Monday, November 12, 2012

Today's links

1--No Individual Charges In Probe of J.P. Morgan, WSJ

The top U.S. securities regulator doesn't intend to charge any individuals in its planned enforcement action against J.P. Morgan Chase & Co. for the allegedly fraudulent sale of mortgage bonds, according to people close to the investigation.
The largest U.S. bank by assets will pay a significant financial penalty under the proposed deal, which has been approved by Securities and Exchange Commission staff but not by the agency's five commissioners, said the people close to the probe

2--White House Grand Bargain offer to Speaker Boehner Obtained by Bob Woodward, NBC

Below are documents obtained by the Washington Post’s Bob Woodward that show a grand bargain proposal the White House was prepared to make in order to reach agreement with the House Republicans last year. This is how Woodward described the documents on Meet the Press this morning:
"This is a confidential document, last offer the president -- the White House made last year to Speaker Boehner to try to reach this $4 trillion grand bargain. And it's long and it's tedious and it's got budget jargon in it. But what it shows is a willingness to cut all kinds of things, like TRICARE, which is the sacred health insurance program for the military, for military retirees; to cut Social Security; to cut Medicare. And there are some lines in there about, "We want to get tax rates down, not only for individuals but for businesses." So Obama and the White House were willing to go quite far."
 3-- Banks should fear ominous new rulings in Fannie/Freddie MBS cases, Reuters

In the JPMorgan decision, issued Monday, Cote specifically addressed the adequacy of Fannie and Freddie's evidence that the bank knowingly misrepresented underwriting standards on the loans underlying various mortgage-backed notes issued by JPMorgan, Bear and Washington Mutual. Cote pointed to the FHFA complaint's 60-page discussion of deficient underwriting and said they were sufficient to permit the case to proceed. But she also said that the FHFA doesn't have to show underwriting flaws marred each of the mortgage-backed offerings, just that "there was a systematic failure by the defendants in their packaging and sale of RMBS." ...

"FHFA alleges that the defendants acted recklessly by seeking to profit from ever more risky mortgage lending while, at the same time, passing on the risk (and ultimately the losses) associated with these practices to the public via their sale of securities to Fannie Mae and Freddie Mac," Cote said. The judge went on to turn the banks' arguments that Fannie and Freddie's MBS losses were due to a downturn in the housing market completely against the banks. They're not the victims of the housing crisis, she wrote, but (at least according to FHFA) the cause of "the most severe economic downturn this country has experienced since the Great Depression." And yes, she said, "These allegations are sufficient to support the plaintiff's demand for punitive damages."

JPMorgan also disclosed that it is now facing put-back claims, in one form or another, on $140 billion in mortgage-backed notes. Yes, you read that right: $140 billion. That doesn't mean there are $140 billion in claims, but it means that holders of $140 billion in MBS notes have asserted, in litigation or through contractual demands, that the bank must buy back deficient mortgages in their trusts. Given that MBS investors generally claim breach rates in excess of 50 percent, JPMorgan's exposure to mortgage put-backs is tens of billions of dollars.
The bank, of course, thinks the put-back demands are meritless and its entire litigation exposure is a trifling matter. The SEC filing's 10-page discussion of the various litigation headaches facing JPMorgan -- which include really serious matters, such as the securities class action over its CIO losses, various Libor suits and the Federal Energy Commission's market manipulation case -- begins with the brash assertion that the bank's "reasonable possible losses" in all of this litigation (aside from its litigation reserves) range from zero dollars to $6 billion.
Zero dollars? I think not. In fact, I'm prepared to say that based on two rulings this week by U.S. District Judge Denise Cote of Manhattan in the Federal Housing Finance Agency's securities fraud litigation against MBS issuers and underwriters, JPMorgan has exceedingly low odds of getting out of the Fannie Mae and Freddie Mac conservator's case -- which involves claims on $33 billion in JPMorgan, Bear and Washington Mutual MBS -- wit h out a settlement.

