and competitiveness, larger class sizes and fewer teachers are the last thing the nation needs. Staffing reductions also mean that schools are less able to respond to the needs of poor children, whose ranks have increased by 2.3 million from 2008 to 2010.

The situation calls out for swift passage of Mr. Obama’s jobs bill and even more far-reaching efforts to revive growth and employment. The alternative is lasting damage from a jobs crisis that has already done enormous harm to families and communities.

Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud | Tagged: bankruptcy, borrower, countrywide, disclosure, economy, foreclosure, foreclosure defense, foreclosure offense, foreclosures, fraud, housing, jobs, LOAN MODIFICATION, modification, Ny Times, Occupy wall Street, OWLS, quiet title, rescission, RESPA, securitization, TILA audit, trustee, WEISBAND | 9 Comments »

$600 TRILLION IN SWAPS: WHO OWNS THE DEBT?

Posted on April 27, 2011 by Neil Garfield

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EDITOR’S ANALYSIS: Here is the problem: $600 TRILLION in swaps seems like a big number. It is. And it is only an estimate, so we can assume there is some variance. How big is it? Well the combined currency issued across the world by all governments is $50 TRILLION. So it doesn’t take a rocket scientist to know that there is 12 times the amount of the world’s currency sitting out there masquerading as securities based upon paper whose value is derived from some debt which is to be paid, you guessed it, in currency.

A lot of the swaps might cancel each other out but we are still stuck with the fact that the securities affecting ownership, guarantee and payment of debt due from borrowers have virtually nothing to back them up — even if you used literally all the money in the world there would only be 8% coverage. And we know that a lot of these swaps have been exercised and triggered in the mortgage market — and that was what triggered the United States printing another few TRILLION dollars so the financial firms playing with these weapons of mass destruction could get paid 100 cents on the dollar instead of, at most, 8 cents.

Now if the 100% payment of the debt was triggered by the swap contracts and the swap contracts are 12 times all the currency in the world, it stands to reason that these synthetic derivatives represent the sale of the same debt 12 times over. One would think that once was enough, but not on Wall Street. One would also think that a third party paying off the debt would have some legal or equitable right to go after the original borrower on the debt, which is what the banks are saying in the foreclosures. BUT the swap contracts all have a provision that specifically waives any rights to the debt — which means they are paying to someone who will still own the debt. They are paid in full, perhaps 12 times over, but they still have the debt, or do they?

The originating parties to the swaps were NOT the investors who bought mortgage backed securities or mortgage bonds. That would make too much sense. No, the originating parties on the swap contracts were the brokers who sold the mortgage bonds — and sometimes sold the same load of toxic waste several items over by the use of swap contracts. In fact, that was the way they could be sure the pool would fail — by loading even the highest tier of the special purpose vehicle (trust) with swap contracts on the lowest tier (tranche). Being sure of something gives you an advantage to say the least. Making a “bet” on the failure of the pool, as a whole is like betting the sun will come up in the morning — if it doesn’t, who cares about anything?

So you have these bonds, derivatives on bonds, and bets on derivatives on bonds circulating in a swirl of hand written notes (literally) so nobody can keep track of them, which is LEGAL because Congress made it legal when it declared these instruments to neither securities nor insurance contracts in 1998. But back on earth where most of us live, we have some problems that just won’t go away. Besides the obvious fact that the vapor created by these financial firms is more than anything the world can sustain, it isn’t possible to know who actually “owns” the debt or whether some agency relationship arises as a result of the swap contracts or derivatives.

Wall Street’s answer to this problem is to go to court masquerading some entity as a pretender lender and portraying the situation as an ordinary loan transaction where the creditor is present. This in turn creates the presumption that the borrower must now satisfy the burden of proving that the debt was paid. In fact, it is the initial presumption that is incorrect and the clever way it is presented to Judges has led them to believe that the creditor exists because the debt MUST exist, when in fact it has most probably been extinguished several times over. By thus shifting the burden of proof to the borrower, who knows he borrowed money and knows he didn’t make the payment, EVERYONE assumes that the borrower is in trouble. Lawyers representing the borrowers on any loan that was securitized do their clients a disservice when they make that mistake.

Now Judges in trial and appellate courts and even courts of limited jurisdiction are beginning to see the light. By applying the simple principle embodied in the alignment of parties, the party seeking affirmative relief is the pretender lender, not the borrower. By applying the rules of civil procedure, the pretender lender must make allegations that have hit a brick wall: that it is the lender or the successor to the lender. The simple factual problem faced by the pretender lender is that they never made the loan from their own funds nor did they ever buy the loan with their own funds. Their attempt at fabrication of documents to show loans transfers has also blown up i their face and many lawyers can expect to be disciplined, sued civilly and even criminally for their participation in this scheme. PLAUSIBLE DENIABILITY IS DISSOLVING.

By applying the simplest and most basic of rules and laws, for the last 10 years or more, there has not been any actual creditor thus far, seeking to enforce any debt that was securitized, which in the case of consumer debt, is basically all of it. Consumers, homeowners, and their lawyers didn’t create this problem. Wall Street did. And the idea that in court they can shift the burden of paying for the mess or otherwise cleaning it up is preposterous. And the days of MAKING the consumers pay for it is equally preposterous because they have no more money or credit. Thus Wall Street has painted themselves into the proverbial corner and as this continues to unravel, the consequences of leveraging 40 times on an “asset” (that was overvalued to begin with, and never transferred into new ownership) are that the eventual collapse of empires on Wall Street is inevitable. The only question is when?

Derivatives Firms Face New Capital Rules

By BEN PROTESS

Financial regulators proposed new rules on Wednesday that would require large derivatives trading firms to bolster their capital cushions, the latest attempt to reduce risk in the $600 trillion swaps market.

The rules, proposed by the Commodity Futures Trading Commission, are largely aimed at swaps dealers — brokerage firms, big energy trading shops and Wall Street bank subsidiaries that arrange derivatives deals. The plan also would apply to so-called major swaps participants, companies that are either highly leveraged or have huge positions in swaps contracts.

The agency’s commissioners voted 4 to 1 in favor of advancing the proposal to a 60-day public comment period, after which they must vote on a final version of the rules. Scott D. O’Malia, one of the agency’s two Republican commissioners, voted against the proposal.

The proposed rules are a result of the Dodd-Frank Act, the financial regulatory law enacted last year. The law mandated an overhaul of swaps trading, an unregulated industry that was at the center of the financial crisis.

The commission has already proposed rules that would require many swaps — a type of derivative contract that can be tied to the value of commodities, interest rates or mortgage securities — to be traded on regulated exchanges.

But for months, the commission had declined to say which types of swaps would face the new rules. On Wednesday, after months of deliberation, the commission said its swaps definition would include foreign currency options and foreign exchange swaps and forwards.

The commissioners voted 4 to 1 to propose the definition, which would exempt insurance products and consumer transactions like contracts to purchase home heating oil.

The commission’s separate proposal to build capital cushions in the derivatives industry could help prevent a repeat of the 2008 financial collapse, regulators say.

In the lead-up to the financial crisis, investors bought billions of dollars worth of credit default swaps as insurance policies on risky mortgage-backed securities. When the underlying mortgages soured, American International Group and other companies that sold the swaps lacked the capital to honor their agreements.

Under the commission’s new plan, those firms would have to put aside enough cash to cover unforeseen calamities. Regulators, until recently, had little authority to set any rules for the swaps market.

“Capital rules help protect commercial end-users and other market participants by requiring that dealers have sufficient capital to stand behind their obligations,” Gary Gensler, the commission chairman, said in a statement.

Still, there is no guarantee that enhanced capital levels will avert future disasters. And there is no magic capital number that regulators see as a cure-all; different firms will face different requirements.

Swaps dealers and major trading firms that are already registered with the commission as futures brokers would have to hold at least $20 million of adjusted net capital, on top of existing requirements.

Other firms that are subsidiaries of big banks would have to meet the same capital standards as the parent company, while storing away at least $20 million of Tier 1 capital.

Yet another set of firms would have to keep tangible net equity equal to $20 million, in addition to putting aside funds to cover market and credit risk.

The commission’s proposal covers more than 200 firms expected to register as swaps dealers and major swaps participants.

The commission also voted to reopen or extend the public comment period 30 days on its earlier rule proposals. The agency plans to finalize most Dodd-Frank rules by the fall.

Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud | Tagged: bailout, bankruptcy, borrower, disclosure, foreclosure, foreclosure defense, foreclosure offense, fraud, Lender Liability, mortgage meltdown, Ny Times, rescission, securitization, TILA audit, trustee | 26 Comments »

“Phantom” Trustees: Tools of Wall Street

Posted on April 11, 2011 by Neil Garfield

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EDITOR’S ANALYSIS: There are so many “Trustees” running around these days, it is impossible to figure out what they do and if they even really exist. In the article below, Streitfield points out that the “Trustees” on deeds of trust “in those states where foreclosures are not governed by the courts” are essentially phantom entities. The original trustee on teh deed fo trust is usually a genuine entity qualified to act in good faith on behalf of the beneficiary.

There are three phantom deals running parallel in each “securitized” loan situation: (1) the actual transaction which involves money exchanging hands and where there is no trustee at all named on the deed of trust for the investor-lender (2) the fictitious securitization infrastructure under which the investor believes the receivables are being carved up into pieces that reduce risk to nearly zero in which there is no trustee named on the deed of trust for investor-lender or anyone else and (3) the fictitious transaction described in the closing documents in which a trustee is named on the deed of trust for a false beneficiary.

The current practice is driven by the fact that the original “trustee” on the deed of trust is unwilling to perform tasks that are at best dubious as to their authenticity or compliance with legal requirements. Thus when the “loan” is declared in default (but is not necessarily in default) by some remote entity taking instructions from another remote entity, a “substitution of trustee” is executed and filed. This is of course years after the deal was done usually and is signed by people without authority — like from MERS or some other robo-signing forgery and fabrication mill. The new “Trustee” is completely controlled by Wall Street and simply has a name that is used to initiate foreclosures, whether it even knows that the notice went out or not.

This practice is mirrored by the now multitudinous so-called foreclosure mills that were bankrolled by Wall Street, who staffed the offices, supplied the money, and and personnel, and leased the license of an attorney who had few scruples in connection with the use of his name or law license. If you get a look at the daily calendar of David Stern or any of the other foreclosure mill moguls you’ll see they didn’t have much to do. Neither do the trustees. BILLIONS of dollars were paid out to such mills, trustees, and remote vehicles for them to keep their mouths shut and do what they were told to do.

As the article below points out, people like Adam Levitin are highly critical of the deals that are being made with the remote vehicles and servicers, inasmuch as the real players who too the money from the investors, intentionally lost it as part of a scheme whereby they turn the investors’ loss into a profit worth multiples of the loss, and are now seeking to take homes in foreclosures using appearances instead of reality.

Levitin says, and I agree, that these deals are worse than no deal at all because they provide political cover to Wall Street. We can expect to see more of them until Wall Street has its way and the matter is “settled” with entities that have no assets, no authority, and whose mere presence causes defective and chaotic title problems for generations to come.

New Rules for Mortgage Servicers Face Early Criticism

By DAVID STREITFELD

Federal banking regulators have not officially imposed their new rules for the top mortgage servicers, but criticism is already being heard. A wide coalition of consumer and housing groups is denouncing the legal agreements, which are likely to be published within a few days.

The new rules require the servicers to improve their processing systems, to stop foreclosing while negotiating to modify the loan and to give borrowers a single direct means of contact.

Servicers will be required to bring in a consultant to investigate complaints by homeowners who lost money because of foreclosure processing errors in 2009 and 2010. In some cases the homeowners could be compensated.

The problem, said Alys Cohen of the National Consumer Law Center, is the agreements “do not in any way require the servicers to stop avoidable foreclosures, and that is what we need.”

At the heart of the complaints by Ms. Cohen and others is whether the servicers, which are arms of the biggest banks, may be compelled to give households fighting foreclosure a better shot at renegotiating their loans and staying in their properties.

The servicers argue that whatever mistakes they made in handling foreclosures — errors that will be amply on view in a regulatory report accompanying the agreements — they never foreclosed on anyone not in severe default. They are strongly resisting proposals to cut the debt of homeowners in default to help them stay put.

The issue has wide repercussions for an ailing housing market. About four million people are either in foreclosure or near it. Some housing analysts argue that adding those houses to the abundant inventory already on the market will further reduce values for all owners and prolong the downturn.

To some critics, the pending fixes are all but useless. Adam Levitin, an associate professor of law at Georgetown University who has closely monitored efforts to more tightly regulate foreclosure practices, calls it “a sham settlement” that is worse than none at all.

“It gives the banks political cover, undermines attempts at a real and just resolution, and could be the basis for the regulators to claim that state actions are pre-empted,” Mr. Levitin said. Allowing federal regulators to pre-empt or elbow aside potentially stronger state actions during the housing boom has been widely seen as contributing to the collapse.

Representatives of the regulators, including the Office of the Comptroller of the Currency and the Federal Reserve, declined to comment.

The legal agreements, which take the form of consent orders, will be signed by the 14 largest servicers, including Bank of America, Wells Fargo and JPMorgan Chase. They are being published on the heels of new evidence that foreclosures are still being conducted improperly.

The Washington attorney general, Rob McKenna, sent a letter last week to a group of trustees. The trustees work with the servicers in states like Washington where the courts do not oversee foreclosures.

Washington law requires trustees to have a local office so borrowers in default can submit documentation or last-minute payments. In a continuing foreclosure investigation, Mr. McKenna found that many trustees were effectively invisible. In his letter, Mr. McKenna called their absence “widespread, illegal and contrary to an effective and just foreclosure process.”

Among the groups protesting the consent orders are the Center for Responsible Lending, the Consumer Federation of America and dozens of local and regional housing groups. In a letter to the regulators, the groups are asking for the withdrawal of the agreements in favor of “specific and protective measures regarding loss mitigation, account management and documentation.”

Efforts to get the servicers to change their practices have a long and not particularly successful track record. During the boom the servicers needed to do little more than deposit the checks of borrowers. That changed when defaults began to swell and borrowers called to try to work out new loan arrangements.

Servicers were ill-equipped to deal with something so complicated. Nor did they have much incentive, because in most cases the loans had long ago been sold to investors. Borrowers complained that servicers were sloppy, that they lost paperwork and then lost it again, that they reshuffled borrowers among endless personnel to no effect and that they foreclosed on the property even while supposedly negotiating to save it.

These assertions were brought into sharp focus last fall after revelations by servicers that in their haste and sloppiness they had broken local laws and regulations. They imposed moratoriums while saying they were clearing up the problem, but by then a range of federal and state investigations were under way.

A coalition of all 50 state attorneys general joined by the Obama administration set out to change the process of foreclosure so more borrowers could remain in their homes. The goal of the regulators was more limited.

The efforts by the attorneys general to impose a broader settlement with a multibillion-dollar penalty and some provision to restructure mortgages by cutting debt are continuing, however slowly.

Attorney General Tom Miller of Iowa, who is leading the effort, said a settlement with regulators “neither pre-empts nor impacts our efforts.” The attorneys general are striving to pursue their negotiations out of the public eye so every incremental step is not open to commentary and criticism.

Filed under: foreclosure | Tagged: borrower, creditor, disclosure, foreclosure, foreclosure defense, foreclosure offense, Lender Liability, LEVITIN, McKenna, Mortgage, National Consumer Law Center, Ny Times, predatory lending, rescission, securitization, trustee | 11 Comments »

DOJ JAILS BORROWER WHILE MOZILO AND OTHERS SETTLE

Posted on April 8, 2011 by Neil Garfield

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EDITOR’S COMMENT: I sat on this story for a while checking out some facts. Words alone can’t describe my reaction to this. They were called “liar’s loans” because the no-doc loans were intended to be approved regardless of actual income. Under TILA and industry standards for underwriting loans, the ultimate responsibility for the accuracy of the data and the viability of the loan is that of the lender. So here is this guy who gets attracted to do exactly what Wall Street wanted him to do —- sign papers regardless of the accuracy of the data.

Minimal due diligence would have and does reveal that the income stated on his application was inaccurate in terms of his true income but accurate in terms of justifying approval of the loan. In virtually all such cases, the mortgage broker makes the decision on the amount of income to state. With the full knowledge of Wall Street aggregators, who were using the money of investors, everything was inflated — stated income, property value, etc. This guy believing that the banks knew what they were doing and were “banking” on the value of the property which was fraudulently stated BY THE LENDER, signs the papers, like everyone else who did NO-DOC loans.

There was actual fraud here. It was the aggregators controlled by Wall Street investment banking firms, who lied to investors to get money on false pretenses. They then used the money to fund fees and yield spread premiums that were many times any amount ever earned on originating mortgages. Basically they got away with it. Settlements involving restitution of a small fraction of the gigantic stolen principal “donated” by investors was all that anyone was hit with.

