Robert Reich

Chancellor's Professor of Public Policy, University of California at Berkeley; Author, 'Aftershock'

Break Up the Big Banks, Says the Dallas Fed

Posted: 03/29/2012 2:44 pm

As the Supreme Court shows every sign of throwing out "Obamacare" and leaving 30 million Americans without health insurance, another drama is being played out in the quiet corridors of the Federal Reserve system that may affect even more of us.

Taxpayers will be on the hook for another giant Wall Street bailout, and the economy won't be mended, unless the nation's biggest banks are broken up.

That's not just me talking, or the Occupier movement, or that wayward executive who resigned from Goldman Sachs a few weeks ago. It's the conclusion of the Dallas Federal Reserve, one of the most conservative of the Fed's regional banks.

The lead essay in its just released annual report says a cartel of giant banks continues to hobble the recovery and poses an ongoing danger to the economy.

Wall Street's increasing power remains "difficult to control because they have the lawyers and the money to resist the pressures of federal regulation." The Dodd-Frank act that was supposed to control Wall Street "leaves TBTF [too big to fail] entrenched."

The Dallas Fed goes on to argue that the Fed's easy money policy can't be much help to the U.S. economy as long as Wall Street is "still clogged with toxic assets accumulated in the boom years."

So what's the answer, according to the Dallas Fed? It's "breaking up the nation's biggest banks into smaller units."

Thud. That's the sound the report hitting the desks of Wall Street executives. They and their Washington lobbyists are doing what they can to make sure this report is discredited and buried.

When I spoke with one of the Street's major defenders in the Capitol this morning he snorted, "Dallas represents small regional banks that are jealous of Wall Street." When I reminded him the Dallas Fed was about the most conservative of the regional banks and knew firsthand about the dangers of under-regulated banks -- the Savings and Loan crisis ripped through Texas like nowhere else -- he said, "Dallas doesn't know its [backside] from a prairie gopher hole."

So as Republicans make the repeal of "Obamacare" their primary objective (and Alito, Scalia, Thomas, Roberts and perhaps Kennedy sharpen their knives) another drama is taking place at the Fed. The question is whether Bernanke and company in Washington will heed the warnings coming from its Dallas branch, and amplify the message.

Robert Reich is the author of Aftershock: The Next Economy and America's Future, now in bookstores. This post originally appeared at RobertReich.org.

Bank of America Sold Card Debts to Collectors Despite Faulty Records

By Jeff Horwitz

MAR 29, 2012 6:31pm ET

Bank of America has sold collections agencies rights to sue over credit card debts that it has privately noted were potentially inaccurate or already repaid.

In a series of 2009 and 2010 transactions, Bank of America sold credit card receivables to an outfit called CACH LLC, based in Denver. Co. Each month CACH bought debts with a face value of as much as $65 million for 1.8 cents on the dollar. At least a portion of the debts were legacy accounts acquired from MBNA, which Bank of America purchased in 2006.

The pricing reflected the accounts' questionable quality, but what is notable is that the bank could get anything at all for them. B of A was not making "any representations, warranties, promises, covenants, agreements, or guaranties of any kind or character whatsoever" about the accuracy or completeness of the debts' records, according to a 2010 credit card sales agreement submitted to a California state court in a civil suit involving debt that B of A had sold to CACH.

In the "as is" documents Bank of America has drawn up for such sales, it warned that it would initially provide no records to support the amounts it said are owed and might be unable to produce them. It also stated that some of the claims it sold might already have been extinguished in bankruptcy court. B of A has additionally cautioned that it might be selling loans whose balances are "approximate" or that consumers have already paid back in full. Maryland resident Karen Stevens was the victim of one such sale, which resulted in a three-year legal battle (see related story).

Bank of America declined requests to comment for this story, other than to say through spokeswoman Betty Riess that it works with credit card customers to try to resolve delinquent debt issues. CACH did not respond to several phone and email messages seeking comment on the terms of its purchases.

Some industry observers said that the language in Bank of America's sales documents should be regarded as standard legalese intended to protect it against a disgruntled buyer's legal claims. And even though Bank of America refused to stand behind the accuracy of the records it sold, debt buyers are the ones who make the call to sue.

"The buyer has the primary responsibility to test the … quality of what they're buying," says Samuel Golden, a former OCC ombudsman who is a managing director at consulting firm Alvarez & Marsal in Houston, Texas.

Collectors' responsibilities aside, other banks' sales agreements suggest Bank of America's standards are emblematic of wider industry practice that raises risk management concerns. For less than $1.2 million a month — a rounding error on B of A's income statement — the company sold CACH accounts that raise regulatory and reputational questions about the accuracy of its records and its disclosures to courts.

Industry Practice

As the originators of credit card loans, banks are at the headwaters of the rivers of bad debt that flow into the collections industry. Over the last two years, Bank of America has charged off $20 billion in delinquent card debt. The bank settles or collects a portion of that itself and retires other accounts when borrowers go bankrupt or die. An undisclosed portion of the delinquent debt gets passed along to collectors. Once sold, rights to such accounts are often resold within the industry multiple times over several years.

Bank of America's caution that its card records may be incomplete or inaccurate suggests that documentation and accuracy problems may originate at the debt's source. Other banks' debt sale contracts acknowledge potentially large holes in their records as well.

