CBO: principal reduction best for economy

Three cheers for Chris Hayes on MSNBC. In his new show, ALL IN, last night he reported and editorialized on the mistakes of giving banks relief and “screwing” homeowners since 2008. On his show he had Elliot Spitzer who took the administration to task for not doing something before this time. And to top it off DeMarco, the head of the former government sponsored entities (GSE), who has single-handedly blocked principal reduction is being removed and his replacement is an ardent consumer advocate currently a Representative from North Carolina. Things are changing.

The Congressional Budget Office is accepted as a non-partisan agency which has torpedoed both Democratic and Republican proposals on the economy. Upon request from Congress, the CBO studied the mortgage and foreclosure market and concluded that principal reduction should be the keystone of policy for Fannie and Freddie because it is a win-win that will return money to the taxpayers, spur the economy with an fiscal stimulus with a program that costs nothing, increasing GDP and employment. The CBO unequivocably recommended immediate implementation of large-scale reductions in mortgage principal.

The momentum is growing for the reduction of household debt just as this blog, numerous economists and financial experts have been virtually demanding. Iceland has proved the point. We have there a live experiment. Iceland has adopted a policy of continual reduction of household debt. The result was a healthier economy growing at a higher pace than any other country hit by the world- wide recession because consumer wealth, confidence and earnings increased allowing for consumption of goods and services that are in sharp decline in the U.S. and Europe. And the banks in Iceland are healthier and better regulated than at any time before the crash.

It is clearly a win- win situation for all stake holders. All this is providing fuel for the policy of principal reduction in household debt, including mortgages, forcing the banks to eat the difference. Of course Iceland also jailed the bankers who created the conditions that caused the Iceland economy to crash n 2008. Now you wouldn’t know it ever happened — but only if live in Iceland. Policy experts here and the CBO that measures past, present and future effects of economic policies are now moving away from the disastrous European experiment in reduced spending (“austerity”) which kicked the Euro economy when it was already down.

This means that homeowners will fight even harder to stay alive while the new policies go into effect and the right thing is done for consumers and homeowners in particular, that will provide trillions in fiscal stimulus for the economy with little negative impact on the banks who were using other people’s money to fund the mortgages, suffered no loss in mortgage defaults and only reported losses on bogus mortgage bonds backed by mortgage loans, which in turn were guaranteed by Fannie and Freddie 90% of the time. Those GSE entities under a single Federal Agency now guarantee or own more than 90% of all U.S. mortgages.

The remaining correction in describing the mortgages that were supposedly filed on record is that the mortgages were for the most part unenforceable, as is consistently alleged by investor lawsuits against investment banks that created and sold the bogus mortgage bonds AND that the “reduction” is really CORRECTION to adjust for fraudulent appraisals on which homeowners, the government and investors relied.

For the first time the reception of homeowners has changed from deadbeat to the ultimate resource to restore economic growth and who were screwed worse than anyone in the criminal enterprise that Wall Street called “securitization.” There was no securitization. Wall Street banks put the money in their own pockets instead of funding the so-called asset pools, “trusts” and other special purpose vehicles that the investors belied was receiving their money. The paperwork is all a sham from origination, where the “lender” never loaned a penny through assignments that conveyed nothing and were completely unsupported by value or consideration.

CONGRATULATIONS TO THE SOLDIERS IN THIS WAR AGAINST OPPRESSION OF THE AVERAGE CITIZEN.

Big Banks Headed For Break-Up

“What policy makers are starting to realize is that the absence of prosecutions and regulatory action against these banks has produced a profound loss of confidence not only in the financial markets but in the leader of the financial markets (the United States) to control itself and its own participants in finance. It’s not just fair to enforce existing laws and regulations against the banks who so flagrantly violated them and nearly destroyed all the economies of the world, it’s the only practical thing to do.” — Neil F Garfield, livinglies.me
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The selection of an attorney is an important decision  and should only be made after you have interviewed licensed attorneys familiar with investment banking, securities, property law, consumer law, mortgages, foreclosures, and collection procedures. This site is dedicated to providing those services directly or indirectly through attorneys seeking guidance or assistance in representing consumers and homeowners. We are available to any lawyer seeking assistance anywhere in the country, U.S. possessions and territories. Neil Garfield is a licensed member of the Florida Bar and is qualified to appear as an expert witness or litigator in in several states including the district of Columbia. The information on this blog is general information and should NEVER be considered to be advice on one specific case. Consultation with a licensed attorney is required in this highly complex field.

Editor’s Comment: There is an old expression that says “At the end of the day, everybody knows everything.” The question of course is how long is the “day.” In this case the day for the bank appears to be about 10-12 years. The foibles of their masters, the conduct of their policies, and the arrogance of their behavior has led them into the position where the once unthinkable break-up of the bank oligopoly and their control, over our government is coming to a close.

The titans of Wall Street have thus far avoided criminal prosecution because of the misguided assumption — promulgated by Wall Street itself — that such prosecutions would destroy the economic systems all over the world (remember when Detroit arrogance reached its peak with “what’s good for GM is good for the country?”). But the Dallas Fed are joining the ranks of of once lone voices like Simon Johnson stating that Too Big to Fail is not a sustainable model and that it distorts the markets, the marketplace and our society.

It is virtually certain now that the mega banks are going to literally be cut down to size and that some form of Glass-Steagel will be revived. As that day nears, the images and facts pouring out onto the public and the danger to the American taxpayer facing deficits caused by the banks in part because they siphoned out the life-blood of liquidity from the American marketplace will overwhelm the last vestiges of resistance and the same lobbyists who were the king makers will be the kiss of death for re-election of any public official.

As they are cut down, the accounting and auditing will start and it will take years to complete. What will emerge is a pattern of theft, deceit, fraud, forgery, perjury and other crimes that are most easily seen in the residential foreclosures that now appear to be mostly illusions that have caused nightmare scenarios for millions of Americans and people in other countries. Those illusions though are still with us and they are still taken as real by many in all branches of government. The thought that the borrower should never have been foreclosed and that the amount demanded of them was wrong is not accepted yet. But it will be because of arithmetic.

Investment banks sold worthless bonds issued by empty creatures that existed only on paper without any assets, money or value of any kind. The banks then funded mortgages of increasingly obvious toxicity to people who might have been able to afford a normal mortgage or who couldn’t afford a mortgage at all but were assured by the banks that the deal was solid. Both investors and homeowners were taken to the cleaners. Neither of them has been addressed in any bailout or restitution.

It is the bailout or restitution to the investors and homeowners that is the key to rejuvenating our economy. Trust in the system and wealth in the middle class is the only historical reference point for a successful society. All the rest crumbled. As the banks are taken apart, the privilege of using “off-balance sheet” transactions will be revealed as a free pass to steal money from investors. The banks took the money from investors and used a large part of it to gamble. Then they covered their tracks with lies about the quality of loans whose nominal rates of interest were skyrocketing through previous laws against usury.

For those who worry about the deficit while at the same time remain loyal to their largest banking contributors, they are standing with one foot upon the other. They can’t move and eventually they will fall. The American public may not be filled with PhD economists, but they know theft when it is revealed and they know what should happen to the thief and the compatriots of the thief.

For the moment we are still rocketing along the path of assuming the home loans, student loans, credit cards, auto loans, furniture loans et al were valid loans wherein the lenders had a risk of loss and actually suffered a loss resulting from the non payment by the borrower. As the information spreads about what really happened with all consumer debt, housing included, the people will understand that their debts were paid off by the investment banks, the insurance, companies and the counterparties on hedge products like credit default swaps.

A creditor is entitled to be repaid the money loaned. But if they have been repaid, the fact that the borrower didn’t pay it does not create a fact pattern under which the current law allows the creditor to seek additional payment from the borrower when their receivable account is zero. Yet it is possible that the parties who paid off the debt might be entitled to contribution from the borrower — if they didn’t waive that right when they entered into the insurance or hedge contract with the investment banks. Even so, the mortgage lien would be eviscerated. And the debt open to discussion because the insurers and counterparties did in fact agree not to pursue any remedies against the borrowers. It’s all part of the cover-up so the transactions look like civil matters instead of criminal matters.

Thus far, we have allowed windfall after windfall to the banks who never had any risk of loss and who received federal bailouts, insurance, and proceeds of credit default swaps and multiple sales of the same loan — all without crediting the investors who advanced all the money that was used in the mortgage maelstrom.

The practical significance of this is simple: the money given to the banks went into a black hole and may never be seen again. The money given BACK to (restitution) investors will result in fixing at least partly the imbalance caused by the bank theft. It will also decrease the loss suffered by the lenders in the loans marked as home loans, auto loans, student loans etc. This in turn reduces the amount owed by the borrower. Their is no “reduction” of principal there is merely a “deduction” or “correction” to reflect payments received by the investors or their agents.

The practical significance of this is that money, wealth and income will be  channeled back to the those who are in the middle class or who belong there but for the trickery of the banks and the economy starts to hum a little better than before.

It all starts with abandoning the Too Big To Fail hypothesis. What policy makers are starting to realize is that the absence of prosecutions and regulatory action against these banks has produced a profound loss of confidence not only in the financial markets but in the leader of the financial markets to control itself and its own participants in finance. It’s not just fair to enforce existing laws and regulations against the banks who so flagrantly violated them and nearly destroyed all the economies of the world, it’s the only practical thing to do.

Big Banks Have a Big Problem
http://economix.blogs.nytimes.com/2013/03/14/big-banks-have-a-big-problem/

We The Taxpayers Are On The Hook For Mortgages, Student Loans, Banks
http://lonelyconservative.com/2013/03/we-the-taxpayers-are-on-the-hook-for-mortgages-student-loans-banks/

Documentary Co-Produced by Broker Exposes Foreclosure Devastation, Housing System Flaws, in Low-Income Hispanic Neighborhood of Phoenix
http://rismedia.com/2013-03-13/documentary-co-produced-by-broker-exposes-foreclosure-devastation-housing-system-flaws-in-low-income-hispanic-neighborhood-of-phoenix/

Housing advocates accuse Wells Fargo of damaging communities through foreclosures
http://www.scpr.org/blogs/economy/2013/03/13/12908/housing-advocates-accuse-well-fargo-damaging-commu/

 

HAMP-PRA Program Explained

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For assistance with presenting a case for wrongful foreclosure, please call 520-405-1688, customer service, who will put you in touch with an attorney in the states of Florida, Tennessee, Georgia, California, Ohio, and Nevada. (NOTE: Chapter 11 may be easier than you think).