BUT when it comes to the little guy who gets played by Wall Street into this scam, the U.S. Department of Justice has no problem prosecuting criminal claims against the borrower. I think it was Stalin who said that if you kill one person you’re a murderer, but if you kill millions, you are the head of state.

The defendant here was relying upon the appraisal to justify the deal. He had nothing to do with the amount reported as the appraised value. If he knew that the property was not worth the amount of the loan he would have no reason to proceed with the deal. The borrower thus gets defrauded by the same scheme that defrauded the investors. Yet, in another example of how bankers are controlling he story, it’s a borrower who goes to jail for signing a document that he — and everyone else involved — knew was false as to his income but which he did not know was false as to the property value. He was led to believe the deal would “work out” because of rising property values.

It was not this defendant who brought down the financial system or even all of the other liar loans. It was the people on Wall Street who needed those liar loans to move money and create “profit” and “fees” out of the fictitious transactions. Nobody knows more about underwriting securities and loans than Wall Street and the commercial banks. Any bank loaning their own money would never approve a liar loan with inflated appraisals. And that is why the investment banks ran away with market share. Any risk-averse banker knew that these loans were bad and so did the risk takers on Wall Street. They didn’t care because their goal was to make the trade without regard to outcome. They were churning investor money and houses and lives.

And yet, this guy goes to jail for 21 months. Innocence is not the issue here. Fairness and equal treatment is at issue. And punishment proportionate to the crime — $13 trillion PLUS versus whatever this guy did. How much time did Mozilo get? Adding salt to the wound, the man is ordered to pay restitution to whose company? — Mozilo’s Countrywide, now Bank of America.

In Prison for Taking a Liar Loan

By JOE NOCERA

A few weeks ago, when the Justice Department decided not to prosecute Angelo Mozilo, the former chief executive of Countrywide, I wrote a column lamenting the fact that none of the big fish were likely to go to prison for their roles in the financial crisis.

Soon after that column ran, I received an e-mail from a man named Richard Engle, who informed me that I was wrong. There was, in fact, someone behind bars for what he’d supposedly done during the subprime bubble. It was his 48-year-old son, Charlie.

On Valentine’s Day, the elder Mr. Engle said, his son had entered a minimum-security prison in Beaver, W.Va., to begin serving a 21-month sentence for mortgage fraud. He then proceeded to tell me the tale of how federal agents nabbed his son — a tale he backed up with reams of documents and records that suggest, if nothing else, that when the federal government is truly motivated, there is no mountain it won’t move to prosecute someone it wants to nail. And it was definitely motivated to nail Charlie Engle.

Mr. Engle’s is a tale worth telling for a number of reasons, not the least of which is its punch line. Was Mr. Engle convicted of running a crooked subprime company? Was he a mortgage broker who trafficked in predatory loans? A Wall Street huckster who sold toxic assets?

No. Charlie Engle wasn’t a seller of bad mortgages. He was a borrower. And the “mortgage fraud” for which he was prosecuted was something that literally millions of Americans did during the subprime bubble. Supposedly, he lied on two liar loans.

“The Department of Justice has made prosecuting financial crimes, including mortgage fraud, a high priority,” said Neil H. MacBride, the United States attorney for the Eastern District of Virginia, in a statement. (Mr. MacBride, whose office prosecuted Mr. Engle, declined to be interviewed.)

Apparently, though, it’s only a high priority if the target is a borrower. Mr. Mozilo’s company made billions in profit, some of it on liar loans that he acknowledged at the time were likely to be fraudulent and which did untold damage to the economy. And he personally was paid hundreds of millions of dollars. Though he agreed last year to a $67.5 million fine to settle fraud charges brought by the Securities and Exchange Commission, it was a small fraction of what he earned. Otherwise, he walked. Thus does the Justice Department display its priorities in the aftermath of the crisis.

•

It’s not just that Mr. Engle is the smallest of small fry that is bothersome about his prosecution. It is also the way the government went about building its case. Although Mr. Engle took out the two stated-income loans, as liar loans are more formally called, in late 2005 and early 2006, it wasn’t until three years later that his troubles began.

As a young man, Mr. Engle had been a serious drug addict, but after he got clean, he became an ultra-marathoner, one of the best in the world. In the fall of 2006, he and two other ultra-marathoners took on an almost unimaginable challenge: they ran across the Sahara Desert, something that had never been done before. The run took 111 days, and was documented in a film financed by Matt Damon, who served as executive producer and narrator. Mr. Engle received $30,000 for his participation.

The film, “Running the Sahara,” was released in the fall of 2008. Eventually, it caught the attention of Robert W. Nordlander, a special agent for the Internal Revenue Service. As Mr. Nordlander later told the grand jury, “Being the special agent that I am, I was wondering, how does a guy train for this because most people have to work from nine to five and it’s very difficult to train for this part-time.” (He also told the grand jurors that sometimes, when he sees somebody driving a Ferrari, he’ll check to see if they make enough money to afford it. When I called Mr. Nordlander and others at the I.R.S. to ask whether this was an appropriate way to choose subjects for criminal tax investigations, my questions were met with a stone wall of silence.)

Mr. Engle’s tax records showed that while his actual income was substantial, his taxable income was quite small, in part because he had a large tax-loss carry forward, due to a business deal he’d been involved in several years earlier. (Mr. Nordlander would later inform the grand jury only of his much lower taxable income, which made it seem more suspicious.) Still convinced that Mr. Engle must be hiding income, Mr. Nordlander did undercover surveillance and took “Dumpster dives” into Mr. Engle’s garbage. He mainly discovered that Mr. Engle lived modestly.

In March 2009, still unsatisfied, Mr. Nordlander persuaded his superiors to send an attractive female undercover agent, Ellen Burrows, to meet Mr. Engle and see if she could get him to say something incriminating. In the course of several flirtatious encounters, she asked him about his investments.

After acknowledging that he had been speculating in real estate during the bubble to help support his running, he said, according to Mr. Nordlander’s grand jury testimony, “I had a couple of good liar loans out there, you know, which my mortgage broker didn’t mind writing down, you know, that I was making four hundred thousand grand a year when he knew I wasn’t.”

Mr. Engle added, “Everybody was doing it because it was simply the way it was done. That doesn’t make me proud of the fact that I am at least a small part of the problem.”

Unbeknownst to Mr. Engle, Ms. Burrows was wearing a wire.

•

Lying on a stated-income loan is, without question, a crime, and one ought not to excuse it even though, as Mr. Engle says, “everybody was doing it” — usually with the eager encouragement of their brokers. But the Engle case raises questions not just about the government’s priorities, but about something even more basic: did he even commit the crimes he is accused of?

Partly, I concede, Mr. Engle is easy to root for. He is a personable, upbeat man who has conquered some serious demons. Part of his Sahara expedition was aimed at raising money for a charity to help bring clean water to Africa. “Every experience in life has the ability to teach lessons if I am open to them,” he wrote on a blog as he prepared to enter prison. How can you not like someone like that?

But the more I looked into it, the more I came to believe that the case against him was seriously weak. No tax charges were ever brought, even though that was Mr. Nordlander’s original rationale. Money laundering, the suspicion of which was needed to justify the undercover sting, was a nonissue as well. As for that “confession” to Ms. Burrows, take a closer look. It really isn’t a confession at all. Mr. Engle is confessing to his mortgage broker’s sins, not his own.

Perhaps anticipating that problem, when Mr. Nordlander finally arrested Mr. Engle in May 2010, he claims to have elicited a stronger, better confession while Mr. Engle was handcuffed in the back seat of his car. Mr. Engle fervently denies this. This second supposed confession, however, was never captured on tape.

As for the loans themselves, on one of them Mr. Engle claimed an income of $15,000 a month. As it turns out, his total income in 2005, according to his accountant, was $180,000, which amounts to … hmmm …$15,000 a month, though of course Mr. Engle didn’t have the kind of job that generated monthly income. (In addition to real estate speculation, Mr. Engle gave motivational speeches and earned around $50,000 a year as a producer on the hit show “Extreme Makeover: Home Edition.”)

The monthly income listed on the second loan was $32,500, an obviously absurd amount, especially since the loan itself was for only $300,000. It was a refinance of a property Mr. Engle already owned, allowing him to pull out $80,000 of the $215,000 in equity he had in the property.

Mr. Engle claims that he never saw that $32,500 claim and never signed the papers. Indeed, a handwriting analysis conducted by the government raised the distinct possibility that Mr. Engle’s signature and his initials in several places in the mortgage documents had been forged. As it happens, Mr. Engle’s broker for that loan, John J. Hellman, recently pleaded guilty to mortgage fraud for playing fast and loose with a number of mortgage applications. Mr. Hellman testified in court that Mr. Engle had signed the mortgage application. Early this week, Mr. Hellman received a reduced sentence of 10 months, less than half of Mr. Engle’s sentence, in no small part because of his willingness to testify against Mr. Engle.

Even the jurors seemed confused about how to think about Mr. Engle’s supposed crime. When it came time to pronounce a verdict, the jury found him not guilty of providing false information to the bank, which would seem to be the only fraud he could possibly have committed. Yet it still found him guilty of mortgage fraud. “I think the prosecution convinced the jury that I was guilty of something but they weren’t sure what,” Mr. Engle wrote in an e-mail.

Like many people, Mr. Engle’s biggest mistake was believing that housing prices could only go up. When the market collapsed, Mr. Engle defaulted on the two properties, which of course is not a crime. Although his accountant tried to persuade the banks to do a complicated refinancing, they refused and foreclosed on the properties. Like many Americans, Mr. Engle wound up being punished by the market for his mistake, losing all his remaining equity along with the properties themselves. Thanks to the government, though, his punishment was far more severe than most.

At his sentencing, Mr. Engle told the judge: “I can say with confidence that I can turn negatives into positives. I have no doubt I will make the best of it.” With his inspiring prison blog, Running in Place: A Blog About Surviving Adversity, he has already begun to do that.

Even when he emerges from prison, though, his ordeal will not be over. As part of his sentence, Mr. Engle was ordered to pay $262,500 in restitution to the owner of his mortgages. And what institution might that be? You guessed it: Countrywide, now owned by Bank of America.

Angelo Mozilo ought to get a good chuckle out of that one.

Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud | Tagged: Bank of America, borrower, countrywide, disclosure, foreclosure, foreclosure defense, foreclosure offense, fraud, JOE NOCERA, Lender Liability, LIAR LOAN, Mozilo, Ny Times, predatory lending, rescission, securitization | 30 Comments »

LIQUIDATE EVERYTHING: LET THEM EAT CAKE

Posted on April 1, 2011 by Neil Garfield

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EDITORIAL COMMENT: Conservatives don’t conserve anything and liberals are not liberating anyone. Regulators don’t regulate, and congress isn’t passing laws that make any sense. Policy makers are getting their orders from Wall Street instead of originating the policy decisions. 216,000 jobs were added last month to our ailing economy, but most of those jobs were in sectors where the going wage won’t pay for even basic living expenses.

They say the unemployment rate has dropped to 8.8% — which is SPIN ON STEROIDS. First you have another 8%-10% who have become so discouraged they have stopped looking for a job. Then you have the underemployed at around 10%-15%. And now, courtesy of the Wall Street spin cycle which the government is parroting, we have something I would call “soft unemployment” — which consists of people who are technically employed but not making a living wage, which looks like it is right around 7%-8%.

So altogether we have an unemployment problem of around 36%+. AND THEY CALL THAT PROGRESS. One third of our labor force is not employed when we need them employed working on an infrastructure that is seriously going to collapse with increasing frequency. Why do we need to wait until the bridges fall, the tunnels collapse, and the electricity and water get turned off?

We all know that no matter how they spin things, the housing market is still falling into an abyss, homelessness is on the rise, and employment, if you want to call it that, is at an all-time low. Half of our economy as the government reports consists of financial services, which means that half of our economy consists of trading meaningless pieces of paper as though this was actually commerce. I thought commerce was like buying a toaster or hiring someone to clean your yard. If you take away the Wall Street vapor asset levels are a small fraction of what is reported, and the level of commerce is around 52%-55% of reported GDP, which means that our debt ratio as a country is much higher because the reported $14 trillion dollar economy is really an $8 trillion economy — and going down.

There is no possibility of true economic recovery unless we get practical and face reality. One of the realities is that we can’t rely on our politicians to do anything that makes any sense. That is quite a challenge. If we don’t stop the sale of homes in fraudulent foreclosures we will be setting the stage for more of the same, and setting the example that crime pays. As the wealth of the nation goes down the toilet, Wall Street strangely is coming up with more and more assets and income —- hmmm.

Just where is all that “money” coming from — or was it there all along, was the bailout a scam rewarding Wall Street for creating the illusion of securitizing debt and thus enabling the largest PONZI scheme in the history of the world?

The Mellon Doctrine

By PAUL KRUGMAN

NY Times

“Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.” That, according to Herbert Hoover, was the advice he received from Andrew Mellon, the Treasury secretary, as America plunged into depression. To be fair, there’s some question about whether Mellon actually said that; all we have is Hoover’s version, written many years later.

But one thing is clear: Mellon-style liquidationism is now the official doctrine of the G.O.P.

Two weeks ago, Republican staff at the Congressional Joint Economic Committee released a report, “Spend Less, Owe Less, Grow the Economy,” that argued that slashing government spending and employment in the face of a deeply depressed economy would actually create jobs. In part, they invoked the aid of the confidence fairy; more on that in a minute. But the leading argument was pure Mellon.

Here’s the report’s explanation of how layoffs would create jobs: “A smaller government work force increases the available supply of educated, skilled workers for private firms, thus lowering labor costs.” Dropping the euphemisms, what this says is that by increasing unemployment, particularly of “educated, skilled workers” — in case you’re wondering, that mainly means schoolteachers — we can drive down wages, which would encourage hiring.

There is, if you think about it, an immediate logical problem here: Republicans are saying that job destruction leads to lower wages, which leads to job creation. But won’t this job creation lead to higher wages, which leads to job destruction, which leads to …? I need some aspirin.

Beyond that, why would lower wages promote higher employment?

There’s a fallacy of composition here: since workers at any individual company may be able to save their jobs by accepting a pay cut, you might think that we can increase overall employment by cutting everyone’s wages. But pay cuts at, say, General Motors have helped save some workers’ jobs by making G.M. more competitive with other companies whose wage costs haven’t fallen. There’s no comparable benefit when you cut everyone’s wages at the same time.

In fact, across-the-board wage cuts would almost certainly reduce, not increase, employment. Why? Because while earnings would fall, debts would not, so a general fall in wages would worsen the debt problems that are, at this point, the principal obstacle to recovery.

In short, Mellonism is as wrong now as it was fourscore years ago.

Now, liquidationism isn’t the only argument the G.O.P. report advances to support the claim that reducing employment actually creates jobs. It also invokes the confidence fairy; that is, it suggests that cuts in public spending will stimulate private spending by raising consumer and business confidence, leading to economic expansion.

Or maybe “suggests” isn’t the right word; “insinuates” may be closer to the mark. For a funny thing has happened lately to the doctrine of “expansionary austerity,” the notion that cutting government spending, even in a slump, leads to faster economic growth.

A year ago, conservatives gleefully trumpeted statistical studies supposedly showing many successful examples of expansionary austerity. Since then, however, those studies have been more or less thoroughly debunked by careful researchers, notably at the International Monetary Fund.

To their credit, the staffers who wrote that G.O.P. report were clearly aware that the evidence no longer supports their position. To their discredit, their response was to make the same old arguments, while adding weasel words to cover themselves: instead of asserting outright that spending cuts are expansionary, the report says that confidence effects of austerity “can boost G.D.P. growth.” Can under what circumstances? Boost relative to what? It doesn’t say.

Did I mention that in Britain, where the government that took power last May bought completely into the doctrine of expansionary austerity, the economy has stalled and business confidence has fallen to a two-year low? And even the government’s new, more pessimistic projections are based on the assumption that highly indebted British households will take on even more debt in the years ahead.

But never mind the lessons of history, or events unfolding across the Atlantic: Republicans are now fully committed to the doctrine that we must destroy employment in order to save it.

And Democrats are offering little pushback. The White House, in particular, has effectively surrendered in the war of ideas; it no longer even tries to make the case against sharp spending cuts in the face of high unemployment.

So that’s the state of policy debate in the world’s greatest nation: one party has embraced 80-year-old economic fallacies, while the other has lost the will to fight. And American families will pay the price.

Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud | Tagged: Andrew Mellon, bailout, Bank of America, borrower, credit crisis, disclosure, foreclosure, fraud, Herbert Hoover, Lender Liability, MERS, Ny Times, PAUL KRUGMAN, Ponzi, predatory lending, rescission, Treasury secretary, unemployment | 9 Comments »

WHY ELIZABETH WARREN SCARES THE CRAP OUT OF BANKS

Posted on March 21, 2011 by Neil Garfield

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“If there had been a cop on the beat to hold mortgage servicers accountable a half dozen years ago,” she said at one point, “the problems in mortgage servicing would have been found early and fixed while they were still small, long before they became a national scandal.”