4--OCC Servicer Review Firm Also “Scrubs” Loan Files, Fabricates Documents, naked capitalism (from the archive)

Reader Lisa N. pointed me to a troubling October 2010 press release by SolomonEdwardsGroup, a company that describes itself as a “national financial services consulting and staffing firm” about its remediation services for “significant loan documentation problems.” Alert readers will recognize that this is shortly after the robosiging scandal broke.
Here are the key parts of the press release:
SEG’s teams can also be rapidly deployed across the U.S., to help banks and servicers “scrub” files and determine which foreclosures may have been tainted by incorrect loan documentation and processing issues such as robo-signing….
For instance on a recent engagement, SEG quickly deployed a 25-person team to review a single-family loan portfolio containing 5,000 loans and within six weeks brought the portfolio into compliance with investor guidelines. During another recent engagement, SEG successfully completed the same type of project involving 20,000 single-family loans tainted by fraud allegations.
Needless to say, this sounds consistent to the charges we’ve heard from borrower attorneys and have even seen at trial: that of “tah dah” documents appearing suddenly in court that solved all the problems with the evidence presented. A not that unusual case occurred last week, in Kings County, New York, where in HSBC v. Sene, when the lawyers for the bank tried submitting two notes (borrower IOUs), the second attempting to remedy problems raised by the first one, each presented as the original. The judge not only ruled against the foreclosure but referred the case to the district attorney and the state attorney general

5-- Michael Olenick (archive) on Bof A, naked capitalism

The changes to Countrywide come at the same time that Bank of America has been pushing regulators to transfer the $75 trillion of derivatives it inherited through the acquisition of Merrill Lynch into the insured bank. They’ve already transferred most of that junk pile, though it is not clear whether regulators will force them to roll-back part or all of the transfers.

BOA has set aside $16.3 billion for “put-back” liability claims; the ability of investors to force a bank to repurchase failed mortgage-related securities. This liability usually stems from material misrepresentations in Pooling & Servicing Agreements (PSAs), the contracts governing the process that allow banks to sell pieces of bundled mortgage to third parties. That sounds like a lot of money except that AIG has already sued BOA for $10 billion on the grounds that the bank, or agents of the bank, essentially lied to the insurance company enticing it to write a type of non-regulated default insurance called a Credit Default Swap (CDS), against mortgage securities they knew were filled with lousy loans.

In addition to the $10 billion AIG lawsuit, the Federal Housing Finance Agency (FHFA), which effectively controls Fannie Mae and Freddie Mac, has also sued the parent bank for $6 billion in put-back liability, sued BOA-owned Merrill Lynch for $24.8 billion, and sued Countrywide for $26.6 billion 

6--Olenick again: "No secondary market" (archive) naked capitalism

Besides the GSEs there is the private secondary loan market. I’d argue it doesn’t exist but I searched EDGAR and it does: I found one publicly registered private MBS last year. That’s not a typo: Sequoia Mortgage Trust 2011-1 bundled 303 loans, the only apparent new publicly listed MBS. In comparison Countrywide had some months during the bubble where they’d create an MBS each month, usually for thousands of loans.

It’s noteworthy that the second densest population in Sequoia’s MBS is New York, NY, which has, by far, the longest foreclosure period anywhere in the country. So much for the theory that prolonged foreclosures, as opposed to anticipated housing gluts and uncertain markets, alienate investors.
As long as the private secondary market remains effectively dead and the gavels continue to slam on the foreclosures home prices will sway like a Banyan tree in a hurricane. Like that tree prices may go up a little, or down a little, but the real question is whether that tree, and the price of the house next to it, will be planted in the ground or floating in the Atlantic when the storm passes.

Alpha housing analyst Laurie Goodman of Amherst Securities estimates shadow inventory is about ten times higher than does housing data provider CoreLogic. Having worked through my own study of shadow inventory, comparing state-by-state delinquency rates cross-referenced to housing stock volume I concluded Goodman’s analysis makes more sense. However, there’s almost no point arguing because the fact that they are so far apart is a strong indicator that nobody has a good grasp on these vital metrics needed to call a market floor.

Warren Buffet noted in his 2011 roundup letter that last year he predicted “a housing recovery will probably begin within a year or so.” He goes on to note “I was dead wrong,” showing a level of self-confidence seldom seen in this field. Buffet predicts “housing will come back,” and he goes on to illustrate some positive trends, but declines to call out a specific timeframe.