Editor’s Note: The PRA (Principal reduction Alternative) portion of HAMP has not been utilized with efficiency by homeowners. First of all  it is a good idea to have several copies —digital and on paper — when you submit your modification proposal. The pattern that is clear. They claim to have not received it, they destroy the file because one thing was missing, etc. So be prepared to submit multiple times and get in writing that the foreclosure will not go forward while this process is underway. A demand letter from an attorney referencing the Dodd-Frank Act and its prohibition against dual tracking, will probably produce some results, especially if it is sent to every known party at every known address including the tiny letters in a font so light you can barely see it on the bank of the end of month statement.

Remember you are in all probability communicating with people who never owned nor funded the loan nor the purchase of the loan and that in order to clear the title on your client’s home you will need a “Guarantee of Title” from the title company and I think it is a good idea to get a judge’s order (a) approving the settlement and (b) declaring that these are the only stakeholders. That Order probably will require notice by publication for a period of weeks, but it is the only sure way of ending the corruption of your title. If you are not in court yet, then see if you can work into the agreement that you can file a quiet title action and that the party approving the modification will not contest it.

As you know, if you have been reading this blog for any length of time, I do not consider the lowering of the principal due as a reduction or a forgiveness. This raises tax issues but also raises your chances of getting a very good settlement.

Don’t limit yourself to the documents requested by the bank. The package you submit should contain a spreadsheet of calculations and the formulas used by an expert to determine a reasonable value for the property and a reasonable rate of interest and term. In your submission letter, you should demand that the party receiving it (which I think should include the subservicer, Master Servicer, Investment Banker and “trustee” of the investment pool) must respond in kind unless they accept the modification as proposed.

Realize also that modification is a sham PR stunt, but it can have teeth if you use it properly. The current pattern is the “servicer” or “pretender lender” tells you that in order to get relief you must stop paying on your mortgage. Their excuse is that if you are paying, there is nothing wrong. My position is that if you are paying, you are undoubtedly paying the wrong amount of interest and principal because of the receipts and disbursements that occurred off balance sheet and off the income statements of the intermediaries who claimed the insurance and bailout money as their own.

Thus your expert should provide a formula and estimate of the amount of money that should have been paid to investors but which is sitting in  custodial or operating accounts in the name of the investment banker or its affiliate. If that doesn’t bring down the principal then move on to the hardship stuff mentioned in the article below. But remember that if the expert is able to estimate the amount of principal that was mitigated by the subservicer (continuing to make payments after the loan was declared in default) and When the receipts occurred, this would reduce not only the principal demanded by demonstrate the extra interest paid on a principal balance that was misstated in the EOM statements and the notice of default and notice of sale (or service of process in the  judicial states). In such cases, which is by far the majority of all loans out there including those paid off and refinanced, the overpayment of interest and perhaps even an overpayment of principal.

This is tricky stuff. You need an expert who understands this article and has some ideas of his/her own. AND you need a lawyer who wants more than to simply justify his/her fee. You want a lawyer, obsessed with winning, and who won’t let go until the other side gives in. Remember these cases rarely if ever go to trial. Once the pretender lender takes you as a credible threat they cannot afford to posture any longer lest they end up in trial where it comes out they never owned or purchased the loan, the investor’s agents were prepaid by insurance, CDS and federal bailouts. Millions of foreclosures preceded you in which title was corrupted by the submission of a credit bid by a stranger (non-creditor to the transaction. The tide is turning — be part of the solution!

The Home Affordable Modification Program (HAMP) was established a few years ago by the Departments of the Treasury and Housing and Urban Development to help homeowners who are underwater avoid foreclosure.

Since 2010, one of HAMP’s programs has been the Principal Reduction Alternative (HAMP-PRA). Borrowers who qualify for the program have their mortgage principal reduced by a predetermined amount (called the PRA forbearance amount).

A borrower qualifies for the HAMP-PRA program only if:

  • the mortgage is not owned or guaranteed by Fannie Mae or Freddie Mac
  • the borrower owes more than the home is worth
  • the house is the borrower’s primary residence
  • the borrower obtained the mortgage before January 1, 2009
  • the borrower’s mortgage payment is more than 31 percent of gross (pre-tax) monthly income.
  • up to $729,750 is owed on the 1st mortgage.
  • the borrower has a financial hardship and is either delinquent or in danger of falling behind
  • the borrower has sufficient, documented income to support the modified payment, and
  • the borrower has not been convicted of a real estate related fraud or felony in the last ten years.

The end goal of the HAMP-PRA program is to reduce the borrower’s mortgage loan until the borrower’s monthly payment is reduced to a monthly payment amount determined under the HAMP guidelines.

Major Economists Tell Obama to Reduce Mortgage Debt

What’s the Next Step? Consult with Neil Garfield

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For assistance with presenting a case for wrongful foreclosure, please call 520-405-1688, customer service, who will put you in touch with an attorney in the states of Florida, California, Ohio, and Nevada. (NOTE: Chapter 11 may be easier than you think).

Editor’s Comment: I think Obama is stuck on the idea that correction of loans to reflect their true value is a gift to undeserving people — because that is the message he is getting from Wall Street. I have demonstrated on these pages that correction of loan principal is not a gift, it is paid in full, and even if you disagree with indisputable facts, it is the only practical thing to do as Iceland has clearly shown, with the only growing economy in Western nations.

Now we find out that Obama was given exactly that advice 18 months before he won reelection. Let’s see if he does it. He sought got the advice of seven of the world’s leading economists who all agreed that reduction of household debt — and in particular the dubious mortgage debt that Wall Street is using to make more and more profit, is something that the administration should do right away.

We can only guess why the administration has not done it, but I know from background sources that this ideological battle has been going on in the White House since Obama was first elected. What is needed is for Obama to take the time to get to know the real facts. And those facts show clearly that (1) the foreclosures that already were allowed to proceed did so on imperfected liens which is to say the right to foreclose was absent regardless of the amount and (b) the principal claimed as due on those loans was (1) not due to the people who claimed it and (2) far above the real amount that was due because the banks stole the money from insurance, credit default swaps and federal bailouts from investing pension funds and other managed funds.

The banks claimed ownership of loans they neither funded nor purchased and also had the audacity to claim the losses and then overstated the losses by a factor of 10. The insurance companies and counterparties on the credit default swaps, along with the federal government, paid the banks who didn’t have a dime in the deal and therefore lost nothing. The investors received small pittances in settlements when they should have received from their investment bankers (agents of the investors) the money that was received.

An accounting from the Master Servicer and the trustee or manager of the “pools” would clearly show that the money was received and not allocated in accordance with the contrnacts nor common law. As a result we are left with a fake loss that was tossed over the fence at the investors. Had they allocated the gargantuan payments received from multiple insurance policies on the same bonds and loans, the principal would be reduced anyway.

This is why I keep saying that you should use Deny and Discover as  your principal strategy and direct it not just to the subservicer who deals directly with the homeowner borrowers but also the Master Servicer who deals with the subservicer, the insurance companies, the counterparties on credit default swaps, and the federal government.

Following the money trial will in most cases show that the lien recorded was imperfect and not enforceable because the party who was designated as the lender was not the lender, hence “pretender lender.” Following this trail from one end to the other and forcing the books open will show that most loans were table funded (predatory per se as per TILA reg Z) — and not for the benefit of the investors, but rather for the benefit of the bankers (a typical PONZI scheme).

In an economy driven by consumer spending, the reduction in household debt will drive the economy forward and upward. The real total in many cases is zero after credits for insurance, CDS, and federal bailouts. If you leave the tax code alone, and let the “benefit” be taxed, the federal government will receive a huge amount of taxes that the banks evaded, but they would get it from homeowners, whose tax debt would be a small fraction of the mortgage debt claimed by the banks.

The problem can be solved. It is a question of whether the leader of our nation studies the issues and comes to his own conclusions instead of being led on a string by Wall Street spinning.

Failure to act will produce a wave of strategic defaults because like any business failure, the “businessman” — i.e., the homeowner — has concluded that the investment went bad and they will just walk away — resulting in another windfall to the banks who after cornering the world’s supply of money will have cornered the world’s supply of real estate.

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SHILLER: Principal Must be Written Down for Economic Recovery

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Editor’s Comment:  

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

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

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

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

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

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

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

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

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

By Mamta Badkar

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

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

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

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

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

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

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Editor’s Comment: The very same people who so ardently want us to remain strong and fight wars of dubious foundation are the ones who vote against those who serve our country. Here is a story of a guy who was being shot at and foreclosed at the same time — a blatant violation of Federal Law and good sense. When I practiced in Florida, it was standard procedure if we filed suit to state that the defendant is not a member of the armed forces of the United States. Why? Because we don’t sue people that are protecting our country with their life and limb.

It IS that simple, and if the banks are still doing this after having been caught several times, fined a number of times and sanctioned and number of times, then it is time to take the Bank’s charter away. Nothing could undermine the defense and sovereignty of our country more than to have soldiers on the battlefield worrying about their families being thrown out onto the street.

One woman’s story:

My husband was on active duty predeployment training orders from 29 May 2011 to 28 August 2011 and again 15 October 2011 to 22 November 2011. He was pulled off the actual deployment roster for the deployment date of 6 December 2011 due to the suspension of his security clearance because of the servicer reporting derogatory to his credit bureau (after stating they would make the correction). We spoke with the JAG and they stated those periods of service are protected as well as nine months after per the SCRA 50 USC section 533.

We have been advised that a foreclosure proceeding initiated within that 9 month period is not valid per the SCRA. I have informed the servicer via phone and they stated their legal department is saying they are permitted to foreclose. They sent a letter stating the same. I am currently working on an Emergency Ex Parte Application for TRO and Preliminary Injunction to file in federal court within the next week. It is a complicated process.

The servicer has never reported this VA loan in default and the VA has no information. That is in Violation of VA guidelines and title 38. They have additionally violated Ca Civil Code 2323.5. They NEVER sent a single written document prior to filing NOD 2/3/2012. They never made a phone call. They ignored all our previous calls and letter. All contact with the servicer has been initiated by us, never by them. This was a brokered deal. We dealt with Golden Empire Mortgage. They offered the CalHFA down payment assistance program in conjunction with their “loan” (and I use that term loosely). What we did not know was that on the backside of the deal they were fishing for an investor.