EDITORIAL COMMENT: It’s a simple answer really. She is real and they are not. She wants us to have the truth, they want us to fight with each other over ideology while the truth sails away.

With Barofsky leaving the TARP watchdog, and the only meaningful prosecutions Warren is the only person left in the administration whose intent conforms with the job of a public servant protecting consumers from wholesale fraud by the banking industry. Now they are after her with a vengeance to extinguish the risk of action by the administration that puts away people who should be convicted felons, and the risk that restitution to the government, taxpayers, homeowners and investors will be seriously pursued.

Whereas Barofsky’s eye was on past transgressions and unraveling the mystery of the TARP money, Warren’s eye is more on the future to stop the banks from using business models that uses consumers as targets. We have a very unbalanced situation that seems likely to get worse unless Warren is successful.

The failure of Congress and thus the Justice department to include banking in the scope of industries where monopolies must be regulated and controlled has left the industry in charge of itself and controlling what little is left of government regulation. In any other situation the justice department would have a clear path to antitrust remedies. It’s like water, electric and phone service — if we are going to give companies monopolistic share of the marketplace and raise barriers to entry for competition, then they should be regulated like utilities or broken up into much smaller companies.

If water companies were allowed the freedom of the banks, we would be paying $100 per gallon. That is what we are doing in finance, but nobody wants to see it that way except a few people who are accused over being alarmist.

It strikes me as hypocritical for the anti-regulators to say that big government is unwieldy and can’t be managed properly and then allow the creation of a financial industry that in every real metric is bigger than government and even more unmanageable — and not possible to regulate. We’re getting the worst case scenario every way we turn. We’ve already tried deregulating the financial industry and except for top members of the industry itself, NOBODY IS BETTER OFF. Quite the contrary, debt, which is the life blood of the financial industry, is draining the life force out of economy.

Whenever it is that we push the reset button to clear title and stabilize commercial transactions, it better include a practical view of the financial industry. It should be serving the needs of the country and the marketplace. Instead we have them dictating what the economy and the country will get.

Elizabeth Warren has an uphill battle without much support from anywhere that counts. SO she needs YOUR support by writing to her and your congressman and state legislators about the inequalities in our economy that have stretched us past the breaking point. The goal is to have a healthy and productive society and a fair marketplace governed by democratic principles. The current status quo, for which the banks have dug in their heels to maintain, is anti-capitalism, anti-free market, and anti American.

Capitalism is an economic system that is midway between fascism (controlled by business) and socialism (everyone gets a share of the pie). The American dream is what drives capitalism — where we know there will be inequalities and excesses and we are willing to tolerate that because that is how opportunity and innovation flourish creating better circumstances for each generation of Americans. Using the unfounded fear of socialism, big business has taken us over the line to fascism in the marketplace and the society. we are a nation in which the government does not respond, much less fear, the reaction of the people because they are so easily manipulated by sound bites that scare them. Elizabeth Warren is practical and firm in her drive to return us to true capitalism, in which trickery is not protected by a system where predators run the government.

We need to return the favor and give her support every way we can.

An Advocate Who Scares Republicans

By JOE NOCERA

The piñata sat alone at the witness table, facing the members of the House subcommittee on financial institutions and consumer credit.

The Wednesday morning hearing was titled “Oversight of the Consumer Financial Protection Bureau.” The only witness was the piñata, otherwise known as Elizabeth Warren, the Harvard law professor hired last year by President Obama to get the new bureau — the only new agency created by the Dodd-Frank financial reform law — up and running. She may or may not be nominated by the president to serve as its first director when it goes live in July, but in the here and now she’s clearly running the joint.

And thus the real purpose of the hearing: to allow the Republicans who now run the House to box Ms. Warren about the ears. The big banks loathe Ms. Warren, who has made a career out of pointing out all the ways they gouge financial consumers — and whose primary goal is to make such gouging more difficult. So, naturally, the Republicans loathe her too. That she might someday run this bureau terrifies the banks. So, naturally, it terrifies the Republicans.

The banks and their Congressional allies have another, more recent gripe. Rather than waiting until July to start helping financial consumers, Ms. Warren has been trying to help them now. Can you believe the nerve of that woman?

At the request of the states’ attorneys general, all 50 of whom have banded together to investigate the mortgage servicing industry in the wake of the foreclosure crisis, she has fed them ideas that have become part of a settlement proposal they are putting together. Recently, a 27-page outline of the settlement terms was given to banks — terms that included basic rules about how mortgage servicers must treat defaulting homeowners, as well as a requirement that banks look to modify mortgages before they begin foreclosure proceedings. The modifications would be paid for with $20 billion or so in penalties that would be levied on the big banks.

Naturally, the banks hate these ideas, too. So the Republican members of the subcommittee had another purpose as well: to use the hearing to serve as a rear-guard action against the proposed settlement.

“Under what statutory authority are you currently acting?” demanded Representative Patrick McHenry, a Republican from North Carolina, questioning the legitimacy of her role in setting up the consumer bureau. He also questioned whether the government had the right to impose a $20 billion penalty on the banks — and then use that money for (heaven forbid) mortgage modifications.

Spencer Bachus, Republican of Alabama, the new chairman of the Financial Services Committee, wanted to know how closely Ms. Warren had been consulting with the White House and Treasury Secretary Timothy Geithner about naming a director for the bureau — and whether she would accept a recess appointment “knowing the type of blowback from that.” (A recess appointment is a temporary appointment the president can make when the Senate is in recess, thus avoiding the need for Senate confirmation.)

Representative Steve Pearce, Republican of New Mexico, said that he fully expected the Consumer Financial Protection Bureau to be no better than “the S.E.C. and Mr. Madoff.” “Within two years,” he added, “your agency is going to be operating exactly the same, that it’s simply out there grinding wheels away.”

Representative Scott Garrett, Republican of New Jersey, zeroed in on the proposed settlement. Where in the statute did she have the authority to consort with the attorneys general? he demanded to know. “Are you making recommendations to government regulators about the dollar amount?” he badgered. “Is that part of your role, to make recommendations about dollar amounts?”

On and on it went, until the hearing sputtered to a close, two and a half hours after the browbeating had begun.

•

To listen to the House Republicans, you’d think the financial crisis of 2008 was like that infamous season of the long-running soap opera “Dallas,” the one that turned out to be a season-long dream. Subprime mortgages? Too-big-to-fail banks? Unregulated derivatives? No problem! With the exception of their bête noire, Fannie Mae and Freddie Mac, the Republicans act as if nothing needs to be done to prevent another crisis. Indeed, they act as if the crisis never happened.

The home page on the House Financial Services Committee’s Web site has been turned into a screed against Dodd-Frank. Clearly, the committee is going to spend this session trying to minimize the effect of the legislation, starving agencies of the funds needed to enact the regulations mandated by the new law, for instance. In fact, that effort has already begun.

It’s not just the House Republicans either. Already the Office of the Comptroller of the Currency has reverted to form, becoming once again a captive of the banks it is supposed to regulate. (It has strenuously opposed the efforts of the A.G.’s to penalize the banks and reform the mortgage modification process, for instance.) The banks themselves act as if they have a God-given right to the profit they made precrisis, and owe the country nothing for the trouble they’ve put us all through. The Justice Department has essentially given up trying to make anyone accountable for the crisis.

Thank goodness, then, for the attorneys general — and for Ms. Warren. On Main Street, where the attorneys general operate, it is pretty obvious that problems persist. During the subprime boom, many states tried to stop the worst lending abuses, only to be blocked by federal banking regulators. Now that the country is dealing with the aftermath of those abuses — the rising tide of defaults and foreclosures — it is the attorneys general who are, once again, put in the position of trying to stamp out abuses, this time of the foreclosure process itself.

Their leverage comes from the fact that the banks and their servicing divisions have, in the words of the University of Minnesota law professor Prentiss Cox, “routinely violated basic legal process” by, for instance, not transferring the note after the sale of a home. But in addition to assessing a financial penalty on the banks, the A.G.’s are trying to use the threat of litigation to force the banks to finally deal with defaulting homeowners more fairly and humanely. That is the essence of the settlement proposal that has been floating around. That — and a big push to finally come up with a modification plan that works.

When I spoke to Tom Miller, the Iowa attorney general — and the leader in this 50-state effort — he said that one reason he had asked Ms. Warren for advice was that she had already hired people with genuine expertise that he wanted to take advantage of. But that’s not the only reason. If the banks were to agree to settle the case on the A.G.’s terms, the Consumer Financial Protection Bureau would be the agency charged with enforcing the terms. So it makes sense to include its current leadership as they work through ideas for a settlement. Besides, the A.G.’s don’t really trust anybody else in the federal government to be on the side of financial consumers. Given their previous experience, why would they? Ms. Warren is the one person in Washington they feel is on the same side they’re on.

The notion that Ms. Warren lacks statutory authority to talk to the attorneys general is an objection so silly it is hard to take seriously. Consulting with the only government officials around who are actually trying to do something for financial consumers is precisely what she ought to be doing. Given that her agency could wind up enforcing the terms, it’s practically a necessity.

As for the idea the Republicans have been spreading talk that the attorneys general are overstepping their bounds by trying to force reform — and a big penalty — on the mortgage servicers, that’s pretty silly, too. As Adam Levitin, a Georgetown law professor, has pointed out on his blog recently, settlements are private agreements between two parties. The banks can accept what the A.G.’s are proposing. Or they negotiate different terms. Or they can reject them outright, and go to court to fight over the proper remedy. It’s really not any different from the multistate tobacco settlement of some years ago, which imposed some minor reforms on the tobacco industry along with a giant financial penalty. Congress had nothing to do with it.

I wish I could say with certainty that the ideas put forth by the attorneys general will finally help ease the foreclosure crisis. I hope they do. Mr. Levitin thought there was a decent likelihood of success; Mr. Cox, a former assistant attorney general himself, was also hopeful — though more skeptical. “So much of it rides on how well it is enforced,” he said.

Which is also why Ms. Warren is the most logical person to be the agency’s initial director: if the settlement does come to pass, no one will understand its terms better, or have a better feel for how to enforce them. Let’s face it: there isn’t anybody in Washington more fearless about standing up to the big banks. No wonder they don’t like her.

As I listened to her on Wednesday, I was struck anew at how clearly she articulates the need for the new bureau. “If there had been a cop on the beat to hold mortgage servicers accountable a half dozen years ago,” she said at one point, “the problems in mortgage servicing would have been found early and fixed while they were still small, long before they became a national scandal.”

Senate Republicans have vowed to block her appointment if President Obama nominates her. Yet even if her nomination goes down in flames, Senate confirmation hearings would be clarifying. Americans would get to hear Ms. Warren explain why the Consumer Financial Protection Bureau has the potential to help Americans. And they would get to hear Republicans explain why the status quo — including the everyday horror of the foreclosure mess — is just fine.

It has been much noted in recent months that President Obama seems unwilling to start a fight with Republicans. Maybe that’s why he has shied away from nominating Ms. Warren to a job for which she is so clearly suited. But if protecting financial consumers — and helping the millions of Americans struggling to hold onto their homes — isn’t worth fighting for, then what is?

Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud | Tagged: bailout, bankruptcy, banks, Consumer Financial Protection Bureau, disclosure, Elizabeth Warren, foreclosure defense, foreclosure offense, Lender Liability, mortgage meltdown, Nocera, Ny Times, Obama, Office of the Comptroller of the Currency, predatory lending, Republicans, rescission, securitization, TILA | 19 Comments »

QUOTE OF THE DAY: MARK TWAIN AND THOMAS FRIEDMAN

Posted on November 17, 2010 by Neil Garfield

“Why should homeowners take responsibility for the screw-ups of the financial geniuses on Wall Street and the screw-ups of those who did their closings?” — Neil Garfield

Op-Ed Columnist NY Times

Too Good to Check

By THOMAS L. FRIEDMAN

Published: November 16, 2010

“A lie can travel halfway around the world while the truth is putting on its shoes.”—TWAIN

… there is an antidote to malicious journalism — and that’s good journalism. — FRIEDMAN

EDITOR’S NOTE:

HERE IS THE LIE: (THE LIVING LIES THAT WENT ALL AROUND NOT HALF WAY): The financial crisis is only partially related to the housing meltdown and to unemployment. The fundamentals are too complicated for the average person to understand. It’s more complicated than just doing justice. The homeowners should shoulder most of the blame — they knew they couldn’t make the payments.

HERE IS THE TRUTH:

The financial crisis is ALL about the housing meltdown.
If Wall Street had not flooded main street with an overabundance of money and provided ridiculous incentives that would tempt even an honest person to lie, the financial sector would still be back down at 16% of our GDP, capital would have been available for new business, business expansion and people would still have jobs where they could actually pay for things.
The excesses of other debt would still have taken its toll, but without the housing crisis Wall Street would not have “made” trillions, the bonuses would not have been there, the ridiculous inflation of “Appraised values” would never have occurred nor would the alleged “drop” in values to what they always were have been a problem. Nothing is more complicated than doing justice — that’s the American way.
Homeowners did not create this mess, they did not mess up the obligations, notes, receivables, mortgages and deeds of trust, with artificial entities instead of the real people involved. Homeowners did not do the closing. They just signed what was put in front of them like everyone else does at a real estate closing, assuming that the “bank” (pretender lender unknown to the borrower) would have reviewed every “i” and saw every “t” crossed when in reality the game was rigged, nobody was doing due diligence, nobody was “underwriting” the loans and the lies were spread all over the globe to sell phantom mortgage bonds and synthetic instruments on the backs of homeowners who were deceived to their detriment by the lie that the property was worth more than the loan and that the property would rise still further in value.

Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud | Tagged: ANDERSON COOPER, Mark Twain, Ny Times, THOMAS FRIEDMAN | 8 Comments »

YOU MAY BE ENTITLED TO CASH PAYMENT FOR WRONGFUL FORECLOSURE — Coming to a Billboard Near YOU

Posted on September 27, 2010 by Neil Garfield

SERVICES YOU NEED

EDITOR’S NOTE: Well it has finally happened. Three years ago I couldn’t get a single lawyer anywhere to consider this line of work. I predicted that this area of expertise in their practice would dwarf anything they were currently doing including personal injury and malpractice. I even tried to guarantee fees to lawyers and they wouldn’t take it. Now there are hundreds, if not thousands of lawyers who are either practicing in this field or are about to take the plunge. The early adopters who attended my workshops and read my materials, workbooks and bought the DVD’s are making some serious money and have positioned themselves perfectly ahead of the crowd.

Congratulations, everyone, it was the readers who made this happen. Without your support I would not have been able to reach the many thousands of homeowners and lawyers and government officials whoa re now turning the corner in their understanding of this mess and their willingness to do something about it.

The article below from Streitfeld sounds like it was written by me. No attribution though. No matter. The message is out. The foreclosures were and are wrongful, illegal, immoral and the opposite of any notion we have of justice. They were dressed up to look right and they got way with it for years because so many homeowners simply gave up convinced they had only to blame themselves for getting into a raw deal. Those homeowners who gave up were wrong and now they will find themselves approached by lawyers who will promise them return of the house they lost or damages for the wrongful foreclosure. When you left, you thought your loan had not been paid and that the notice you received was legitimate. You were wrong on both counts. The loan had been paid, there were other people who had signed up for liability along with you to justify the price on steroids that was sold to your lender (investor).

For those who are just catching up, here it is in a nutshell: Borrower signs a note to ABC Corp., which says it is the lender but isn’t. So you start right away with the wrong party named on the note and mortgage (deed of trust) PLUS the use of a meaningless nominee on the mortgage (deed of trust) which completely invalidates the documents and clouds the title. Meanwhile the lender gets a mortgage bond NOT SIGNED BY THE BORROWER. The bond says that this new “entity” (which usually they never bothered to actually form) will pay them from “receivables.” The receivables include but ARE NOT LIMITED TO the payments from the borrower who accepted funding of a loan. These other parties are there to justify the fact that the loan was sold at a huge premium to the lender without disclosure to either the borrower or the lender. (The tier 2 Yield Spread Premium that raises some really juicy causes of action under TILA, RESPA and the 10b-5 actions, including treble damages, attorney fees and restitution).

And and by the way for the more sophisticated lawyers, now would be the time to sharpen up your defense skills and your knowledge of administrative laws. Hundreds of thousands of disciplinary actions are going to filed against the professionally licensed people who attended the borrower’s “closing” and who attended the closing with the “lender.” With their livelihood at stake, their current arrogance will morph into abject fear. Here is your line when you quote them fees: “Remember that rainy day you were saving up for? Well, it’s raining!” Many lawyers and homeowners are going to realize that they have easy pickings when they bring administrative grievances in quasi criminal proceedings (don’t threaten it, that’s a crime, just do it) which results in restitution funded by the professional liability insurer. careful about the way you word the grievance. Don’t go overboard or else the insurance carrier will deny coverage based upon the allegation of an intentional act. You want to allege gross negligence.

