Tag: Mortgage

Holder the Liar

The one good thing I figured Barack Obama would do as President was go after the shysters in the mortgage industry. Surely a Democrat as liberal as Obama would make sure that those who aided and abetted mortgage fraud would be punished, right? And last year — coincidentally, right before the election — they announced that they had brought 530 cases representing over 73,000 fraudulent mortgages and a billion in lost home value. It was just the tip of an awful iceberg, but it was something.


The Justice Department made a long-overdue disclosure late Friday: Last year when U.S. Attorney General Eric Holder boasted about the successes that a high-profile task force racked up pursuing mortgage fraud, the numbers he trumpeted were grossly overstated.

We’re not talking small differences here. Originally the Justice Department said 530 people were charged criminally as part of a year-long initiative by the multi-agency Mortgage Fraud Working Group. It now says the actual figure was 107 — or 80 percent less. Holder originally said the defendants had victimized more than 73,000 American homeowners. That number was revised to 17,185, while estimates of homeowner losses associated with the frauds dropped to $95 million from $1 billion.

The government restated the statistics because it got caught red-handed by a couple of nosy reporters. Last October, two days after Holder first publicized the numbers, Phil Mattingly and Tom Schoenberg of Bloomberg News broke the story that some of the cases included in the Justice Department’s tally occurred before the initiative began in October 2011. At least one was filed more than two years before President Barack Obama took office.

It will surprise no one who reads this blog that the Justice Department used every tactic short of extraordinary rendition to evade reporters’ questions about the program. When pressed for details of the arrests and prosecutions, they stalled delayed and obfuscating until … get this … after the election.

Oh, and they’ve done it before:

This was the second time, mind you, that Holder’s Justice Department had pulled a stunt like this. In December 2010, Holder held a press conference to tout a supposed sweep by the president’s Financial Fraud Enforcement Task Force called “Operation Broken Trust.” (The mortgage-fraud program was part of the same task force.) As with the mortgage-fraud initiative, Broken Trust wasn’t actually a sweep. All the Justice Department did was lump together a bunch of small-fry, penny-ante fraud cases that had nothing to do with one another. Then it held a press gathering.

At least on that occasion, the Justice Department promptly provided me with a list of the defendants’ names and case details when I asked for them. That is how I was able to determine for a December 2010 column that the government’s Broken Trust numbers were inflated. Among the handful of cases on the list that I spot-checked, one defendant was sentenced to probation before the operation’s supposed start date. Another person on the list had no record of criminal charges. Other cases had nothing to do with any actions by the task force. The Justice Department still hasn’t restated the Broken Trust numbers — even though those statistics clearly were in error, too.

And, just in case you’re wondering about the brokers who piled fraudulent mortgages into tottering piles of securities shit and the ratings agencies that gave those tottering piles of shit AAA ratings: they have not been held responsible either.

Holder is setting records of lies and obfuscations on every issue imaginable. From Fast and Furious to mortgage fraud, he consistently and continuously misleads the American public. And yet when the Republicans tried to cite for contempt (for lying his ass off about F&F), they were branded as anti-Obama-crazed maniacs. And the DOJ is just a fraction of the lies spewed by this Administration on the subject of the law, from claiming they are winding down the War on Drugs while they ramp it up to the head of NSA lying to Congress with a straight face.

So you’ll forgive me if I take today’s announcement of changes to the War on Drugs with some salt. I love the idea of not charging low-level drug offenders with crimes that invoke harsh minimum sentences. But I don’t trust these assholes to actually do it. What I trust them to do is, shortly before the 2014 election, announce that they’ve overhauled or War on Drugs and kept non-violent people out of prison while they continue to do it.

Holder has earned that distrust. And that distrust is the biggest reason why he shouldn’t be Attorney General any more. Respect for the Rule of Law is a critical component to any functioning society. Holder has brought the Rule of Law into contempt. Enough of this.

The Bubble Reinflates

This is mildly disconcerting. Megan Mcardle describes bidding wars breaking out over houses in DC. One house had over a hundred offers and prices are heading into the stratosphere again.

