In October 2007, CNBC's Diana Olick called me about Countrywide's so-called plan to modify mortgage loans scheduled to reset to higher rates. Subprime borrowers with a strong payment history would be able to refinance and possibly get prime FHA loans. Current paying borrowers with credit issues would be offered Fannie Mae or Freddie Mac loans under a new expanded program.
Mortgage Loans with Less than Zero Value
Mortgage modification programs, including HAMP, were abysmal failures. At the time I told Olick that mortgage servicers were selling loans for 3-6 cents on the dollar and they were happy to dump them:
"They work 13-hour days trying to salvage what they can, doing anything to avoid reporting a delinquency or foreclosure. They disclosed disturbing information unavailable even on trustee reports. The servicer asserted the rating agencies are incorrect in their optimism; recovery rates of 60% are unattainable. My average recovery rate assumption of 30% is also currently unattainable."
If loans couldn't be sold to a sucker, banks and their servicers walked away. Mortgage securitization complicated matters, and often homes are left vacant and not foreclosed upon. Looters strip vacant properties of pipes, fixtures, and anything of salvage value. The loans within the securitizations are worthless.
Why do banks and trustees pretend the loans have value? If banks and lenders foreclosed, it would be revealed that the cost to maintain the property before resale and the legal costs relative to the value of the property meant that they had negative equity.
At first this was a problem for loans with low loan balances, but as property values dropped, even loans with higher balances had the same problem. The problem spread, and it hasn't yet stopped spreading.
Triple Tragedy: Meltdown, Spreading Contagion, and Crime
This tragedy is echoed by similar problems in Ohio, Michigan and other subprime targets on the West Coast, Nevada, and in the South. Although some examples aren't as stark or depressing, the general idea of plummeting property values and vacant properties infecting a neighborhood and its surrounding areas still stands. Affected states have to carry the burden of these paralyzed limbs, and banks and their cronies that perpetrated this mess just walk away. This video, first reported by the Chicago Tribune is a stunning local example:
Since 2007, Chicago's Englewood and West Englewood areas slid into a sinkhole. Homes that once housed lower middle class and middle class families stand empty. Those with the means to move have fled. Those without the means have stayed while the prairie reclaims a large part of the south side of Chicago. More and more homes have been boarded up. Grass has grown so high in some formerly residential areas it obscures all but the tallest humans. Crime soared. Property values in surrounding neighborhoods are plummeting as the wasteland spreads to their doorsteps.
"Countrywide Broke the Law"
It would be easy to turn away from this and blame the borrowers. Some of the borrowers were absentee landlords who knew what they were doing. Some borrowers overreached. But in many cases, people were victimized by predatory lenders. For example, a complaint of alleged fraud against Goldman Sachs, includes allegations of fraudulent practices by Countrywide, now owned by Bank of America. A former Countrywide employee stated that approximately 90% of all "liars' loans, loans that allowed reduced documentation about borrowers' income and assets, sold out of a Chicago office had inflated incomes.
The borrowers weren't inflating the income. Countrywide routinely doubled the amount of the potential borrower's income to qualify borrowers for loans they couldn't afford so that Countrywide and its mortgage brokers could continue to earn fees and commissions. Prior to a settlement in which Countrywide paid a paltry $8 billion--the damage done is much greater-- to eleven states, Illinois Attorney General Lisa Madigan stated: "Countrywide broke the law, homeowners did not."
Fed's August 2007 Back Door Bail Out of Countrywide
In August 2007, investors shunned Countrywide's asset backed commercial paper (ABCP) backed by its mortgage loans and demanded much higher interest rates. In the ensuing panic, Countrywide wanted to borrow around $11.5 billion from banks on its credit card-like revolving credit lines, but the banks balked. The banks asked the Fed for concessions, and the Fed agreed.
The Fed deal appeared to have been leaked. On Thursday, August 16, 2007, the Dow fell more than 340 points when it appeared Countrywide was about to go under, but rebounded to close down only 15 points. The next morning the Fed announced its new bank lending concessions.
The Fed bailed out Countrywide and its affiliated banks through its back door. The Fed agreed to let banks borrow against private label mortgage loans with phony "AAA" ratings, cut the banks' discount rate from 6.25%* to 5.75%, and extended "overnight" borrowings to 30 days.
BofA, Wells Fargo, U.S. Bank, Deutsche Bank, and JPMorgan Cut and Run
Banks that supplied money -- and in some cases now own -- suspect mortgage lenders also packaged up and sold those loans to investors. They own or owned mortgage "servicers" that cannot recover foreclosure costs combined with the costs of maintaining and reselling the house. After pumping up appraisals and falsifying borrowers' income on applications, banks are walking away and sticking taxpayers with the bill.
According to the Woodstock Institute, the mortgage servicers and trustees linked to abandoned properties in Chicago are Bank of America, Wells Fargo, U.S. Bank, Deutsche Bank, and JPMorgan Chase.
Despite evidence of widespread interconnected mortgage lending, securitization, and foreclosure wrong-doing and fraud, there are no meaningful felony indictments of senior executives at mortgage lenders or of senior executives of banks bailed out by taxpayers.