One such example involves a 2009 U.S. Bancorp forward flow agreement, which outlines plans to sell a certain volume of delinquent accounts in the future. U.S. Bancorp's agreement states that it may have failed to credit borrowers for some payments and only guarantees the accuracy of account balances within a 10% margin of error.

Teri Charest, a spokeswoman for the bank, noted that the contract had expired and said that, regardless of such past contractual language, the bank scrubs its card data and that the claims it sells are accurate.

JPMorgan Chase, meanwhile, drafted an agreement to sell $200 million of credit card debt to Palisades Collection in 2008, even though records proving the debt might be unavailable for close to half the claims. "Seller represents and warrants that documentation is available for no less than 50% of the Charged-off Accounts," JPMorgan Chase's sales agreement stated.

The bank declined to comment. Palisades' chief counsel Seth Berman says the company has not bought Chase card debt in several years, but that its standards were always high.

The U.S. Office of the Comptroller of the Currency is already investigating JPMorgan Chase's handling of credit card debt records, as reported by American Banker earlier this month. A group of current and former employees described at the time how the bank had sold card accounts previously deemed "toxic waste" and which suffered from errors in the amounts being claimed.

CACHing In

At Bank of America, records declared unreliable yet sold to CACH were used to file thousands of lawsuits against consumers, according to a review of hundreds of cases in the state courts where collection suits are typically filed. The overwhelming majority of cases end in default judgments, which are awarded to creditors when borrowers don't show up to contest the claims made against them.

In cases where debtors do challenge collections demands in court, the original bank-creditor must testify about the documentation supporting the claims. In several such instances, people identified as Bank of America employees have submitted affidavits attesting to the validity of debts sold by the bank to collections firms.

Even though Bank of America previously disavowed "the accuracy of the sums shown as the current balance," the sworn statements vouch for the borrowers' debts down to the penny and declare that the bank's "computerized and hard copy records" back the claims. There are other possible discrepancies, as well: the affidavits state that B of A "has no further interest in this account for any purpose," while the sales contracts reference a "revenue sharing plan."

The prospect that B of A was selling unreliable credit card debts did not deter CACH from buying them. A subsidiary of SquareTwo Financial, CACH does not collect debts itself. Instead, it operates like a restaurant franchiser, acquiring rights to the delinquent debts that are the raw materials of the collections business. It then works with law firms around the country that do the actual collections work, providing them with debt files, court witnesses and other services.

In thousands of cases in state courts, CACH has appended a single page from its purchase agreements with Bank of America attesting to its ownership of delinquent credit card debt. CACH has omitted from many such filings the more than 30 additional pages where Bank of America disclaims the accuracy of its debt records. Even so, attorneys affiliated with CACH have cited the reliability of Bank of America's records as the foundation for their collections lawsuits.

In the case involving CACH in Duval County, Florida, a person described as B of A "Bank Officer" Michelle Samse swore in an affidavit that "There is due and payable from WENDY CODY as of 9/18/2009 the sum of $12266.83." The Samse affidavit, typical of many others, went on to say "The statements made in this affidavit are based on the computerized and hard copy books and records of Bank of America, which are maintained in the ordinary course of business." Attempts to contact Samse and Cody through Bank of America switchboards and public records searches were unsuccessful.

Trust Us

The degree of precision attested to regarding Cody's debt is curious, considering that Bank of America declared it was unable to produce records to back it up. "[T]he original contract in this matter has been destroyed, or is no longer accessible," Semse's affidavit states. "This affidavit is to be treated as the original document for all purposes."

The affiliate representing CACH in the Cody case was Collect $outheast, which uses the phrase "Let us show you the MONEY!" in company promotions. Collect $outheast and Florida attorneys representing CACH in other cases did not respond to requests for comment.

Taras Rudnitsky, a consumer defense attorney in Lake Mary, Florida has regularly defended consumers against lawsuits filed by CACH affiliates in Duval County. He says he regularly demands that debt buyers file banks' sales agreements with the court and invariably runs into stiff opposition.

"In every single case I have involving a debt buyer, they refuse to produce a forward flow agreement," he says, referring to the term for sales contracts under which banks agree to sell a specific number of delinquent accounts in the future. "When push comes to shove, the case disappears."

Weak Link

For individual clients, dismissal of such a case is a victory, but such outcomes are the exception. In the vast majority of collections suits, consumers fail to respond to card payment demands and become liable for default judgments, says Peter Holland, who runs the University of Maryland Law School's Consumer Defense clinic and has collected some of the forward flow agreements. As a result, the questionable reliability of second-hand debt claims is failing to receive the attention it deserves, he says.

"The [terms of] forward flows are being hidden from the public and from the courts," says Holland. "When the banks say explicitly that they don't have the documentation, that's something courts need to know. When a bank says a balance is 'approximate,' that's something courts and consumers need to know."

To date, it is debt collectors who have been the main focus of complaints and lawsuits alleging wrongdoing. In the past year alone, collections firms have paid out a number of multi-million dollar settlements over allegations they robo-signed affidavits, failed to produce evidence to support payment demands and sued consumers over debts that were no longer owed.

According to a trade organization for the collections industry, much of the criticism of collectors' records stems from banks' failure to provide adequate documentation of debts.