I’m not familiar with DC, but I am interested in the general question of whether we are we in danger of another housing bubble. Interest rates are ridiculously low, which tends to drive up housing prices (people who are spending less on debt service can afford more principle). We still have active federal programs to forestall foreclosures and help people refinance. DC, specifically, has had an effective moratorium on foreclosures.

I’m not ready to be alarmed yet. The broader measures of real estate show national real estate prices hovering near pre-bubble levels. But it would be just like us to not learn the lesson of the 2000’s. And just like the government to make it possible.

(In other mortgage news, a study has indicated that the Community Reinvestment Act was a huge contributor to the financial crisis. CRA-covered loans ramped up to $6 trillion in the bubble. I would take this with some salt — low interest rates contributed as did pressure from above to create loan for CDS’s and CDO’s: the instruments that brought the major banks to their knees. But we’re getting to the point where it’s simply untenable to pretend that the CRA played no role in what happened. Not that this will stop people from pretending it didn’t.)

Why I Would Not Live in California, Parts 284-286

I’ve actually had good times when I’ve been in California. I know a lot of people who live out there. There are lots of opportunities for science and technology. It’s five hours closer to Australia than my current abode. It would be a lovely place to live … if it weren’t run by a bunch of totalitarian dunces.

Today, we find ourselves amidst a trifecta of good-old fashioned California What the Fuck:

A handful of local officials in California who say the housing bust is a public blight on their cities may invoke their eminent-domain powers to restructure mortgages as a way to help some borrowers who owe more than their homes are worth. …

… instead of tearing down property, California’s San Bernardino County and two of its largest cities, Ontario and Fontana, want to put eminent domain to a highly unorthodox use to keep people in their homes.

The municipalities, about 45 minutes east of Los Angeles, would acquire underwater mortgages from investors and cut the loan principal to match the current property value. Then, they would resell the reduced mortgages to new investors.

Bainbridge has the dirty details. Essentially, the cities would seize mortgages from companies, cut the principle to the current value, then let a well-connected venture capital firm sell a new mortgage to the homeowners for a $25,000 profit. If that sounds like moneyed interests and government ganging up to rob banks, that’s because that’s what it is.

Bainbridge points out why this is so bad for Californians (I mean, apart from the robbery, corruption, violation of basic contract law, etc.):

There will dountless be costs to California tax payers. There will inevitably be litigation (even though Messrs Williams, Gluckstern, and Altman reportedly are deliberately targeting the weakest banks with the shallowest pockets for legal fights). Banks will be less willing to lend to Californians, which will drive down property values. As such, this is a wealth transfer from people like yours truly who were fiscally prudent, took on only as biug a mortgage as we could afford, and didn’t run up huge lines of credit to people who were fiscally imprudent, who took on jumbo mortgages to buy far bigger houses than they needed, who ran up huge lines of credit to finance spending, and stupidly thought the housing bubble would last forever. Now that the music’s stopped, they’re going to get relief–with a big chunk being siphoned off for Messrs Williams, Gluckstern, and Altman–at our expense.

This is pure robbery, enabled by a greedy government.

But, wait there’s more. The California legislature just voted for the initial funding of the $68 billion rail line from Los Angeles to California. I just want you to take a moment and think about that. $68 billion. For a train. A train that no one will ride because it will be cheaper to fly between the two cities. Gillespie talks about how this passed over fierce opposition in the electorate.

Electorate, what electorate? Obama and Pelosi are the ones who matter.

Or rather, Obama and Pelosi are the ones who matter when you know you don’t have the courage to take on your public unions in Sacramento and are planning to go hat-in-hand to the federal government for a bailout when your state’s economy crashes into a grove of fig trees at 200 miles per hour. Prediction: Appeasing the great and powerful O will pay off with federal dollars when weak-willed legislators prove utterly unable to defuse the state’s pension bomb. Also, if Obama wins reelection, perhaps he’ll ride in on his unicorn and save California from the education cuts that are almost certainly likely to happen now that Brown’s tax initiative is likely doomed.

Yes, that will be us, the non-Californians, making sure the state can build this gigantic white elephant of a public work. According to their own estimates, the rail will pay for itself … sometime in the late 22nd century.

So that’s the economy. What about the law?