*Corrected typo from 6.75% to 6.25%. The events surrounding episode and other bailouts are covered in detail my book on the financial crisis and the resulting economic stagflation: Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street.
Don McNay: Bank of America: Too Big to Follow the Law
"At first this was a problem for loans with low loan balances, but as property values dropped, even loans with higher balances had the same problem. The problem spread, and it hasn't yet stopped spreading."
Crisis economy formation measures must be implemented now or this great nation is doomed. Job mobilization and production in vital sectors of the population's physical economy must be activated now as if all out war were declared.
The immediate implementation of the Glass-Steagall standard in US banking is absolutely crucial to the stabilization of the national economy, the United States, cancelling all obligations to the Inter Alpha Group of Banks, the Wall St. cabal. Put the Fed into bankruptcy protection, recover the bailout trillions. Create the US National Bank that funds the 50 states, then fund the necessary facilities that enhance the population's standard of living. Stop Perpetual War. No other options exist, and time is running out.
MY sister-inlaw lives in Nashville Tn. and when she refinanced her home it was appraised at more than $250,000.00 . When she had to refinance it three years latter she was told it was worth only $175,000.00 and she would have to pay the difference between what she owes and $175,000.00.
Even with the housing downturn her house should have gone down that much in three years. If you can get the appraisers to talk then you will find out who commited the real crimes.
police protect the wealthiest,we are robbed blind WITH NO PROSECUTIONS! goldman sachs, blankfein, paulson, robby rubin and his proteges, geithner and the ny fed syndicate, bernanke, greenspam, thain, fuld, sandy weill, chais, picower, dimon, wynn, adelson, charles prince, stephen friedman, jerry speyer... decimated the middle class, lowered their own taxes, SIT ON TRILLIONS, invest in OTHER countries NOT THE US where unemployment, foreclosures, no quality healthcare, college students without HOPE and huge BANK LOANS, homelessness, all at historic levels.
call out the police to keep the rabble down and arrest them if they videotape the police so there's no evidence! there will be an "internal investigation" where there are never any prosecutions in cities across the country.
nationally warrant-less wiretaps are rampant. the fbi knocks out hundreds of web businesses seizing web servers looking for spammers.
http://bits.blogs.nytimes.com/2011/06/21/f-b-i-seizes-web-servers-knocking-sites-offline/
this is all about the GREATEST REDISTRIBUTION OF WEALTH IN HISTORY that republicans droned on about during the last election.
they LIED about who it was being redistributed to; the WEALTHIEST OF THE WEALTHY. they want a constant state of war, huge prisons, and a police state because it's good for their businesses.
http://www.thefiscaltimes.com/Columns/2010/10/08/Neocons-Talk-Deficit-but-Wont-Budge-on-Defense-Cuts.aspx
welcome to serfdom 2.0
I've been trying something else, copied N.C. Guilford County Thigpen's collection of "Linda Green" and other robo/forged signatures and summary. Handed some copies out. People recognize wide variation of signatures as forgery, eyes widen, jaws drop, bringing reality home. Great visual aid to understanding monstrous mess!
Laws put in place after S&L disaster allowed systematic take-overs to wind down fraudy banks. Instead it's still being papered over. When we reward bad behavior, we simply get more bad - now exhibited in foreclosure frauds, HAMP disasters and taking houses where people don't have loans or aren't behind with payment. This is third world or post-communist government behavior.
Unlike 1929, this time Washington didn't investigate crash because they didn't want to know - or didn't want public to know. We've had no Pecora.
Bless the author/blogger for continuing to dig up and expose the dirt.
Of course the person that took the loan in the first place bears absolutly NO responcibility for THIER actions.
To correct this, the market should have been allowed to take its losses. A.I.G., Citi-Goup, Bank of America, should ALL have been allowed to go bankrupt. Yes...it would have been painful. The administration however, decided that some were.."too big to fail." You are living through the results of that incompetent decision. It will take YEARS to recover, even if we have competent leadership elected in 2012.
Problem solved. (And banks properly spanked for their crimes)
The banksters (with the full cooperation of the past and current administration) have been allowed to kick the 'mark to market' can down the road, hoping that the Oil Fairy and the Good Jobs fairy will alight on the country again to make these properties have value again. People who work for Walmart wages can barely afford CARS, let alone houses; And even the people lucky enough to find subsistence wage jobs are a net economic drain on communities once you calculate Food Stamps and Section 8 housing vouchers. Somebody needs to come up with a real solution to this mess.
We should have closed down Freddie Mac and Fannie Mae long ago. Government credit, if not properly supervised, is squandered.
And this is the problem with government underwriting of quasi-private enterprises like banks (through the FDIC). If the government can't regulate the conduct of your business, then you shouldn't get the benefit of its insurance pool. The FDIC is now telling banks to limit their portfolios of commercial real estate loans, fearing the recession may start wiping out malls and office complexes. The only threat the FDIC has is the threat of FDIC takeover.
http://www.youtube.com/watch?v=QU0XiklHPMc
One Possible Solution (1 of 5)
http://www.youtube.com/watch?v=2atnm1oTjJ8