Another task force to combat mortgage fraud

January 24, 2012: President Barack Obama’s State of the Union pledge to create a special unit to punish fraud in mortgage finance met with skepticism Wednesday for coming so late in his term and amid signs that his administration is close to settling with large banks accused of shoddy mortgage-lending practices.

Obama said Tuesday night that he was asking Attorney General Eric Holder to create a special unit of federal prosecutors and leading state attorneys general “to expand our investigations into the abusive lending and packaging of risky mortgages that led to the housing crisis.”

The new unit, the president said, would “help turn the page on an era of recklessness that hurt so many Americans.”

Critics said the announcement might have been more appropriate at the start of the Obama administration, not in the fourth year of his term. And it appears to duplicate a lot of groundwork already done.

“It just seems like more maneuvering,” said Chris Farrell, director of research for Judicial Watch, a conservative group that promotes transparency in government.

A sympathetic member of the congressionally created Financial Crisis Inquiry Commission, charged with getting to the bottom of the 2008 financial crisis, also questioned Obama’s timing.

“He should have done it three years ago in January 2009, when the trail would have been fresh, witnesses’ memory would have been fresh, the statutes of limitations would have been necessarily missed,” said the commissioner, who requested anonymity to speak freely. “I think it’s high time that it be done – people need to be held accountable.”

The work group is being created even as the Securities and Exchange Commission over the past two years has been settling civil lawsuits against big banks such as Goldman Sachs, JP Morgan Chase and Citibank. They all stood accused of misrepresentation about the safety of complex mortgage bonds they sold to investors.

“Personally, I’ve certainly been disappointed in the outcomes of the SEC investigations, and as yet they have not brought significant actions against entities that … had all kinds of misrepresentation,” said Barry Zigas, director of housing policy for the Consumer Federation of America.

Consumer advocates, and many ordinary Americans, are unhappy that no big Wall Street figures have been sent to jail for financial crimes tied to the near-collapse of the U.S. financial system in 2008, a crisis rooted in shoddy mortgage lending.

Significantly, New York Attorney General Eric Schneiderman will take the lead on the working group for state attorneys general. He forcefully argued against a proposed $20 billion to 25 billion settlement being worked out by the Obama administration and five large banks – Bank of America, JPMorgan Chase, Wells Fargo, Citibank and Ally Financial. Schneiderman exited the talks last summer angry that a settlement would stop further investigation.

His appointment to the new unit, however, seems a way to clear obstacles for a proposed settlement that was sent to states for review on Monday, prompting speculation that a deal is near.

Residential Rents Rise

THERE are two things everyone knows about American economic recoveries. The first is that the housing sector traditionally leads the economy out of recession. The second is that there is no chance of the housing sector leading the present economy anywhere, except deeper into the mire. In the two years after the recession of the early 1980s housing investment rose 56%; it is down 6.3% in the present recovery. America is saddled with a debilitating overhang of excess housing, the thinking goes, and as a result is doomed to years of slow growth and underemployment.

The economic landscape is unquestionably littered with the wreckage of the crash. Home prices languish near post-bubble lows, over 30% below peak. The plunge in prices has left nearly a quarter of all mortgage borrowers owing more than the value of their homes; nearly 10m are seriously delinquent on their loans or in foreclosure. The hardest-hit markets are ghost neighbourhoods, filled with dilapidated properties. Housing markets are far from healthy. Yet current pessimism seems overdone. A turnaround in sales, prices and construction may be closer than many imagine.

The potential for a strong housing recovery lies in the depths of the bust. America’s housing boom was remarkable for its impact on prices and for the flow of new households into the market, which pushed the home-ownership rate above 69%, the highest on record. Construction also boomed, but less wildly. Housing completions were above average during the boom, but not unusually so, particularly in light of the relatively restrained growth in housing supply during the 1990s (see chart 1). The bust, by contrast, dragged new construction to unprecedented depths. At the current rate, fewer homes will be added to the housing stock this year than in any year since records began in 1968.

America therefore has only a minor problem of excess housing supply. Under normal conditions, that small glut would quickly have disappeared in a bust on the present scale. But America is now adding new households at a rate well below normal—not because the population is growing more slowly, but because, for example, young people are opting to stay longer in their parents’ home. According to one analysis, there are now 1.5m more young adults (aged 18 to 34) living at home than would be expected, given long-term trends. Thrift imposed by a sickly economy is probably the principal cause. Better prospects for young adults would encourage the forming of new households, buoying the demand for new homes.