"We're not getting what we need from the seller," says Mark Schiffman, a spokesman for the American Collections Association, which wants to see better recordkeeping and more documentation included in debt sales. "Consumer groups want to see original contracts and original documentation. That would make a lot of these debts disappear because a lot of that documentation may not exist."

Regulatory Interest

Washington regulators are beginning to look at what responsibility banks have for wrongful collections activity. But questions about jurisdiction and whether banks will get roped in remain open.

"Not enough information [is] flowing through to debt collectors," says Tom Pahl, an assistant director in the Federal Trade Commission's division of financial practices. Despite its concern, the FTC lacks the authority to regulate financial institutions

"We can't reach the banks to say 'Thou shalt file the following pieces of information with the loans,'" Pahl says. "We're trying to do most of this through either law enforcement, which is case-by-case, or by jawboning the industry."

The Consumer Financial Protection Bureau has jurisdiction over credit cards and last month announced plans to take a close look at the collections industry. The bureau's interest has been heightened by revelations of abuses by mortgage servicers, including robo signing of affidavits, according to spokeswomen Jennifer Holland.

The CFPB is "very concerned that the same shortcuts and violations may be occurring with other kinds of debt collection," she says.

The OCC, which likewise oversees banks, declined to comment on specific institutions' sales of credit card receivables. However, it expects banks to adhere to high standards regarding account records, especially in cases where institutions attest under oath to their accuracy, according to OCC spokesman Bryan Hubbard.

"There may be reasons it's hard to do. Large portfolios being bought. Systems integration. But banks are still accountable for maintaining accurate records," says Hubbard.

Program to aid unemployed homeowners provides little relief

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

March 3, 2012

Only a fraction of the $7.6-billion federal Hardest Hit Fund has been paid out to needy borrowers. California has provided homeowners less than 2% of the federal funds it received, as of last year.

A $7.6-billion federal program to help unemployed homeowners stave off foreclosure has provided little relief two years after being unveiled, with less than $218 million of the money paid out to needy borrowers as of Jan. 1.

California, which was allocated nearly $2 billion from the Hardest Hit Fund, provided less than $38.6 million in assistance for 4,357 borrowers by the end of last year, according to the state's latest report to the Treasury Department.

That amounted to less than 2% of the federal funds available to the state's Keep Your Home California program.

"It's about helping the homeowner, and that's not happening," said Bruce Marks, head of the foreclosure counseling group Neighborhood Assistance Corp of America. "As we speak, there are thousands of people losing their homes."

The Hardest Hit program was funded by the U.S. Treasury Department with money left over from the federal government's TARP program. States have earmarked about 70% of the money to keep unemployed homeowners current on their mortgage payments or to help borrowers catch up on missed payments. The rest is set aside for other relief programs, such as reducing mortgage balances and helping borrowers move after losing their homes. In addition to California, 17 other foreclosure-torn states and the District of Columbia were eligible for funds.

Government officials, lenders and housing advocates offer a variety of explanations for why the money has not been spent, including a slow-moving bureaucracy and the government's inability to make eligible homeowners aware of the program. For example, state and federal officials said California's Employment Development Department declined to mail information about the program to laid-off workers applying for unemployment benefits, citing legal constraints.

In Oregon, state labor officials aggressively promoted the program to residents on unemployment. It led to 16.4% of the available federal funds being distributed as of Dec. 31 — the most of any state.
"I really, really don't understand why that unemployment program isn't used more" to promote the program, said Paul Leonard, California director of the Center for Responsible Lending, an advocacy group.

A California Employment Development Department spokesman did say the program was promoted on the agency's website and on its Facebook page. Samuel Herrera, 59, said he is struggling to keep up with the payments on his Bakersfield home after he was out of work for three months last year. Herrera said he went to a jobs center run by the state unemployment department last year and asked if there were any programs for borrowers. No one mentioned the Keep Your Home California program, he said.

"I am always looking for whatever news and new programs that come out to help homeowners working to pay their mortgages," Herrera told The Times, speaking in Spanish. "I am sorry I didn't know about it, because immediately when I lost my job I went to unemployment, and I asked them if there were any new programs to help me." State officials said another reason for the program's poor performance was that lenders would not go along with a plan to write down mortgage balances.

California, Nevada and Arizona jointly devised a plan to provide mortgage relief funds to struggling borrowers only if banks and loan investors agreed to reduce the principal owed on the loan by a matching amount. For instance, a $25,000 principal reduction from the lender would be doubled, producing a $50,000 benefit to the borrower.

State officials say banks, loan investors and the government-owned mortgage giants Fannie Mae and Freddie Mac declined to go along with the plan.

"I think the biggest reason is the banks are not participating in the principal-reduction piece," said Diane Richardson, legislative director for the California Housing Finance Agency, which developed the state's program. "They are choosing not to participate for whatever reason."California is now considering helping homeowners without lender participation, state housing agency spokeswoman Evan Gerberding said.

"That is something we might consider," she said. "We are constantly looking at ways to improve the program and make it more accessible to homeowners."Many lenders have adamantly opposed principal write-downs, arguing that they are not worth the cost and that they would create a "moral hazard" by rewarding delinquent borrowers while others get nothing.

Edward DeMarco, head of the independent federal agency that oversees Fannie Mae and Freddie Mac, has contended that reducing principal on mortgages owned or guaranteed by Fannie and Freddie was not consistent with his responsibility to protect taxpayers. The government has pumped $183 billion into the companies, which were seized in 2008 to prevent their bankruptcy.

