Begging the Banks

Treasury Secretary Henry Paulson today called on the banks that the federal government has just given $250 billion dollars to make that money available to others in the economy.

“We must restore confidence in our financial system,” Paulson said. “The needs of our economy require that our financial institutions not take this new capital to hoard it, but to deploy it.”

The “needs of our economy” might require that the banks not hoard the money that the government has given them, but the Bush administration isn’t requiring much of anything.

I agree with Paulson that the economy will not begin to recover until there is liquidity in the credit markets.  That, indeed, was the rationale behind the government’s massive and unprecedented bailout of the financial industry.

Why, then, is Paulson asking the banks to do the only thing that justified giving them those billions of taxpayer dollars?

If, as is apparent to just about everyone, the economy will not recover until liquidity is restored to financial markets, why doesn’t the federal government require that the banks not hoard the billions that the government is giving them?

The answer is that, despite the acuteness of the financial crisis, and despite the government’s belated decision to take large scale action, the basic approach of the Bush administration has not changed.

In fact, for the past year, the Bush administration has taken a consistent, and faulty, two pronged approach to dealing with the expanding economic crisis, and this approach has not changed with the latest bailout.

This two pronged approach is

• (1) make capital available at extremely low rates to banks and financial institutions with the goal of restoring liquidity, and then
• (2) beg and plead with these same banks and financial institutions to move this capital into the economy.

As the housing and mortgage crisis worsened, Federal Reserve Chairman Ben Bernanke announced a series of cuts in interest rates.  Each time, Bernanke repeated his call for lenders to voluntarily reduce the principal on delinquent loans to adjust them for the drop in home prices, rejecting the far more more forceful action proposed by Democrats favoring legislation that would require the refinancing of hundreds of thousands of mortgages.

Of course, the banks did not voluntarily do what Bernanke requested.

Now Treasury Secretary Paulson is following the same dead end path in asking the banks to voluntarily take the actions that are needed for the restoration of the market.

The Bush adminstration’s beg and plead approach did not work in the past, and it will not work now.

Of course, no one, except the apocalypticals of the far Left and Right, and Libertarians driven crazy by ideology or alcoholism, want to see the global economy collapse.  Sane people don’t want to see bread lines or live with their guns at the ready in a bunker in the woods.

But we can now longer expect that capitalists, driven by personal gain, will voluntarily act to save the system that sustains them.

What is needed is a comprehensive and mandatory overhaul of the entire banking and financial system and the credit markets on the order of the Securities and Exchange Act of 1934.

And for that, we’ll have to wait at least until a new Congress, a new administration, and a new political and economic philosophy take over in January 2009.

I hope we last that long.

Florida Joins States Suing Countrywide

Florida has joined Illinois and California as states suing subprime lender Countrywide Financial for deceptive and unfair trade practices.

The Florida lawsuit claims that Countrywide put borrowers into mortgages they couldn’t afford or loans with rates and penalties that were misleading.

As in the Illinois and California actions, Countrywide CEO Executive Angelo Mozilo was also named as a defendant.

Here you can read the complaint filed Broward County Circuit Court in Attorney General, Department of Legal Affairs, State of Florida v. Countywide Financial Corp., Countrywide Home Loans Inc., and Angelo Mozilo.

Here you can read our earlier reports on the Illinois and California lawsuits against Countrywide.

In filing the lawsuit, Florida Attorney General William “Bill” McCollum said that “It is unthinkable that a company would try to take advantage of someone’s dream of homeownership. Florida homeowners who are trying to protect their homes from foreclosures shouldn’t have to worry about their mortgage brokers or lenders unfairly profiting at their expense.”

“Similar to other mortgage lenders, Countrywide attempted to generate large numbers of mortgage loans for resale on the secondary mortgage market. In doing so, the company purportedly originated loans with little concern about whether the borrower could afford and maintain payments on these loans. In the process, the company allegedly eased or ignored its own underwriting standards and encouraged borrowers to enter into “teaser” rates while concealing or misrepresenting that much larger payments would become due.”