Parents who transport a youngster without a car seat and lose the child in a fatal traffic accident may have their surviving children removed by social welfare authorities, the California Supreme Court decided unanimously Thursday.

The state high court ruled in favor of Los Angeles County social workers who placed two young boys in foster care after their 18-month-old sister, held on the lap of an aunt, was killed when a driver ran a stop sign and plowed into the car their father was driving.

The ruling permits counties to remove children in such cases even if the child’s death was not caused by criminal negligence or abuse. Social welfare agencies also are not required to show that the fatal conduct posed a risk to the surviving children, the court said.

We all know that the best way to deal with an unimaginable tragedy is to seize someone’s kids.

Now, to be fair, this was not exactly an ideal family. There were 20 people living together and there was evidence that the children were neglected. However, as we have learned about a million times, once you establish a precedent, it applies to everyone. All law enforcement, anti-terror and bureaucratic abuses are justified by the worst case scenarios and then applied to scenarios that we didn’t ever imagine they’d apply to.

At some point, California is just going to implode — fiscally, legally, culturally and morally. The only thing we can do is take in the good people as they flee the chaos.

The Least Surprising Mortgage Story

You remember the Tobacco settlement, don’t you? Based on dubious claims that smoking costs the states healthcare money, 46 states entered into an agreement that (1) froze the market for cigarettes in favor of a cartel existing companies; (2) took hundreds of billions from those companies, which they simply passed on as price hikes to the captive market; (3) paid lawyers tens of millions of dollars; (4) poured money into states ostensibly for healthcare and anti-smoking initiatives that, in the end, went into the same ratholes all other taxes went to.

We’re seeing the same script play out with the mortgage bubble. The big banks are more powerful and have a bigger market share than before. They’ve paid lots of money to various governments, and

Hundreds of millions of dollars meant to provide a little relief to the nation’s struggling homeowners is being diverted to plug state budget gaps.

In a budget proposed this week, California joined more than a dozen states that want to help close gaping shortfalls using money paid by the nation’s biggest banks and earmarked for foreclosure prevention, investigations of financial fraud and blunting the ill effects of the housing crisis. California was awarded more than $400 million from the banks, and Gov. Jerry Brown has proposed using the bulk of that sum to pay the state’s debts.

The money was part of a national settlement valued at $25 billion and negotiated with five big banks over abuses in their mortgage and foreclosure processes.

Fifteen states, so far, have admitted they will use all or most of the settlement money like general revenue. This is being justified as “economic development”.

Is anyone surprised? Is anyone at all shocked that state governments took one look at the mortgage industry and said, to paraphrase what Dave Barry said about the Tobacco Settlement: “You’re making billions by selling mortgages to people who can’t afford them and then selling the securities to investors the Feds bail out. We want a piece of that action!”

Really, the only thing missing is warning labels on mortgage documents. I’m sure they’re working on that.

FM and FM Reloaded

A couple off weeks ago, the SEC indicted a number of executives from Fannie Mae and Freddie Mac for fraud. A detailed look at the indictment is here. Money quote is a long one, but I think you have to read it:

The SEC’s complaint against the former Fannie Mae executives alleges that, when Fannie Mae began reporting its exposure to subprime loans in 2007, it broadly described the loans as those “made to borrowers with weaker credit histories,” and then reported — with the knowledge, support, and approval of Mudd, Dallavecchia, and Lund — less than one-tenth of its loans that met that description. Fannie Mae reported that its 2006 year-end Single Family exposure to subprime loans was just 0.2 percent, or approximately $4.8 billion, of its Single Family loan portfolio. Investors were not told that in calculating the Company’s reported exposure to subprime loans, Fannie Mae did not include loan products specifically targeted by Fannie Mae towards borrowers with weaker credit histories, including more than $43 billion of Expanded Approval, or “EA” loans.

Fannie Mae’s executives also knew and approved of the decision to underreport Fannie Mae’s Alt-A loan exposure, the SEC alleged. Fannie Mae disclosed that its March 31, 2007 exposure to Alt-A loans was 11 percent of its portfolio of Single Family loans. In reality, Fannie Mae’s Alt-A exposure at that time was approximately 18 percent of its Single Family loan holdings.