Over the past two years CalHFA has stated on numerous occasions they do not own the 1st trust deed. Guild (the servicer) says they do. I have a letter dated two weeks after closing of the loan saying the “servicing” was sold to CalHFA. Then a week later another letter stating the “servicing” was sold to Guild. Two conflicting letters saying two different things. The DOT and Note are filed with the county listing Golden Empire Mortgage as the Lender, North American Title as the Trustee and good old MERS as the Nominee beneficiary.

There is no endorsement or alonge anywhere in the filing of the county records. We signed documents 5/8/2008 and filings were made 5/13/2008. After two years of circles with Guild and CalHFA two RESPA requests were denied and I was constantly being told “the investor, the VA and our legal department” are reviewing the file to see how to apply the deferrment as allowed by California law and to compute taxes and impound we would need to pay during that period. Months of communications back in forth in 2009 and they never did a thing. Many calls to CalHFA with the same result. We don;t own it, call Guild, we only have interest in the silent 2nd.

All of a sudden in December 2011 an Assignment of DOT was filed by Guild from Golden Empire to CalHFA signed by Phona Kaninau, Asst Secretary MERS, filed 12/13/2011. om 2/3/2012 Guild filed a Cancellation of NOD from the filing they made in 2009 signed by Rhona Kaninau, Sr. VP of Guild. on the same date Guild filed a substitution of trustee naming Guild Admin Corp as the new trustee and Golden Empire as the old trustee, but on out DOT filed 5/13/2008 it lists North American Title as the Trustee. First off how can Rhona work for two different companies.

Essentially there is no fair dealing in any of this. Guild is acting on behalf of MERS, the servicing side of their company, and now as the trustee. How is that allowed? Doesn;t a trustee exist to ensure all parties interests are looked out for? It makes no sense to me how that can be happening. On the assignment I believe there is a HUGE flaw… it states ….assigns, and transfers to: CalHFA all beneficial interest…..executed by Joshua as Trustor, to Golden Empire as Trustee, and Recordeed….. how can you have two “to’s” .. shouldn’t after Trustor it say FROM???? Is that a fatal flaw???

And then looking at the Substitution it states “Whereas the undersigned present Beneficiary under said Deed of Trust” (which on the DOT at that time would show MERS but on the flawed assignment says Golden Empire was the trustee), it then goes on the say “Therefore the undersigned hereby substitutes GUILD ADMIN CORP” and it is signed “Guild Mortgage Company, as agent for CalHFA”, signed by Rhona Kaninau (same person who signed the assignment as a MERS Asst Secretary). I mean is this seriously legal??? Would a federal judge look at this and see how convoluted it all is?

I appreciate the offer of the securitization discount but in out current economic situation and having to pay $350 to file a federal case we just can’t afford it right now. I hope you will keep that offer open. Will this report cover tracking down a mortgage allegedly backed by CalHFA bonds? This is their claim.

Thank you so much for your assistance. This is overwhelming. Do you have any attorneys here in Southern California you world with I might be able to talk to about what they would charge us for a case like this?

Now They See the Light — 40% of Homes Underwater

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Editor’s Comment:

They were using figures like 12% or 18% but I kept saying that when you take all the figures together and just add them up, the number is much higher than that. So as it turns out, it is even higher than I thought because they are still not taking into consideration ALL the factors and expenses involved in selling a home, not the least of which is the vast discount one must endure from the intentionally inflated appraisals.

With this number of people whose homes are worth far less than the loans that were underwritten and supposedly approved using industry standards by “lenders” who weren’t lenders but who the FCPB now says will be treated as lenders, the biggest problem facing the marketplace is how are we going to keep these people in their homes — not how do we do a short-sale. And the seconcd biggest problem, which dovetails with Brown’s push for legislation to break up the large banks, is how can we permit these banks to maintain figures on the balance sheet that shows assets based upon completely unrealistic figures on homes where they do not even own the loan?

Or to put it another way. How crazy is this going to get before someone hits the reset the button and says OK from now on we are going to deal with truth, justice and the American way?

With no demographic challenges driving up prices or demand for new housing, and with no demand from homeowners seeking refinancing, why were there so many loans? The answer is easy if you look at the facts. Wall Street had come up with a way to get trillions of dollars in investment capital from the biggest managed funds in the world — the mortgage bond and all the derivatives and exotic baggage that went with it. 

So they put the money in Superfund accounts and funded loans taking care of that pesky paperwork later. They funded loans and approved loans from non-existent borrowers who had not even applied yet. As soon as the application was filled out, the wire transfer to the closing agent occurred (ever wonder why they were so reluctant to change closing agents for the convenience of the parties?).

The instructions were clear — get the signature on some paperwork even if it is faked, fraudulent, forged and completely outside industry standards but make it look right. I have this information from insiders who were directly involved in the structuring and handling of the money and the false securitization chain that was used to cover up illegal lending and the huge fees that were taken out of the superfund before any lending took place. THAT explains how these banks are bigger than ever while the world’s economies are shrinking.

The money came straight down from the investor pool that included ALL the investors over a period of time that were later broker up into groups and the  issued digital or paper certificates of mortgage bonds. So the money came from a trust-type account for the investors, making the investors the actual lenders and the investors collectively part of a huge partnership dwarfing the size of any “trust” or “REMIC”. At one point there was over $2 trillion in unallocated funds looking for a loan to be attached to the money. They couldn’t do it legally or practically.

The only way this could be accomplished is if the borrowers thought the deal was so cheap that they were giving the money away and that the value of their home had so increased in value that it was safe to use some of the equity for investment purposes of other expenses. So they invented more than 400 loans products successfully misrepresenting and obscuring the fact that the resets on loans went to monthly payments that exceeded the gross income of the household based upon a loan that was funded based upon a false and inflated appraisal that could not and did not sustain itself even for a period of weeks in many cases. The banks were supposedly too big to fail. The loans were realistically too big to succeed.

Now Wall Street is threatening to foreclose on anyone who walks from this deal. I say that anyone who doesn’t walk from that deal is putting their future at risk. So the big shadow inventory that will keep prices below home values and drive them still further into the abyss is from those private owners who will either walk away, do a short-sale or fight it out with the pretender lenders. When these people realize that there are ways to reacquire their property in foreclosure with cash bids that are valid while the credit bid of the pretender lender is invlaid, they will have achieved the only logical answer to the nation’s problems — principal correction and the benefit of the bargain they were promised, with the banks — not the taxpayers — taking the loss.

The easiest way to move these tremendous sums of money was to make it look like it was cheap and at the same time make certain that they had an arguable claim to enforce the debt when the fake payments turned into real payments. SO they created false and frauduelnt paperwork at closing stating that the payee on teh note was the lender and that the secured party was somehow invovled in the transaction when there was no transaction with the payee at all and the security instrumente was securing the faithful performance of a false document — the note. Meanwhile the investor lenders were left without any documentation with the borrowers leaving them with only common law claims that were unsecured. That is when the robosigning and forgery and fraudulent declarations with false attestations from notaries came into play. They had to make it look like there was a real deal, knowing that if everything “looked” in order most judges would let it pass and it worked.

Now we have (courtesy of the cloak of MERS and robosigning, forgery etc.) a completely corrupted and suspect chain of title on over 20 million homes half of which are underwater — meaning that unless the owner expects the market to rise substantially within a reasonable period of time, they will walk. And we all know how much effort the banks and realtors are putting into telling us that the market has bottomed out and is now headed up. It’s a lie. It’s a damned living lie.

One in Three Mortgage Holders Still Underwater

By John W. Schoen, Senior Producer

Got that sinking feeling? Amid signs that the U.S. housing market is finally rising from a long slumber, real estate Web site Zillow reports that homeowners are still under water.

Nearly 16 million homeowners owed more on their mortgages than their home was worth in the first quarter, or nearly one-third of U.S. homeowners with mortgages. That’s a $1.2 trillion hole in the collective home equity of American households.

Despite the temptation to just walk away and mail back the keys, nine of 10 underwater borrowers are making their mortgage and home loan payments on time. Only 10 percent are more than 90 days delinquent.

Still, “negative equity” will continue to weigh on the housing market – and the broader economy – because it sidelines so many potential home buyers. It also puts millions of owners at greater risk of losing their home if the economic recovery stalls, according to Zillow’s chief economist, Stan Humphries.

“If economic growth slows and unemployment rises, more homeowners will be unable to make timely mortgage payments, increasing delinquency rates and eventually foreclosures,” he said.

For now, the recent bottoming out in home prices seems to be stabilizing the impact of negative equity; the number of underwater homeowners held steady from the fourth quarter of last year and fell slightly from a year ago.

Real estate market conditions vary widely across the country, as does the depth of trouble homeowners find themselves in. Nearly 40 percent of homeowners with a mortgage owe between 1 and 20 percent more than their home is worth. But 15 percent – approximately 2.4 million – owe more than double their home’s market value.

Nevada homeowners have been hardest hit, where two-thirds of all homeowners with a mortgage are underwater. Arizona, with 52 percent, Georgia (46.8 percent), Florida (46.3 percent) and Michigan (41.7 percent) also have high percentages of homeowners with negative equity.

Turnabout is Fair Play:

The Depressing Rise of People Robbing Banks to Pay the Bills

Despite inflation decreasing their value, bank robberies are on the rise in the United States. According to the FBI, in the third quarter of 2010, banks reported 1,325 bank robberies, burglaries, or other larcenies, an increase of more than 200 crimes from the same quarter in 2009. America isn’t the easiest place to succeed financially these days, a predicament that’s finding more and more people doing desperate things to obtain money. Robbing banks is nothing new, of course; it’s been a popular crime for anyone looking to get quick cash practically since America began. But the face and nature of robbers is changing. These days, the once glamorous sheen of bank robberies is wearing away, exposing a far sadder and ugly reality: Today’s bank robbers are just trying to keep their heads above water.

Bonnie and Clyde, Pretty Boy Floyd, Baby Face Nelson—time was that bank robbers had cool names and widespread celebrity. Butch Cassidy and the Sundance Kid, Jesse James, and John Dillinger were even the subjects of big, fawning Hollywood films glorifying their thievery. But times have changed.