According to Marc Taps of Legal Services of North Florida, “Our legal services programs throughout the state have seen a large number of clients who are now in default on mortgages written by Countrywide. It appears to us Countrywide did no due diligence and accepted applications which were patently fraudulent and reflected no ability on the part of the borrowers to make the required payments. We cannot help but conclude that the most financially unsophisticated segment of the population was targeted by the brokers who knew Countrywide would write these mortgages.”

The lawsuit also claims that Countrywide hid any potentially negative effects of “teaser” loans, including rising rates, prepayment penalties and negative amortization, which borrowers would inevitably face if they were making minimum payments or trying to refinance.

Traditionally, lenders require borrowers to document income and assets, but investigators with the Attorney General’s Office believe Countrywide offered reduced or no documentation loan programs to increase its loan sales. Countrywide also allegedly paid greater compensation to brokers for loans with higher interest rates and prepayment penalties because it could sell those loans for higher prices on the secondary market.

The Florida Attorney General’s Office also asserts that “[Countrywide’s] deceptive marketing practices were supposedly designed to sell costly loans while hiding or misrepresenting the terms and dangers. Countrywide’s deceptive sales practices resulted in a large number of loans ending in default and foreclosure, with the company reporting earlier this year that more than 25 percent of its subprime loans were delinquent. The Attorney General’s Office received more than 150 complaints about Countrywide, prompting a subpoena in February and ultimately leading to today’s lawsuit.”

In a sign that the growing state legal assault on Countrywide is a bipartisan project, McCollum is the first Republican state attorney general to sue Countrywide.

As we’ve observed before, Countrywide’s expanding legal troubles do not bode well for Bank of America, which plans to acquire Countrywide.

Adding to the pressure on Bank of America to abandon the Countrywide deal, McCollum vowed that he would go after Bank of America’s assets to pay for the damages owed by Countrwide if the sale goes through.

Florida asks consumers who believe they have been victimized by Countrywide to call the Attorney General’s fraud hotline at 1-866-966-7226 or  file a complaint online at: http://myfloridalegal.com.

 UPDATE:

The state of Washington is expected to file a lawsuit against Countrywide soon, accusing Countrywide of discriminating against minority borrowers. The state wants to fine the mortgage lender and revoke its license to conduct business in the state.

California Sues Countrywide for Mortgage Deception

California has joined Illinois today as states suing beleaguered subprime mortgage giant Countrywide Financial Corp. for deceptive loan practices.

In a lawsuit filed this morning in Los Angeles Superior Court, California Attorney General Jerry Brown sued Countrywide Financial, its chief executive Angelo Mozilo, and president David Sambol, for engaging in deceptive advertising and unfair competition by pushing homeowners into mass-produced, risky loans for the sole purpose of reselling the mortgages on the secondary market.

The lawsuit alleges that Countrywide Financial used deceptive tactics to push homeowners into complicated, risky, and expensive loans so that the company could sell as many loans as possible to third-party investors. 

The complaint also alleges that the company marketed complex and difficult to understand loans with very low initial or “teaser” interest rates or payments. Countrywide employees, including loan officers, underwriters, and branch managers–who were under intense pressure to process a constantly increasing number of loans–misrepresented or obfuscated the fact that borrowers who obtained certain types of loans would experience dramatic increases in monthly payments.

Here you can read the complaint filed in California v. Countrywide Financial Corp, Full Spectrum Lending, Angelo Mozilo, and David Sabol.

According to the Calfornia Attorney General’s Office, “In the past, lenders like Countrywide sold home loans to customers and held the loans in their own portfolio, an incentive to maintain strong underwriting standards. Countrywide, however, sold its loans to third-parties in the form of securities or whole loans, often earning more profit for riskier loans. The business model generated windfall profits for Countrywide.”

“The company pushed these loans by emphasizing a low “teaser” or initial rate, often as low as 1 percent for pay option ARMs. Countrywide obscured the negative effects–including rising rates, prepayment penalties and negative amortization–which would inevitably result from making minimum payments or trying to refinance. The company misrepresented or hid the fact that borrowers who obtained its home loans–including exploding adjustable rates and negatively amortizing loans–would experience dramatic increases in monthly payments.”