The misleading disclosures were made as Fannie Mae’s executives were seeking to increase the Company’s market share through increased purchases of subprime and Alt-A loans, and gave false comfort to investors about the extent of Fannie Mae’s exposure to high-risk loans, the SEC alleged.

In the complaint against the former Freddie Mac executives, the SEC alleged that they and Freddie Mac led investors to believe that the firm used a broad definition of subprime loans and was disclosing all of its Single-Family subprime loan exposure. Syron and Cook reinforced the misleading perception when they each publicly proclaimed that the Single Family business had “basically no subprime exposure.” Unbeknown to investors, as of December 31, 2006, Freddie Mac’s Single Family business was exposed to approximately $141 billion of loans internally referred to as “subprime” or “subprime like,” accounting for 10 percent of the portfolio, and grew to approximately $244 billion, or 14 percent of the portfolio, as of June 30, 2008.

There’s a handy-dandy chart included. The two GSE’s claimed they had about $14 billion in subprime exposure. The SEC is alleging that the actual exposure was $360 billion. I know this must be shocking to the Left. We all know that government and its supported enterprises only lie when Republicans want to start a war. But there it is in black and white.

It has become an article of faith that Fannie and Freddie did not cause the financial crisis and the allegation they did is all part of a big Republican government hating lie (read here, here and here). And, to some extent, I agree. They didn’t “cause” the problem. But those analyses were based on numbers from FM-squared that turned out to be complete and total fabrications. Now, I agree that the financial crisis had multiple and complex causes. But even Krugman will have to admit that, at the absolute minimum, the GSE’s throwing hundreds of billions into subprime mortgages was adding serious fuel to the fire. FM2 may not have caused the crisis, but they made it a hell of a lot worse. And, seriously, what planet do you have to live on to have claimed, even before this came out, that the agencies guaranteeing half of the mortgages in the country had no culpability for the bubble?

But here’s the thing: let’s allow that FM2 were more of a “me-too” player, coming late to the subprime party. When you think about it, that’s almost worse. They couldn’t even time a bubble properly. They were the last sucker in the ponzi pyramid that was our national housing market. They gambled hundreds of billions — a bet the taxpayers ended up having to stand for — at the worst possible time. And saps like Krugman think they’re a model for healthcare?

And even if you don’t blame FM2 for the financial crisis, we can blame them for over a hundred billion in bailouts. We can blame them for paying for $100 million in executive salaries. We can blame them for lying their asses off by a factor of 25 in how exposed they were.

This isn’t a little deal. As Joe Biden would say, this is a Big Fucking Deal. But do you see the media screaming about it? Do you see a tenth of the outrage we see when some Wall Street asshole gets a $10 million golden parachute? Do you see all the FM2 defenders acknowledging that they were lied to? FM2 lost tens of billion of our money trying to buy into housing right before it collapsed. Shouldn’t that piss off someone on the Left?

Blow the Houses Up

This is the first of two posts, one on housing, one on banking. I’ll post the second one shortly.

Just when you thought it was safe to get back into the financial waters our dumbass government decides to resurrect the housing bubble — or at least try to.

First, there is the effort to maintain the high limit on conforming loans — that is, the loans that Fannie/Freddie will backstop. The upper limit on these loans recently declined from $730k to $625k (preferably on its eventual road to $0). But the Senate has passed an extension of the high limit under the apparent impression that poor people need the lower interest rates that come with conforming loans to buy their million dollar homes. Fortunately, the House is less keen on this idea.

And yet, it only gets better! Here comes Johnny Isakson (R-Real Estate Industry) with the SAVE Act. What the hell is the SAVE Act? I’m glad you asked.

The SAVE Act would require lenders to take into account, when underwriting the loan, potential savings from various energy savings features of the house. If a new appliance reduced your electric bill, Congress would require that the lender allow that ”savings” to used to bid for a higher priced house. The impact of the bill would be to allow for even higher debt-to-income ratios on the part of borrowers, as if high mortgage to income payments has had nothing to do with the mortgage crisis we are in.