Bank and government officials say another reason is that many homeowners have simply chosen not to participate, reasoning that they paid inflated prices for their homes and that it no longer makes financial sense to keep the mortgage.Whatever the reasons, housing advocates say many of the nearly 1 million Americans who lost their homes to foreclosure last year might not have if the program had been better managed.

Federal and state officials acknowledge the program started slowly but contend that it is gaining traction. In addition to the funds used by the end of last year, "considerably more has been committed," said Mark McArdle, director of the Hardest Hit Fund for the Treasury Department. California had allocated $50 million through the end of February and estimates that $200 million is in the pipeline, according to the state housing finance agency.

The program varies from state to state. In California, the funds can be used to help out-of-work homeowners by making monthly payments of up to $3,000 for nine months. During 2011, the state's housing finance agency delivered less than $25 million in such payments to 3,551 borrowers.

A recent $25-billion settlement struck by state attorneys general and the Justice Departmentrequires the five largest mortgage servicers to reduce billions of dollars in principal. That deal raised hopes of higher participation in the California, Arizona and Nevada programs by servicers who could help borrowers further with the additional matching funds at no cost.

One borrower who did get help was Gabriela Barrios of Compton, a single mother of two who had her loan balance cut by $40,000 and her interest rate lowered under the Keep Your Home California program.

Barrios, a clinical coordinator for United Healthcare, received first-time home buyer assistance from the city of Compton and a loan from the state Housing and Finance Department."I felt it was a blessing, like God sent me a blessing," Barrios said.scott.reckard@latimes.com  alejandro.lazo@latimes.com

America’s Sickest Housing Markets

Posted: July 13, 2012 at 6:48 am

Read more: America’s Sickest Housing Markets - 24/7 Wall St. http://247wallst.com/2012/07/13/americas-sickest-housing-markets/#ixzz20jXiEDBM

According to data released earlier this month, asking home prices in the nation’s largest metro regions rose for the fourth time in five months. This is another positive sign for the national real estate market. However, a review of the data, provided by home price authority Trulia.com, indicates that many of the country’s largest cities continue to struggle due to weak demand, high foreclosure rates and negative
equity.

Read: America’s Sickest Housing Markets

While many of the largest housing markets are showing positive signs, based on both vacancy rate and average year-over-year home price decline, many markets are taking longer than most to recover. Several of these are a product of the burst housing bubble, while others have been in trouble for decades. Based on housing data, 24/7 Wall St. identified the five “sickest” housing markets in America.

Three of the five worst housing markets are in California. They are Sacramento, San Diego and the Riverside-San Bernardino-Ontario metro region — the central part of the state often referred to as the “Inland Empire.” The remaining two cities are Virginia Beach, Va., and Toledo, Ohio. Each of these areas averaged a decline in home prices between the first six months of 2011 and the first six months of 2012.

These housing markets also have high home vacancy rates, indicating a lack of interest in these regions. High vacancy rates — the percentage of homes currently unoccupied — also tend to depress property values. Each of the five markets is among the top 25 for the highest home vacancy rates and rental vacancy rates. Riverside and Virginia Beach are in the top 15 for each. Toledo has the highest home vacancy rate in the country, at 5.6% of homes.

Trulia’s chief economist, Jed Kolko, told 24/7 Wall St. that the underlying causes of home price declines are high vacancy rates, foreclosures and negative equity. He explained that in many cases the burst housing bubble, and subsequent collapse of home prices, were the primary causes of these metro regions real estate woes.

Of the five markets on our list, three had among the largest declines in home prices during the recession. Housing in Sacramento and Riverside lost over half of their value during the decline. “Markets like Sacramento and Riverside-San Bernardino saw a lot of overbuilding during the bubble and therefore had more housing than there was demand. They have a lot of foreclosures still on the market, their short sales are still a big share of home sales,” said Kolko.

Indeed, according to the first quarter 2012 negative equity report from real estate site Zillow, each of the three California markets have among the largest proportions of homes with mortgages worth less than the current home value, known as underwater mortgages. In San Diego, nearly one in 10 mortgages is underwater.

The troubles in other markets, Kolko explained, are more the result of long-term economic difficulty, as in the case of Toledo, for example. Toledo and many other Midwestern locations, he explained, “are not suffering from overbuilding so much as from years of slow job growth and slow demand.” A review of Realtor.com’s search ranks, which rate the amount of interest in a housing market based on incoming searches, shows that Toledo is the second-least searched large housing market in the country.

RealtyTrac’s foreclosure rates for the first six months of the year also reflect the trouble these markets are in. Four of the five markets on our list are in the top third for homes in foreclosure. The Riverside-San Bernardino-Ontario metro area has the highest foreclosure rate in the country among the 75 markets we reviewed, with one out of every 39 homes with mortgages foreclosed upon between January and June.

Also Read: The Fastest Growing Cities in America

To identify the America’s sickest housing markets, 24/7 Wall St. reviewed U.S. Census Bureau home and rental vacancy data for the 75 largest metropolitan statistical areas in the country for the first quarter of 2012. We then narrowed the list to markets where home vacancy rates had declined from the previous quarter to eliminate those markets that are showing real improvement. Using a six-month average of year-over-year declines in asking price from Trulia.com, we excluded metro regions where asking prices had shown a trend of increasing in the past six months. Finally, we excluded any remaining markets with positive housing data. These data sets included: negative equity and home price declines from Zillow.com, foreclosure rates from Trulia.com, home price forecasts from Fiserv and time on market and real estate search popularity from Realtor.com.