Although total housing supply is not far out of line, the distribution of supply between the rental and owner-occupied markets remains distorted. In September the inventory of newly built houses for sale fell to its lowest level since record-keeping began. But the inventory of existing houses, while falling, remains high. In September the figure dipped below 3.5m, down from over 4.5m in 2008 but still above the 2.5m registered early in the last decade. The total number of vacant homes for sale has steadily declined and is at the lowest level since 2006. But the pace of sales remains extraordinarily low, and foreclosures will continue to prevent a faster decline in inventory.

Rental markets, by contrast, look far stronger. America’s rental vacancy rate stood at 9.8% in the third quarter of 2011, down from a high above 11% in 2009. Vacancy rates in some cities are strikingly low—2.4% in New York City, for instance, and 3.6% in San Francisco—which translates into rising rents. Nationally, rents rose 2.1% in the year to August, in stark contrast to house prices (see chart 2).

Strength in the market for rentals is beginning to seep into the more troubled owner-occupied sector. Rising rents help housing markets heal on both the supply and demand side, by encouraging renters to consider buying and through the movement of supply into the rental market, easing the glut of houses for sale. The Obama administration hopes to take advantage of better rental conditions to unload some of the more than 200,000 foreclosed-on homes held by the two government-sponsored mortgage giants, Fannie Mae and Freddie Mac, and the Federal Housing Administration (which account for roughly half of all such inventory), on to investors who may rent the properties out.

Rental-market strength is also rousing a long-dormant building industry. New housing starts rose 15% from August to September of this year, driven by a 53% surge in new structures containing five units or more. In the three months to September construction employment rose by 29,000 jobs. The sector is still some 2.2m jobs below its pre-recession peak, and new hiring there would help a dismal labour market.

The convalescence, however, may be complicated. Housing recoveries have seemed imminent before, only to peter out when the economic outlook weakened. Foreclosures are falling, but they continue to place downward pressure on prices. New proposals from the administration aim to help underwater borrowers refinance, but more lavish assistance for troubled borrowers is too politically unpopular and expensive for Washington’s taste.

The macroeconomic environment, too, remains troublesome. Housing markets could lurch sharply downwards if a new shock, perhaps from Europe, disturbed the global economy. A new financial shock could rattle confidence and send buyers fleeing, while the flow of mortgage credit from exposed banks would dry up. Lenders carry the scars of the housing crash. Cautious banks are reluctant to lend. Housing-finance institutions, having kept credit standards too loose during the bubble, now seem to be setting them too tight, preventing rising demand and low rates from translating into new sales.

Yet once the housing sector finds its footing it may quickly gain momentum. A switch from falling to rising prices should encourage banks to make more loans. Higher house values would chip away at negative equity, stanching the flow of defaults and foreclosures.

A new analysis by Goldman Sachs argues that housing can “punch above its weight” in recoveries. Rising house values boost confidence and spending, and home construction is more labour-intensive than other sectors. A housing recovery should also give monetary policy more traction; low interest rates do less to perk up the economy when housing markets are depressed. Indeed, the Federal Reserve is considering nudging recovery along by buying mortgage assets, which should ease the flow of credit to borrowers.

Such hopes for housing would smack of an effort to reanimate a corpse, had the bust not so far outpaced the boom. But a turnaround now seems probable on many measures. If it happens, the recovery should become much more vigorous.

The 99 Percent

OF ALL the many banners being waved around the world by disgruntled protesters from Chile to Australia the one that reads, “We Are the 99%” is the catchiest. It is purposefully vague, but it is also underpinned by some solid economics. A report from the Congressional Budget Office (CBO) points out that income inequality in America has not risen dramatically over the past 20 years—when the top 1% of earners are excluded. With them, the picture is quite different. The causes of the good fortune of those at the top are disputed, but the CBO provides some useful detail on that too. The biggest component of the increase in after-tax income for the top one percent is “business income” as opposed to income from labour or investments (though admittedly these things are hard to untangle). Whatever the cause, the data are powerful because they tend to support two prejudices. First, that a system that works well for the very richest has delivered returns on labour that are disappointing for everyone else. Second, that the people at the top have made out like bandits over the past few decades, and that now everyone else must pick up the bill. Of course it is a little more complicated than that. But this downturn ought to test the normally warm feelings in America of the 99% towards the 1%.

Securitizing Fannie- guaranteed to fail

James Johnson, who, for most of the 1990s, ran Fannie Mae, the largest of the Government Backed Mortgage Companies (GSEs). Tall, charming and politically shrewd, Mr Johnson spotted a golden opportunity to use a popular cause—increasing home ownership—as a means of building Fannie’s power in Washington, and also feather his and his fellow executives’ nests along the way.