Perhaps worse the bill would also direct appraisers to include energy savings into the value of the house. Sadly this is anything but “sensible accounting”. As any decent appraiser knows, a house is worth what someone will pay for it, not what the value of various improvements are. That’s why most residential appraisals are based upon comparable sales, and not simple cost or revenue accounting (marginal theory of value, anyone?).

My desk has a dent from me banging my head on it every time I read these stories. Is this not what got us into this mess? Complicated loans that no one understood that were predicated on the idea that housing prices would go up? Now we’re getting complicated loans that no one understands predicated on the idea that “green technology” will make houses more valuable. My developer in Texas trumpeted green building methods. It was nice but it didn’t make us pay more for the house. My current house is about as green as a black steer’s tuckus on a moonless prairie night, but I still bought it because the neighborhood was perfect. If green housing is worth more to buyers, the market will tell us.

No one in Congress is qualified to run the housing market. They need to stop pretending they can before they fuck things up even further.

The Taibbi Plan

Matt Taibbi, one of the key members of the More Clever than Smart Club, has an essay on what he would have OccupyWallStreet demand. It’s making the rounds. Let’s go through it. I’ve almost finished reading The Big Short, a book you really should read to understand the recent financial crisis. So this will serve two purposes: responding to Taibbi and talking about what I learned from Michael Lewis.

1. Break up the monopolies. The so-called “Too Big to Fail” financial companies – now sometimes called by the more accurate term “Systemically Dangerous Institutions” – are a direct threat to national security. They are above the law and above market consequence, making them more dangerous and unaccountable than a thousand mafias combined. There are about 20 such firms in America, and they need to be dismantled; a good start would be to repeal the Gramm-Leach-Bliley Act and mandate the separation of insurance companies, investment banks and commercial banks.

I don’t entirely disagree with this point. I thought as much in 2008 when we were told we had to bail out companies because they were “too big to fail”. If that’s the case, we need to stop them from being so big. We’ve broken up monopolies before; I don’t see why we should stop now.

That having been said, I’m dubious that this will achieve anything. As Reihan Salam points out, other countries have done fine with the same system. This idea hinges one whether you accept the idea that companies are too big to fail. I’m not sure I do.

2. Pay for your own bailouts. A tax of 0.1 percent on all trades of stocks and bonds and a 0.01 percent tax on all trades of derivatives would generate enough revenue to pay us back for the bailouts, and still have plenty left over to fight the deficits the banks claim to be so worried about. It would also deter the endless chase for instant profits through computerized insider-trading schemes like High Frequency Trading, and force Wall Street to go back to the job it’s supposed to be doing, i.e., making sober investments in job-creating businesses and watching them grow.

Several problems with this one, which is a favorite of the Left. First, a transaction tax will never go away after it’s “paid” for the bailout (which is already mostly paid back). It will stay with us longer than the phone tax that was instituted for the Spanish-American War and was repealed in … 2006. Moreover, the biggest outstanding bailouts are Chrysler, GM and Freddie/Fannie. How is a transactions tax going to punish them?

Second, the big problem here was not high frequency trading, which is a minor irritation. It was the entire system acting stupidly with mid- to long-term investments. Credit default swaps and collateralized debt obligations were sold with the anticipation of years of risk-free revenue. Howie Hubler didn’t lose $9 billion on high-frequency trading; he lost it betting on huge CDO’s.

Which brings me to a point that Taibbi doesn’t address at all — the ratings agencies. Michael Lewis makes it crystal clear that the ratings agencies — S&P and Moody’s — had no fucking clue what was going on. They would give ratings to mortgage bonds without bothering to find out what was in them. In fact, they specifically told their employees not to look. The result was that tranches of triple-B mortgage bonds were put together into CDO’s that they rated AAA. People — investors who were interested in “making sober investments in job-creating businesses and watching them grow” bought these, thinking they were as safe as Treasury Bonds. They clearly weren’t. And not only did the ratings agencies not suffer for their massive failure, Dodd-Frank strengthened their control of the market.