These are America”s sickest housing markets.

Read more: America’s Sickest Housing Markets - 24/7 Wall St. http://247wallst.com/2012/07/13/americas-sickest-housing-markets/#ixzz20jXRdKXS

5) Sacramento-Arden-Arcade-Roseville, Calif.

>Average annual list price decline: -7.2%

> Rental vacancy: 6.8%

> Homeowner vacancy: 2.5%

Asking home prices in the Sacramento metro region were down by 4.1% from June of this year compared to June of last year. Since they peaked in late 2005, home prices in the Sacramento metro region lost more than half of their value. This 54.7% drop is the sixth-largest decline among the country’s large housing markets. More than 2% of homeowners were in foreclosure between January and June of this year, the sixth-highest proportion of the 75 metropolitan areas considered. The number of home listings in the metro region has decreased by almost 36% since April 2011. In March activists from the region visited President Obama’s Sacramento reelection offices demanding that government sponsored enterprises reduce principals on mortgage loans to reflect the present value of homes in the area.

4) Virginia Beach-Norfolk-Newport News, Va.

> Average annual list price decline: -3.4%

> Rental vacancy: 6.8%

> Homeowner vacancy: 2.8%

The housing market of Virginia’s south shore is still suffering from the recession — the average drop in list prices for the first six months of this year was 3.4%. Median home prices have plummeted almost 20% since peaking in 2007, but a disconnect between potential buyer incomes and housing prices in the Virginia Beach area seems to still exist.  The metropolitan area has a median list price that is almost 25% higher than the national average, while median incomes there are only about 13% higher than the national median, according to Fiserv 2011 fourth-quarter estimates. In February, the Virginia Beach Assessor’s Office released a projected fiscal year 2013 assessment of $48.7 billion for the value of all taxable property in the area. This represented a 3.7% decline from the previous year, with 79% of properties receiving a decreased assessment value.

3) San Diego-Carlsbad-San Marcos, Calif.

> Average annual list price decline:-3.2%

> Rental vacancy: 8.6%

> Homeowner vacancy: 2.7%

With nearly 165,000 home mortgages underwater, the greater San Diego metropolitan area has one of the nation’s highest number of homes in negative equity. Home values in the San Diego region had the 13th-largest drop (37.1%) from their peak in 2006 to the first quarter this year of all metropolitan areas reviewed. Underwater homes are a problem, and the region has $20.5 billion in total negative equity, with nearly 10% of homes under water. According to the North County Times, the assessed value of all taxable property in the county fell by 0.14% to $395.1 billion in 2011.

2) Toledo, Ohio

> Average annual list price decline: -6.8%

> Rental vacancy: 6.4%

> Homeowner vacancy: 5.6%

From January to June, 2012, Toledo has had some of the sharpest declines in housing list prices. Between January 2011 and January of this year, for example, asking prices fell 11.7%. Between the fourth quarter of 2011 and the fourth quarter of this year, Fiserv project that median home value in the region will fall by nearly 3%, which would be one of the largest declines among large metro regions in the U.S. Toledo has the single highest homeowner vacancy rate among largest metro areas, with a rate of 5.6% in the first quarter 2012. In the Toledo metropolitan area, 37.5% of homeowners with mortgages are in negative equity.

Also Read: Home Sellers Smarter than Realtors Think

1) Riverside-San Bernardino-Ontario, Calif.

> Average annual list price decline: -1.8%

> Rental vacancy: 9.4%

> Homeowner vacancy: 4.4%

Riverside is the third California metropolitan area suffering from a sick housing market. In this region, homeowners paying a mortgage have $41.5 billion in negative equity, the fifth-highest amount in the nation. Many of these homes are under water because median home prices plunged by 55.6% from their peak in 2006. The metro had an annual unemployment rate of 14.3% in 2010, the highest among the largest cities in the country (it was 11.8% in May 2012), and 12.3% of homeowners with a mortgage are 90 or more days delinquent on their payments — the ninth-highest rate. According to Southern California’s City News Service, the assessed value of all taxable property in the county is estimated to be $204.8 billion for the 2012-2013 fiscal year, a $300 million decline from the $205.1 billion assessment in the previous fiscal year. While the decrease is lower than previous years, it means things have yet to improve.

Michael A. Sauter, Lisa Nelson and Alexander E. M. Hess

 
Read more: America’s Sickest Housing Markets - 24/7 Wall St. http://247wallst.com/2012/07/13/americas-sickest-housing-markets/#ixzz20jWwwop2

Is eminent domain a way out of the housing crisis? By Joe Nocera

There are few counties in America in a rough shape as San Bernardino County in California.  During the housing bubble, the good times were very good.  But then came the bust. Today, San Bernardino County has one of the highest unemployment rates in the nation: 11.9 percent.  Home pricing have collapsed. Every second home is under water, meaning the homeowner owes more on the mortgage than the house is worth.  It is well documented that under water mortgages have high likelihood of defaulting and eventually, being foreclosed on. It also has been clear for some time that the best way to keep troubled homeowners in their homes is by reducing the principal on their mortgages, thus lowering their debt burden and more closely aligning their mortgages with the actual value of the home.  Which is why Greg Devereaux, the county’s chief executive officer, found himself listening intently when the folks from  Mortgage Resolution Partners came knocking on his door.  They had spent a year kicking around an intriguing idea: have localities buy underwater mortgages using their power of eminent domain and then write the homeowner a new reduced mortgage.