“In an effort to rope in as many customers as possible, Countrywide greatly relaxed and liberally granted exceptions to its mortgage lending standards. Traditionally, lenders required borrowers to document income and assets but Countrywide offered reduced or no documentation loan programs to increase its loan sales. Angelo Mozilo and David Sambol actively pushed for easing underwriting standards and granting exceptions to documentation requirements.”

“In Countrywide’s 2006 annual report, the company touted the massive growth of its loan production from $62 billion in 2000 to $463 billion in 2006–three times the increase of the U.S. residential loan production market, which tripled from $1.0 trillion in 2000 to $2.9 trillion in 2006. 26 percent of Countywide loans were for California properties. The company sold an ever-increasing number of loans in an effort to gain a 30 percent market share of loan originations and then sell its loans on the secondary market, as mortgage-backed securities or pools of whole loans. Countrywide’s securities trading volume increased from $647 billion in 2000 to $3.8 trillion in 2006.”

“Countrywide routinely sold loans based upon a borrower’s stated income and without verifying the information. Loan officers memorized scripts that marketed low payments by focusing on the potential customer’s dissatisfaction, saying, for example, ‘Which would you rather have, a long-term fixed payment, or a short-term one that may allow you to realize several hundred dollars a month in savings?’ The loan officer did not state that the payment on this new loan would exceed the payment on the current loan.

“Countrywide paid greater compensation to brokers for loans with a higher interest rates, as well as prepayment penalties, because it could sell those loans for higher prices on the secondary market. Countrywide also paid rebates to brokers who originated loans with prepayment penalties, adjustable rates and high margins.”

“Countrywide operated an extensive telemarketing operation in which it touted its expertise and claimed to find the best financial options for customers. Customer Service representatives at Countrywide call centers were required to complete calls within three minutes, often processing sixty-five to eight-five calls per day. Employees who did not meet quotas were terminated. The company’s deceptive marketing practices, designed to sell costly loans while hiding or misrepresenting the terms and dangers, included:

• Encouraging borrowers to refinance or obtain financing with complicated mortgage instruments like hybrid adjustable rate mortgages or payment option adjustable mortgages;
• Marketing complex loan products by emphasizing a very low “teaser” rate while misrepresenting the steep monthly payments, increased interest rates and risk of negative amortization;
• Dramatically easing underwriting standards to qualify more people for loans;
• Using low or no-documentation loans which allowed no verification of stated income;
• Hiding total monthly payment obligations by selling homeowners a second mortgage in the form of a home equity line of credit;
• Making borrowers sign a large stack of documents without provider time to read the paperwork; and
• Misrepresenting or hiding the fact that loans had prepayment penalties.”

“As the secondary market’s appetite for loans increased, Countrywide further relaxed its standards to finance borrowers with ever-decreasing credit scores. Countrywide employees routinely overrode the company’s computerized underwriting system, known as CLUES, which issued loan analysis reports recommending or discouraging loans based on factors such as a consumer’s credit rating. As the pressure to produce loans increased, Countrywide set up an entire department in Plano, Texas, at the direction of Mozilo and Sambol, where employees could submit requests for underwriting exceptions. In 2006, 15,000 to 20,000 loans a month were processed through this exception process.>

“Countrywide’s deceptive sales practices resulted in a large number of loans ending in default and foreclosure. According to Countrywide’s February 2008 records, a staggering 27 percent of its subprime mortgages were delinquent. Overall, approximately 20,000 Californians lost their homes to foreclosure in May 2008 and 72,000 California homes were in default, roughly 1 out of 183 homes.”

“Despite receiving numerous complaints from borrowers claiming that they did not understand their loan terms, Countrywide ignored loan officer’s deceptive practices and loose underwriting standards. Countrywide also pushed its borrowers to serially refinance, repeatedly urging borrowers to obtain home loans to pay off their current debt.”

The California Attorney General’s Office asks that consumers who believe they have been victimized by Countrywide Consumers should file a complaint by contact the Attorney General’s Public Inquiry Unit in writing at Attorney General’s Office California Department of Justice Attn: Public Inquiry Unit P.O. Box 944255, Sacramento, California or through an online complaint form available at http://ag.ca.gov/contact/complaint_form.php?cmplt=CL

 

Illinois Sues Countrywide and Mozilo For Fraud and Deception

In the first state action against Countrywide Financial, the Attorney General of Illinois is suing Countrywide and its chief executive, Angelo Mozilo, claiming that the company and its executives engaged in unfair and deceptive practices that defrauded borrowers by selling them costly and defective loans that quickly went into foreclosure.