EVERYBODY in the securitization structure gets paid premium money to keep their mouth shut and money changes hands faster than one of those street guys who moves shells or cards around on a table. Yes everyone gets paid — except the borrower who never got the benefit of his the bargain he signed up for — a home worth whatever they said it was worth at closing. It wasn’t worth that and it will never be worth that and everyone except the borrower knew it with the possible exception of some lenders who didn’t care because the other people who the borrower knew nothing about, had “guaranteed” the value of the lender’s investment and minimized the risk to the level of “cash equivalent” AAA-rated.

The securitization “partners” did not dot their “i’s” nor cross their “t’s.” And that is what the article below is about. But they failed to do that for a reason. They didn’t care about the documents because they never had any intention of using them anyway. It was all a scam cleverly disguised as a legitimate part of the home mortgage industry. It was instead a Ponzi scheme without any of the attributes of real appraisals, real underwriting reviews and committees and decisions. They bought the signature of the borrowers by promising the moon and they sold the apparent existence of signature (which in many cases) did not even exist) to Lenders by promising the stars.

And now, like it wasn’t news three years ago when we first brought it up, suddenly mainstream media is picking up the possibility that the foreclosures were all fraudulent also. The pretender lenders were intentionally and knowingly misrepresenting themselves as lenders in order to grab property that didn’t belong to them and to which they had no rights — to the detriment of both the borrowers and the lenders. And some judges, government officials and even lawyers appear to be surprised by that, are you?

———–

GMAC’s Errors Leave Foreclosures in Question

By DAVID STREITFELD

The recent admission by a major mortgage lender that it had filed dubious foreclosure documents is likely to fuel a furor against hasty foreclosures, which have prompted complaints nationwide since housing prices collapsed.

Lawyers for distressed homeowners and law enforcement officials in several states on Friday seized on revelations by GMAC Mortgage, the country’s fourth-largest home loan lender, that it had violated legal rules in its rush to file many foreclosures as quickly as possible.

Attorneys general in Iowa and North Carolina said they were beginning separate investigations of the lender, and the attorney general in California directed the company to suspend all foreclosures in that state until it “proves that it’s following the letter of the law.”

The federal government, which became the majority owner of GMAC after supplying $17 billion to prevent the lender’s failure, said Friday that it had told the company to clean up its act.

Florida lawyers representing borrowers in default said they would start filing motions as early as next week to have hundreds of foreclosure actions dismissed.

While GMAC is the first big lender to publicly acknowledge that its practices might have been improper, defense lawyers and consumer advocates have long argued that numerous lenders have used inaccurate or incomplete documents to remove delinquent owners from their houses.

The issue has broad consequences for the millions of buyers of foreclosed homes, some of whom might not have clear title to their bargain property. And it may offer unforeseen opportunities for those who were evicted.

“You know those billboards that lawyers put up seeking divorcing or bankrupt clients?” asked Greg Clark, a Florida real estate lawyer. “It’s only a matter of time until they start putting up signs that say, ‘You might be entitled to cash payment for wrongful foreclosure.’ ”

The furor has already begun in Florida, which is one of the 23 states where foreclosures must be approved by courts. Nearly half a million foreclosures are in the Florida courts, overwhelming the system.

J. Thomas McGrady, chief judge in the foreclosure hotbed of St. Petersburg, said the problems went far beyond GMAC. Four major law firms doing foreclosures for lenders are under investigation by the Florida attorney general.

“Some of what the lenders are submitting in court is incompetent, some is just sloppy,” said Judge McGrady of the Sixth Judicial Circuit in Clearwater, Fla. “And somewhere in there could be a fraudulent element.”

In many cases, the defaulting homeowners do not hire lawyers, making problems generated by the lenders hard to detect.

“Documents are submitted, and there’s no one to really contest whether it is accurate or not,” the judge said. “We have an affidavit that says it is, so we rely on that. But then later we may find out that someone lost their home when they shouldn’t have. We don’t like that.”

GMAC, which is based in Detroit and is now a subsidiary of Ally Financial, first put the spotlight on its procedures when it told real estate agents and brokers last week that it was immediately and indefinitely stopping all evictions and sales of foreclosed property in the states — generally on the East Coast and in the Midwest — where foreclosures must be approved by courts.

That was a highly unusual move. So was the lender’s simultaneous withdrawal of important affidavits in pending cases. The affidavits were sworn statements by GMAC officials that they had personal knowledge of the foreclosure documents.

The company played down its actions, saying the defects in its foreclosure filings were “technical.” It has declined to say how many cases might be affected.

A GMAC spokeswoman also declined to say Friday whether the company would stop foreclosures in California as the attorney general, Jerry Brown, demanded. Foreclosures in California are not judicial.

GMAC’s vague explanations have been little comfort to some states.

“We cannot allow companies to systematically flout the rules of civil procedure,” said one of Iowa’s assistant attorneys general, Patrick Madigan. “They’re either going to have to hire more people or the foreclosure process is going to have to slow down.”

GMAC began as the auto financing arm of General Motors. During the housing boom, it made a heavy bet on subprime borrowers, giving loans to many people who could not afford a house.

“We have discussed the current situation with GMAC and expect them to take prompt action to correct any errors,” said Mark Paustenbach, a spokesman for the Treasury Department.

GMAC appears to have been forced to reveal its problems in the wake of several depositions given by Jeffrey Stephan, the team leader of the document execution unit in the lender’s Fort Washington, Pa., offices.

Mr. Stephan, 41, said in one deposition that he signed as many as 10,000 affidavits and other foreclosure documents a month; in another he said it was 6,000 to 8,000.

The affidavits state that Mr. Stephan, in his capacity as limited signing officer for GMAC, had examined “all books, records and documents” involved in the foreclosure and that he had “personal knowledge” of the relevant facts.

In the depositions, Mr. Stephan said he did not do this.

In a June deposition, a lawyer representing a foreclosed household put it directly: “So other than the due date and the balances due, is it correct that you do not know whether any other part of the affidavit that you sign is true?”

“That could be correct,” Mr. Stephan replied.

Mr. Stephan also said in depositions that his signature had not been notarized when he wrote it, but only later, or even the next day.

GMAC said Mr. Stephan was not available for an interview. The lender said its “failures” did not “reflect any disrespect for our courts or the judicial processes.”

Margery Golant, a Boca Raton, Fla., foreclosure defense lawyer, said GMAC “has cracked open the door.”

“Judges used to look at us strangely when we tried to tell them all these major financial institutions are lying,” said Ms. Golant, a former associate general counsel for the lender Ocwen Financial.

Her assistants were reviewing all of the law firm’s cases Friday to see whether GMAC had been involved. “Lawyers all over Florida and I’m sure all over the country are drafting pleadings,” she said. “We’ll file motions for sanctions and motions to dismiss the case for fraud on the court.”

For homeowners in foreclosure, the admissions by GMAC are bringing hope for resolution.

One such homeowner is John Turner, a commercial airline pilot based near Detroit. Three years ago he bought a Florida condo, thinking he would move down there with a girlfriend. The relationship fizzled, his finances dwindled, and the place went into foreclosure.

GMAC called several times a week, seeking its $195,000. Mr. Turner says he tried to meet the lender halfway but failed. Last week it put his case in limbo by withdrawing the affidavit.

“We should be able to come to an agreement that’s beneficial to both of us,” Mr. Turner said. “I feel like I’m due something.”

Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud | Tagged: affidavits, allonge, assignments, damages, fraud, GMAC, Indorsements, Ny Times, slander of title, Streitfeld, Substitution of Trustee, wrongful foreclosure | 62 Comments »

LABOR DAY ABYSS

Posted on September 6, 2010 by Neil Garfield

EDITOR’s comment: Everyone seems to agree that nobody really knows the identity of the creditor in the millions of mortgage transactions that were created from 2001 to 2008. Yet the general consensus from the administration and the media is that these transactions should be enforced anyway. The idea of enforcing a transaction in which only one of the parties is known is enough to make the authors of any of the major legal treatises turn over in their graves. It is so obviously ridiculous that one need not consult the United States Constitution on due process, nor any statute or case in common law. Nevertheless this elephant continues to sit in our living rooms claiming ownership of our home. Thus a fictional character is prevailing over the rights of real people owning real homes who were tricked into fraudulent loan products based inflated appraisals that created the reasonable assumption on the part of the borrower that the “experts” had verified the fair market value and validated the viability of the loan product.

Most people understand that these homeowners were victims of fraud more than they were borrowers of money for a legitimate transaction. These title twisting transactions continue to become increasingly convoluted as the “ownership” of the “loans” becomes increasingly blurred by a continuing process of transfers, “sales,” auctions without creditors or bona fide bidders, and the continuation of the strategy of moving the goal post every time anyone wants to examine it.

In the article below the Obama administration is described as having exhausted all possible remedies and is now faced with the untenable choice of future homeowners versus current homeowners. This is delusional thinking based on business dogma. The “experts” are now all raising their voices in a growing chorus of “let the market collapse.” It is only natural for these so-called experts to suggest such a dark scenario.

Under the business dogma currently driving the limp choices being made by the administration and by Congress, a crash in home housing prices from current levels would produce the foundation for a bull market in housing prices that would be reduced to oversold levels. This so-called bull market could only be fueled by speculators who are sitting on piles of money. It certainly won’t be fueled by the average consumer whose median income is dropping, whose wealth has been drained through Wall Street speculation, whose savings do not exist, and whose credit has been exhausted. In short, this brilliant strategy of giving up on the housing market can only result in a further widening between those who have money and wealth and those who do not and now have no prospects.

I know that most people do not have the time to be students of history. But a little time spent on Google or Wikipedia will show you that no society in human history has ever been sustained on a status quo that excluded an expanding and vibrant middle class, with abundant opportunities for improvement in the financial condition of anyone in any class of that society. There is an answer to this problem but it is being ignored for political reasons. We cannot instantly raise median income for tens of millions of people. We can and we should lay the foundation for abundant opportunities for improvement in their economic and social condition, but this will not solve the current situation.

The current situation is that we are sitting on the abyss. And it seems that the general consensus is to see no evil, hear no evil and therefore ignore the only realities that must be addressed. We cannot escape the fact that in our current situation our economy is driven by consumer spending. We cannot escape the fact that consumer spending cannot rise in the short term by an increase in median income. We cannot escape the fact that consumer spending can only rise by presenting the consumer with a proposition that is acceptable––one in which both real and apparent consumer wealth is increased. Unless the deal is real, the current lack of confidence in the economy, our society and our government will prevent any increase in consumer spending and therefore prevent any improvement in our current economic decline.

Consumers have made it clear that they do not trust the housing market, they will not accept a continuation of credit driven spending, and that they are alone in fending for themselves and future generations. Therefore the savings rates on what little money consumers are receiving as income are increasing at unprecedented rates. This money is not going to come out of savings and into the marketplace and a general rush towards spending that will revive the old consumer driven economy unless the basic and real concerns of consumers are directly addressed with reality and conviction. The perception (delusion) is that consumers are a bottomless well from which infinite sums of money can be withdrawn by way of taxes, insurance, subsidies to big business, and a government that is primarily concerned with the appearance of stability on Wall Street rather than the reality of amends that need to be offered.

I am not a pundit. I am only seeking to apply common sense to a situation that seems to be wallowing in dogma, and political maneuvering. In my view they are arranging the deck chairs on the Titanic. In my view the worst is yet to come. In my view under the worst-case scenarios our way of life, our society, our economy and our government will be destabilized unless we open our eyes. It’s true that we don’t have a lot of tools left in the box. But then again we never did have a lot of tools in the box.

A great fraud has been committed on American and foreign taxpayers and investors as well as American and foreign buyers of real estate, commercial and residential. The perpetrators of this great fraud were intermediaries between the people who had money and the people who didn’t. If an honest attempt was made to do the right thing, we would do more to improve the confidence of our own consumers as well as foreign investors than any of these of exotic and creative plans to shore up an economy based on illusion and delusion.

If we already know that the identity of the creditor is in doubt, then we already have a perfectly legitimate legal reason to stop foreclosures. If we already know that the prices that were used in many fraudulent loan transactions were not equal to any sustainable measure of fair market value and that neither the borrower nor the actual lender (investor) was aware of this misrepresentation, then we already have a perfectly legitimate and legal reason to restructure all the affected loans, especially since most of them are controlled through guarantees of federal agencies if not outright ownership by those federal agencies. If we already know that somebody probably exists who has actually lost money on these transactions, or some of them, then it shouldn’t be hard for them to come forward, provide the necessary accounting and proof of ownership, and be included in the restructuring of these mortgage loans.

What is stopping the use of common sense is that we are relying on the very intermediaries who caused the problem in the first place and who have everything to gain by a continuation of the foreclosures, by a continuation of the free fall in housing prices, by a continuation of the charade of modifications, and by the speculative bull market that is currently being constructed right under the nose of this administration. That bull market may have a temporary effect on the economy (or at least the indexes that measure economic results) and of course the stock market, but in reality it is easy to see that such a bull market will only be another bubble which will cause more devastation and further undermine confidence in the American economy and the American government.

HERE IS WHAT A FAIR RESOLUTION WOULD LOOK LIKE:

ALL HOMES ELIGIBLE (INCLUDING REO). Forget the blame game

ALL MORTGAGE BONDS ELIGIBLE. Forget the blame game

REGULATE SERVICING COMPANIES LIKE UTILITIES OR REPLACE THEM WITH COMPANIES THAT WILL DO THE JOB

SUSPEND ALL FORECLOSURES, SALES, JUDICIAL AND NON-JUDICIAL. SUSPEND MORTGAGE PAYMENTS, ALL MORTGAGES 90 DAYS.

OFFER INTEREST RATE ONLY RE-STRUCTURE TO HOMEOWNERS THAT REDUCES FIXED INTEREST RATE TO 2%

OFFER PRINCIPAL REDUCTION TO 110% OF FAIR MARKET VALUE WITH 5% FIXED INTEREST RATE, TOGETHER WITH AN EQUITY APPRECIATION CLAUSE OF 20% FROM REDUCED PRINCIPAL.

OFFER CERTIFICATION OF OWNERSHIP FROM FEDERAL AGENCY TO THE HOMEOWNER.

CREATE FAST TRACK QUIET TITLE ACTIONS TO RESOLVE ALL TWISTED TITLE ISSUES RESULTING FROM SECURITIZED LOANS

OFFER TO SERVICE THE NEW LOANS FOR INVESTORS WHO PROVE OWNERSHIP.

CREATE CUT-OFF DATE: HOMEOWNERS WHO DON’T TAKE THE DEAL EITHER STAY WITH EXISTING TITLE AND MORTGAGE SITUATION OR GO THROUGH FORECLOSURE. INVESTORS WHO DON’T TAKE THE DEAL EITHER STAY WITH EXISTING TITLE AND RECEIVABLE SITUATION OR SUE THEIR INVESTMENT BANKERS.

I KNOW. WHO HAS THE POWER TO DO THIS? OBAMA, THAT’S WHO. NO NEW REGULATIONS ARE REQUIRED. STATE AND FEDERAL LEGISLATION TO PUT A “CAP”ON THIS IS UNNECESSARY, BUT IF THEY WANT TO DO IT THEY COULD DO IT AFTERWARD. The immediate result is that the downward pressure on housing would vanish. The upward mobility of consumers would instantly appear. The confidence by consumers that the government cares more about them than the oligopoly of banks who appear to be running the country would soar, as would their spending. World-wide confidence in the American financial system would soar because they would see the end of illusion and delusion.

And let’s not forget that the American moral high-ground would be restored, which is the only real basis for the consent of the governed here and around the world.
—————–

Housing Woes Bring New Cry: Let Market Fall

By DAVID STREITFELD

The unexpectedly deep plunge in home sales this summer is likely to force the Obama administration to choose between future homeowners and current ones, a predicament officials had been eager to avoid.

Over the last 18 months, the administration has rolled out just about every program it could think of to prop up the ailing housing market, using tax credits, mortgage modification programs, low interest rates, government-backed loans and other assistance intended to keep values up and delinquent borrowers out of foreclosure. The goal was to stabilize the market until a resurgent economy created new households that demanded places to live.

As the economy again sputters and potential buyers flee — July housing sales sank 26 percent from July 2009 — there is a growing sense of exhaustion with government intervention. Some economists and analysts are now urging a dose of shock therapy that would greatly shift the benefits to future homeowners: Let the housing market crash.

When prices are lower, these experts argue, buyers will pour in, creating the elusive stability the government has spent billions upon billions trying to achieve.

