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.

Big Banks Could Rake In Up To $12 Billion Because Of HARP 2.0

The Huffington Post  |  By Bonnie Kavoussi Posted: 06/18/2012 11:38 am Updated: 06/18/2012 11:38 am

A government program meant to help struggling homeowners will at minimum help some struggling banks.

Big banks could rake in as much as $12 billion in revenue by refinancing the mortgages of homeowners that owe more on their homes than they are worth, according to an analysis by Nomura, a Japanese bank, cited by the Wall Street Journal.

The government last year announced an expanded version of HARP, known as HARP 2.0, which was meant to allow underwater borrowers that were current on their payments to refinance their mortgages at market rates. Instead, the program has allowed big banks to charge steep fees and above-market interest rates, all while refinancing mortgages they already handle, according to several news outlets.

Meanwhile, the homeowners getting their mortgages refinanced through the government program, known as the Home Affordable Refinance Program, or HARP, are likely to save as little as $2.5 billion, the WSJ calculates.

Today, roughly one in five homeowners are underwater on their mortgages, according to CoreLogic. Underwater homeowners are more likely to default on their mortgages than homeowners that are not underwater, multiple studies have found.

In March, American Banker reported that big banks have been profiting from HARP 2.0 by charging higher interest rates to existing borrowers. Amherst Securities came to a similar conclusion that month, saying banks were "charging higher rates to HARP borrowers and... earning massive profits on originations."

HARP 2.0 benefited banks from the outset, allowing them to shift the liability from big banks to Fannie Mae and Freddie Mac -- two government-sponsored enterprises -- for underwater mortgages refinanced through HARP 2.0 that go into default after big banks offload their mortgages onto Fannie and Freddie, The Huffington Post's Zach Carter reported last October. Fannie and Freddie previously were able to force the big banks that sent them ineligible loans refinanced through HARP that fall into default to pay for the losses.

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All that said, HARP 2.0 has helped some underwater homeowners emerge from the shadow of overwhelming debt, according to the San Francisco Chronicle. John Oliver of Vallejo, California, will save $171,000 because of his new JPMorgan Chase loan, he told the San Francisco Chronicle.

Buying A House Costs As Much As It Did During 2007 Housing Boom, Study Says

The Huffington Post  |  By Bonnie Kavoussi Posted: 06/15/2012 12:02 pm Updated: 06/15/2012 12:17 pm

Buying a house still is as expensive as it was during the height of the housing boom in 2007, according to a recent study by Andrew Davidson and Alexander Levin of Andrew Davidson & Co

In spite of falling housing prices, it still is as unaffordable to buy a house as it was during the height of the housing boom, according to a new study.

Even though housing prices and mortgage interest rates have hit record lows, buying a house still is as expensive as it was in 2007 -- when housing prices were astronomical -- because banks are requiring heftier down payments and have stopped letting borrowers make low initial payments, according to a recent study by Andrew Davidson and Alexander Levin of Andrew Davidson & Co., a financial research firm. (H/t the Wall Street Journal.)

Among non-agency loans, the total cost of buying a house (as a percentage of property value) has barely fallen since peaking in 2008 because the "equity cost" -- that is, the down payment -- has spiked since 2006 and stayed elevated, according to the study. Among non-agency loans, the "equity cost" of buying a house (as a percentage of property value) cost more between 2009 and 2011 than at any other time since the new millennium. The "equity cost" for all borrowers has more than doubled since 2006, according to the study.

So much for housing affordability.

This study demonstrates that the reality of the housing market is more complicated than it seems. Previous studies have found that homeownership now is cheaper than renting -- if you can afford it. Renting cost 15 percent more than homeownership at the end of last year, according to recent research by Deutsche Bank cited by the Wall Street Journal. Buying a house is also cheaper than renting in 98 of the 100 largest metropolitan areas, according to research by Trulia, a real estate website.