In Mississippi this week, a man walked into a bank and handed a teller a note demanding money, according to broadcast news reporter Brittany Weiss. The man got away with a paltry $1,600 before proceeding to run errands around town to pay his bills and write checks to people to whom he owed money. He was hanging out with his mom when police finally found him. Three weeks before the Mississippi fiasco, a woman named Gwendolyn Cunningham robbed a bank in Fresno and fled in her car. Minutes later, police spotted Cunningham’s car in front of downtown Fresno’s Pacific Gas and Electric Building. Inside, she was trying to pay her gas bill.

The list goes on: In October 2011, a Phoenix-area man stole $2,300 to pay bills and make his alimony payments. In early 2010, an elderly man on Social Security started robbing banks in an effort to avoid foreclosure on the house he and his wife had lived in for two decades. In January 2011, a 46-year-old Ohio woman robbed a bank to pay past-due bills. And in February of this year, a  Pennsylvania woman with no teeth confessed to robbing a bank to pay for dentures. “I’m very sorry for what I did and I know God is going to punish me for it,” she said at her arraignment. Yet perhaps none of this compares to the man who, in June 2011, robbed a bank of $1 just so he could be taken to prison and get medical care he couldn’t afford.

None of this is to say that a life of crime is admirable or courageous, and though there is no way to accurately quantify it, there are probably still many bank robbers who steal just because they like the thrill of money for nothing. But there’s quite a dichotomy between the bank robbers of early America, with their romantic escapades and exciting lifestyles, and the people following in their footsteps today: broke citizens with no jobs, no savings, no teeth, and few options.

The stealing rebel types we all came to love after reading the Robin Hood story are gone. Today the robbers are just trying to pay their gas bills. There will be no movies for them.

Five Bad Reasons to Avoid Principal Correction (Reduction)

5 years ago it was obvious to anyone with the facts that the entire system or mortgage origination and mortgage foreclosures had been turned on it’s head, starting with one huge lie: that the value of the property exceeded the amount of the loan. It was in 2005 when 8,000 appraisers warned congress that their industry had been poached by the banks — unless they came back with an “appraisal” that was $20,000 higher than the contract amount, they would never see another dime of business. This one fact was the keystone for the largest economic crime in human history.

The answer is obvious. If a borrower had bribed an appraiser to submit a fair Market value that they both knew could never be sustained — and the obvious purpose was to defraud a lending institution not underwriting a loan under the mistaken belief that the collateral was adequate to repay the loan, the borrower and the appraiser would be punished, disciplined and prosecuted and rightfully so. The outcome of such a case would have been that the perpetrators would lose any license they had for appraisals, that the property would be foreclosed, and that the perpetrators would be ordered to pay restitution for the loss incurred by the lending bank.

The law is pretty simple and there is no protection for anyone to lie for the purpose of defrauding another person. There are no federal or state exemptions, no complexities that make prosecution difficult, just plain facts in which the money of the lending bank was converted into the money of the borrower, the appraiser and maybe their co-conspirators — the mortgage broker, the real estate broker and others. Indeed a perusal of the newspapers across the countries reveals just such prosecutions against borrowers, mortgage brokers and others who conspired to defraud the system (albeit the actual victim being unknown but nonetheless named in each indictment or information prosecuting people “low on the food chain.”

The facts in the mortgage meltdown are equally simple and we call for the same remedies, prosecution, discipline and punishment of the perpetrators. But in this case the perpetrators are the banks. They needed to inflate the appraisals in order to accomplish their twin objectives — closing another loan and making certain that even the “good” loans would fail. Now they confused the issue of title to the property and loan ownership beyond recognition if you look at THEIR paperwork instead of the traditional way record title is kept as notice to the world — through public records title registries.

By blaming the homeowners for the mortgage mess and by sleight of hand tricks played with investors, the Banks managed to steal the homes, steal the money of the investors and steal the bailout. They now seek to steal the non-existent mortgage bonds to fill their balance sheets with non-existent assets. The simple remedies that apply against the. Borrower and the appraiser who lied about the property value are said to present system risks, thus making old fashioned restitution for fraud inapplicable.

So here are the five major reasons the media, the pundits, the government agencies and of course the all-powerful Banks say that the most obvious remedy doesn’t apply.

1. The Banks didn’t commit the crime. It was the originators, the borrowers, the mortgage brokers, the appraisers — anyone but them. Not true. In fact not even close to true. The Banks put the pressure on by setting quotas in dollar volume without regard to quality. There are only two ways of enlarging the dollar volume of loans funded — (1) increase the number of loans and (2) increase the dollar amount of the loans. Since we know that the number of loans was decreasing by 2004-5, the only option left was to artificially inflate the value of the collateral which would enable the originator to fund a larger loan.

2. It’s not fair to reduce principal. But of course it is fair that banks get paid 100 cents on the dollar based upon an initial value and loan they tricked the borrower into taking. And it is fair that the banks get paid by the investors, paid by the insurers and paid by taxpayers all for the same loans even if they were not in default. The debt has been paid in full several times over. Allowing correction to a value of the collateral and the principal on the loan where the banks or investors get paid all over again, but at a realistic level is better than what the banks deserve — I.e., nothing.

3. Reducing principal will cause secondary problems that will disrupt the markets. First this refers to something bad happening if HELOCs or other secondary financing get paid off or modified. It is at best a muddled argument that is both wrong and at variance with the main argument that the borrowers are dead beats that don’t want to pay anything to anyone.

4. Correcting principal will cause disruption of the credit markets. Right. So by this logic, the fruit of fraud should always be sustained and allowed to prosper no matter who gets hurt. This logic certainly undercuts the notion of creating confidence in the credit markets.

5. Correcting principal to the value that should have been used when the deal was made will encourage people in the future to take out loans they nave o intention of repaying. This theory is advanced over the proposition that if Banks get away with this chicanery they might do it again. Here the borrowers did nothing wrong except believe the value that was used in the appraisal. Itmis the banks with a history if wrongdoing, not the borrowers.

Why Everyone Should Support Principal Corrections on Mortgages

First, let’s talk to the guy that says homeowners shouldn’t get a break because it would be unfair to him. After all he paid his mortgage and he is still paying his mortgage and nobody is helping him, right? Wrong. Everyone who has a mortgage is getting a federal subsidy. They get to pay less in taxes and the more they owe, the less taxes they pay. That is the interest deduction for home ownership. So the question is not whether homeowners should get help, because they all get help. And if the guy who still has his home doesn’t wake up to the fact that foreclosures mean fewer homeowners and fewer homeowners means that those who want to eliminate the home mortgage interest deduction will get more traction. They already have a number of people in high places who would like this federal subsidy eliminated because it does nothing for big business and big banking. Putting your support into whatever it takes for people to stay in their homes and pay on mortgages, even if they are lower, means more people that would join you in opposition to eliminating the interest deduction. Oppose them and it will cost you thousands of dollars in additional taxes.

Next, those who are ideologically opposed to any relief for someone who stops paying on a loan. They say that if we don’t hold the borrower’s feet to the fire, we will undermine the entire concept of credit because borrowers would think they could walk away from any debt and would do so. The evidence is in. Most borrowers don’t want to walk from their debt. They want the deal they were sold on by the banks — an affordable loan. They didn’t get it because the originators were not acting as banks. The originators were getting paid for signatures not good loans. What is undermining the credit industry is that nobody trusts the creditors and won’t take the deal on hedge products and swaps. It isn’t that the financial world trusts the borrower any more or any less. They don’t trust the banks because they corrupted the loan underwriting process and because it was the banks who screwed up real estate title and obscured the ownership of loans thus freezing the once liquid credit markets that were running very well on the Uniform Commercial Code. Now we are parsing words and splitting hairs — what is a possessor, holder, holder in due course, what is the effect of fabricated loans, assignments, substitutions, notices, auctions, credit bids, deeds and evictions? If you want confidence in the credit markets restored, we must show that we can control the banks so they can’t do this again.

The main reason everyone should support principal correction is that it is a correction. The values used were pure fabrication created to induce pension funds to throw money down a rabbit hole called a “REMIC POOL” and to induce the homeowner into thinking that he was getting the deal of a lifetime. That was fraud. And in this country when someone is defrauded we take the bounty away from the perpetrators and return it to the victims.

Yves Smith: Obama Pressing for a “Shock and Awe” Mortgage Mod Program, 3 Million in 6 Months

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

THEY STILL DON’T GET IT

EDITOR’S ANALYSIS: The plan is from Wall Street, the facts are fictional, and the result will be negligible. I commend Obama for getting more aggressive but his advisers are still not giving him the right information. If he had it, I believe he would be acting differently. He has a practical problem of putting the housing crisis behind us in a way that is politically possible. The answer is PRINCIPAL CORRECTION TO TRUE FAIR MARKET VALUES WHEN THESE DEALS WERE MADE. Anything less will maintain the current foreclosure climate for decades, keep unemployment in double digits, and prevent any real recovery from the economic meltdown they are still trying to hide.

It is really a matter of finding a true and understandable explanation for why so many people are getting the benefit of a downward correction in the principal. It is simple — they stole the money, no borrower would have signed documents on property that was worth half the debt. It was a lie and we are correcting that lie.

Obama Pressing for a “Shock and Awe” Mortgage Mod Program, 3 Million in 6 Months

Today, March 16, 2011, 2 hours ago | Yves SmithGo to full article

Given how well “shock and awe” worked in the Iraq war, I’d see the Administration’s use of that expression in the context of the mortgage mess as a Freudian slip.

I must confess to being surprised at the report by Shahien Nasiripour of Huffington Post, namely that the Administration is pushing for an even more aggressive-looking mortgage modification program than has been rumored. The reason I’m surprised is that this effort, even though it appears misguided on several fronts and falls far short of what is needed, represents an upping of the demands being made against banks. That is contrary to both the Obama Administration’s past behavior of making great sounding promises and walk them so far back as to wind up in a different country, and of inconveniencing the banks terribly much. But Shahien is an able reporter, so I’m sure he has the facts right.

The scorecard thus far appeared to be that the state attorneys general were the only group moving forward against the foreclosure fraud, but the bold promises of criminal prosecutions were quickly recanted. Instead, a 27 page outline of their settlement demands was leaked. As we discussed, it was a disappointment. Virtually all of it merely insisted that banks obey existing law. It has only two new requirements. One was ending dual track (if a bank is entering into a modification discussion or program with a borrower, it cannot keep moving forward in parallel with a foreclosure). The other was “single point of contact,” meaning having one person at the bank serve as case manager and be the interface with the borrower. We deemed that to be operationally unworkable even if the banks had their records and systems working well. And if they got those in order, borrowers would not need a designated person to make sure a modification request was handled properly.