Here you can read the complaint in Illinois v. Countrywide Financial Corp., Countywide Home Loans Inc., Full Spectrum Lending, Countrywide Home Loans Servicing LP, and Angelo R. Mozilo. 

The lawsuit, which will be filed on Wednesday in Cook County, accuses Countrywide and Mozilo of improper underwriting standards, structuring loans with risky features, and misleading consumers with hidden fees and fake marketing claims, including its still heavily advertised “no closing costs loan.” 

The complaint also alleges that Countrywide created incentives for its employees and brokers to sell questionable loans by paying them more on such sales.

The lawsuit asks for an unspecified amount of monetary damages and requests that the court require Countrywide to rescind or reform all the questionable loans it sold from 2004 through the present. 

In addition, the lawsuit asks the Court to require that Mozilo personally contribute to paying the damages.

Illinois Attorney General Lisa Madigan also asks the court for 90 days to review any loans currently in foreclosure or moving toward foreclosure.

The complaint states that Countrywide was the largest lender in Illionis from 2004 through 2006, selling about 94,000 loans to consumers in the state. The company operated about 100 retail branch offices in Illinois and its loans were also offered by Illinois mortgage brokers. Countrywide also purchased loans through a network of 2,100 correspondent lenders in the state.

The complaint also describes dubious practices in Countrywide’s huge servicing arm, which oversees $1.5 trillion in loans. 

For example, the complaint alleges that an Illinois consumer whose Countrywide mortgage was in foreclosure came home to find that the company had changed her locks and boarded up her home, although no judgment had been entered and no foreclosure sale conducted, and that It took a week for the homeowner to regain access to her home.

Attorney General Madigan claims that “People were put into loans they did not understand, could not afford and could not get out of. This mounting disaster has had an impact on individual homeowners statewide and is having an impact on the global economy. It is all from the greed of people like Angelo Mozilo.”

The lawsuit is being filed on the same day that Countrywide’s shareholders will meet to decide whether to agree to a sale of the company to Bank of America.

We’ve written before about why we think that Bank of America will ultimately pull out of the deal. 

Adding to the arguments that we earlier made against Bank of America’s purchase of Countrywide, the New York Times notes that “The lawsuit adds to the considerable legal risks facing Bank of America as it prepares to absorb Countrywide in a takeover announced in January. Countrywide and its executives have been named as defendants in shareholder lawsuits, and the company’s practices are the subject of investigations by the Securities and Exchange Commission, the F.B.I. and the Federal Trade Commission, which oversees loan servicing companies.”

In addition to the Illinois lawsuit, at least three lawsuits against Countrywide have been filed by offices of the U. S. Trustee, part of the Department of Justice that monitors the bankruptcy system,  contending that Countrywide’s loan servicing practices were an abuse of the bankruptcy system.

Countrywide CEO Angelo Mozilo also has troubles of his own. 

Mozilo is the subject of a Securities and Exchanges Commission investigation into his sales of Countrywide stock before the price imploded; from 2005 to 2007 Angelo R. Mozilo sold much of his Countrywide stock realizing $291.5 million in profits.

And, as we’ve reported, Mozilo is at the center of the new controversy regarding recent revelations that politically connected “Friends of Angelo,” including  U.S. Senators Christopher Dodd (D- Conn.) and Kent Conrad (D-N. Dak.), as well as members of both the current Bush and previous Clinton administrations, got special “V.I.P.” loans with extremely favorable terms from Countrywide.

In the last three quarters, Countrywide reported $2.5 billion in losses, and in the first quarter of 2008, total nonperforming assets reached $6 billion, almost five times that of the same period last year.

UPDATE:

California has also sued Countrywide for deceptive practices. 

You can read the story here.

You can also read the complaint in California v. Countrywide Financial Corp, Full Spectrum Lending, Angelo Mozilo, and David Sabol.

