Sunday, October 17, 2010

Today's Best Reads

1--The Mortgage Fraud Scandal Is The Biggest In Human History, L. Randall Wray, Business Insider

Excerpt: This is the biggest scandal in human history. Indeed, all previous scandals from around the globe combined cannot even touch this one in terms of scale and scope and stench. This is the mother of all frauds and it will be etched into the history books for all time.

Now we know that it was not just the mortgage brokers, and the appraisers, and the ratings agencies, and the accountants, and the investment banks that were behind the fraud. It was the securitization process itself that was fraudulent. Indeed, the securities themselves are fraudulent. Many, perhaps most, maybe all of them.

Some are trying to argue that this is just a matter of some missing paperwork. A moratorium would allow the banks to get all their ducks in a row so that they can supply all the documents needed to foreclose.

However, as reported by Ellen Brown (at Web of Debt) and by Yves Smith (at Naked Capitalism), the paperwork does not exist. Worse, as Yves has discovered, the banks are furiously working to manufacture documents, aided and abetted by companies like DocX that specialize in “document recovery solutions”—for a fee they will create fraudulent documents that banks can use in court. (Must read)

2--Time for a debt Haircut, Peter Coy, Bloomberg Businessweek

Excerpt: Ireland illustrates why governments need to make private creditors share the pain. The bursting of its real estate bubble left the country overwhelmed with bad debts and forced the government to impose painful budget cuts. Embracing austerity has won Ireland the praise of the European Union—and little else. The Irish economy shrank at an annual rate of 5 percent in the second quarter because the sharp reduction in government spending hasn't been offset by a jump in private spending. And its borrowing costs have surged. Investors now have to pay 4.7 percent of the face value of Irish government bonds annually to protect against the risk of default for five years, 12 times the cost for insurance on German bonds. ...

One way or another, the world's savers and investors are going to have to pay the bill for unrecoverable debts. The question is whether that happens in a rip-the-Band-Aid-off round of debt reduction or is dribbled out over years in the form of government-induced inflation (which will ease the burden of debt while eating away at the value of savings). Policymakers are clearly concerned about the potential consequences of principal reduction. If my neighbor gets his mortgage reduced, why not mine? The stigma will be gone, and then who knows what happens? It's scary, all right. Yet the situation in Ireland shows there may be no alternative. (Another "must read")

3--Foreclosure Sales In Question: So You Bought A Foreclosed Home. Now What?, Huffington Post

Excerpt: It seemed too good to be true: You bought a house in foreclosure at a fraction of the former price. Maybe you even knocked out a wall or two and remodeled with all the money you saved.

But now thousands of foreclosures around the country may be invalid because of bank paperwork problems. Should you worry?

"Anyone who's purchased a foreclosed property in the last three years should really be concerned," says George Babcock, a Providence, R.I., attorney who represents homeowners who have been foreclosed on.

4--Deflating the Japanese Horror Story, Dean Baker, CEPR

Excerpt: A low inflation rate, whether positive or negative, keeps real interest rates higher than would be desirable in a severe downturn. It also prevents the economy from inflating away the debt burden left over from the housing bubble.

This point is important because many people wrongly believe that the United States will only be suffering from a problem of too low inflation if the inflation rate actually turns negative and we have deflation. This is not true. The inflation rate in the United States is already a level that is hampering growth. Any further drop in the inflation rate will make the situation worse but there is no importance to crossing zero.

5--For foreclosure processors hired by mortgage lenders, speed equaled money, Washington Post

Excerpt: The law firm of David J. Stern in Plantation, Fla., for instance, assigned a team of 12 to handle 12,000 foreclosure files at once for big financial companies such as Fannie Mae, Freddie Mac and Citigroup, according to court documents. Each time a case was processed without a challenge from the homeowner, the firm was paid $1,300. It was an unusual arrangement in a legal profession that normally charges by the hour.

The office was so overwhelmed with work that managers kept notary stamps lying around for anyone to use. Bosses would often scream at each other in daily meetings for “files not moving fast enough,” Tammie Lou Kapusta, the senior paralegal in charge of the operation, said in a deposition Sept. 22 for state law enforcement officials who are conducting a fraud investigation into the firm. In 2009 alone, Stern’s law firm handled over 70,000 foreclosures.” (Wa Post manages to get through the entire 2-page article without using the word "fraud" even once.)