There was also a rumor, which was connected to the AG negotiations, that the banks would be asked to make mortgage modifications at their own expense, and the number $20 billion was bandied about. The AGs and the Federal regulators seemed to be collaborating closely, which we also objected to; the state and Federal issues are very different. The idea that the banks would be pressured to make mods has gotten a huge amount of pushback in the media and from Republican legislators; there appears to be a full bore PR salvo underway.

Now notice all these ideas are being evaluated in a vacuum. We don’t know what liability the banks would be released from (the legal term is what form of release they would receive). Nor do we or the regulators have an even remotely adequate understanding of all the bad stuff the banks did. The media and anti-foreclosure attorneys have reported on various abuses, most importantly, servicer driven foreclosures, in which the borrower has either made all his payments, or perhaps been late on one or two, and impermissible application of payment, fee pyramiding and junk fees quickly drive a minor arrearage that most borrowers could correct into a foreclosure.

So despite my caviling, if the release covered only robo-signing and false affidavits, this deal (the 27 page term sheet plus a commitment to do mortgage mods) would be a very good deal for homeowners. But if it was a broad waiver, it would be a steal for the banks.

With that as an overlong but necessary background, the latest development looks like a ratcheting up of the effort against the banks, and perhaps a shift in who is in the driver’s seat among the Federal regulators. It had appeared that originally the Treasury was leading the cross-regulatory Foreclosure Task Force; it was the Treasury’s Michael Barr who spoke before the Financial Stability Oversight Council to launch it officially last November. Even then we deemed it to be an exercise in window-dressing that would make the bank stress tests look tough. It went from bad to worse when John Dugan of the Office of the Comptroller of the Currency, the most bank friendly regulator, spoke at recent Congressional hearings and indicated that the task force reviewed 2800 loan files of delinquent borrowers (from the bank side only; as we have stressed, independent verification was impossible given the compressed time frame for the whitewash exams) and found all bank foreclosures to be warranted. Needless to say, those who have been paying attention to this story saw the results as proof of the lack of interest in getting to the bottom of bank abuses. And the OCC playing a prominent role seemed to be further confirmation.

So here are the highlights from the Huffington Post story:

The Obama administration is seeking to force the nation’s five largest mortgage firms to reduce monthly payments for as many as three million distressed homeowners in as little as six months as part of an agreement to settle accusations of improper foreclosures and violations of consumer protection laws….

The modified mortgages could cost the five financial behemoths — Bank of America, JPMorgan Chase, Citigroup, Wells Fargo and Ally Financial — as much as $30 billion…

t also could lead to reduced mortgage payments or lowered loan balances for nearly two-thirds of the 4.7 million delinquent homeowners who have yet to fall into foreclosure, according to data provider Lender Processing Services.

The aim is to ensure the number of assisted borrowers is spread throughout the country, and that banks modify both expensive and inexpensive mortgages, people involved in the talks said. Banks also would likely forgive mortgage principal in situations where a pre-determined formula dictated that it was the best way to modify a home loan. Balances on second mortgages and home equity loans — of which nearly half of all outstanding loans are owned by BofA, JPMorgan, Citi and Wells — would also have to be written down.

That would then kick-start the healing process needed to clear the large overhang of repossessed and soon-to-be-foreclosed homes that’s depressing house prices and sapping consumer confidence.

This is pretty bizarre. It reads like HAMP 2.0. Notice that the banks are NOT being required to make principal mods. The story simply states, “reduce monthly payments”. So the $30 billion is presumably for a combination of servicer costs, payment reductions, and some second mortgage writedowns (since the Administration has stressed that these modifications are to come out of the hide of banks, I am curious as to how a bank would compensate a securitization trust for a first mortgage mod).

But $30 billion for 3 million homeowners, even assuming every penny went to principal mods, is a mere $10,000 per borrower. If you assume the bottom end of the target participation range (1 million), the maximum dollar amount ($30 billion) and modest budget for servicer costs (10% of mod amount), the highest average you could expect is $27,000 per borrower. That’s helpful but unlikely to be outcome changing for borrowers in distress. So this exercise appears to be about maximizing participation rather than really rescuing anyone. So this exercise appears also to be a stress test 2.0: that the Administration can uses this initiative as a way to talk up real estate and put a floor under the housing market.

Why is this a terrible idea?

First, there is good reason to believe that mere payment reduction plans don’t work when the borrower is upside down. Homeowners are not dumb. Why should they struggle to keep a home if in the end they will still face negative equity if they need to exit in the next few years? What is keeping a lot of these homeowners in place is probably inertia: they like the house, their kids are in local schools, moving is disruptive, and exiting the house involves a lot of hassle and probable adverse impact on their credit record. A payment mod does not change the basic equation. By contrast, the one party known to have tried deep principal mods, distressed investor Wilbur Ross, has reported far lower redefault rates than for other types of mod programs.

And a lot of borrowers are upside down. A recent CoreLogic report found that as of fourth quarter 2010, 11.1 million homeowners had mortgage debt in excess of the value of their house. Moreover, the negative equity for those upside down by more than 50% was $450 billion.

So what is a puny $30 billion max (which will include servicer expenses) accomplish? By itself, nothing except some modification theater. In combination with principal mods, which would come from reduction in principal balances by investors, you could see a positive outcome. As we have stressed, when banks foreclose, the losses to investors are 70% and rising as home values continue to fall and foreclosure defense attorneys are making headway in local courts making arguments based on chain of title issues. All but a tiny sliver of subordinated bond holders would welcome deep principal mods. When you are looking at 70%+ losses, 30% to 50% would look like a screaming bargain.

Second, servicers have every incentive to make sure mods fail. They don’t get paid to mod. They do get paid to foreclose. Their income is based on fees based on principal balances (which is one of many reason they’ve rejected principal mods) plus fees they earn for various activities performed in foreclosures. Tom Adams estimates that servicing is costing 125 basis points today, versus income of 50 basis points coming from regular servicing fees based on principal balances plus 30 to 50 basis points based on late, junk, and foreclosure related fees. So having borrowers fail is economically attractive to servicers.

Third, servicers have never been any good at mortgage mods. Tom Adams again:
Giving a modification to a borrower, principal or otherwise, is basically underwriting a new loan. Obviously, many of the lenders have proven that they were not very good at that. However, at least they had staff and “guidelines” for making the loans.

Servicers have neither guidelines nor staff for loan underwriting. Principal modifications were just not contemplated by the securitization model.

I’ve visited dozens of lenders and servicers over a 20 year period and the only company I saw that had a real policy for modifications was Household Finance (now a part of HSBC). Their stated plan was a perpetual debt model (”generational”). They aggressively offered modifications, sometimes even for moderately delinquent borrowers. They claimed about a 25% re-default rate (I looked at data that more or less confirmed this). Of course, left unsaid was that they didn’t always mind re-defaults as they were an opportunity for additional servicer fees on a loan that was going south either way (investors wouldn’t have wanted to hear that).

The next closest thing to a modification plan was Litton, which was an advocate of short sales based on their confidence in their own valuation of the loans. Litton only serviced loans on which they were the residual holder, so they had an economic incentive similar to third party investors, as long as their was value in the residual (which is pretty unlikely now, for most deals).

As far as servicer factory floors – rather than sweatshops, they bore a resemblance to college dorms – young staff with a high turnover rate (20-40% in good times), lots of calling campaign contests, decorations, balloons, morale boosters. Typical call center stuff, though the mortgage servicers were more aggressive with the morale stuff than credit card, student loan, etc.

Very different from commercial loan servicing, where the concept of -re-underwriting, modification, workouts etc. are much more a part of normal business.

Note that Goldman is now trying to sell Litton….not that there is anyone who could possibly want to buy it.

Law professor and securitization expert Adam Levitin has argued that servicers should not do mods, that the task needs to be assigned to a third party. There have been approaches to compensate for the lack of servicer skills in this area, including having mortgage counselors play a prominent role as well as the NACA approach, where an independent group verifies and uploads key borrower documents and works with borrowers to prepare a household income and expenses spreadsheet which is a key input to a loan re-underwriting. But absent a new approach, why should a repeated failed experiment of unmotivated servicers doing mods lead to different outcomes? I much prefer his not quite a joke solution of having the banks spend the then rumored settlement amount of $20 billion on Legal Aid. The threat of borrowers chipping away at banks enough to develop class action theories or prove out the New York trust theory discussed on this blog (which would pave the way to asteroid-hitting-the-finanical system suits against trustees) might change their incentives.

Fourth, the six month timetable is nuts. Servicers are factories. As the late Tanta pointed out, it takes servicers six months to implement the software changes associated with meaningful new initiatives. Even if they did a full court press, the most they could compress it to is probably four months.

Although a lot of the chaos of HAMP mods appeared to be servicer “dog ate my homework” loss of borrower-submitted documents, there is every reason to believe that a lot of the screw-ups reflected deep-seated operational problems. Servicers are working with platforms, both software and procedural, that are already deficient and cracking under the volume of delinquent loans. Asking them to do something different, on an aggressive timetable, and in high volumes is just about certain to create a complete train wreck.

Even though we are deeply skeptical, the dynamics are curious indeed. The HuffPo account states that the Department of Justice is leading the negotiations with the banks, and HUD, the Treasury, and the FDIC are on board. The OCC, which recently seemed to be in the driver’s seat, has apparently been marginalized. And the upping of the rumored amount to be extracted from the banks, $30 billion (admittedly a maximum, we’ll believe that when we see it) is markedly higher than the earlier $20 billion that elicited all sorts of noise.

Even though the Foreclosure Task Force’s exam was cursory, and managed to find that all foreclosures were warranted, save in a very limited number of cases when an “intervening event or condition” took place. Nevertheless, that review found legal violations (and the language suggests they go beyond the poster child of robosigning). Of course, a literature search or database query of court filings would have shown the same thing. But Walsh’s testimony in February made no mention of Federal violations (click to enlarge):

Screen shot 2011-03-16 at 5.22.32 AM

So what is the Administration’s source of leverage against the banks? In theory, it has a ton, starting (as we have pointed out in meetings with the Treasury) violations of REMIC, the IRS rules that govern securitizations (the investors would be charged but the violations result from bank failures to adhere to their representations in the pooling and servicing agreements; they have a basis for litigation, and this is a nuclear weapon level of threat). We raised it twice in an August meeting with Treasury when officials, including Geithner, piously maintained that there was little they could do about servicers. The questions about using IRS violations to bring servicers to heel were pointedly ignored. And we knew then that the issue had already been raised directly with a senior enforcement officer at the IRS who knew the REMIC rules and was initially very interested. The result? The report back was that the matter had gone over to the White House, which said it did not want to use tax as a tool of policy. Ahem, didn’t Obama swear to uphold the laws of the land?