 

The “Friends of Angelo” — Countrywide’s Sweetheart Loans to Washington Big-Shots

The scandal involving special “sweetheart” loans to politicians and Washington insiders by Countrywide Financial is both heating up and widening.

Earlier this week, James A. Johnson was forced to step down as head of Barack Obama’s vice president selection team when it was revealed that he had profited from special deals on three home loans with Countrywide that were approved by Countrywide founder Angelo Mozilo only for his “close friends.”

At that time, we wrote that “Given its central role in the subprime mortgage debacle, it is no surprise that Countrywide Financial has become politically radioactive. The most recent evidence for the politically deadly consequences of an association with Countrywide or its corporate officers is the sudden and ungraceful exit of businessman James A. Johnson, a long time Washington insider and lobbyist, from Barack Obama’s vice-presidential selection team.”

Now it appears that Mozilo had a much larger circle of “close friends” in Congress and in recent Democrat and Republican administrations than was originally supposed, and that sweatheart loan deals were given by Countrywide to a wide array of Washington politicians and big-shots.

The “Friends of Angelo” list is now known to include Senator Christopher Dodd (D-Conn.), Senator Kent Conrad (D-N. Dak.), Bush’s Secretary of Housing and Urban Development Alphonso Jackson, former Clinton Secretary of Health and Human Services Donna Shalala, and former U.N. ambassador and Clinton Assistant Secretary of State Richard C. Holbrooke.

According to Portfolio.com, which broke the story:

“Most of the officials belonged to a group of V.I.P. loan recipients known in company documents and emails as “F.O.A.’s”—Friends of Angelo, a reference to Countrywide chief executive Angelo Mozilo. While the V.I.P. program also serviced friends and contacts of other Countrywide executives, the F.O.A.’s made up the biggest subset. According to company documents and emails, the V.I.P.’s received better deals than those available to ordinary borrowers. Home-loan customers can reduce their interest rates by paying “points”—one point equals 1 percent of the loan’s value.”

“For V.I.P.’s, Countrywide often waived at least half a point and eliminated fees amounting to hundreds of dollars for underwriting, processing and document preparation. If interest rates fell while a V.I.P. loan was pending, Countrywide provided a free ‘float-down’ to the lower rate, eschewing its usual charge of half a point. Some V.I.P.’s who bought or refinanced investment properties were often given the lower interest rate associated with primary residences.”

“Unless they asked, V.I.P. borrowers weren’t told exactly how many points were waived on their loans, the former employee says. However, they were typically assured that they were receiving the ‘Friends of Angelo’ discount, and that Mozilo had personally priced their loans.

“The V.I.P. loans to public officials in a position to advance Countrywide’s interests raise legal and ethical questions. Countrywide’s ethics code bars directors, officers and employees from ‘improperly influencing the decisions of government employees or contractors by offering or promising to give money, gifts, loans, rewards, favors, or anything else of value.’ Federal employees are prohibited from receiving gifts offered because of their official position, including loans on terms not generally available to the public. Senate rules prohibit members from knowingly receiving gifts worth $100 or more in a calendar year from private entities that, like Countrywide, employ a registered lobbyist.”

So far, neither Senator Dodd nor Senator Conrad have admitted any wrongdoing, and both claim that they did nothing for Mozilo or Countrywide in return for their sweetheart deals.

Dodd, who is chairman of the Senate Banking Committee, claims that he never inquired or even wondered whether his special status with Countrywide might be related to his position as a senator or as Banking Committee chairman.

“Well, I don’t know we did anything wrong here,” Dodd said at a press conference. “I negotiated a mortgage at a prevailing rate, a competitive rate. If anyone had said to me, ‘We’re giving you some special treatment here,’ I would have rejected it. So no, I don’t feel at this point that I have any obligation. I did what I was supposed to do. I did what millions of other people did.”

Conrad, who is chairman of the Senate Budget Committee and a member of the Senate Finance Committee, has said that he gave the money he saved on his special deal with Countrywide to charity.

We hope that Congress vigorously investigates this scandal, and that it fully exposes those who benefited from special deals with Countrywide while they were on the public payroll.