The 30-year mortgage interest rate hit record lows in May, according to Freddie Mac. That is largely thanks to efforts by the Federal Reserve tobring down interest rates to boost the economy. Housing prices also have continued to fall across the country, according to the S&P/Case-Shiller Home Price Indices. But homeownership still is a distant dream for many.

Number Of Homes At Risk Of Foreclosure Rose In May, Weighing On Property Values

AP  |  By ALEX VEIGA Posted: 06/14/2012 12:09 am Updated: 06/14/2012 12:56 pm

LOS ANGELES (AP) — Lenders initiated foreclosure proceedings against more U.S. homeowners in May, setting the stage for increases in home repossessions and short sales — scenarios that could further weigh down home values in coming months.

Default or scheduled-home-auction notices were filed for the first time against 109,051 homes last month. That's an increase of 12 percent from April and up 16 percent versus May last year, foreclosure listing firm RealtyTrac Inc. said Thursday.

The firm monitors documents filed on properties with mortgages that have gone unpaid. Once that process begins, homes can end up foreclosed-upon, sold at auction or via a short sale. A short sale is when the bank agrees to accept less than what the borrower owes on their mortgage.

May was the first month since January 2010 that the number of homes starting on the foreclosure path rose on an annual basis. But the trend has been visible in the monthly numbers, with four out of the first five months of this year recording increases over the preceding month. The data reflects how banks and mortgage servicers have been stepping up efforts this year to address unpaid mortgages.

Foreclosure activity, as measured by the number of homes receiving foreclosure-related notices, slowed sharply last year as banks grappled with allegations that they had been processing foreclosures without verifying documents. A $25 billion settlement reached in February between the nation's biggest mortgage lenders and state officials has since cleared the way for banks to move against homeowners who have fallen behind on their mortgage payments. "Lenders are starting to catch up with the delayed foreclosures of the past year and a half," said Daren Blomquist, a vice president at RealtyTrac. Some 33 states saw annual increases in homes entering the foreclosure process last month, with New Jersey, Pennsylvania and Florida posting the biggest gains.

Many of the homes now entering the foreclosure process could end up repossessed by banks. Going by the last five years, it could be as many as half. Some 8.7 million U.S. homes entered the foreclosure process between January 2007 and last month, RealtyTrac said. Out of those, 4.3 million properties ended up foreclosed-upon.

Still, the pace of home repossessions has been easing overall of late, with May being an exception.

Banks took back 54,844 properties last month, up 7 percent from April, the firm said. That represents the first monthly increase after three consecutive monthly declines. Repossessions were still down 18 percent from May last year, although 17 states saw increases, including North Carolina, Florida and Georgia.

Notably, states that have been foreclosure hotbeds throughout the housing downturn — California, Nevada and Arizona — each recorded sharp annual declines in home repossessions last month.

One factor: Banks are increasingly opting to resolve foreclosure cases via short sale, rather than completing the foreclosure process by taking back properties.

In the first three months of the year, short sales grew 25 percent from a year earlier, hitting a three-year high. In contrast, sales of bank-owned properties declined 15 percent versus the first quarter of last year, according to RealtyTrac. "The trend we're seeing is actually short sales are becoming the preferred method for many lenders, rather than bank repossession," Blomquist said.

Foreclosure sales can spell trouble for nearby homeowners, who could see the value of their homes erode further as neighboring foreclosures sell. But short sales typically sell at a smaller discount than bank-owned homes, so they have less of a negative impact on home prices.

All told, foreclosure-related notices were reported on 205,990 U.S. properties last month, an increase of 9 percent from April and down 4 percent versus May last year, RealtyTrac said. On a state level, foreclosure activity in Georgia jumped 33 percent between April and May, and vaulted 30 percent from May last year. That translates to one in every 300 households receiving a foreclosure-related warning, the nation's highest foreclosure rate last month.

Rounding out the top 10 states with the highest foreclosure rate in May are Arizona, Nevada, California, Illinois, Florida, Ohio, Michigan, South Carolina and Utah.