“Housing needs to go back to reasonable levels,” said Anthony B. Sanders, a professor of real estate finance at George Mason University. “If we keep trying to stimulate the market, that’s the definition of insanity.”

The further the market descends, however, the more miserable one group — important both politically and economically — will be: the tens of millions of homeowners who have already seen their home values drop an average of 30 percent.

The poorer these owners feel, the less likely they will indulge in the sort of consumer spending the economy needs to recover. If they see an identical house down the street going for half what they owe, the temptation to default might be irresistible. That could make the market’s current malaise seem minor.

Caught in the middle is an administration that gambled on a recovery that is not happening.

“The administration made a bet that a rising economy would solve the housing problem and now they are out of chips,” said Howard Glaser, a former Clinton administration housing official with close ties to policy makers in the administration. “They are deeply worried and don’t really know what to do.”

That was clear last week, when the secretary of housing and urban development, Shaun Donovan, appeared to side with current homeowners, telling CNN the administration would “go everywhere we can” to make sure the slumping market recovers.

Mr. Donovan even opened the door to another housing tax credit like the one that expired last spring, which paid first-time buyers as much as $8,000 and buyers who were moving up $6,500. The cost to taxpayers was in the neighborhood of $30 billion, much of which went to people who would have bought anyway.

Administration press officers quickly backpedaled from Mr. Donovan’s comment, saying a revived credit was either highly unlikely or flat-out impossible. Mr. Donovan declined to be interviewed for this article. In a statement, a White House spokeswoman responded to questions about possible new stimulus measures by pointing to those already in the works.

“In the weeks ahead, we will focus on successfully getting off the ground programs we have recently announced,” the spokeswoman, Amy Brundage, said.

Among those initiatives are $3 billion to keep the unemployed from losing their homes and a refinancing program that will try to cut the mortgage balances of owners who owe more than their property is worth. A previous program with similar goals had limited success.

If last year’s tax credit was supposed to be a bridge over a rough patch, it ended with a glimpse of the abyss. The average home now takes more than a year to sell. Add in the homes that are foreclosed but not yet for sale and the total is greater still.

Builders are in even worse shape. Sales of new homes are lower than in the depths of the recession of the early 1980s, when mortgage rates were double what they are now, unemployment was pervasive and the gloom was at least as thick.

The deteriorating circumstances have given a new voice to the “do nothing” chorus, whose members think the era of trying to buy stability while hoping the market will catch fire — called “extend and pretend” or “delay and pray” — has run its course.

“We have had enough artificial support and need to let the free market do its thing,” said the housing analyst Ivy Zelman.

Michael L. Moskowitz, president of Equity Now, a direct mortgage lender that operates in New York and seven other states, also advocates letting the market fall. “Prices are still artificially high,” he said. “The government is discriminating against the renters who are able to buy at $200,000 but can’t at $250,000.”

A small decline in home prices might not make too much of a difference to a slack economy. But an unchecked drop of 10 percent or more might prove entirely discouraging to the millions of owners just hanging on, especially those who bought in the last few years under the impression that a turnaround had already begun.

The government is on the hook for many of these mortgages, another reason policy makers have been aggressively seeking stability. What helped support the market last year could now cause it to crumble.

Since 2006, the Federal Housing Administration has insured millions of low down payment loans. During the first two years, officials concede, the credit quality of the borrowers was too low.

With little at stake and a queasy economy, buyers bailed: nearly 12 percent were delinquent after a year. Last fall, F.H.A. cash reserves fell below the Congressionally mandated minimum, and the agency had to shore up its finances.

Government-backed loans in 2009 went to buyers with higher credit scores. Yet the percentage of first-year defaults was still 5 percent, according to data from the research firm CoreLogic.

“These are at-risk buyers,” said Sam Khater, a CoreLogic economist. “They have very little equity, and that’s the largest predictor of default.”

This is the risk policy makers face. “If home prices begin to fall again with any serious velocity, borrowers may stay away in such numbers that the market never recovers,” said Mr. Glaser, a consultant whose clients include the National Association of Realtors.

Those sorts of worries have a few people from the world of finance suggesting that the administration should do much more, not less.

William H. Gross, managing director at Pimco, a giant manager of bond funds, has proposed the government refinance at lower rates millions of mortgages it owns or insures. Such a bold action, Mr. Gross said in a recent speech, would “provide a crucial stimulus of $50 to $60 billion in consumption,” as well as increase housing prices.

The idea has gained little traction. Instead, there is a sense that, even with much more modest notions, government intervention is not the answer. The National Association of Realtors, the driving force behind the credit last year, is not calling for a new round of stimulus.

Some members of the National Association of Home Builders say a new credit of $25,000 would raise demand but their chances of getting this through Congress are nonexistent.

“Our members are saying that if we can’t get a very large tax credit — one that really brings people off the bench — why use our political capital at all?” said David Crowe, the chief economist for the home builders.

That might give the Obama administration permission to take the risk of doing nothing.

Filed under: bubble, CDO, CORRUPTION, Eviction, evidence, expert witness, foreclosure mill, GTC | Honor, HERS, investment banking, MODIFICATION, Mortgage, Motions, Pleading, securities fraud, Servicer, STATUTES, trustee | Tagged: borrower, bull market, congress, creditor, David Streitfeld, fraud, fraudulent appraisals, fraudulent loan transactions, housing market, identity of the creditor, Investor, Ny Times, Obama, speculators, Wall Street | 45 Comments »

Revenue Sharing? How About Revenue Withholding?

Posted on August 30, 2010 by Neil Garfield

It is time to bring back true general revenue sharing — temporarily — to stimulate the economy. Hundreds of articles in political science and public policy journals have studied past efforts, and analyzed the concept of fiscal federalism, without establishing general revenue sharing as a fundamental pillar of Keynesian stabilization policies. This lapse is understandable: most of these articles were written before the current economic crisis, the most serious since the Great Depression. — Schiller

In the absence of revenue sharing and in the context of a reality with dark implications, I can foresee state and municipal governments finding creative ways to divert revenue that would otherwise go to the federal government and retaining it at the local level. It sounds like a radical move and it probably contains some highly controversial elements. The fact remains, as Schiller points out, that we are not getting the results we need when we need it. We are not getting the action we need where we need it. Time has run out. In order to restore services, jobs and encourage liquidity in the capital markets, state and local governments are going to need to reach for innovative solutions, including like Wall Street did, issuing their own currency. Local government support of local community banks and credit unions together with existing agencies that already have numerous powers that have rarely if ever been used is the only option left to avoid an economic catastrophe that seems to be obvious to most citizens but completely obscured in Beltway analysis and decision-making. — Garfield

EDITOR’S COMMENT: In the article below this world-famous economist whose analysis has been proven to be accurate and useful looking at trends that extend over 100 years, is sounding an alarm. Will anyone listen? This economist has proven the obvious: housing prices have a direct index relationship with median income. If people are making less money they must seek less expensive housing. We have an overbuilt housing market fueled by a delusional artificial infusion of fake liquidity. Neither the sale of existing homes nor the sale of new homes is going to have any positive effect on the economy for the foreseeable future. The only solution, as Schiller points out, is to cut through all the red tape and instantaneously put as many people to work creating actual products and projects that add value to our society. Each day we wait we get closer to the edge of a cliff that most of us at least fear is present, but which policy makers are ignoring at our peril.

The stability of our society and the prospects for our economy are the stakes in this gamble. The people making the decisions and the people who influence those making decisions do not believe they will be affected by a negative outcome either way. I don’t think that they are correct. But whether I am right or wrong, the fact appears to be that our decision-makers appear largely derived from a group of people whose analysis is based on theoretical long-term models rather than the current emergency.

August 28, 2010

The Case for Reviving Revenue Sharing

By ROBERT J. SHILLER

PROTRACTED unemployment is eating away at millions of people. And the economy’s failure to create enough jobs for them is part of a vicious circle that could keep turning for years to come.

In my last column, I called for big, temporary government programs aimed directly at putting people back to work. But how might we best accomplish this? The clock is ticking, and we don’t have time to create new national organizations to employ people. Instead, the most efficient approach is to use existing organizations for specific ideas and projects.

State and local governments as well as nonprofit and other organizations need to be mainstays in this effort. We need to enlist their help — without telling them exactly what to do. As for a framework, think of the general revenue sharing program adopted by Congress in 1972.

In his 1971 State of the Union message, President Richard M. Nixon advocated general revenue sharing to offset the tendency for power to be concentrated in Washington. Give local governments the money and “put the power to spend it where the people are,” he said.

Support for the idea was not confined to Republicans. A leading Democrat, Senator Hubert H. Humphrey, supported it in 1972, saying that federal taxes were more progressive than state and local ones and that federal money could be spent more effectively by people with local knowledge than by “some agency head in Washington.”

General revenue sharing came under attack in the Reagan years, and Congress ended it in 1987, arguing that by breaking the link between taxation and local needs, it encouraged higher taxes.

We are in a different time now. State and local governments are in severe fiscal trouble, and their constitutions often prevent deficit spending. In these circumstances, the federal government, which does not face such constraints, needs to raise revenue for them.

Legislation providing the states with $26 billion, which President Obama signed into law this month, took an important step in this direction. It did not create true general revenue sharing, because it tied the funds to specific needs — mostly hiring teachers and paying for Medicaid. But it did free states to use other resources as they saw fit.

The need for a Keynesian revenue-sharing program is clear. After Congress approved stimulus legislation in 2009, Lawrence H. Summers, head of the National Economic Council, said that “it’s harder to spend $300 billion within a year on quality projects than you might think.” And no wonder the task was tough: decision makers in Washington were removed from local needs.

Martin Shubik, a professor of mathematical institutional economics at Yale, has proposed creating a “Federal Employment Reserve Authority,” a permanent agency that would do extensive research and maintain a detailed list of ready-to-go public works projects should a recession come. That’s a great idea, but we do not have such an agency now, and, if we did, it might still suffer from a Washington bias.

Now, local governments are laying off a wide variety of employees, including teachers, police officers and social workers. So why don’t we embrace general revenue sharing? Unfortunately, when faced with a need for stimulus, members of Congress seem to prefer to start their own projects, for which they are likely to get more credit from voters. Local governments, meanwhile, which are more likely to know where spending is really needed, remain in deep trouble.

It’s time for the public to assert loftier expectations. We need to respect existing government bureaus and organizations for their ideas, and get down to the business of financing important jobs temporarily, and on a huge scale. This will avert more layoffs, and perhaps give cities and states time to recover to the point they can pay local employees from local revenue.

When the administration of Franklin D. Roosevelt began its vast job creation program in 1933, it had to accept certain practical realities, which limited the immediate stimulus that could be provided. Foremost among them was that the government had to work largely within the framework of existing organizations — whether state and local governments, the military or nonprofit groups — which provided much of the economy’s infrastructure.

Economic stimulus is not a matter of turning on the money spigot, as some economists are wont to describe it. It is about getting the widespread cooperation of dispersed organizations to provide jobs, at least for as long as the economy is weak.

When the Roosevelt administration and Congress created the Civilian Conservation Corps in 1933, it was done within the framework of the Army. There seemed to be no other organization that could move hundreds of thousands of young men into wilderness encampments where they could work on conservation efforts. But the Roosevelt C.C.C. placed no more than a half-million people in jobs. We need to reach further than that.

Labor unions, which represent workers who naturally fear displacement by people in new jobs, might seem to be an obstacle. But unions do have an idealistic base, and working union members have sons and daughters and friends and relatives who are unemployed. The unions need to be consulted if new jobs are to be created in a relatively nonthreatening way. In a savvy move, President Roosevelt made a union leader the head of the C.C.C.

The concept of general revenue sharing can also be extended to the nation’s nonprofits, including charities and foundations. The government has long given support to such organizations, but usually in the form of narrow grants. But broader general revenue grants could be made in times like these.

Millions of people need jobs, and there are organizations that could help put them to work. It’s time to move forward.

Robert J. Shiller is professor of economics and finance at Yale and co-founder and chief economist of MacroMarkets LLC.

Filed under: bubble, CDO, CORRUPTION, foreclosure, investment banking, Mortgage, trustee | Tagged: government, jobs, Ny Times, Revenue Sharing, ROBERT J. SHILLER | 19 Comments »

The Obvious: Bankers Told Recovery May Be Slow

Posted on August 30, 2010 by Neil Garfield

“I’m more worried than I have ever been about the future of the U.S. economy,” said Allen Sinai, co-founder of the consulting firm Decision Economics and a longtime participant in the symposium. “The challenge is unique: poor and diminishing growth, a sticky unemployment rate, sky-high deficits and a sovereign debt that makes us one of the most fiscally irresponsible countries in the world.”

Editor’s Comment: It is only natural that the setting for this event was in a place with the word “hole” in it. Carmen M Reinhart, an economist at the University of Maryland told 110 central bankers and economists that they were deluding themselves. While they were congratulating themselves on having weathered the storm, the economy is clearly in freefall.

They keep using the term “jobless recovery” as though that was something real. With GDP falling under 2% under the latest calculation, which probably excludes between 30 and 50% of all human activity worthy of measurement, we clearly do not have a recovery nor do we have an economy that under any scenario could generate more jobs than those being lost. In a nutshell, unemployment is virtually certain to increase.

Before we start blaming the current president or even his predecessor for the current state of events, let me point out that it took more than three decades for the financial sector to grow from less than 15% of the nation’s GDP to over 40%. In simplistic terms we allowed the economy to create a system in which the financial community was taking a 40% commission on every transaction of every nature because they had been permitted, without regulation, to literally issue the equivalent of money.

The hard truth is that 25% of our current economy as it is currently measured is pure vapor. We don’t make anything or provide any services within that gap which adds value to our society or anyone in it. Reality has a nasty way of catching up. There is a 25% contraction waiting in the wings. The only way to avoid such a calamitous result is to use our strongest resource, American ingenuity, to create new businesses, new industries, and new jobs at an unprecedented pace that will shock the economy back into normal sinus rhythm.

With the vast majority of bankers and economists holding on to old ideas, unrealistic perceptions of reality, and an aversion to the risk of trying something new, the economist from the University of Maryland is merely stating the obvious––and doing it in the most gentle way possible. Stating that the recovery may be slow is the equivalent of saying that we will be on the ground shortly after it is obvious that the engines and wings have fallen off the aircraft.

August 28, 2010

Bankers Told Recovery May Be Slow

By SEWELL CHAN

JACKSON HOLE, Wyo. — The American economy could experience painfully slow growth and stubbornly high unemployment for a decade or longer as a result of the 2007 collapse of the housing market and the economic turmoil that followed, according to an authority on the history of financial crises.

That finding, contained in a new paper by Carmen M. Reinhart, an economist at the University of Maryland, generated considerable debate during an annual policy symposium here, organized by the Federal Reserve Bank of Kansas City, which concluded on Saturday.

The gathering, at a historic lodge in Grand Teton National Park, brought together about 110 central bankers and economists, including most of the Federal Reserve’s top officials. In 2008, the symposium occurred weeks before the Lehman Brothers bankruptcy nearly shut down the financial markets. At the symposium last year, officials congratulated themselves on weathering the worst of the crisis.

But the recent slowing of the recovery cast a pall on this year’s gathering. As economists (some wearing jeans and cowboy boots) conferred on a terrace with a sweeping view of the 13,770-foot peak of Mount Teton, or watched a horse trainer tame an unruly colt at a nearby ranch, they anxiously discussed research like Ms. Reinhart’s. (Participants pay to attend the event, which is not financed by taxpayers, a Kansas City Fed spokeswoman emphasized.)

“I’m more worried than I have ever been about the future of the U.S. economy,” said Allen Sinai, co-founder of the consulting firm Decision Economics and a longtime participant in the symposium. “The challenge is unique: poor and diminishing growth, a sticky unemployment rate, sky-high deficits and a sovereign debt that makes us one of the most fiscally irresponsible countries in the world.”

Ms. Reinhart’s paper drew upon research she conducted with the Harvard economist Kenneth S. Rogoff for their book “This Time Is Different: Eight Centuries of Financial Folly,” published last year by Princeton University Press. Her husband, Vincent R. Reinhart, a former director of monetary affairs at the Fed, was the co-author of the paper.

The Reinharts examined 15 severe financial crises since World War II as well as the worldwide economic contractions that followed the 1929 stock market crash, the 1973 oil shock and the 2007 implosion of the subprime mortgage market.

In the decade following the crises, growth rates were significantly lower and unemployment rates were significantly higher. Housing prices took years to recover, and it took about seven years on average for households and companies to reduce their debts and restore their balance sheets. In general, the crises were preceded by decade-long expansions of credit and borrowing, and were followed by lengthy periods of retrenchment that lasted nearly as long.

“Large destabilizing events, such as those analyzed here, evidently produce changes in the performance of key macroeconomic indicators over the longer term, well after the upheaval of the crisis is over,” Ms. Reinhart wrote.