But the bottom line, and it certainly has been consistent with the Administration’s posture, is that it sees its authority over the banks as being narrow. But the Huffington Post article mentioned consumer law violations, and the 2003 FTC/HUD action against miscreant servicer Fairbanks was based on a broad range of violations. Perhaps the powers that be revisited some of the thinking behind that action. One can only assume they have a real smoking gun; this sudden show of spine (even if the effort falls vastly short of a sound course of action) is very much out of character (although Treasury has been bloody-minded in its Volcker rule negotiations with banks, so this is not completely without precedent).

The Administration’s argument may also be that if the banks do widespread mods, they can also get consumers to waive their rights to litigate. That may be the real rationale for a broad-but-shallow strategy. No Federal or state governmental body can waive a private party’s right to seek recourse. But do the banks buy that they have real liability from chain of title issues? They appear to be in deep denial on this front, given the lack of investor lawsuits. But we are told that the reason that those who have studied the question haven’t acted isn’t that they think they have a weak case, but if they prevailed, it would blow up the banking system, which isn’t exactly in their interest. But if they came up with a more limited basis for action, they might well proceed if only to pressure servicers to do meaningful principal mods.

But even with this new desire by the officialdom to press forward, it isn’t clear the other moving parts will line up. The Administration is also pushing the state attorneys general to wrap up their settlement. But that group appears to be fracturing, with defections expected on the Republican side and probable among some Democrat AGs as well (the article mentions New York’s Eric Schneiderman as a possible holdout; we are also told the Nevada AG Catherine Masto is not keen about the deal). The banks also want a pound of flesh to come from Fannie and Freddie, which makes sense given that we have gotten reports from readers of HAMP mods being approved by servicers and nixed by the GSEs.

This is all very curious indeed. My gut (and it could prove to be dead wrong) is that there is no negotiating space between the banks and the Administration, that the bid and offer are too far apart. The haste on the part of the Administration to wrap things up is not likely to help them in the absence of a real threat; undue eagerness to strike a deal is usually a sign of weakness. But the $30 billion may also be on the table to give room to negotiate down for the banks to save face. Since the Obama Administration has never been very good at negotiating, the results even on a level of bargaining are likely to be underwhelming.

BOA SAYS NO TO CORRECTION OF PRINCIPAL: “UNFAIR AND UNEXPLAINABLE”

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SEE modification-plan-sought-follow-the-money-not-the-paperwork

EDITOR’S NOTE: Moynihan is pulling out the old argument, trying to stir up people who have been paying their mortgage so he and the other mega banks won’t be required to cough up trillions of dollars they stole through fraudulent appraisals of property inducing people to get into “loan” transactions that were guaranteed to fail, which the mega banks were betting on, so they would win going both ways. They did the same thing to investors with fraudulent appraisals (ratings) inducing people to get into MBS transactions, which were guaranteed to fail, and which the mega banks were betting on, so they could win going both ways.

What he is saying is that it is too hard to explain to people who have been paying their mortgage payments why others, who were not paying their mortgage payments, are getting a break. What he means is that if they DID explain it as a clawback from a fraudulent series of transactions, millions more people, whether they were paying or not, would demand their money back too. They will realize that just because they CAN afford to take the loss on a fraudulent transaction, doesn’t mean they SHOULD take the loss any more than anyone else.

And THAT in turn would be the end of the mega banks and the grip on this country’s power structure. because it would deplete every bit of equity they have and remove them from the table of active players in banking, leaving the REST of the banking industry, consisting of over 7,000 banks and credit unions to pick up the pieces which will be remarkably easy to do, and will produce no catastrophe other than for the those who continue to benefit from a PONZI scheme that is remaining alive, morphing into the next great catastrophe.

See Simon Johnson’s extremely clear, well written analysis, with citations and back-up for everything he says and I say www.baselinescenario.com.

AND Moynihan is issuing a tacit threat: everyone who relies on dividend income and is expecting dividend income from BOA will be on the short end of the stick — kind of like the lowest people in every PONZI scheme. I’m not saying they should be punished for believing this drivel from Moynihan. In a nation of laws, however, it is no argument at all to leave “well enough alone” if it means that victims remain uncompensated because other people, possibly without knowledge of the tainted aspect of the money, will lose.  Such shareholders in the mega banks may also be victims, at least some of them, and they may have their remedies too. In the end, there won’t be enough money to go around to satisfy everyone, but one thing is for sure — in a nation of laws — the perps should do the walk, not the victims.

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NY Times

Bank Chief Rejects Idea of Reducing Home Loans

By NELSON D. SCHWARTZ

Showing resistance for the first time against government pressure to write off tens of billions worth of mortgage debt, Bank of America executives said on Tuesday that the idea was unworkable and warned that it would be unfair to borrowers who had managed to stay current on their loans.

“There’s a core problem that if you start to help certain people and don’t help other people, it’s going to be very hard to explain the difference,” said Brian T. Moynihan, the chief executive of Bank of America. “Our duty is to have a fair modification process.”

All 50 state attorneys general, as well as a host of federal agencies, are pushing for a settlement over investigations into foreclosure abuses by major mortgage servicers that could cost the industry $20 billion or more. Much of that money would be earmarked to reduce principal owed by homeowners facing foreclosure.

But picking just who to help is among the thorniest questions facing government regulators, as well as the banks themselves. Even the most outspoken attorney general on the issue, Tom Miller of Iowa, acknowledged on Monday that too generous a program might encourage homeowners to walk away from properties where the value of the loan exceeded how much the underlying property was worth.

Indeed, industry experts estimate that nearly a trillion dollars worth of mortgage debt is “underwater,” a result of house prices having fallen since the original loans were made. Federal officials hope a settlement with the servicers will help individual borrowers and provide a cushion for the weak housing market.

Officials of Bank of America, the nation’s biggest mortgage servicer, argue that any effort to help troubled borrowers should not penalize borrowers who are underwater but have managed to make their monthly payments.

“There may be as much as $1 trillion worth of mortgages that are underwater,” said Terry Laughlin, the Bank of America executive whose unit, Legacy Asset Servicing, handles mortgages that are delinquent or in default. “What do you do for those borrowers that have a job but have negative equity and have paid on time and honored their obligations?”

“This is an unsolvable question,” he said. “It’s a very slippery slope.”

The comments by Mr. Moynihan and Mr. Laughlin came at a daylong meeting with investors and analysts in New York, the first of its kind for Bank of America since 2007.

Despite fierce criticism by regulators and political leaders that its efforts to help troubled borrowers have fallen short, Bank of America executives insist that the number of successful modifications the bank has completed is on the rise. The bank says more than 800,000 mortgages have been modified in the last three years.

Writing down billions of principal now could actually retard the recovery by encouraging borrowers to default, they argue. “It’s not that we don’t want to help troubled borrowers,” Mr. Laughlin said. “It’s a moral hazard issue.”

Late last week, the attorneys general presented the five biggest mortgage servicers, including Bank of America, with a 27-page proposal that would drastically reshape how they deal with homeowners facing foreclosure. It did not include a specific dollar figure, but government officials say they want to combine any overhaul of the foreclosure process with a monetary settlement that could finance more modifications for troubled borrowers.

The existing modification program created by the Obama administration, known as HAMP, has helped far fewer borrowers than originally promised. It also faces fierce opposition from Republicans in the House of Representatives, who voted last week to kill the program.

Mr. Moynihan believes investors who hold trillions in mortgage securities have to be involved in any settlement. It is not exactly clear what role they would play as part of the settlement with the federal government.

Officials at Bank of America, as well as other large servicers, declined to comment on the specifics of the 27-page proposal, and the industry has been cautious about fighting back too aggressively, mindful of the tales of robo-signing and other abuses that prompted the investigation by the attorneys general and federal regulators last fall.

What’s more, consumers and politicians are keenly aware that Bank of America and other financial giants have staged a remarkable turnaround since the government bailed out the industry after the collapse of Lehman Brothers in 2008.

“I think reasonable minds will prevail on this,” Mr. Moynihan said. “We do push back and we get to reasonableness.”

Still, the comments at Tuesday’s investor meeting are a preview of the arguments the industry is poised to make more forcefully in the weeks ahead as it negotiates with the attorneys general and other regulators behind closed doors. On Monday, Mr. Miller said he hoped a settlement could be reached within two months.

As the huge volume of loan losses recedes and the economy improves, Mr. Moynihan said his company had the power to earn $35 billion to $40 billion a year. Bank of America lost $2.2 billion in 2010, weighed down by special charges and the lingering effects of the housing bust and the recession on consumers.

He also reiterated his position that the long wave of acquisitions undertaken by his predecessors was over. “I can’t stress enough to you how much of a peace dividend we’ll get without mergers,” Mr. Moynihan said. “That peace dividend is effectively a permanent dividend.” The bank intends to resume payouts to shareholders in the second half of 2011.

THE PROBLEM WITH PRINCIPAL “REDUCTION” VS PRINCIPAL “CORRECTION”

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While Wall Street has us all thinking that this is so complicated that it can never be unraveled, the reverse is true. If the homeowner was the victim of a crime or misfeasance or malfeasance, then the homeowner has every right to restitution and redress of his grievances. If the homeowner was treated fairly and there were no material violations of the Federal and state lending laws, then there is no restitution or redress, because nothing bad happened. Anyone opposed to this plan of action is taking a position against our centuries old system of common law, statutes and procedural due process.” — Neil Garfield

The problem is that the Courts are looking at policy instead of legal precedent. The pretender lenders are doing everything they can, and doing it successfully, to make sure that the Court never considers or hears the factual question of whether the homeowner was harmed by a wrongful act committed by some or all of the people at the closing of the loan. This isn’t magic or rocket science. If the wrongful act occurred we all know that the law requires the wrongful actor to be punished and the victim is to be made as whole as possible given the reality of the circumstances.” — Neil Garfield

EDITOR’S ANALYSIS: The Washington Post editorial below hits the nail on the head as to the political and legal problems associated with principal REDUCTION. Where does it end? The current plan being discussed is too little, too late and carries political liability equivalent to a third rail. It also is probably not legal.