It’s principal reduction using a stick instead of a carrot.  When you first hear this idea, it sounds a little crazy.  Eminent domain take a mortgage?  But the more closely you look, the more sense it starts to make.  It would be a way to break the logjam that keeps mortgages in mortgage backed bonds securitizations from being modified. It could prevent foreclosures and stabilize the housing prices.  The core issue that Mortgage Resolution Partners is trying to solve is what might be called the securitization problem.  Bundling mortgages into securities and selling them to investors was, initially, a wonderful idea because it greatly expanded the amount of capital available for home ownership.  But the people who wound up owning the mortgages investors were diffuse, often with conflicting interests, while the mortgages were managed by services or trustees who didn’t actually own them.  The securitization contracts never anticipated that people might need to modify.

It has been nearly impossible to modify mortgages stuck in securitizations.  It turns out that there is nothing to prevent a government entity from using eminent domain to acquire a mortgage. ‘Eminent domain has existed for centuries”, said Robert Hockett, a law professor at Cornell who has served as an advisor to Mortgage Resolution Partners.  “And it is applicable to any kind of property, including a mortgage.”  What matters, Hockett continued, is two things: Is the entity paying fair value for the property, and is it for a legitimate public purpose?  Can there be any doubt that keeping people in their homes constitutes a legitimate public purpose?  This is a yoke around the American economy, said Steven Gluckstern, an entrepreneur with a varied career in insurance and finance who is the chairman of Mortgage Resolution Partner. “When people are underwater, their behavior changes. They stop spending.

There are 12 million homes that are underwater.  Is the answer to really just let them get foreclosed on?  Or wait for housing prices to rise?”  According to Gluckstern, the fact that the foreclosure crisis is continuing is precisely why housing prices aren’t rising, despite some of the lowest interest rates in history.  As for fair value, since the home has dropped dramatically in value, the mortgage is worth a lot less than its face value.  On Wall Street, in fact, traders are buying securitized mortgage bonds at a steep discount reflecting the true value of the mortgages they’re buying.  Yet the homeowner remains saddled with a mortgage that is unrealistically high.  The plan calls for the county to buy mortgages at a steep but fair, discount to its face value, and then to offer the homeowner a new mortgage that reflects much, though not all, of that discount.  (Fees and costs would be paid for by the spread.)  The money to buy the mortgages would come from investors.  Mortgage Resolution Partners is in the process of raising money.

The securitization industry is up in arms about this proposal. In late June, after the plan was leaked to Reuters, 18 organizations, including the association of Mortgage Investors, wrote a threatening letter to the San Bernardino board of supervisors claiming that the plan would inflict significant harm to homeowners in the county. Devereaux insists that no final decision has been made. But, he says, this is the first idea that anyone has approached us with that has the potential to have a real impact on our economy.  Other cities are watching closely to see what happens in San Bernardino.  We’re four years into a housing crisis.  It’s time to give eminent domain a try.

As Barclays CEO resigns

Libor manipulation scandal engulfs 16 top banks

By Christopher Marsden and Julie Hyland 4 July 2012

The Libor scandal, thus far focused on British-based Barclays bank, has revealed that global capitalism functions not as a free market, but as a rigged market controlled by contending groups of corporations, cartels and multi-billionaire speculators.

The sums involved in the manipulation of Libor (the London inter-bank lending rate) and its European equivalent, Euribor, are staggering. The most conservative estimate of the money accrued to the world’s top banks by these practices is £48 billion ($75 billion).

Libor and Euribor are two of the crucial mechanisms for setting interest rates on a vast array of financial products. Libor is the largest and most variable rate, covering ten currencies. It even helps determine the rate of the US dollar in the form of Eurodollars.

Traders in London, New York, Japan and elsewhere colluded to manipulate the Libor rate so as to make massive profits or conceal losses, at the direct expense of pension funds and mortgage and loan holders.

These practices—involving what the British Financial Services Authority (FSA) admits were a “significant number of employees”—played a major role in determining the extent of the global financial crash of 2008.

A former Barclays executive who was close to the bank’s Libor-setting operation told the Financial Mail that the Libor mis-quotes “gave an illusion of stability and was a key factor in masking the severity of the crisis.”

A legal case in the United States is seeking damages of £70 billion ($110 billion) from Barclays and almost £80 billion ($126 billion) from the UK government-owned Royal Bank of Scotland (RBS)—figures far in excess of the banks’ market valuations.

This alone would make it the financial crime of the century. Yet after investigations going back to 2007 in at least three countries, no one has been prosecuted. Instead, those responsible have earned millions upon millions.

It was not until this week that the two leading figures in Barclays, Chairman Marcus Agius and Chief Executive Bob Diamond, reluctantly resigned. Both can expect handsome severance packages.

Meanwhile, the British Conservative/Liberal Democrat government has done nothing other than promise yet another toothless parliamentary inquiry—the standard mechanism for burying every crime of the ruling elite from the Iraq war to the News of the World phone hacking scandal.