Ms. Reinhart added that officials may err in failing to recognize changed economic circumstances. “Misperceptions can be costly when made by fiscal authorities who overestimate revenue prospects and central bankers who attempt to restore employment to an unattainably high level,” she warned.

Several scholars here cautioned that it was premature to infer long-term economic woes for the United States from the aftermath of past crises.

The Reinharts’ research “has not yet tried to assess the extent to which different policy stances mitigated the length of the outcome,” said Susan M. Collins, an economist and the dean of the Gerald R. Ford School of Public Policy at the University of Michigan. “But the reality is that we need to have an understanding that the issues we are dealing with are severe, and that we should not expect them to be unwound in a few months.”

Ms. Collins added: “I’m very much a glass-half-full person. What we’ve seen in the past few years has been a policy success. Things are not where we want them to be, but they could have been a lot worse.”

The Reinharts’ paper was not the only one to offer somber implications for policy makers.

Two economists, James H. Stock of Harvard and Mark W. Watson of Princeton, presented a paper arguing that inflation, which has already fallen so much that some Fed officials fear the economy is at risk of deflation, a cycle of falling prices and wages, could fall even further by the middle of next year.

Inflation has been running well below the Fed’s unofficial target of about 1.5 percent to 2 percent. Ben S. Bernanke, the Fed chairman, reiterated on Friday that the central bank would “strongly resist deviations from price stability in the downward directions.”

Mr. Stock and Mr. Watson noted that recessions in the United States were associated with declines in inflation, with an exception being an increase in inflation in 2004, which occurred despite a “jobless recovery” from the 2001 recession. The authors said they could not explain the anomaly but also could not “offer a reason why it might happen again.”

Filed under: bubble, CDO, CORRUPTION, foreclosure, MODIFICATION, Mortgage, trustee | Tagged: FINANCIAL MARKETS, Ny Times, recovery, SEWELL CHAN | 5 Comments »

Lakeside Bank, St. Charles, La — The Way Banking Should Be

Posted on August 29, 2010 by Neil Garfield

Editor’s Comment: Only one Bank has failed in Louisiana since the financial crisis began. And only one bank in the United States has commenced operations in the year 2010 — this one in Louisiana. Despite an unofficial moratorium on new bank charters of 70-year-old retiree, Hartie Spence, managed to navigate the regulations and got the only new start-up bank to open in the country, operating out of a secondhand double wide trailer.

The probable reason for the apparent safety of banks in the state of Louisiana is the rampant poverty. But it shows that even where people have very little money the financial system can be stable as long as outsiders don’t meddle in their financial affairs. Louisiana was a bad target all Wall Street and thus avoided the absurd fraudulent increases in appraisal values that lie at the core of the financial crisis. Landing was based upon the actual value of the property, the willingness of a lender to take the risk, and the ability of the borrower to repay.

For hundreds of years that was the lending model and obviously the only one that makes any sense. For 10 years that model was turned on its head in places other than Louisiana where lenders were not lenders, where inflated appraisal values were a good thing, and where the ability of borrowers to repay a loan was obstructed by layers of unknown entities never disclosed at the time of closing and obstructed by exotic terms and presumptions that were plainly wrong but which work to the benefit of the intermediaries who had arranged for the funding of the loan from investors and the buying of the loan product by unwitting borrowers.

I don’t know anything about this particular bank other than what I have read. I don’t know the people in it and I don’t know their business model. But in an economy where new bank charters are being discouraged, and new start-ups of any kind of business are made increasingly difficult while the government aids the large corporations and financial institutions that got us into this mess, I think this bank deserves the support not only of its own community but anyone who is looking for a new banking relationship. Between the Postal Service, the Internet and the telephone your bank can be anywhere.

August 28, 2010

In Hard Times, One New Bank (Double-Wide)

By ANDREW MARTIN

LAKE CHARLES, La. — The only new start-up bank to open in the United States this year operates out of a secondhand double-wide trailer, on a bare lot in front of the cavernous Trinity Baptist Church. A blue awning covers the makeshift drive-through window.

Called Lakeside Bank, it is run by a burly and balding former tackle for Louisiana State’s football team named Hartie Spence, who doles out countrified humor along with deposit slips and the occasional loan.

“This is the one place where the cause of death is mildew,” he quipped, standing outside the trailer in withering heat.

Asked how his bank in this steaming town of oil refineries and oversize casinos managed to win over federal regulators, Mr. Spence, 70, said, “I’m still thinking it’s my looks that did it.”

The dearth of new banks follows a particularly wrenching period for the industry. As the financial crisis deepened, hundreds of banks and thrifts closed and thousands more were saddled with bad loans and credit card defaults, costing the industry billions of dollars.

As a result, the number of investor groups applying to start a new bank from scratch has dropped precipitously. And for the intrepid few who have tried, regulators — sharply criticized for lax oversight in recent years — are being particularly stingy in granting approval.

So far this year, Mr. Spence holds the privilege of opening the only truly new federally insured bank. (In seven other instances, investors received regulatory approval to buy an existing bank, usually one that had failed, and reopen it).

Of course, many of the nation’s biggest banks were bailed out by the government, and have since rebounded. But since January 2008, more than 280 smaller banks and thrifts have been closed, and many community banks are struggling to recover from the real estate collapse.

Those bank failures have cost the Federal Deposit Insurance Corporation’s fund roughly $70 billion, and not surprisingly, the agency’s regulators are now giving greater scrutiny to new bank applications, according to bankers and industry officials.

Technically, banks obtain charters from their primary regulatory agency, either state banking regulators or, for national banks, the Office of the Comptroller of the Currency. But the charters are contingent on the applicants’ obtaining deposit insurance from the F.D.I.C.

The F.D.I.C. said the reduction in charters simply reflects the effects of the recession on new businesses. “There was considerable interest in forming banks before the economy deteriorated,” said an agency spokesman, David Barr. “In today’s climate we are seeing very little interest.”

However, last year the agency toughened its oversight of new banks, saying banks that had been open for fewer than seven years were “over represented” among failed banks in 2008 and 2009.

The reason, the agency said in a public release, is that many new banks strayed from their approved business plans and ran into problems because of “weak risk management practices,” among other problems.

Ralph F. “Chip” MacDonald III, a lawyer in Atlanta who advises banks on regulatory matters, said he believed the F.D.I.C. had imposed an “unofficial moratorium” on new bank charters, a charge that the agency denies.

Adam Taylor, president of the Bank Capital Group, an Atlanta company that helps investors set up new banks, said he had several recent clients, whom he declined to name, withdraw applications for new banks after it became clear that the F.D.I.C. would not approve them. He said the agency rarely denies charters — a fact confirmed by agency records — but that it places the applications in “purgatory” until the applicants give up.

The number of banks and thrifts — also known as savings and loans — in the United States has been declining steadily for 25 years, because of consolidation in the industry and deregulation in the 1990s that reduced barriers to interstate banking. There were 6,840 banks and 1,173 thrifts last year, down from 14,507 banks and 3,566 thrifts in 1984.

The number of charters has generally declined too, though there have been periodic swings. The lowest number of bank charters granted in any one year was 15, in 1942.

How, then, did Lakeside Bank win this year’s regulatory lottery?

Mr. Spence’s looks aside, he said that regulators were not ready to grant approval until Lakeside had raised enough capital, created a sufficiently conservative business plan and hired an experienced management team.

The initial idea for Lakeside Bank came from a local real estate developer, Andrew Vanchiere, who was dissatisfied with his existing bank. In 2007, he rounded up a group of local businessmen who set about raising $13 million in start-up capital and began looking for someone to run the bank.

The initial candidates were deemed too inexperienced by regulators. When the group contacted Mr. Spence in 2008, he was a few months into retirement and coming to the realization that fishing for trout and redfish just wasn’t enough to keep him occupied.

“I was bored absolutely stiff,” said Mr. Spence, who had successfully run several Louisiana banks during his career. “My response was, ‘Let’s do it!’

“You can manage a good bank in a bad economy, particularly when you are at the bottom,” he said. Noting that he has a clean balance sheet and can be selective about making loans, he added, “I thought it was a perfect time to be starting.”

Lakeside’s application was also helped by the surprising vitality of Lake Charles, a city of 72,000 roughly 30 miles from the Texas border. Lake Charles has gotten a boost from casino gambling and the oil and gas industry, as well as an infusion of new businesses, including liquefied natural gas terminals and a new plant that builds parts for nuclear reactors.

Louisiana, meanwhile, has fared better than many states during the economic downturn because of the petroleum industry and the infusion of government and insurance money to pay for damages from Hurricanes Katrina, Rita and Ike.

Only one bank has failed in Louisiana since the financial crisis began.

Regulators made it clear that Lakeside would not be approved if other banks in town were struggling to stay afloat, Mr. Spence said. But Lakeside, which opened on July 26, sits on a busy boulevard lined with about a dozen or more banks or credit unions, all of which appear to be thriving.

“There’s enough for all of us, and we are no threat to them for many, many years,” Mr. Spence said of his competitors.

Lakeside Bank is promoting itself as an old-fashioned community bank that focuses on customer service and bread-and-butter banking products, even though it also makes them available online.

Whereas loan decisions for many big banks are made in distant cities, Mr. Spence said that Lakeside will make them right there in the double-wide trailer, at least until the bank moves into a more permanent structure in a year or two.

“That’s our motto, ‘The Way Banking Should Be,’ ” he said, adding later, “It got rushed enough yesterday that I had to answer the phones and work the switchboard.”

Filed under: community banks | Tagged: ANDREW MARTIN, FDIC, Harties Spence, Lakeside Bank, Louisiana, moratorium, Ny Times, St. Chales | 11 Comments »

NON-DISCLOSURE DETAILS FROM THE OTHER SIDE

Posted on August 11, 2010 by Neil Garfield

ONE MORE QUESTION TO ASK IN DISCOVERY: WHAT ENTITIES WERE CREATED OR EMPLOYED IN THE TRADING OF MORTGAGE BONDS, CDO’S, SYNTHETIC CDO’S OR TOTAL RETURN SWAPS (NEW TERM)?

EDITOR’S COMMENT: LOUISE STORY, in her article in the New York Times continues to dig deeper into the games played by Wall Street firms. You’ll remember that the executives of the major Wall Street firms were spouting off the message that the risks and consequences were unknown to them. They didn’t know anything was wrong. Maybe they were stupid or distracted. And maybe they were just plain lying. The risks to these fine gentlemen and their companies are now enormous. If the veil of non-disclosure (opaque, in Wall Street jargon) continues to be eroded, they move closer and closer to root changes in Wall Street and both criminal and civil liability. It also leads inevitably to the conclusion that the loans and the bonds were bogus.

Yes it is true that money exchanged hands — but not in any of the ways that most people imagine and not in any way that was disclosed as required by TILA, state law, Securities Laws and other applicable statutes, rules and regulations. They continue to pursue foreclosure principally for the purpose of distracting everyone from the truth — that the transactions were wrong in every conceivable way and they knew it.

If there was nothing wrong with these innovative financial products why were they “off-balance sheet.” If there isn’t any problem with them now, then why can’t they produce an accounting, like any other situation, and say “this person borrowed money and didn’t pay it back. We will lose money if they don’t — here is the proof.” If everything was proper and appropriate, then why are we seeing revealed new entities and new layers of deception as Ms. Story and other reporters dig deeper and deeper?

The answer is simple: they were hiding the truth in circular transactions that were partially off balance sheet and partially on. I wonder how many borrowers would be charged with fraud for doing that? Now, thanks to Louise Story, we have some new names to research — Pyxis, Steers, Parcs, and unnamed “customer trades. They all amount to the same thing.

The bonds and the loans claimed to be attached to the bonds were being bought and sold in and out of the investment banking firm that created them. If they produce the real accounting the depth and scope of their fraud will become obvious to everyone, including the Judges that say we won’t give a borrower a free house. What these Judges are doing is ignoring the reality that they are giving a free house and a free ride to companies with no interest in the transaction. And they are directly contributing to a title mess that will take decades to untangle.

August 9, 2010

Merrill’s Risk Disclosure Dodges Are Unearthed

By LOUISE STORY

It was named after a faint constellation in the southern sky: Pyxis, the Mariner’s Compass. But it helped to steer the mighty Merrill Lynch toward disaster.

Barely visible to any but a few inside Merrill, Pyxis was created at the height of the mortgage mania as a sink for subprime securities. Intended for one purpose and operated off the books, this entity and others like it at Merrill helped the bank obscure the outsize risks it was taking.

The Pyxis story is about who knew what and when on Wall Street — and who did not. Publicly, banks vastly underestimated their exposure to the dangerous mortgage investments they were creating. Privately, trading executives often knew far more about the perils than they let on.

Only after the housing bubble began to deflate did Merrill and other banks begin to clearly divulge the many billions of dollars of troubled securities that were linked to them, often through opaque vehicles like Pyxis.

In the third quarter of 2007, for instance, Merrill reported that its potential exposure to certain subprime investments was $15.2 billion. Three months later, it said that exposure was actually $46 billion.

At the time, Merrill said it had initially excluded the difference because it thought it had protected itself with various hedges.

But many of those hedges later failed, and Merrill, the brokerage giant that brought Wall Street to Main Street, soon collapsed into the arms of Bank of America.

“It’s like the parable of the blind man and the elephant: you had some people feeling the trunk and some the legs, and there was nobody putting it all together,” Gary Witt, a former managing director at Moody’s Investors Service who now teaches at Temple University, said of the situation at Merrill and other banks.

Wall Street has come a long way since the dark days of 2008, when the near collapse of American finance heralded the end of flush times for many people. But even now, two years on, regulators are still trying to piece together how so much went so wrong on Wall Street.

The Securities and Exchange Commission is investigating whether banks adequately disclosed their financial risks during the boom and subsequent bust. The question has taken on new urgency now that Citigroup has agreed to pay $75 million to settle S.E.C. claims that it misled investors about its exposure to collateralized debt obligations, or C.D.O.’s.

As Merrill did with vehicles like Pyxis, Citigroup shifted much of the risks associated with its C.D.O.’s off its books, only to have those risks boomerang. Jessica Oppenheim, a spokeswoman for Bank of America, declined to comment.

Such financial tactics, and the S.E.C.’s inquiry into banks’ disclosures, raise thorny questions for policy makers. The investigation throws an uncomfortable spotlight on the vast network of hedge funds and “special purpose vehicles” that financial companies still use to finance their operations and the investments they create.

The recent overhaul of financial regulation did little to address this shadow banking system. Nor does it address whether banking executives should be required to disclose more about the risks their banks take.

Most Wall Street firms disclosed little about their mortgage holdings before the crisis, in part because many executives thought the investments were safe. But in some cases, executives failed to grasp the potential dangers partly because the risks were obscured, even to them, via off-balance-sheet programs.

Executives’ decisions about what to disclose may have been clouded by hopes that the market would recover, analysts said.

“There was probably some misplaced optimism that it would work out,” said John McDonald, a banking analyst with Sanford C. Bernstein & Company. “But in a time of high uncertainty, maybe the disclosure burden should be pushed towards greater disclosure.”

The Pyxis episode begins in 2006, when the overheated and overleveraged housing market was beginning its painful decline.

During the bubble years, many Wall Street banks built a lucrative business packaging home mortgages into bonds and other investments. But few players were bigger than Merrill Lynch, which became a leader in creating C.D.O.’s

Initially, Merrill often relied on credit insurance from the American International Group to make certain parts of its C.D.O.’s attractive to investors. But when A.I.G. stopped writing those policies in early 2006 because of concerns over the housing market, Merrill ended up holding on to more of those pieces itself.

So that summer, Merrill Lynch created a group of three traders to reduce its exposure to the fast-sinking mortgage market. According to three former employees with direct knowledge of this group, the traders first tried sell the vestigial C.D.O. investments. If that did not work, they tried to find a foreign bank to finance their own purchase of the C.D.O.’s. If that failed, they turned to Pyxis or similar programs, called Steers and Parcs, as well as to custom trades.

These programs generally issued short-term I.O.U.’s to investors and then used that money to buy various assets, including the leftover C.D.O. pieces.

But there was a catch. In forming Pyxis and the other programs, Merrill guaranteed the notes they issued by agreeing to take back any securities put in the programs that turned out to be of poor quality. In other words, these vehicles were essentially buying pieces of C.D.O.’s from Merrill using the proceeds of notes guaranteed by Merrill and leaving Merrill on the hook for any losses.

To further complicate the matter, Merrill traders sometimes used the cash inside new C.D.O.’s to buy the Pyxis notes, meaning that the C.D.O.’s were investing in Pyxis, even as Pyxis was investing in C.D.O.’s.

“It was circular, yes, but it was all ultimately tied to Merrill,” said a former Merrill employee, who asked to remain anonymous so as not to jeopardize ongoing business with Merrill.