And THAT is why words make all the difference. Principal REDUCTION stands for the proposition that we are going to arbitrarily pick a number of people and reduce the balances due on the amount demanded, as evidenced by the promissory note. I see nothing but problems in such an approach. The principal problem is that it does not address WHY lowering the obligation from the amount stated on the promissory note is necessary or proper?

On the other hand principal CORRECTION stands for the proposition that the amount demanded is not the right amount and that we are going to correct it to  assure that it matches up with reality. There is no arbitrary or political decision necessary. The only basis for doing it would be that the amount stated on the note is wrong, or was procured by fraud, or some other long-standing legally recognized doctrine of law in which the borrower is the victim who has suffered damages that require redress.

If the Obama administration wants to propose a program of principal correction, it can do so by rule or regulation, just as the Federal Reserve can do in Reg Z. Given the fact that table-funded loans (i.e., all securitized loans for practical purposes) are improper and that the appraisals were false along with other violations of underwriting standards relied upon by homeowners and investors, they only need to state that upon proof of one or more of the violations of the consumer’s rights to disclosure and fairness, the terms of the obligation shall be adjusted to reflect terms of the transaction proposed to the borrower at the time of closing as opposed to the deal claimed by the pretender lender now.

If the mortgage is legally invalid and requires reformation or a substitute to make it valid, then the party seeking protection under the terms of the alleged mortgage must negotiate terms with the homeowner, same as any other case where such things have happened.

As in all other cases where such things have occurred before the latest mortgage foreclosure rampage, these things are self-evident if taken on a case by case basis. In some cases, the property will be foreclosed by a party who is in fact the creditor and has the right to do so. In other cases there will be adjustments to the terms of the obligation which might include a correction of principal (where the appraisal was inflated), interest rate (where the rate was not properly disclosed), term where the “reset” was not properly disclosed etc.

While Wall Street has us all thinking that this is so complicated that it can never be unraveled, the reverse is true. If the homeowner was the victim of a crime or misfeasance or malfeasance, then the homeowner has every right to restitution and redress of his grievances. If the homeowner was treated fairly and there were no material violations of the Federal and state lending laws, then there is no restitution or redress, because nothing bad happened. Anyone opposed to this plan of action is taking a position against our centuries old system of common law, statutes and procedural due process.

The problem is that the Courts are looking at policy instead of legal precedent. The pretender lenders are doing everything they can, and doing it successfully, to make sure that the Court never considers or hears the factual question of whether the homeowner was harmed by a wrongful act committed by some or all of the people at the closing of the loan. This isn’t magic or rocket science. If the wrongful act occurred we all know that the law requires the wrongful actor to be punished and the victim to be made as whole as possible given the reality of the circumstances.

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A questionable plan to aid underwater homeowners

THE U.S. ECONOMY can’t truly recover until the housing market revives. Yet recent data indicate that prices, already off an average of 30 percent from their peak in 2006, have still not touched bottom. Lending conditions are tight, and mortgage rates are ticking up again. Nearly a quarter of mortgage borrowers are “underwater,” owing more than their houses are worth. Massive federal assistance – $1 trillion in Federal Reserve mortgage-bond purchases; dramatic expansion of Federal Housing Administration (FHA) loans; an Obama administration push to modify existing home loans – has slowed the collapse but not, apparently, ended it.

What more, if anything, should be done? The latest administration idea is to use the two government-controlled mortgage-finance firms, Fannie Mae and Freddie Mac, to help underwater borrowers. Under the plan, Fannie and Freddie, which back about half of all U.S. home loans, would identify creditworthy borrowers who are underwater but still current on their payments – and then turn their loans over to the FHA, which would refinance them in return for a write-off of at least 10 percent of the unpaid principal balance. Though the administration notes that this is no panacea, officials argue it could make a significant difference to between 500,000 and 1.5 million borrowers, reducing their debt and their risk of eventual foreclosure. Fannie and Freddie would absorb losses from the principal writedown, but proponents of the plan argue that Fannie and Freddie would be even worse off if foreclosures occur later – and the Treasury, which is covering the two entities’ losses, would be on the hook either way.

The entities and their regulator, the Federal Housing Finance Agency (FHFA), are cool to the idea. In addition to the threat to Fannie and Freddie’s already disastrous bottom lines, an obvious drawback is moral hazard: If government starts paying off some people’s debt principal, what’s to stop others from demanding the same break? Preventing moral hazard, of course, limits any plan’s impact. Previous loan-modification efforts also have attempted to target that elusive cohort of distressed-but-capable borrowers, with disappointing results. Analysts at Credit Suisse recently described the potential benefits of the administration plan as “more symbolic and psychological than fundamental.”

Republicans in Congress have started to push back as well. On Monday, the incoming chairman of the House subcommittee that oversees Fannie and Freddie, Rep. Randy Neugebauer (R-Tex.), published a letter to FHFA noting that “the program targets performing loans” and asking “why it would be in the best interest of the U.S. taxpayer for Fannie and Freddie to write down principal on these types of loans.”

Mr. Neugebauer wants a public report detailing the potential costs of the program. More transparency might be a good idea before Fannie and Freddie proceed. Given the mixed results of past loan-modification schemes, a formal public statement of the potential costs and benefits of the latest one doesn’t seem too much to ask.

LA Times: California foreclosure aid fund swells, but banks hesitate: PRINCIPAL CORRECTION

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EDITOR’S NOTE: The problem I have with this kind of reporting is the presumption that the using a lower amount of principal as the amount due under the mortgage is some sort of gift to homeowners. It is “PRINCIPAL CORRECTION” not principal reduction. The appraised value of the property at the start of the homeowner’s deal was wrong. Professional appraisers from across the country have confirmed that. The petition from 8,000 licensed appraisers to congress predicted the problem and complained that they were not being hired because they refused to falsify the appraisal. In each case the the appraisal was inflated using non-industry methods of appraisal.

  • In each case the value used at closing turned out to be at least 20% higher than the amount that could have been used even if one were to use the “high side.”
  • In each case the homeowner relied on the appraisal to complete the deal.
  • In each case the homeowner received assurances that the property would further appreciate.
  • In each case the fair market value was supposed to be verified by the lender which is why homeowners are allowed to and encouraged to rely on it.
  • In each case the pretender lender created the illusion of an underwriting process where the borrower believed that the party designated as the “lender” was equally at risk to the homeowner.
  • In each case the party designated as the “lender” did not advance any funds for the loan.
  • In each case the real source of the money used to fund the loan was mentioned or disclosed at the closing.
  • In each case, the homeowner was completely unaware that the party designated as the “lender” had no risk.
  • In each case the homeowner was completely unaware that the party designated as the “lender” was standing in a a straw-man for the real lender.
  • In each case neither the named nominee beneficiary nor the party designated as the “lender” had any financial interest in the loan other than the fee they were receiving as vehicles for the sale of securities.

So the notion that the current fair market value is some sort of gift to homeowners is completely false and simply a restatement of the deception that defrauded homeowners in the first instance. The press and other sources on this insist on using the words “Principal reduction” when they should be using the words “principal correction.” It isn’t a gift — it is a correction of a wrong that is being made right. That’s what justice is intended to provide.

California foreclosure aid fund swells, but banks hesitate

The state’s Keep Your Home plan has grown to $2 billion from $700 million. However, mortgage servicers haven’t officially agreed to participate in the principal reduction part of the program.

By Alejandro Lazo and E. Scott Reckard, Los Angeles Times

November 10, 2010

Federal funding for a California plan that helps borrowers facing foreclosure has snowballed to $2 billion, enough to potentially help more than 100,000 homeowners.

But the program lacks formal agreements with the nation’s largest banks and investors, and their cooperation is needed to make the proposed effort broadly successful.

Out of the three major mortgage servicers — Bank of America Corp., Wells Fargo & Co. and JPMorgan Chase & Co. — only Bank of America has told the state that it will participate in a central part of its Keep Your Home program that would reduce the principal balance of certain troubled mortgages, and even BofA has yet to sign an agreement. Fannie Mae and Freddie Mac have declined to participate in the principal reduction part of the plan.

The Keep Your Home program, which uses federal funds reserved for the 2008 rescue of the financial system, is intended for low- and moderate-income people who own only one property. To qualify in Los Angeles County, a family of four couldn’t earn more than $75,600. The maximum benefit for any household participating in the program is $50,000.

The biggest part of the plan gives $875 million in temporary financial help to homeowners who have seen their paychecks cut or have lost their jobs. The program would provide as much as $3,000 a month for six months to cover home payments, including principal, interest, insurance and homeowner association dues.

Another piece would provide as much as $15,000 to help homeowners get current on their mortgages, and another would provide assistance to move for those people who can’t afford to remain in their homes. Most of the big banks and Fannie and Freddie have signaled that they’re willing to participate with these parts of the plan.

But the most controversial part of the program, and the one most difficult for banks and investors to sign on to, dedicates $790 million to principal reduction. This would write down the value of an estimated 25,135 “underwater” mortgages, which are loans in which homeowners owe more on their properties than what they are worth.

The California plan — as well as programs created by Nevada and Arizona — would pay lenders $1 for every dollar of mortgage debt forgiven. Experts say reducing principal on such underwater loans would go far to reducing foreclosures in the three states because home values have fallen so steeply that homeowners are tempted to walk away from their obligations.

But the financial industry has been reluctant to participate in government-administered programs that would require them to reduce the amount that borrowers owe them.

“If you can’t do the principal write-down, you are limited in what you can do,” said Dan Immergluck, an associate professor at the Georgia Institute of Technology, who studied the different state plans developed with the federal bailout money.

“It is one thing for them to agree not to write down principal when they are being asked to foot the whole bill,” he said, “but when the states are agreeing to match this 50-50, it seems rather ridiculous of the servicers and the investors not to agree to this.”

Diane Richardson, director of legislation for the state’s housing finance agency, which created the California plan, said she expects other lenders to follow Bank of America’s lead once the program is underway.