The primary influence of Wall Street on the financial crisis was that high-stakes mid-term gambles brought banks to their knees and they “had” to be bailed out. But perhaps an even greater influence was that the mortgage bond market created an upward suction on the mortgage market. People were making billions off of mortgage-based securities. To feed that money engine, more mortgages were needed. This created not only immense pressure but immense profits for mortgage brokers who sold people houses they couldn’t afford, sold them on bad ideas like option loans and sold no-document loans. The mortgage sellers didn’t care if the loans were good because they were selling them right to Wall Street. Wall Street didn’t care because they were selling them to each other.

Yes, there was pressure from the Community Reinvestment Act and ACORN. But that was a comparatively small effect. The tranches that did in the big banks and crashed the system were Alt-A: mortgages sold to people who had good credit scores. Everyone knew the mortgages sold to poor people were bad; it was the mortgages sold to middle class and wealthy people that broke the system.

A transaction tax does not address this problem at all. What would have addressed it was letting the banks go bust. People who bought bad mortgages suffered — they lost their homes, their credit rating and their savings. That’s what should happen when you let the bank talk you into doing something stupid. But the banks didn’t suffer.

Here’s a better idea that would replace Taibbi’s points (1) and (2). Rewrite Dodd-Frank so that any company that is bailed out in future has to fire their Board of Directors. Rewrite it so that companies that are bailed out will be eventually liquidated or broken up. Re-inject moral hazard so that companies see bailout as a last resort, rather than a first one.

3. No public money for private lobbying. A company that receives a public bailout should not be allowed to use the taxpayer’s own money to lobby against him. You can either suck on the public teat or influence the next presidential race, but you can’t do both. Butt out for once and let the people choose the next president and Congress.

I have no problem with this … if it includes agencies like ACORN that get loads of public money as well as public employee unions and public employees and government contractors (which would often include me). What Taibbi wants is to single out only some of the people sucking on the public teat; the ones he doesn’t like. Everyone else can go ahead.

4. Tax hedge-fund gamblers. For starters, we need an immediate repeal of the preposterous and indefensible carried-interest tax break, which allows hedge-fund titans like Stevie Cohen and John Paulson to pay taxes of only 15 percent on their billions in gambling income, while ordinary Americans pay twice that for teaching kids and putting out fires. I defy any politician to stand up and defend that loophole during an election year.

I sort of agree with this one. I see no reason why a businessman earning half a mil in salary should be taxed at twice the rate of a hedge-fund manager. The carried interest rule was a mistake.

However, I doubt this will actually work. People do not get rich by allowing the government to figure out how to tax them more. And the carried interest rule exists for a reason. Jim Manzi has pointed out that it would be child’s play for hedge fund managers to shift the funds so that they become capital gains or other forms of equity.

A better idea would be an overhaul of the tax system that keeps it simple and eliminates the complexities that allow income to be sheltered and fed the financial doomsday machine.

5. Change the way bankers get paid. We need new laws preventing Wall Street executives from getting bonuses upfront for deals that might blow up in all of our faces later. It should be: You make a deal today, you get company stock you can redeem two or three years from now. That forces everyone to be invested in his own company’s long-term health – no more Joe Cassanos pocketing multimillion-dollar bonuses for destroying the AIGs of the world.

This would be a huge mistake, I think. We have attempted this before and the result has always been bad Unintended Consequences. If you force them to get company stock, what’s going to happen? Well, precisely what happened in the 90’s — a stock market bubble. You’re going to have CEO’s deliberately or fraudulently inflating their stock so they can cash out.

The principle is also warped, in my opinion. If a company wants to pay bonuses to people before they do anything, let it be on their own head. We already have “say on pay” thanks to Dodd-Frank. As long as we don’t bail them out — or at least make bailout conditional on canceling bonuses — this problem will take care of itself. We don’t need to stop companies from being stupid; bankruptcy will do that for us.

This post and my response circles what I’m thinking about OWS. It is a typical liberal event. They have correctly identified the problem: big business has too much influence in Washington and vice-versa. But they are dumb as a bag of hammers when it comes to the solution. Taibbi’s proposal, lauded in liberal circles as “restrained”, would inevitably create another bubble, would create massive legal challenges that would tangle up the courts and would not address some of the biggest problems: the ratings agencies and the government’s willingness to cover up the stupidity of investors.

We turned down this road with TARP. Now is not the time to double down. Now is the time to work the problem.