To provide the guarantee that made all of this work, Merrill entered into a derivatives contract known as a total return swap, obliging it to cover any losses at Pyxis. Citigroup used similar arrangements that the S.E.C. now says should have been disclosed to shareholders in the summer of 2007.

One difficulty for the S.E.C. and other investigators is determining exactly when banks should have disclosed more about their mortgage holdings. Banks are required to disclose only what they expect their exposure to be. If they believe they are fully hedged, they can even report that they have no exposure at all. Being wrong is no crime.

Moreover, banks can lump all sorts of trades together in their financial statements and are not required to disclose the full face value of many derivatives, including the type of guarantees that Merrill used.

“Should they have told us all of their subprime mortgage exposure?” said Jeffery Harte, an analyst with Sandler O’Neill. “Nobody knew that was going to be such a huge problem. The next step is they would be giving us their entire trading book.”

Still, Mr. Harte and other analysts said they were surprised in 2007 by Merrill’s escalating exposure and its initial decision not to disclose the full extent of its mortgage holdings. Greater disclosure about Merrill’s mortgage holdings and programs like Pyxis might have raised red flags to senior executives and shareholders, who could have demanded that Merrill stop producing the risky securities that later brought the firm down.

Former Merrill employees said it would have been virtually impossible for Merrill to continue to carry out so many C.D.O. deals in 2006 without the likes of Pyxis. Those lucrative deals helped fatten profits in the short term — and hence the annual bonuses paid to its employees. In 2006, even as the seeds of its undoing were being planted, Merrill Lynch paid out more than $5 billion in bonuses.

It was not until the autumn of 2007 that Pyxis and its brethren set off alarm bells outside Merrill. C.D.O. specialists at Moody’s pieced together the role of Pyxis and warned Moody’s analysts who rated Merrill’s debt. Merrill soon preannounced a quarterly loss, and Moody’s downgraded the firm’s credit rating. By late 2007, Merrill had added pages of detailed disclosures to its earnings releases.

It was too late. The risks inside Merrill, virtually invisible a year earlier, had already mortally wounded one of Wall Street’s proudest names.

Filed under: bubble, CASES, CDO, CORRUPTION, evidence, expert witness, foreclosure, foreclosure mill, foreign relations, GTC | Honor, HERS, inflation, investment banking, Investor, Mortgage, Motions, Pleading, trustee | Tagged: Custom trades, HERS, Louise Story, Ny Times, Parcs, TOTAL RETURN SWAPS | 62 Comments »

TBW Taylor Bean Chairman Arrested On Fraud Charges

Posted on June 17, 2010 by Neil Garfield

“The fraud here is truly stunning in its scale and complexity,” said Lanny A. Breuer, assistant attorney general in the criminal division of the Department of Justice. “These charges send a strong message to corporations and corporate executives alike that financial fraud will be found, and it will be prosecuted.”

Once they determined that that approach might be difficult to conceal, they started selling mortgage pools and other assets to Colonial Bank that they knew to be worthless, officials said. Mr. Farkas and his partners relied on this technique to sell more than $1 billion of fraudulent assets over the course of several years, even covering up the fraud by recycling old fake assets for new ones, according to the complaints.

Editor’s Note: TBW has been high on my list of incompetent fraudsters. I always thought it was a stupid risk to “sell” mortgages and “sell” the servicing rights (probably to their own entity), and then take the servicing back. Stupid maybe, but they had no choice. The entire Taylor Bean operation wreaks of fraud and inconsistencies.

Bottom Line: If you have a TBW as the originating “lender” this article indicates, as we have known all along, that they were using OPM (Other People’s Money) and they were NOT the lender even though they said they were. It is highly likely that few, if any, of the loans were actually “securitized” because the loans were either nonexistent as described, never accepted by any pool (even though there might be a pool out there that claims ownership) and that none of the assignments were ever completed.

Thus your claims against TBW (including appraisal fraud, predatory loan practices, deceptive loan practices, fraud etc.) are properly directed, to wit: TBW still owns the paper, although the obligation is subject to an equitable unsecured claim from investors who funded the loan.

June 16, 2010

Executive Charged in TARP Scheme

By ERIC DASH

Federal prosecutors on Wednesday accused the former chairman of Taylor, Bean & Whitaker, once one of the nation’s largest mortgage lenders, of masterminding a fraud scheme that cheated investors and the federal government out of billions of dollars and led to last year’s sudden failure of Colonial Bank.

The executive, Lee B. Farkas, was arrested late Tuesday in Ocala, Fla., after a federal grand jury in Virginia indicted him on 16 counts of conspiracy, bank fraud, wire fraud and securities fraud. Separately, the Securities and Exchange Commission brought civil fraud charges against Mr. Farkas in a lawsuit filed on Wednesday.

Prosecutors said the fraud would be one of the biggest and most complex to come out of the housing collapse and the government’s huge bailout of the banking industry. In essence, they described an elaborate shell game that involved covering up the lender’s losses by creating fake mortgages and passing them along to private investors and government agencies.

Federal officials became suspicious after Colonial BancGroup, the main source of financing for Mr. Farkas’s company, tried to obtain $553 million in bailout money from the Troubled Asset Relief Program. The TARP application, filed in early 2009, was contingent on the bank first raising $300 million from private investors.

According to the S.E.C. complaint, Mr. Farkas and his partners said they would contribute $150 million, two private equity firms would each contribute $50 million, and a “friends and family” investor group would contribute another $50 million. “In truth, neither of the $50 million investors were private equity investors and neither ever agreed to participate,” the complaint said.

Mr. Farkas pocketed at least $20 million from the fraud, which he used to finance a private jet and a lavish lifestyle that included five homes and a collection of vintage cars, prosecutors said.

But the case is likely to expand beyond Mr. Farkas. The complaints cite the involvement of an unnamed Colonial Bank executive and other co-conspirators in the suspected fraud, and prosecutors said they might hold others accountable down the road.

Officials said the many layers of the scheme resulted in more than $1.9 billion of losses to investors; a $3 billion loss to the Department of Housing and Urban Development, which guaranteed many of the loans that Mr. Farkas’s company sold; and a $3.6 billion hit to the Federal Deposit Insurance Corporation, which had to take over Colonial Bank and pay its depositors after many of the bank’s assets were found to be worthless.

The complaints also list BNP Paribas and Deutsche Bank, which provided financing to Mr. Farkas’s company, as victims of the suspected fraud. Together, they lost $1.5 billion.

According to the complaints, the fraud started as early as 2002 with an effort to conceal rising operating losses at Taylor, Bean & Whitaker, a mortgage lender founded by Mr. Farkas. The first stage involved an attempt to hide overdrafts on a credit line the company had with Colonial Bank. As those overdrafts grew, prosecutors contend, Mr. Farkas and his associates started selling fake mortgage assets to Colonial Bank in exchange for tens of millions of dollars.

The transactions were “designed to give the false appearance that the loans were being sold into the secondary mortgage market,” Mr. Breuer said. “In fact, they were not.”

By 2008, prosecutors contend, the scheme had entangled the federal government. Investigators in the Office of the Special Inspector General for TARP took notice of the size of Colonial Bank’s bailout application and became suspicious of the accuracy of the bank’s statements.

That led investigators to alert other federal officials and draw a connection between Colonial Bank and Taylor, Bean & Whitaker, whose offices were raided by federal agents in August 2009. Both companies would soon stop operating.

“We knew it was a longstanding and close relationship between Colonial and T.B.W., and we decided that we needed to take a much closer look,” Neil M. Barofsky, the TARP special inspector general, said at a news conference on Wednesday. Investigators also discussed the situation with Treasury officials to “make sure the money would not go out the door.”

Federal officials have conducted nearly 80 criminal and civil investigations into companies that accepted TARP money, but so far they have filed charges in only one other case. In March, the head of Park Avenue Bank in Manhattan was accused of trying to defraud the government bailout program.

Filed under: bubble, CASES, CDO, CORRUPTION, Eviction, evidence, expert witness, Fannie MAe, foreclosure, foreclosure mill, GTC | Honor, HERS, investment banking, Investor, MODIFICATION, Mortgage, Motions, Pleading, securities fraud, Servicer, STATUTES | Tagged: accounting, bank fraud, civil fraud charges, Colonial BancGroup, Colonial Bank, conspiracy, Department of Housing and Urban Development, Department of Justice, DOJ, ERIC DASH, Federal Deposit Insurance Corporation., fraud, HERS, infrastructure, investors, Lanny A Breuer, Lee B Farkas, Ny Times, Securities and Exchange Commission, securities fraud, Taylor, Taylor Bean, TBW, wire fraud | 27 Comments »

Student Loans Non-Dischargeable? — NOT SO FAST

Posted on June 5, 2010 by Neil Garfield

If the government guarantee was waived in whole or in part, which I am sure is the case, then the rationale for non-dischargeability disappears. So I am suggesting that the assumption that the student loan is non-dischargeable should be challenged based upon the individual facts of your student loan. If it was securitized and it most likely was, then the party seeking to enforce the debt must prove that the government guarantee still applies. Otherwise it should be treated like any other unsecured debt.

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Editor’s comment: Fact: Nearly all finance was securitized and still is. Ron Lieber talks below about efforts to change the law so student loans could be dischargeable in bankruptcy. Good idea. But I’m not so sure it is necessary to change the law.

The entire student loan structure, as President Obama has pointed out, is just plain wrong. Somehow loans that were provided by government anyway became guaranteed by government and then actually “funded” by banks. The banks could charge whatever interest they wanted, which frequently rose to usurious levels and if the student didn’t pay, then the government did, which is the way it was before they let private banks into the mix.

The effect was to burden students with loans that were impossible to pay off given the economic context of unemployment, underemployment and stagnant median income. So the prospective students frequently put off the education or avoided it entirely because the economics did not make sense. Those that did take the plunge are “underwater” just like U.S. Homeowners all because of financial chicanery.

To top things off they made student loans —- private student loans — non-dischargeable in bankruptcy. The theory was that since the government was doing students the favor of providing a guarantee of the loans, the loans would be more available, thus increasing liquidity in the student loan market. Since the net effect was a gusher of money pouring into private banks from the pockets of students, marketing efforts (including payoffs in student adviser facilities on campus) did in fact lure students into these ridiculous arrangements.

Enter securitization: Since the private bank was guaranteed against loss, this provided the rationale for this lock-up system enslaving students before their careers even begin. But virtually ALL private banks were simply paid a fee for fronting the marketing of the loan which was funded with investor money because the loans were securitized before they were ever granted and thus the money and the risk was already resolved before the “underwriting” of the loan.

Like the mortgage loans, underwriting standards were dropped completely in favor of parameters set by Wall Street. The appearance of underwriting was preserved, but like mortgages, not very well. Like the mortgages, credit enhancements were added to the mix adding co-obligors right in the pooling and servicing agreements and assignments and assumption agreements, including insurance, credit default swaps etc.

Thus the “lender” that originating the Loan was what? A pretender lender whoa advanced no funds or capital of their own. Since the originating lender made the election of laying off the risk into slices and pieces and credit enhancements, they, in my opinion, waived the government guarantee.

If the government guarantee was waived in whole or in part, which I am sure is the case, then the rationale for non-dischargeability disappears. So I am suggesting that the assumption that the student loan is non-dischargeable should be challenged based upon the individual facts of your student loan. If it was securitized and it most likely was, then the party seeking to enforce the debt must prove that the government guarantee still applies. Otherwise it should be treated like any other unsecured debt.

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June 4, 2010

Student Debt and a Push for Fairness

By RON LIEBER

If you run up big credit card bills buying a new home theater system and can’t pay it off after a few years, bankruptcy judges can get rid of the debt. They may even erase loans from a casino.

But if you borrow money to get an education and can’t afford the loan payments after a few years of underemployment, that’s another matter entirely. It’s nearly impossible to get rid of the debt in bankruptcy court, even if it’s a private loan from for-profit lenders like Citibank or the student loan specialist Sallie Mae.

This part of the bankruptcy law is little known outside education circles, but ever since it went into effect in 2005, it’s inspired shock and often rage among young adults who got in over their heads. Today, they find themselves in the same category as people who can’t discharge child support payments or criminal fines.

Now, even Sallie Mae, tired of being a punching bag for consumer advocates and hoping to avoid changes that would hurt its business too severely, has agreed that the law needs alteration. Bills in the Senate and House of Representatives would make the rules for private loans less strict, now that Congress has finished the job of getting banks out of the business of originating federal student loans.

With this latest initiative, however, lawmakers face a question that’s less about banking than it is about social policy or political calculation. At a time when voters are furious at their neighbors for getting themselves into mortgage trouble, do legislators really want to change the bankruptcy laws so that even more people can walk away from their debts?

There are two main types of student loans. Under the proposed changes, borrowers would remain on the hook for federal loans, like Stafford and Perkins loans, as they have been for many years. To most people, this seems fair because the federal government (and ultimately taxpayers) stand behind these loans. There are also many payment plans and even forgiveness programs for some borrowers.

In 2005, however, Congress made the bankruptcy rules the same for the second kind of debt, private loans underwritten by profit-making banks. These have no government guarantees and come with fewer repayment options. Undergraduates can also borrow much more than they can with federal loans, making trouble more likely.

Destitute borrowers can still discharge student loan debt if they experience “undue hardship.” But that condition is nearly impossible to prove, absent a severe disability.

Meanwhile, the volume of private loans, which are most popular among students attending profit-making schools, has grown rapidly in the last two decades as students have tried to close the gap between the rising price of tuition and what they can afford. In the 2007-8 school year, the latest period for which good data is available, about one third of all recipients of bachelor’s degrees had used a private loan at some point before they graduated, according to College Board research.

Tightening credit caused total private loan volume to fall by about half to roughly $11 billion in the 2008-9 school year, according to the College Board. Tim Ranzetta, founder of Student Lending Analytics, figures it fell an additional 24 percent this last academic year, though his estimate doesn’t include some state-based nonprofit lenders.

There is no strong evidence that young adults would line up at bankruptcy court in the event of a change. That gives Democrats and university groups hope that Congress could succeed in making the laws less strict.

In Congressional hearings on the efforts to change the rule, last year and then in April, no lender was present to make the case for the status quo. Instead, it fell to lawyers and financiers who work for them. They made the following points.

BANKRUPTCIES WOULD RISE At the April hearing, John Hupalo, managing director for student loans at Samuel A. Ramirez and Company, made the most obvious case against any change. “With no assets to lose, an education in hand, why not discharge the loan without ever making a payment to the lender?” he said.

Once you set aside this questionable presumption of mendacity among the young, there are actually plenty of practical reasons why not. “People don’t like to go through bankruptcy,” said Representative Steve Cohen, Democrat of Tennessee, who introduced the House bill that would change the rules. “It’s not like going to get a milkshake.”

Andy Winchell, a bankruptcy lawyer in Summit, N.J., likens student loan debt to tattoos: They’re easy to get, people tend to get them when they’re young, and they’re awfully hard to get rid of.

And he would remind clients of a couple of things. First, you generally can’t make another bankruptcy filing and discharge more debt for many years. So if you, in essence, cry wolf with a filing to erase your student loans, you’ll be in a real bind if you then face crushing medical debt two years later.

Then there’s the damage to your credit report. While it doesn’t remain there forever, the blemish can have an enormous impact on young people trying to establish themselves with an employer or buy a home.

Finally, you’re going to have to persuade a lawyer to take your case. And if it seems that you’re simply shirking your obligations, many lawyers will kick you out of their offices. “It’s not easy to find a dishonest bankruptcy attorney who is going to risk their license to practice law on a case they don’t believe in,” Mr. Winchell said.

Sallie Mae can live with a change, so long as there’s a waiting period before anyone can try to discharge the debts. “Sallie Mae continues to support reform that would allow federal and private student loans to be dischargeable in bankruptcy for those who have made a good-faith effort to repay their student loans over a five-to-seven-year period and still experience financial difficulty,” the company said in a prepared statement.

While there is no waiting period in either of the current bills, Mr. Cohen said he could live with one if that’s what it took to get a bill through Congress. “Philosophy and policy can get you on the Rachel Maddow show, but what you want to do is pass legislation and affect people’s lives,” he said, referring to the host of an MSNBC news program.

BANKS WOULDN’T LEND ANYMORE Private student loans are an unusual line of business, given that lenders hand over money to students who might not finish their studies and have uncertain earning prospects even if they do get a degree. “Borrowers are not creditworthy to begin with, almost by definition,” Mr. Hupalo said in an interview this week.

But banks that have stayed in the business (and others, like credit unions, that have entered recently) have made adjustments that will probably protect them far more than any alteration in the bankruptcy laws will hurt. For instance, it’s become much harder to get many private loans without a co-signer. That means lenders have two adults on the hook for repayment instead of just one.

BORROWING COSTS WOULD RISE They probably would rise a bit, at least at first as lenders assume the worst (especially if Congress applies any change to outstanding loans instead of limiting it to future ones). But this might not be such a bad thing.