“Once the program gets going, and other lenders see how successful it is, I think others will come aboard,” she said. The Keep Your Home program was slated to begin Nov. 1, but the launch was pushed back until early next year because the effort grew in complexity and size from when it was announced in February.

Originally, five states in which home values had dropped more than 20% since 2006 were selected to receive $1.5 billion from the Treasury Department’s Troubled Asset Relief Program. The program grew to cover states with high unemployment, which included California, and more federal money was added. California was initially slated to receive $700 million when the Treasury approved the state’s plan in July. Then even more money was added, resulting in a $7.6-billion program involving 18 states and the District of Columbia.

California, which accounts for 21% of the nation’s foreclosure activity, is the largest recipient of the bailout money. Homeowners in the Golden State also remain deeply underwater, according to recent data. In California, 27.9% of homeowners who owned single-family residences were underwater at the end of the third quarter, according to data released Wednesday by real estate information site Zillow.com. In Los Angeles County, 17.4% of borrowers owed more on their mortgages than what their homes were worth.

Even as the state struggles to get big lenders to sign on, the program has provoked complaints that it’s a giveaway to the banks. Critics say property values have fallen so steeply that much troubled mortgage debt is not worth 50 cents on the dollar. Foreclosures on these homes are so costly that the banks will come out ahead financially by writing down loan balances to keep borrowers in the homes, they contend.

“I don’t think we should have to be paying the lenders,” said Prentiss Cox, a professor at the University of Minnesota Law School Clinic. “We have already paid them in the form of the bailout, and it seems to me what we need is enforced loan modification, because that is in everyone’s interest.”

Critics also are unhappy that homeowners who refinanced their homes to take cash out of their properties will not be allowed to participate in the program. That will exclude many African American and Latino borrowers in low-income communities who were hustled into loans they did not understand or could not afford, said Yvonne Mariajimenez, deputy director of Neighborhood Legal Services of Los Angeles County.

These borrowers were “enticed by predatory lenders to refinance and pull out equity to pay medical debt, fix their houses and the like,” Mariajimenez said. “A disproportionate number were people of color that live in minority communities.”

Getting banks to write down principal has proved difficult through government programs, though some lenders have done it through their own proprietary initiatives. The federal government’s loan modification program, which is also funded by money from TARP, has always allowed loan servicers to forgive principal on troubled mortgages, but has never required them to do so.

Proponents of forgiving principal say this is a serious flaw. They contend that debt forgiveness is the only workable way to address the problem created by underwater loans.

alejandro.lazo@latimes.com

scott.reckard@latimes.com

“PRINCIPAL CORRECTION”: INDUSTRY AND GOVERNMENT BLOCKING SHORTSALES

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POLICY CHECK: The issue is not “principal reduction” or even “short-sale”. The issue is obvious. The “values” used in the marketplace were accepted because of lies that people relied upon, whether it was reasonable for them to have relied on those lies or not. It is not “principal reduction” that will correct the situation, it is PRINCIPAL CORRECTION. And that is a correction in our basic principles to reflect a policy of fair play.

The facts are in. There can be no dispute that the government is colluding with industry to prevent the housing industry from stabilizing. The poster boy for this patent policy is the current set of “rules” that exist throughout the mortgage lending infrastructure which prevent anyone who gets approval for a short-sale from receiving a new mortgage from anyone for at least 2 years. It is impossible to think of a scenario where anyone on any side of the political spectrum would approve this intrusion of the government (through Fannie Mae et al rules) into private contracts. In addition, it is just plain stupid. Add the current bankruptcy rules that allow investors with multiple homes to file Chapter 11 and strip the liens down to fair market value but block the lone, one-home homeowner from getting the same relief, and you have a perfectly clear explanation for our currently unfolding economic disaster.

The status of the market is simple and obvious: fair market values of homes are generally so far below the principal stated on the mortgage note that it is impossible for the property to be sold. It would require the typical homeowner to pay $100,000 or more (sometimes much more) to close the transaction with a satisfaction or release of the old mortgage. Since most homeowners do not have this money or won’t part with it if they do (since it would deplete what is left of their resources) practically none of the homes that are under water can or will ever be sold except in foreclosure auctions where the identity of the creditor, the amount due on the obligation, and the status of title are completely obscured, leaving a new field of collateral damage to the marketplace that might end up worse than the the one we already face.

This is an informal but nevertheless highly effective policy of price control which continues to artificially inflate a market that was already artificially inflated by fraudulent appraisals and fraudulent ratings — without which no borrower would have accepted the deal and no investor would have loaned the money. The ONLY beneficiaries of this policy are the players in the financial industry who continue to conduct business behind curtains of obscure “trades,” continuing to make money on a market they have essentially destroyed.

Government and industry continue to paint themselves and all American taxpayers into a corner where the stench of fascism (control of government by private industry) is rising to suffocating levels and producing an American voter who is sickened and disgusted by our failure to follow the only sensible path open to us: break the hold of the bank oligopoly. For years the economists from the International Monetary Fund, central banks from around the world, and “casual” economists like myself have been saying the same thing. But even those who favor smaller government keep voting for politicians who make it increasingly easy for giant profitable corporations to feed at the public trough while the small businessman locks the door for the last time and walks away.

  • $700 billion in TARP money is a tiny fraction of what was gifted to the financial industry.

  • That figure alone could be used as the basis for principal correction, since the banks received the money but continued to foreclose and still ceased lending — the very opposite of what the public expected. Out of the $7 trillion eventually granted, gifted, loaned or guaranteed for the financial industry why isn’t some portion of that money being used to allocate to specific loan accounts across the board? This requires the “principle” of grade school math.

  • It does not require a new law or rule.

  • The creditors received trillions of dollars on obligations that were neither in default nor delinquent as well as actual “troubled loans.”

  • Just applying simple math: If you take 7 million mortgages and apply the $7 trillion received by Wall Street, the borrowers should get credited for the $7 trillion. On average that would mean a credit or correction of the amount of the mortgage note of $1 million per mortgage!

  • OK, I’m oversimplifying, but not as much as you might think.

  • If you don’t like the borrowers getting credit for the taxpayer payment, OK, but why would you give the credit to the financial industry at the expense of the taxpayer? If the taxpayer paid it, why doesn’t the taxpayer get credit for it? Why would you credit the the financial industry for receipt of taxpayer’s money on debt portfolios and still allow them to collect the same amount on the debt?

  • And more importantly why would you give them the house too?

  • And if they got even more money from insurance and credit enhancements why isn’t the taxpayer, the borrower, or both given credit on the obligation that has so obviously been reduced?

  • If the credit due on the obligation was merely a transfer of the receivable to the government, OK, lets’ see the U.S. government in these foreclosures, modifications and short-sales — not the original creditors who have already been paid.

  • The windfall continues to go to non-creditors who never had a dime in the game getting a free house — and we are like sheep being led to slaughter continue believing that the homeowner is not taking “personal responsibility” — right up to the point when the bullet enters our brain.

The plain truth is that we are continuing the big lie and the longer we tell it, the longer we maintain it, the stupider we look, feel and act. We know housing lies at the bedrock of our economy but we are pursuing fiscal policies instead of real policies. Small wonder the economy is not responding. If we continue on this path, the United States will cease being a major world power thereby losing access to world markets and credit upon which it desperately depends. The use of the U.S. dollar as the reserve currency will also cease turning all that money out there into demand liabilities — which means that there will be demands made to redeem those dollars into other currencies or even gold. Like our health, we take it for granted until we lose it. And make no mistake, we are losing it.

Those economists have been outspoken in their criticism and very direct in their warnings — any other country would have long since been forced to undertake austerity measures and corrections to their financial systems that de-centralize the financial power structure. Many have suggested that if the U.S. did not have such clear military superiority that the Wall Street scheme that produced this mess would have been declared an act of war against all countries affected.

Because of a mistaken notion that we can allow banks and other companies to hide the true status of their balance sheets — when everyone knows the figures are cooked — we continue to allow the financial industry to do business as usual, making fictitious profits upon which they reward themselves with bonuses of real money. Instead of making things that consumers want, instead of doing things that consumers will pay for, we are a nation with our head in the sand pretending to do business when at least 40% of our “economy” is trading printed, fabricated paper (or now electronic evidence of paper) back and forth between themselves and calling it “commerce.” And then to make matters worse we fail to apply taxes on income that would apply to anyone else who reported such incredulous profits, leaving the taxpayer with a larger and larger bill whose eventual height cannot yet be determined. Federal and state budgets would be substantially enhanced by the collection of those taxes, but they don’t because they are controlled by the financial oligopoly.

Thus we are continuing to pursue policy that ignores the elephant in the living room — there is nobody left to buy homes, consumer goods and services because they don’t have any money nor do they have access to it. They perceive themselves as in debt up to their eyeballs and now the federal government is telling them that the surplus we had 10 years ago is now a deficit that puts each newborn in debt for the rest of their lives and the lives of their descendants.

REALITY CHECK: Unless we all state the obvious we can’t fix the problem. As long as we continue to direct our attention at “other issues” that are fabricated distractions from the financial industry, the housing market will continue to bust lower and lower levels, taking the rest of the economy with it, and causing social chaos as people are required to relocate with nothing left of their credit scores or bank accounts.

REALITY CHECK: If a new policy would allow the market to correct itself, if the markets caused an economic revival, if new businesses were created, if U.S. innovation regained its first place in the American arsenal, and if jobs were created with rising median income, what difference does it make if some people gain an unintended advantage? We have that unintended advantage right now with all the money being concentrated into a handful of banks and other oligopolies.  If everyone was more prosperous and secure would we really care if some people took undue advantage? And if the answer to that question is YES, then why don’t you care now because the advantage, unfair, illegal and immoral as it is, is now going to people who not only took advantage of the system but destroyed the entire financial system in the process.

POLICY CHECK: The issue is not “principal reduction” or even “short-sale”. The issue is obvious. The “values” used in the market place were accepted because of lies that people relied upon, whether it was reasonable for them to have relied on those lies or not. It is not “principal reduction” that will correct the situation, it is PRINCIPAL CORRECTION. And it is a a correction in our basic principles to reflect a policy of fair play. It is a policy that simply acknowledges the truth: that the prices used for sale of loan products and mortgage bonds were bogus. Starting from that premise existing laws, rules and regulations could take care of most of the problem. A change in the bankruptcy laws that allowed all petitioners the same relief for lien stripping to fair market value instead of excluding the small homeowner, would be very helpful as well.


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