As I’ve written in my own shadow inventory analysis the OCC reports there are about 52.25 million US homes with a first mortgage. But the 2010 US Census reports there are 74.8 million owner-occupied homes and that that 50.34 million of those have a mortgage. There are 131.8 million “housing units” to shelter about 313 million people. These housing figures simply cannot be reconciled except to the conclude that a) the US has an enormous number of post-bubble houses, b) many of those were mortgaged during an enormous housing bubble, and c) far too many American’s remain overleveraged with housing debt, and d) young people who could and should be forming houses are buying are saddled with too much student loan debt to do so.

7--The "tax cuts generate more money (revenue)" myth, economists view

...the CBO because "it assumes higher tax rates generate more money" when making budget projections. That's right, despite all the evidence against the claim that tax cuts actually increased revenue -- it's a myth that won't die because people who know better, or ought to, still promote it -- we should discredit the CBO for making the claim that higher tax rates would help with the budget problem.
And that's not all. The CBO should be further discredited because it says the stimulus package helped to ease the recession:
The CBO repeatedly claimed that Obama’s faux stimulus would boost growth. Heck, CBO even claimed Obama’s spending binge was successful after the fact, even though it was followed by record levels of unemployment.
8--Investors rushing into real estate deals, SF Gate

There is a tsunami of money coming into the market, billions of dollars to buy distressed single-family homes," said Jeff Lerman, a San Rafael real estate lawyer, speaking about the national landscape. "The window of opportunity is rapidly closing (as prices rise). Over the next 18 months, profit margins in single-family opportunistic buying will be compressed quite a bit."
But for now, many distressed homes - foreclosures and short sales - sell for about a third off their peak values, and often for less than it would cost to build a new home.
Investor impact in the Bay Area was magnified during the downturn. That's because for many years, the Bay Area's stratospheric prices made buying homes to rent out a losing proposition, so investors bought elsewhere.
"Historically the (sales) price-to-rent ratio for California single-family homes has never made sense to hold houses at any scale," said Brian Burke, managing director of Praxis Capital, a Santa Rosa real estate investment company. "But the market dynamics have completely changed and opened up an opportunity for us to buy, hold and rent, as well as buying to fix and flip."
A Chronicle analysis of sales data compiled by San Diego research firm DataQuick showed that absentee buyers, who once bought about 10 percent of homes sold in the nine Bay Area counties, account for about a quarter of all purchases this year, more than doubling their share. Absentee buyers are defined as those who have property tax bills sent to a different address than the house they just bought....

For instance, it paid $182,000 at a foreclosure auction for a four-bedroom, two-bathroom Santa Rosa tract home that is now getting a $15,000 "cosmetic rehab" of new carpets, paint, flooring and landscaping. The house should rent for $1,950, Burke said. Once it's rehabbed, he projects its market value will be $253,000. After renting this and similar homes out for five to seven years, Praxis will sell, hoping for significant appreciation.
Praxis has spent $15 million to date on both its flipped and rental properties, and is launching a fund in January focused just on buying homes to rent out. It hopes to raise $25 million, primarily from high-net-worth individuals in the region - winemaking families, small business owners and professionals who are looking to diversify their portfolios, Burke said.
Finding tenants is easy because so many displaced families need housing.

Dominating the market

"Right now the dominating force driving the rental market in California is foreclosed-upon former homeowners transitioning to renters," Burke said. "That demographic is an important market segment for us."
Fixing up dilapidated foreclosures "is the home building of the current decade," Burke said. "In the 2000s, people were building houses everywhere. The home building of today is taking an old rundown house that hasn't been cared for and bringing it up to current standards and modernizing it."...

Investor activity eventually will taper off," LePage said. "Prices will get to the point where it doesn't pencil. That's inevitable - but the big question is when. You have to know when the economy will gain a lot more traction."

9---"Now is the time to pounce,", tales of Indymac and Co, LA Times

The civil lawsuit seeks damages from three former IndyMac executives, accusing them of negligence in approving 23 loans that developers and home builders never repaid, costing the bank almost $170 million.

The executives approved ill-advised loans because they earned bonuses for beefing up lending to developers and builders, said Patrick J. Richard, a lawyer representing the FDIC.

"They violated their duties to the bank," Richard said in his opening statement to the jury Tuesday. "They violated standards of safe and reasonable banking."...

One high-profile example involved the Securities and Exchange Commission's investigation of Countrywide Financial Corp. of Calabasas. The SEC exacted a $67.5-million settlement from former Chief Executive Angelo Mozilo, who ran Countrywide as it expanded to become the nation's largest purveyor of subprime and other high-risk mortgages.