Private loans exist because the cost of college is often so much higher than what undergraduates can borrow through federal loans, which have annual limits. Some lenders may be predatory and many borrowers are irresponsible, but this debate would be much less loud if tuition were not rising so quickly.

So if loans cost more and lenders underwrite fewer of them, people will have less money to spend on their education. Some fly-by-night profit-making schools might cease to exist, and all but the most popular private nonprofit universities might finally be forced to reckon with their costs and course offerings.

Prices might come down. And young adults just getting started in life might be less likely to face a nasty choice between decades of oppressive debt payments and visiting a bankruptcy judge before starting an entry-level job.

Filed under: bubble, CDO, CORRUPTION, expert witness, GTC | Honor, HERS, interest rates, investment banking, Investor, MODIFICATION, Motions, Pleading, securities fraud, Servicer, STATUTES, Student Loans | Tagged: Andy Winchell, bankruptcy, Citibank, Democrat, discharge, John Hupalo, Ny Times, Ron Lieber, Sallie MAe, Samuel ramirez and Company, Steve Cohen, student debt, student loans, tennessee | 3 Comments »

Non-Profit Lenders Step in to Provide Post-Foreclosure Modification

Posted on March 26, 2010 by Neil Garfield

Editor’s Note: Principal reduction can be achieved in more ways than one. Here Non-profit Lenders see the clear opportunity to buy mortgages from dubious sources and then enter into new mortgages with the homeowner thus preventing eviction and restoring the homeowner to non-distress status.

The problem here is that title is not clear and eventually there is going to be a day of reckoning. The underlying theme here is that principal reduction is the ONLY way this mess will be cleared up and getting it right about WHO can sell a mortgage, execute a satisfaction of mortgage, or otherwise enforce or foreclose a mortgage is still in flux.

The reason is that it is in flux is that Judges and lawyers are just starting to get the the counter-intuitive idea that the finance sector actually set out to make bad loans because that was how they made money.

It’s not counter-intuitive if you realize that the real creditor is the investor who put up the money and all the rest are pretenders who pocketed a big portion of the proceeds of securities sale before funding mortgages. It is those pretenders who are “selling” and “enforcing” the “loans.”

My suggestion is that regardless of how and with whom you resolved your mortgage dispute, a quiet title action needs to filed naming all potential claimants in which a Judge declares the rights of the parties and confirms your title subject to whatever new mortgage or modified mortgage you executed. I don’t see any other immediate way to resolve the title problems

March 21, 2010

Finding in Foreclosure a Beginning, Not an End

By JOHN LELAND

BOSTON — Jane Petion lived in her home for 15 years and saw its value rise slowly, rise rapidly and, when the housing bubble burst, plunge at a sickening pace that left her owing $400,000 on a house worth closer to $250,000. Last June, her lender foreclosed on the property. The family received notices of eviction and appeared in housing court.

Then they discovered a surprising paradox within the nation’s housing crisis: Their power to negotiate began after foreclosure, rather than ending there.

In December Ms. Petion signed a new mortgage on her house for $250,000, with monthly payments of less than half the previous level. She and her husband now have a mortgage they can afford in a neighborhood that benefits from the stability they provide. A nonprofit lender made the deal possible by buying the house from her original mortgage company and selling it to her for 25 percent more than its purchase price — a gain to hedge against future defaults.

“It was exactly what we needed to get back on our feet,” said Ms. Petion, who works for a state agency. “We have income. But another bank, it would have been easy to look at our foreclosure and say, ‘I’m sorry, we have nothing for you now.’ ”

This counterintuitive solution — intervening after foreclosure rather than before — is the brainchild of Boston Community Capital, a nonprofit community development financial institution, and a housing advocacy group called City Life/Vida Urbana, working with law students and professors at Harvard Law School.

Though the program, which started last fall, is small so far, there is no reason it cannot be replicated around the country, especially in areas that have had huge spikes in housing prices, said Patricia Hanratty of Boston Community Capital. “If what you’ve got is a real estate market that went nuts and a mortgage market that went nuts, what you’ve got is an opportunity.”

Two years into the nation’s housing meltdown, and after hundreds of billions of dollars of federal rescue programs, government officials and housing advocates denounce the unwillingness of lenders to adjust the balances on homes that are worth less than the mortgage owed on them.

Research suggests that such disparity, rather than exotic interest rates, is the main driver of foreclosures, in tandem with a job loss or another financial setback. The financial industry lobbied aggressively to defeat legislation that would empower bankruptcy judges to adjust mortgage balances to properties’ market value.

That reluctance, however, eases after foreclosure, when lenders find themselves holding properties they need to unload, Ms. Hanratty said.

“We found, frankly, the industry wasn’t ready to do much pre-foreclosure,” she said. “But once it was either on the cusp of foreclosure or had been taken into the bank portfolio, banks really do not want to hold on to these properties because they don’t know how to manage them, don’t know what to do with them.”

Working with borrowed money, Boston Community Capital buys homes after foreclosure and sells or rents them to their previous owners, providing new mortgages and counseling to the owners, who typically have ruined credit. During the process the families remain in their homes. Since late fall it has completed or nearly completed deals on 50 homes, with an additional 20 in progress, Ms. Hanratty said. The organization is now trying to raise $50 million to expand the program.

Steve Meacham, an organizer at City Life/Vida Urbana, is one reason banks may be willing to sell their foreclosed properties to Boston Community Capital. When families receive eviction notices, his group holds demonstrations or blockades outside the properties, calling on lenders to sell at market value. It also connects the residents with the Harvard Legal Aid Bureau, whose students work to pressure lenders to sell rather than evict by prolonging eviction and “driving up litigation costs,” said Dave Grossman, the clinic’s director.

“So they’re being defended legally, and we’re ramping up the pressure publicity-wise,” Mr. Meacham said. “And B.C.C. came in; they had a part that buys properties and a part that writes mortgages. It wouldn’t work without all three.”

A focus of the program has been the working-class neighborhood of Dorchester, where home prices dropped 40 percent between 2005 and 2007, compared with a 20 percent drop statewide, according to research by the Federal Reserve Bank of Boston. Foreclosures and delinquencies there are more than twice the state average, the bank found.

In such neighborhoods, lenders and residents are hurt by evictions, which often leave vacant properties that invite crime and drive down values of neighboring houses, Ms. Hanratty said. “So it’s in the lenders’ interest to get fair market value as quickly as possible, and in the interest of the community to have as little displacement as possible.”

The program is not a solution for all lenders or distressed homeowners. After months of post-foreclosure negotiations with her bank, Ursula Humes, a transit police detective, is waiting for her final 48-hour eviction notice. Her belongings are in boxes.

Mrs. Humes owed $440,000 on her home; her lender offered to sell it to Boston Community Capital for $260,000. But after assessing Mrs. Hume’s finances, the nonprofit asked for a lower selling price, and the lender refused.

On a recent evening, Mr. Grossman of the Harvard law clinic counseled Mrs. Humes on her options. “This is a case that doesn’t have a happy ending,” Mr. Grossman said.

Mrs. Humes said, “I depleted my retirement account and everything I owned, but I’m still going to lose it.”

Many commercial lenders, similarly, would shy away from such a program because it involves writing mortgages for borrowers who have already defaulted once — a high risk for a small reward.

For other homeowners, though, the program is a rescue at the last possible second. Roberto Velasquez, a building contractor, lost his home to foreclosure last November, owing the lender $550,000. After extensive wrangling, during which his family stayed in the house, he bought it again in March for $280,000, a price he can afford.

On the night after he closed, he joined other members of City Life/Vida Urbana at a foreclosed four-unit building in Dorchester from which most of the tenants had been evicted. A group of artists projected videos on sheets in the windows, showing silhouettes of families re-enacting their last 72 hours before eviction. Garbage filled one of the units. Mr. Velasquez said it hurt to stand amid such loss, but he was jubilant at his own perseverance.

“We’ve been fighting for so long,” he said, “and we win, because we’re still in the house.”

Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud | Tagged: clear title, distressed homeowners, JOHN LELAND, modification, mortgage modification, Non-profit lenders, Ny Times, Post-foreclosure relief, principal reduction, quiet title, title problems | 7 Comments »

States Look Beyond Borders to Collect Owed Taxes

Posted on March 25, 2010 by Neil Garfield

as more states catch on and start investing in more payroll auditors and data mining tools to get money back, the end result may be an arms race until every state comes out more or less evenly.

Editor’s Note: There is no better place to start than the trillions in profits from securitized mortgages and the millions of off-record transfers and transactions based upon “interests” in real property located within each state. But who has the courage to take on Wall Street?

see states-ignore-obvious-remedy-to-fiscal-meltdown

March 21, 2010, NY Times

States Look Beyond Borders to Collect Owed Taxes

By CATHERINE RAMPELL

When Josh Beckett pitches for the Red Sox at Yankee Stadium, New York collects income tax on the portion of his salary that he earned in New York State.

But what about a Boston Scientific sales representative who comes to New York to pitch medical products to a new client? New York has decided it wants a slice of that paycheck, too.

Anyone who crosses a state border for work — to make a sales call, say, or meet with a client or do a road show on Wall Street — probably owes income taxes in that state.

If you live in Boston but spend one out of 250 workdays this year in New York, you owe New York income taxes on 1/250th of your salary. And vice versa if you are a New Yorker visiting Boston — or Anywheresville, for that matter — for business.

Such laws have been on the books for decades, and they vary by state. But it is only recently, accountants and tax lawyers say, that many states appear to have picked up enforcement, expanding it beyond the wealthiest celebrities and athletes.

“The states are all hungry for revenue,” said Alan Clavette, an accountant in Newtown, Conn. “We are certainly seeing states like New York and Connecticut looking more and more for executives and everyday taxpayers who may be spending time across the border.”

The states, for their part, say better techniques for tracking tax deadbeats, not pressure to fill their budget holes, have prompted them to become more vigorous at enforcing the provision.

“We are just trying to make sure our tax laws are complied with,” said Richard D. Nicholson, commissioner of the Connecticut Department of Revenue Services. “That’s not driven by a need for revenue. If we’re doing more, it’s because of advances in technology. We can do analysis we could never do before with just paper.”

Once upon a time, state tax officials relied on the sports pages and celebrity magazines to see when well-known higher-earners came to town for work. (Yes, even the taxman reads Us Weekly.) For everyone else, it was largely a “don’t ask, don’t tell” world, says James W. Wetzler, the former tax commissioner for New York State, because it was not cost-effective for states to monitor every bricklayer and lawyer crossing a border.

“We tried to preserve a reasonable balance,” said Mr. Wetzler, now a director at the firm Deloitte Tax. “We wanted to avoid imposing onerous burdens on people just for us to collect small amounts of revenue.”

But now states have greater access to data warehouses that help them better track taxes owed. Real estate transactions, federal data from the Internal Revenue Service, commercial license plates, traffic tickets, bids for government construction projects — all this information, newly digitized and dumped into a computer system, can help states find tax scofflaws.

“We’re sort of getting into ‘1984’ land here,” said Kenneth T. Zemsky, an accountant and partner at Ernst & Young. “A lot of the reason they went after athletes and entertainers is that they couldn’t find the other people. Now they’re able to get those people, too.”

Still, perhaps the best enforcement mechanism may be requiring companies to withhold additional taxes from their employees’ paychecks. State auditors may not be able to monitor every border-crossing, but with corporate payroll managers as their enforcers, they don’t need to.

“Our employees call me the ‘Tax Nazi,’ ” says Dee Nelson, the corporate payroll manager at the Koniag Development Corporation, a government contractor that works on military projects. “They get really angry at me when we withhold their pay if they do a project in Utah or wherever. And I have to explain this is the law, not me just trying to be a bully.”

Ms. Nelson’s employer is based in Anchorage, but at any given time its employees are generally working in five states with five different withholding requirements. She estimates that the administrative work required for managing multistate employees adds about 10 percent to the cost of each project.

Many Fortune 500 companies contacted for this article privately acknowledged having been slightly less vigilant than Ms. Nelson about tracking the minute-by-minute movements of their thousands of employees in the past. But these companies also say that they have been subjected to payroll audits more frequently in the last few years and that tax officials have requested travel logs for highly paid employees during these audits.

In some cases auditors check to see if, say, an employee who was reimbursed for airfare to California also had California income taxes withheld from his paycheck. If not, the company can be fined.

Finding out that you owe income taxes across the border can raise your overall tax bill, if your home state has a low tax rate (or no income tax rate at all, as in a handful of states). But your tax bill may not rise by much, since most states allow you to deduct income taxes paid to another state.

The bigger burden associated with distributing your taxes to more state governments is the administrative effort it requires, for both employee and employer. Many states require filing a return for a single day’s work. For peripatetic workers like salesmen or consultants, filing a pile of additional state tax returns can become prohibitively expensive, not to mention frustrating.

“There’s 50 states out there and 50 different laws,” said Nola Wills, senior vice president and chief compliance officer at Harbor America, a financial services company near Houston. “It’s difficult for a small business to have all the information and resources to know that. In most cases their C.P.A. doesn’t know that, either.”

So long as there is still a great deal of ignorance about these laws, the states with the most aggressive tax compliance teams have the most to gain. They can siphon off more revenue from their neighboring states than the other way around, all without fear of retaliation from anyone who has the power to vote them out of office.

But as more states catch on and start investing in more payroll auditors and data mining tools to get money back, the end result may be an arms race until every state comes out more or less evenly.

“If everybody goes after everybody, nobody wins,” said Arthur R. Rosen, a New York tax lawyer and partner at McDermott Will & Emery. “In this interstate war of ‘you tax my rich guy and I tax your rich guy,’ it’s just a wash, a preposterous flurry of tax returns.”

In the meantime, states may have a new prominent target.

Last year President Obama visited at least 30 states. But, like other presidents before him, he plans to file in just one: his home state, Illinois, according to a White House official.

State tax auditors, start your engines.

Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, Forensic Analysis Workshop, GTC | Honor, Investor, Mortgage, Motion Practice and Discovery, politics, securities fraud, Securitization Survey, taxes, workshop | Tagged: CATHERINE RAMPELL, Ny Times, profits from derivatives, securitized mortgages, state borders, state deficits, state tax auditors, state taxes, tax collection | 3 Comments »

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Letting the Banks Off Easy

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More Bleak Job Numbers

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Derivatives Firms Face New Capital Rules

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New Rules for Mortgage Servicers Face Early Criticism

By DAVID STREITFELD

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In Prison for Taking a Liar Loan

By JOE NOCERA

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The Mellon Doctrine

By PAUL KRUGMAN

And Democrats are offering little pushback. The White House, in particular, has effectively surrendered in the war of ideas; it no longer even tries to make the case against sharp spending cuts in the face of high unemployment.

So that’s the state of policy debate in the world’s greatest nation: one party has embraced 80-year-old economic fallacies, while the other has lost the will to fight. And American families will pay the price.

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“If there had been a cop on the beat to hold mortgage servicers accountable a half dozen years ago,” she said at one point, “the problems in mortgage servicing would have been found early and fixed while they were still small, long before they became a national scandal.”

EDITORIAL COMMENT: It’s a simple answer really. She is real and they are not. She wants us to have the truth, they want us to fight with each other over ideology while the truth sails away.

An Advocate Who Scares Republicans

By JOE NOCERA

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“Why should homeowners take responsibility for the screw-ups of the financial geniuses on Wall Street and the screw-ups of those who did their closings?” — Neil Garfield

Op-Ed Columnist NY Times

Too Good to Check

By THOMAS L. FRIEDMAN

Published: November 16, 2010

“A lie can travel halfway around the world while the truth is putting on its shoes.”—TWAIN

… there is an antidote to malicious journalism — and that’s good journalism. — FRIEDMAN

EDITOR’S NOTE:

HERE IS THE TRUTH:

The financial crisis is ALL about the housing meltdown.

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GMAC’s Errors Leave Foreclosures in Question

By DAVID STREITFELD

The federal government, which became the majority owner of GMAC after supplying $17 billion to prevent the lender’s failure, said Friday that it had told the company to clean up its act.

“You know those billboards that lawyers put up seeking divorcing or bankrupt clients?” asked Greg Clark, a Florida real estate lawyer. “It’s only a matter of time until they start putting up signs that say, ‘You might be entitled to cash payment for wrongful foreclosure.’ ”

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Housing Woes Bring New Cry: Let Market Fall

By DAVID STREITFELD

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The Case for Reviving Revenue Sharing

By ROBERT J. SHILLER

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Bankers Told Recovery May Be Slow

By SEWELL CHAN

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In Hard Times, One New Bank (Double-Wide)

By ANDREW MARTIN

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Merrill’s Risk Disclosure Dodges Are Unearthed

By LOUISE STORY

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Executive Charged in TARP Scheme

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Student Debt and a Push for Fairness

By RON LIEBER

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