The reasons are obvious. Far more than a few dozen traders are involved. The 16 banks cited in the class action taken by the City of Baltimore, Charles Schwab Corp. and others include Barclays, RBS, HSBC, Bank of America, Citigroup, JPMorgan Chase, UBS and Deutsche Bank.

Their respective heads will all claim ignorance of the practices conducted by their traders, despite some of those directly involved saying they were acting under orders.

From at least 2007, the British Banking Association (BBA) and the UK’s regulatory authority, the FSA, were made aware that the Libor rate was being manipulated, but did nothing. Agius is the head of the BBA.

Action was taken in the UK, reluctantly, only in October 2009, after investigations were launched by the financial authorities in the US, Japan, Canada and Switzerland and by the European Commission following the collapse of Lehman Brothers in 2008 and the onset of the global banking crisis.

It was not until last month that Barclays was fined a total of £290 million ($455 million) by the US Commodity Futures Trading Commission, the US Department of Justice and the FSA, with the FSA’s penalty amounting to £59.5 million.

Derivatives and interest rate swaps governed by Libor are valued at $350 trillion and Eurodollar futures at $564 trillion. Barclays, having been granted immunity in return for cooperation, will no doubt consider their fine a very small price to pay indeed—as will all those concerned who have a great deal to hide.

In one exchange on April 16, 2008, a senior Barclays treasury manager informed the British Banking Association that the bank had not been reporting accurately. Stating that Barclays was not the worst offender, he declared, “We’re clean, but we’re dirty-clean, rather than clean-clean.”

Tellingly, the BBA representative responded, “No one’s clean-clean.”

Yesterday, Barclays directly implicated the Bank of England and the former Labour government in the scandal when it released a 2008 email sent by CEO Diamond following a phone call with the deputy governor of the Bank of England, Paul Tucker. Diamond wrote that Tucker had informed him that “senior officials in Whitehall” were concerned that Barclays’ Libor submissions were at the top end and suggested that they did not have to be so high.

The bank had indicated it was acting in accordance with instructions from the top in misreporting its borrowing costs. Diamond appears today before parliament’s Treasury Committee and more revelations of who knew what are expected to follow.

The fact that parliament is to investigate the scandal when leading politicians from all parties are implicated makes clear that no serious action is intended.

Among the senior Conservatives with intimate ties to the banks involved is Deputy Chairman Michael Fallon, a board member of the leading brokerage firm Tullett Prebon, which is cooperating with the FSA.

Prime Minister David Cameron’s close adviser, former party treasurer Michael Spencer, heads the brokerage firm ICAP, which is alleged to have manipulated Libor. Cabinet Office Minister Francis Maude was retained by Barclays to sit on its Asia-Pacific advisory committee between 2005 and 2009.

For Labour, the issue goes beyond a list of individuals with ties to the banks. It was Gordon Brown who, as chancellor in 1997, introduced the financial regulation system that gave free rein to the banks. Brown was praising this system as late as 2006, when he boasted that Labour’s “light touch regulatory environment” had enabled the City of London to capture a greater share of the foreign equity market than anywhere else in the world.

Even in the aftermath of 2008, Labour and the Tories handed over hundreds of billions to the very people who now stand accused of rampant criminality, including cheap money under the Bank of England’s “quantitative easing” policy. One of the Bank of England’s own staffers, Andrew Haldane, has estimated that when the full indirect costs are included, the figure for the total in public funds pumped into the British banks could rise to £7.4 trillion.

Both Labour and the Conservative/Liberal coalition government opposed the introduction of regulatory measures for the City of London banks, including the separation of retail and investment banking operations. Instead, the coalition government has tabled a few measures, some of which were required by the EU competition authorities, which will not be implemented until at least 2019.

Their collective attention was directed towards the imposition of savage spending cuts totalling well over £130 billion, designed to make working people pay for the crimes and gambling debts of the financial elite.

Last year, Diamond was invited by the BBC to give a keynote lecture on the ethics and culture of banking. The difficult concept of culture, he said, could best be defined by “how people behave when no one is watching.”

Much of the rest of his lecture was taken up with insisting on austerity for the majority of the population. “There is no better example than Greece”, he declared, of the need for “a reduction in public spending”. He added, “It’s no surprise then that the UK government has started doing just that…”

That year, Diamond’s remuneration was worth £17.7 million, including a £5.7 million tax payment made on his behalf. His bonus alone was worth £2.7 million.

Any action that may now be taken will seek to reconcile paying back the major corporate victims of the Libor manipulation and the strategic political requirement of maintaining the stability of the global financial system. Once again, the cost of this will be borne by working people through further raids on public finances.

Countrywide Used Loan Discounts To Buy Congress, Fannie Mae Execs, Other Government Officials: Report

By LARRY MARGASAK 07/05/12 12:04 PM ET

WASHINGTON — The former Countrywide Financial Corp., whose subprime loans helped start the nation's foreclosure crisis, made hundreds of discount loans to buy influence with members of Congress, congressional staff, top government officials and executives of troubled mortgage giant Fannie Mae, according to a House report.

The report, obtained by The Associated Press, said that the discounts – from January 1996 to June 2008, were not only aimed at gaining influence for the company but to help mortgage giant Fannie Mae. Countrywide's business depended largely on Fannie, which at the time was trying to fend off more government regulation but eventually had to come under government control.