BUY CONGRESS

His strategy rested on three pillars. The first was to buy Congress, which Fannie did through a combination of lobbying, campaign contributions and perks, such as sweetheart mortgage deals for key political figures (a ruse later copied by private mortgage lenders). Between 1989 and 2009, Fannie spent around $100m securing lawmakers’ affections. Among its biggest boosters were Chris Dodd and Barney Frank, the architects of the massive financial-reform bill passed in 2010 (which contained almost nothing on the GSEs). Helping to keep the politicians onside were the dozens of community groups and charities that Fannie funded, directly or indirectly. These groups were also fooled into believing that the huge financial benefits accrued from the implicit government guarantee enjoyed by Fannie Mae and Freddie Mac, its smaller sibling, flowed mostly to their borrowers, not to their managers and shareholders.

EVISCERATE REGULATORS

The second task, was to eviscerate regulators. Friends of Fannie and Freddie on Capitol Hill ensured that the agency overseeing the firms remained “a 98-pound weakling” and that their capital requirements stayed dangerously flimsy. As the GSEs ramped up their risk-taking, the Federal Reserve seemed, until it was too late, oddly unworried. As Fannie led the way in what Mr Johnson proudly called “underwriting experiments” (read: lending to ever-dodgier types), regulators mostly applauded. The few who expressed alarm were quickly drowned out.

COURT MORTGAGE LENDERS

The third leg of the strategy was to court mortgage lenders. Countrywide’s Angelo Mozilo once described Mr Johnson as so slick that “he could cut off your balls and you’d still be wearing your pants.” Other mortgage lenders ensured Fannie a steady supply of raw material to grow its balance-sheet (which came increasingly to resemble that of a hedge fund), and helped to boost its profits, to which executive pay was increasingly linked. Mr Johnson alone extracted nearly $100m in his nine years at the helm. The final tab for bailing out Fannie could be several hundred times that.

California Courts Clogged

IN THEORY America’s three branches of government are equal. In practice the judiciary is the weakest, as Alexander Hamilton cautioned in “The Federalist Papers”, because it controls neither sword nor purse. Of late, state legislatures and executives have been closing their purses as they struggle to balance tight budgets. At the same time, the federal bench is being weakened by both stagnant salaries and frozen politics. This is now swelling dockets, delaying cases, and reducing access to the legal system.

Ask, for example, Katherine Feinstein, the presiding judge of the San Francisco Superior Court (and daughter of Dianne, California’s senior senator). She says that her court narrowly missed “falling off a cliff” last month by getting an emergency loan. But she expects worse later in this fiscal year because California’s current budget, which has already cut court funding by $350m, contains a trigger for even more reductions. Between 15 to 28 of California’s 58 county courts could go over that cliff in the coming year, she thinks.

How does a court go over the cliff? In unphotogenic slow motion, which makes the dire consequences harder to see. Since the budget cuts started in 2009, says Ms Feinstein, the court has been muddling through. Service has got slower, waiting times longer. An uncontested divorce now takes about half a year, she says. Without the loan, she would have had to lay off so many people that such a divorce would have taken three times as long. With the loan, it will take merely twice as long. That means lives (not just those of the spouses, but also those of children in custodial limbo) are put on hold.

A typical lawsuit now goes to trial within a couple of years, says Ms Feinstein, but that could soon stretch to five years. The backlog of traffic infractions is already so daunting that it compromises enforcement (and the deterrence of bad driving). And so on. The Californian constitution guarantees criminal defendants a right to speedy trial, but it does not technically require courts to administer civil law at all, Ms Feinstein says. So, in theory, civil adjudication could stop altogether, as it already has on one judicial circuit in Georgia. That, she says would bring about the “unravelling of society”.

Courts are in similar straits all over the country. A report by the American Bar Association found that in the last three years, most states have cut court funding by around 10-15%. In the past two years, 26 have stopped filling judicial vacancies, 34 have stopped replacing clerks, 31 have frozen or cut the salaries of judges or staff, 16 have furloughed clerical staff, and nine have furloughed judges. Courts in 14 states have reduced their opening hours, and are closed on some work days. Even the buildings are not immune; around the country 3,200 courthouses are “physically eroded” and “functionally deficient”, says the National Centre for State Courts.

Even criminal cases are not immune. Some crimes, like domestic violence, have increased with the rotten economy. In Georgia, where court funds have fallen by 25% in the last two years, criminal cases now routinely take more than a year to come to trial. This means that jails are full of the innocent alongside the guilty. Their incarceration adds costs far greater than the alleged savings in the court system. Above all, it causes gross injustice.