 

N.Y. Times Editorial Calls for Foreclosure Prevention Legislation Before the Next Mortgage Meltdown

The New York Times entered into the politics of the foreclosure crisis with an explosive editorial today accusing the Bush administration of failing to protect the economy and instead “sowing confusion and delay” in the face of the mortgage meltdown.

Here’s what the Times said:

“The housing bust is feeding on itself: price declines provoke foreclosures, which provoke more price declines. And the problem is not limited to subprime mortgages. There is an entirely different category of risky loans whose impact has yet to be felt — loans made to creditworthy borrowers but with tricky terms and interest rates that will start climbing next year.”

“Yet the Senate Banking Committee goes on talking. It has failed as yet to produce a bill to aid borrowers at risk of foreclosure, with the panel’s ranking Republican, Richard Shelby of Alabama, raising objections. In the House, a foreclosure aid measure passed recently, but with the support of only 39 Republicans. The White House has yet to articulate a coherent way forward, sowing confusion and delay.”

“[I]f house prices fall more than expected — a peak-to-trough decline of 20 percent to 25 percent is the rough consensus, with the low point in mid-2009 — financial losses and economic pain could extend well into 2011.”

“That is because a category of risky adjustable-rate loans — dubbed Alt-A, for alternative to grade-A prime loans — is scheduled to reset to higher payments starting in 2009, with losses mounting into 2010 and 2011. Distinct from subprime loans, Alt-A loans were made to generally creditworthy borrowers, but often without verification of income or assets and on tricky terms, including the option to pay only the interest due each month. Some loans allow borrowers to pay even less than the interest due monthly, and add the unpaid portion to the loan balance. Every payment increases the amount owed.”

“In coming years, if price declines are in line with expectations, Alt-A losses are projected to total about $150 billion, an amount the financial system could probably absorb. But until investors are sure that price declines will hew to the consensus, the financial system will not regain a sure footing. And if declines are worse than expected, losses will also be worse and the turmoil in the financial system will resume.”

“There’s a way to avert that calamity. It’s called foreclosure prevention. There is no excuse for delay.”

We agree with the Times that effective foreclosure prevention legislation is long overdue.  As the Times pointed out, unless Congress acts fast, it is likely that the economic consequences of the bursting of the housing bubble will be even more serious and widespread.

Even Fed Chair Ben Bernanke — who could not be called an advocate of government intervention in the markets — has stated that “High rates of delinquency and foreclosure can have substantial spillover effects on the housing market, the financial markets, and the broader economy” and that what is at stake is not merely the homes of borrowers, but “the stability of the financial system.” 

We also can not imagine a more self-defeating political strategy than that of the Republicans who have opposed foreclosure prevention legislation. 

We’ve already written about Senator Richard Shelby’s close ties to the apartment owners industry, which has aggressively opposed federal aid to homeowners in, or near, default.

Surely, with the presidential election only months away and their party in trouble, more Republicans — including Senator McCain — should see the need for coming to terms with the economic, and political, realities of the foreclosure crisis, even if it requires ideological compromise.

 

Eleven State Foreclosure Prevention Group Slams Lenders and Bush’s New Hope Alliance — Says Not Enough Being Done to Help Homeowners

In the summer of 2007, the Attorneys General of 11 states (Arizona, California, Colorado, Iowa, Illinois, Massachusetts, Michigan, New York, North Carolina, Ohio, and Texas), two state bank regulators (New York and North Carolina), and the Conference of State Bank Supervisors formed the State Foreclosure Prevention Working Group to work with servicers of subprime mortgage loans to identify ways to work together to prevent unnecessary foreclosures. 

The Working Group has now issued two reports, in February 2008 and April 2008, based on data collected from subprime mortgage servicers. 

The reports note that foreclosure prevention continues to fall short, despite widely-publicized campaigns to encourage homeowners in trouble to seek help and initiatives by servicers to fast-track loan modifications.