A Justice Department probe of Mozilo had found too little evidence to support a criminal prosecution. Admitting no wrongdoing, Mozilo paid $22.5 million of the SEC settlement himself, with corporate insurance policies covering most of the balance.

On another front, federal and state prosecutors have filed a series of civil lawsuits accusing major home lenders including Bank of America Corp., Wells Fargo & Co., Citigroup Inc. and JPMorgan Chase & Co. of fraud and recklessness that cost taxpayers and investors billions of dollars.

Taking a different approach, the FDIC suits aim to recover losses in its insurance fund, which compensates depositors when banks fail. The agency says it has authorized lawsuits against 665 insiders at 80 institutions seized during the recent crisis, with 33 suits already filed.

The IndyMac case now going to trial, filed in July 2010, was the first of those suits.

Recoveries typically are modest compared with the losses.

IndyMac's failure cost the federal insurance fund more than $13 billion, the largest loss among the 463 banks that have failed since 2008. But the FDIC is seeking only $170 million in the suit that has gone to trial in L.A., plus $600 million in a separate suit against former IndyMac Chief Executive Michael Perry....

The IndyMac defendants' earnings were modest by the standards of executives running large financial firms, such as Mozilo, whose take during the housing bubble has been estimated at nearly $470 million. But their compensation — in the $500,000 annual range for Koon and Shellem and well over $1 million for Van Dellen, who headed the Homebuilder Division — merited note by the FDIC.

Richard, the lawyer making the FDIC's opening statement, noted that Van Dellen had rejected a suggestion by Perry in July 2006, as cracks appeared in the housing markets, that IndyMac take a cautious approach in its lending to home builders.

Van Dellen replied in an email that "now is the time to pounce," Richard told the jury. "So what was his motivation? His bonus for 2006 production was 4 1/2 times his base salary — $914,000 — tied to production" of more builder loans.

10--Post in Hyper Drive on Effort to Cut Social Security and Medicare, CEPR

11--Continuing US war crimes, Cato

For further explanation, here comes Ben Emmerson, the U.N.'s special rapporteur on counterterrorism and human rights. I'm usually wary of quoting any U.N. official because that organization sometimes talks a good game on human rights, but seldom follows through. However, as a recent story explained, "Emmerson's role at the U.N. is that of an independent researcher and adviser, but he does not necessarily represent the views or speak on behalf of the world body" ("U.N. Official: Aspects of U.S. Drone Program Clearly 'War Crimes,'", Oct. 26).

According to a copy of a recent speech he gave at Harvard University (and reported by, Emmerson said, "It's not my job to speak for the U.N. I speak to the U.N."
And in my reporting, I've found his to be an accurate statement.
During his Oct. 25 appearance at Harvard University, also reported by The Harvard Crimson, Emmerson made this vital point — largely ignored by George W. Bush, Dick Cheney, Obama and many members of Congress — that "even though a state's primary human rights obligation is protecting the lives of its citizens ... this does not 'mean infringing the rights of those suspected of terrorism'" ("U.N. Official: Geneva To Launch Investigation on Drone Attacks," Francesca Annicchiarico, The Harvard Crimson, Oct. 25).

Emmerson told the students at Harvard Law School that he would "be launching an investigation unit within the special procedures of the (U.N.) Human Rights Council to inquire into individual drone attacks, and other forms of targeted killings conducted in counterterrorism operations, in which it has been alleged that civilian casualties have been inflicted" (, Oct. 26).
He added, as others have, that Obama's government doesn't answer some of the most basic explanations on how it validates these programs, nor has it shown that it has inserted safeguards to prevent false charges against those who it claims are terrorists.
12--A people’s bailout: OWS seeks to ‘liberate debtors’, RT

A coalition of OWS groups under the banner of “Strike Debt” has organized the Rolling Jubilee with one goal in mind: create an economy “where our debts are to our friends, families, and communities — and not to the 1%.”
To do this, to group hopes to buy up delinquent debt, like medical and student loans, in order to forgive it.
The activists announced via their official site that they are unable to buy specific individuals' debt, and will instead “help liberate debtors through a campaign of mutual support, good will and collective refusal.”
David Rees, one of their organizers behind the project, announced a test run whereby $500 dollars allowed them to buy $14,000 in distressed debt. “We then erased that debt,” he continued.


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