Fannie was responsible for purchasing a large volume of Countrywide's subprime mortgages. Countrywide was taken over by Bank of America in January 2008, relieving the financial services industry and regulators from the messy task of cleaning up the bankruptcy of a company that was servicing 9 million U.S. home loans worth $1.5 trillion at a time when the nation faced a widening credit crisis, massive foreclosures and an economic downturn.

The House Oversight and Government Reform Committee also named six current and former members of Congress who received discount loans, but all of their names had surfaced previously. Other previously mentioned names included former top executive branch officials and three chief executives of Fannie Mae.

"Documents and testimony obtained by the committee show the VIP loan program was a tool used by Countrywide to build goodwill with lawmakers and other individuals positioned to benefit the company," the report said. "In the years that led up to the 2007 housing market decline, Countrywide VIPs were positioned to affect dozens of pieces of legislation that would have reformed Fannie" and its rival Freddie Mac, the committee said.

Some of the discounts were ordered personally by former Countrywide chief executive Angelo Mozilo. Those recipients were known as "Friends of Angelo."

The Justice Department has not prosecuted any Countrywide official, but the House committee's report said documents and testimony show that Mozilo and company lobbyists "may have skirted the federal bribery statute by keeping conversations about discounts and other forms of preferential treatment internal. Rather than making quid pro quo arrangements with lawmakers and staff, Countrywide used the VIP loan program to cast a wide net of influence."

The Securities and Exchange Commission in October 2010 slapped Mozilo with a $22.5 million penalty to settle charges that he and two other former Countrywide executives misled investors as the subprime mortgage crisis began. Mozilo also was banned from ever again serving as an officer or director of a publicly traded company.

He also agreed to pay another $45 million to settle other violations for a total settlement of $67.5 million that was to be returned to investors who were harmed.

The report said that until the housing market became swamped with foreclosures, "Countrywide's effort to build goodwill on Capitol Hill worked."

The company became a trusted adviser in Congress and was consulted when the House Financial Services Committee and Senate Banking Committee considered reform of Fannie and Freddie and unfair lending practices.

"If Countrywide's lobbyists, and Mozilo himself, were more strictly prohibited from arranging preferential treatment for members of Congress and congressional staff, it is possible that efforts to reform (Fannie and Freddie) would have been met with less resistance," the report said.

The report said Fannie assigned as many as 70 lobbyists to the Financial Services Committee while it considered legislation to reform the company from 2000 to 2005. Four reform bills were introduced in the House during the period, and none made it out of the committee.

Hit with staggering losses, Fannie and Freddie came under government control in September 2008. As of Dec. 31, 2011, the Treasury Department had committed over $183 billion to support the two companies – and there's no end in sight.

Among those who received loan discounts from Countrywide, the report said, were:

_Former Senate Banking Committee Chairman Christopher Dodd, D-Conn.

_Senate Budget Committee Chairman Kent Conrad, D-N.D.

_Mary Jane Collipriest, who was communications director for former Sen. Robert Bennett, R-Utah, then a member of the Banking Committee. The report said Dodd referred Collipriest to Countrywide's VIP unit. Dodd, when commenting on his own loans, said that he was unaware of receiving preferential treatment but knew his loans were handled by the VIP unit.

The Senate's ethics committee investigated Dodd and Conrad but did not charge them with any ethical wrongdoing.

_Rep. Howard "Buck" McKeon, R-Calif., chairman of the House Armed Services Committee.

_Rep. Edolphus Towns, D-N.Y., former chairman of the Oversight Committee. Towns issued the first subpoena to Bank of America for Countrywide documents, and current Chairman Darrell Issa, R-Calif., subpoenaed more documents. The committee said that in responding to the Towns subpoena, Bank of America left out documents related to Towns' loan.

_Rep. Elton Gallegly, R-Calif.

_Top staff members of the House Financial Services Committee.

_A staff member of Rep. Ruben Hinojosa, D-Texas, a member of the Financial Services Committee.

_Former Rep. Tom Campbell, R-Calif.

_Former Housing and Urban Development Secretaries Alphonso Jackson and Henry Cisneros; former Health and Human Services Secretary Donna Shalala. The VIP unit processed Cisneros's loan after he joined Fannie's board of directors.

_Rep. Pete Sessions, R-Texas, was an exception. He told the VIP unit not to give him a discount, and he did not receive one.

_Former heads of Fannie Mae James Johnson, Daniel Mudd and Franklin Raines. Countrywide took a loss on Mudd's loan. Fannie employees were the most frequent recipients of VIP loans. Johnson received a discount after Mozilo waived problems with his credit rating.

The report said Mozilo "ordered the loan approved, and gave Johnson a break. He instructed the VIP unit: `Charge him 1/2 under prime. Don't worry about (the credit score). He is constantly on the road and therefore pays his bills on an irregular basis but he ultimately pays them."

Johnson in 2008 resigned as a leader of then-candidate Barack Obama's vice presidential search committee after The Wall Street Journal reported he had received $7 million in Countrywide discounted loans.

The report said those who received the discounts knew the loans were handled by a special VIP unit.

"The documents produced by the bank show that VIP borrowers received paperwork from Countrywide that clearly identified the VIP unit as the point of contact," the committee said.

The standard discount was .5 waived points. Countrywide also waived junk fees that usually ranged from $350 to $400.