To many judges, as the American Bar Association puts it, “the underfunding of our judicial system threatens the fundamental nature of our tripartite system of government.” In San Francisco, Ms Feinstein thinks that the judicial branch must start explaining itself more forcefully to legislators. And if that doesn’t work, she thinks it may be time to ask voters directly for money.

As one revered judge, Learned Hand, said in 1951, “If we are to keep our democracy, there must be one commandment: thou shalt not ration justice.”

California Backs out of Foreclosure Probe as Banks Fire Up Foreclosures

California Atty. Gen. Kamala Harris will no longer take part in a national foreclosure probe of some of the nation’s biggest banks, which are accused of pervasive misconduct in dealing with troubled homeowners.

Harris removed herself from talks by a coalition of state attorneys general and federal agencies investigating abusive foreclosure practices because the nation’s five largest mortgage servicers were not offering California homeowners relief commensurate to what people in the state had suffered, Harris told The Times on Friday.

A big August surge in foreclosure actions by Bank of America and Bank of New York sent the number of California homeowners entering foreclosure to levels not seen in a year. The third-quarter jump in notices of default, the first formal step in the foreclosure process, came after such filings had dropped to a three-year low earlier this year. Defaults were up 25.9% from the prior quarter, according to according to San Diego-based DataQuick, a real estate information service.

Banks have fired up the foreclosure-processing machinery in recent months after a long lull as they tried to negotiate settlements with regulators over faulty foreclosure practices. That slowdown created a backlog after a slew of investigations were launched following last year’s so-called robo-signing scandal, where banks used improper practices and documents to foreclose on troubled homeowners.

Experts said that banks are probably waiting for some kind of settlement to be hammered out before really picking up the pace on foreclosures again. The increase in new California proceedings comes as talks over a broad foreclosure settlement by state attorneys general with the nation’s five-largest mortgage servicers have experienced setbacks — dragging on far longer than expected.

2012 the year of the foreclosure defender

THE ART OF FORECLOSURE DEFENSE
Foreclosure defense is exploding. Foreclosure defense is the fine art of keeping a homeowner in their home for as long as possible, without the homeowner paying the mortgage. A good foreclosure defender can keep a homeowner in her home for years…rent free. She may be able to get a settlement at the end of the day.

Three rent free years adds up to tens of thousands of dollars of savings. It may be enough time for the kids to finish off high school. Foreclosure defense has helped more homeowners than HAMP and HAFA combined.

The foreclosure defender’s knowledge and execution are priceless. A good foreclosure defender need not be an attorney, real estate agent, nor loan broker. But she needs close relationships with them. She doesn’t need a fancy office to meet her clients, but she must be able to close deals at It’s a Grind. She sounds upbeat on the phone and her texts bring a sense of confidence.

There is no one single way to keep a homeowner in the home. It requires a knowledge of the process. She needs to know about short sales, since those can buy almost a year. A loan mod can keep a homeowner in the home for another year. Foreclosure mediation gets the homeowner four more months. Postponing the trustee sale can buy 90 days. Mortgage litigation can buy six months. Bankruptcy another 100. And then there is the unlawful detainer defense. Which of these to use, when to use them, and how to use them is an art.

Mortgage Forgiveness Debt Relief Act Expires in 2012

September 26, 2011: The time is limited for homeowners who want to ensure they aren’t hit with a big tax bill because they had to walk away from a mortgage obligation.

At the height of the housing crisis, when foreclosures across the country began a troubling increase, Congress passed the Mortgage Forgiveness Debt Relief Act of 2007, designed to provide at least some consolation to folks who had lost their homes.

If you borrow money and the lender then cancels or forgives the debt, you generally have to include the canceled amount as income for tax purposes. As the IRS explains, you aren’t taxed on borrowed money because you have an obligation to repay it. However, if the debt is wiped out, the lender is then required to report the amount of canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.

You can imagine the frustration that many people had with this seemingly unfair tax rule. They had lost their homes and then discovered in a “you’ve-got-to-be-kidding-me” moment that they owed taxes on the forgiven debt.

That’s where the mortgage debt relief act comes in. It allows people to exclude income from the discharge of debt on their principal place of residence. In addition to foreclosure, debt reduced because of a mortgage restructuring also qualifies for relief under the new law.

The law says that only debt forgiven in calendar years 2007 through 2012 is eligible. Up to $2 million of forgiven debt qualifies for this exclusion ($1 million if married filing separately).

To get the relief, debt must have been used to buy, build or substantially improve a principal residence and be secured by that residence. So if you refinanced and took money out of the house to pay off credit card debt, you won’t receive the exclusion. Debt forgiven on second homes, rental property, business property, credit cards or car loans also does not qualify for the tax relief.