6--Foreclosure Counterattack--Propaganda, pseudo legality and thuggery, Naked capitalism

Excerpt: Perhaps the most insidious propaganda line, and certainly the most scabrous, is the bashing of alleged “deadbeats”. While the subprime borrower – powerless, often a minority – has long been an easy target, and the contempt has been spreading up the income scale as more people are engulfed in the catastrophe, the fact remains that few people intentionally bought more house than they could afford. Most were induced by the massive propaganda barrage from the banks, government, MSM, and even consumer groups, to see a house as a guaranteed investment which could only appreciate in price. More importantly, the main cause of inability to keep up the mortgage is losing one’s job or suffering a medical disaster. It’s the banks themselves who have presided over the destruction of America’s jobs, especially over the last two years. And it’s the government which refuses to counteract the banks’ campaign of socioeconomic scorched earth. (That’s the same government which also pointedly refused to reform the health care system, choosing instead to further entrench the existing larcenous dysfunction under a facade of lies and misdirection.)

So it’s the banks and government themselves who are overwhelmingly responsible for the wave of defaults. The defaults are the knock-on effects of the bank crimes, and now the banks want to seize the homes by further criminal means....

Right here at Naked Capitalism we may have seen the pro-bank handiwork, a shot across the bow. Yves was the target of a Denial of Service attack. Now that’s taking trolling to a whole new level. If it was organized on behalf of the banks, it’s part of the logic.

All of this, from the original predatory lending, to flippancy about conveying the titles and legally securing the trusts, to the Bailout dedicated to propping up those toxic MBS, which we now know are probably nothing but unsecured loans, to the government-led propaganda campaign and legislative hankering to cover up and eventually “legalize” this latest revelation, down to the brutish violence and dirty tricks of the gutter, is one coherent whole, one simple train of logic. It’s simply the logic of might makes right, feudal greed, and total nihilism vis the law and democracy. The mortgage debacle reveals so many abdications of the system, and this abdication of the rule of law is one of the most thorough. (A real "first-class" rant)

7--The housing crisis in 1933, and today, Marketwatch

Excerpt: Seventy-seven years ago, with a law that took only 3½ pages of text, Congress created the Home Owners’ Loan Corp. to acquire defaulted residential mortgages from lenders and investors and then refinance them at more favorable and sustainable terms.

In exchange for the loans, lenders would receive HOLC bonds. While the bonds would earn a market rate, the rate was lower than that of the original mortgage, But since the bond took the place of what had become a non-earning asset, and one with little prospect for ever turning a profit, banks eagerly agreed to the trade.

In addition, lenders often would take a loss on the principal value of the original mortgage. This, according to Pollock, was “an essential element of the reliquification program, just as it will be in our current mortgage bust.” ....

HOLC’s investment in any mortgage was limited by law to 80% of the underlying property’s appraised value, with a maximum of $14,000. With an 80% loan-to-value ratio, then, the maximum house price that could be refinanced would be $17,500.

A mere pittance, by today’s standards. But that was in 1933 dollars. After adjusting the $17,500 ceiling by the Consumer Price Index, the maximum today would be about $270,000, Pollock said. And based on changes in the Census Bureau’s median house price since 1940, the limit would be something on the order of $1 million

8--Why QE2 is now nearly inevitable, Edward Hugh, Credit Writedowns

Excerpt: unemployment in the United States (which is currently at 9.6%, and may reach 10% by the end of the year) is causing enormous problems for the Obama administration. The US labour market and welfare system are simply not designed to run with these levels of unemployment for any length of time. In Japan the unemployment rate is 5.1%, and in Germany it is under 8%. So people in Washington, not unreasonably ask themselves why the US should shoulder so much extra unemployment and run a current account deficit just to maintain the Bretton Woods system and the reserve currency status of the US Dollar.

My feeling is that the US administration have decided to reduce the unemployment rate, and close the current account deficit, and that the only way to achieve this is to force the value of the dollar down. That way it will be US factories rather than German or Japanese ones that are humming to the sound of the new orders which come in from all that flourishing emerging market demand.

I think it is as simple and as difficult as that

9--Why Have Deficits Exploded?, Paul Krugman, New York Times

Excerpt: For all those commenters saying that we must have had a surge in government spending — I mean, look at the deficit! — a simple picture....
Government spending has continued to rise more or less on its pre-crisis trend. Revenue has plunged, because the economy is deeply depressed.

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