The major findings of the State Foreclosure Prevention Working Group include the following:

• 70 percent of homeowners who are two months behind on their mortgages still aren’t getting help and are still not on track for any loss-mitigation.
• While the number of borrowers in some kind of loss mitigation program has increased, it has been matched by an increasing level of delinquent loans; thus, the relative percentage has remained about the same. “This large gap suggests a systemic failure of servicer capacity to work out loans.” 
• Only one in three delinquent borrowers completed a workout within 45 days.  Slow assistance is partly why the number of homeowners facing foreclosure increased 16 percent.  Servicers’ loss-mitigation departments are severely strained in managing the current workload.  “We are concerned that servicers overall are not able to manage the sheer numbers of delinquent loans…the burgeoning numbers of delinquent loans that do not receive loss-mitigation attention are clogging up the system on their way to foreclosure…We fear this will translate to increased levels of vacant foreclosed homes that will further depress property values and increase burdens on government services.”
• Homeowners who do receive loss-mitigation help are most likely to receive some form of loan modification.  Such modifications are a solution that seems to offer better long-term prospects for successful resolution of problem loans. Many servicers are replacing their use of repayment plans in favor of loan modifications.
• The Hope Now Alliance — a coalition of mortgage lenders and servicers backed by the Bush administration — has not provided borrowers with very much hope.

Based on their findings, the State Foreclosure Prevention Working Group made the following recommendations:

• Develop a more systematic loan work-out system to replace the intensive, individual, “hands-on” loss-mitigation approach. “Initial efforts to develop systemic approaches are far too limited to make a difference in preventable foreclosures. Without a systematic approach, we see little likelihood that ongoing efforts will make a serious dent in the level of unnecessary foreclosures.”
• Slow down the foreclosure process to allow for more work-outs. “Targeted efforts to slow down subprime foreclosures may give homeowners and servicers more time to find solutions to avoid foreclosure.”

“Progress is being made, but there is a long way to go,” said Iowa Attorney General Tom Miller, a founder and leader of the State Foreclosure Prevention Working Group. “We still see a tremendous gap between the need for loan work-outs and the options in place today.”

“Foreclosures are costly, further reduce real estate values, and harm not only borrowers, but also neighborhoods and communities,” said Massachusetts Attorney General and Working Group member Martha Coakley.  “In most cases, and particularly where mortgage loans contain payment terms that were not structured to be sustainable in a real estate downturn, loan modification and other loss mitigation should be done much more actively.”

We would point out that the states involved in the Working Group have nearly half of the nation’s electoral college votes — and that several of these states are crucial “swing” states in the 2008 presidential election.  The candidates need to pay close attention to the Working Group’s findings and recommendations.

 

Can HUD Be Saved?

We had all but forgotten about the Department of Housing and Urban Development (HUD) when HUD secretary Alphonso Jackson resigned on Monday.

His resignation, far more than his tenure on the Cabinet, reminded us that HUD has a role to play in the current housing and mortgage crisis, particularly in regard to the regulation of Fannie Mae and Freddie Mac. 

We would like to see HUD take an active role in investigating whether discrimination played a role in the subprime mortgage crisis, which has hit the cities and minorities especially hard.

We would also like to see HUD participate in ramped-up efforts to expose and punish mortgage fraud, which has also disproportionately affected minorities.

But perhaps it is too late for HUD.

Created with great hope in 1965 as part of President Lyndon Johnson’s War on Poverty, HUD was given the powerful mission of developing and executing a national policy on housing and cities.  Since then, HUD has become a center of government corruption and waste, betraying the public trust in scandal after scandal under both Democratic and Republication administrations, as it awarded contracts and funneled enormous sums of public money on the basis of personal and political connections rather than the public interest.   

Alphonso Jackson’s resignation gives President Bush the opportunity to appoint a new HUD secretary who is capable of dealing with the devastating consequences of the housing crisis and the mortgage meltdown on the cities.

Whomever the president picks, the first job of any new HUD secretary will be to overcome and reverse HUD’s decades-long track record of incompetence and corruption.

That will be an extremely difficult task.

New Regulation of Credit Industry is Now Inevitable. The Only Question is How Much Regulation, and with How Much Bite?

There can no longer be any question whether there will be new regulation of the credit industry in the wake of the housing meltdown and the mortgage crisis.

The only question now is the extent of the regulation and how much teeth it will have.

Treasury Secretary Henry Paulson eliminated any doubt regarding new regulation when he conceded that the Federal Reserve should bolster its supervision of investment banks while they are taking cheap money from the Fed’s new emergency program.

Paulson said that the Bush administration will soon put forth a blueprint for federal oversight in an effort to promote smoother functioning of financial markets.

”This latest episode has highlighted that the world has changed as has the role of other nonbank financial institutions and the interconnectedness among all financial institutions,” Paulson said.  ”These changes require us all to think more broadly about the regulatory and supervisory framework that is consistent with the promotion and maintenance of financial stability.” 

Greater oversight is necessary, according to Paulson, to “enable the Federal Reserve to protect its balance sheet, and ultimately protect U.S. taxpayers.”

Wall Street’s major investment banking firms, including Goldman Sachs, Lehman Brothers and Morgan Stanley, averaged $32.9 billion in daily borrowing over the past week from the new Fed program, compared with $13.4 billion the previous week. On Wednesday alone, their borrowing from the Fed reached $37 billion.

To add to the growing conservative consensus that greater federal regulation of the credit market is necessary, Wall Street Journal columnist Jon Hilsenrath wrote on the front page of the newspaper’s Money and Investing section that “if the government is going to intervene aggressively when bubbles burst, as it’s doing now, then maybe policy makers should do some new thinking about how to prevent bubbles in the first place.”

Democrats, both in Congress and on the presidential campaign trail, have called for more extensive and permanent regulation of both the credit market and the mortgage industry than that proposed by the Bush administration.

The final outcome will depend on who wins in November and what happens in the economy between now and the next Inauguration Day. 

But it is now clear that one consequence of the Bear Stearns bailout and the Fed’s cheap money policy for the major investment banks is to have made some form of new regulation of the credit market and the mortgage industry inevitable.

In the meantime, we’re still waiting for the enormous sums of cheap money that the Fed has pumped into the credit industry to make its way down the pipeline to the rest of us in the economy. 

The Battle Lines Have Formed in the Politics of the Credit and Mortgage Crisis

The battle lines have formed in the political fight over the federal government’s response to the credit and mortgage crisis.

There are now two clear, and clearly different, strategies being put forward as the federal government attempts to deal with the credit and mortgage crisis — or is it the real estate crisis, the housing crisis, the foreclosure crisis, the liquidity crisis, the international banking crisis, the securities crisis, or all of the above?

One strategy relies on persuasion (and the credit industry’s recognition of group self-interest) and the other on force (and the belief that without the threat of force, individual self-interest will trump group self-interest every time).

The persuasion strategy belongs to the Bush administration, including the President’s Working Group on Financial Markets, and a majority of the Republicans in the House and Senate.

Their basic approach is to use their bully pulpit, as well as some incentives, to attempt to persuade the banks, lenders, mortgage brokers, and others in the credit industry to regulate and reform themselves.

As Treasury Secretary Henry Paulson put it, the Bush administration and the President’s Working Group on Financial Markets (which includes, in addition to the Treasury Secretary, the heads of the Federal Reserve Board, the Federal Reserve Bank of New York, the Securities and Exchange Commission and the Commodity Futures Trading Commission) want “to not create a burden” on the players in the credit industry.

They’re hoping that the industry will see that their own self-interest requires them to take the actions that the administration suggests in order to restore confidence and stability in the credit market.

For the most part, the Working Group’s recommendations would not require legislation, but would be implemented by the credit industry itself.

As the New York Times testily observed, the administration’s program, announced with such fanfare today by Treasury Secretary Paulson, “amounted to little more than demands that investors and financial institutions take greater care in analyzing and managing their risks.”

On the other side of the aisle, and from a different ideological perspective, the Democrats are pushing an agenda that relies far more on the force of government imposed regulations and the concomitant threat of legal sanctions.

The Democrats’ thinking is premised on the belief that even with the credit market in crisis, and even with the general recognition within the credit industry that new rules are necessary for the good of the game, the individual players will adhere to these rules only when they are forced to do so by federal regulators with the threat of punishment.

The Democrats are probably also thinking that a “tough” approach to the banks and the brokers will play well with the voters.

What will happen — will the persuaders or the punishers win out in the end?

Our view is that in the short run — that is, until after the November elections — the persuaders will stand their ground, even in the face of election year attacks from the Democrats, and resist the increasingly insistent calls for unleashing an armed federal force against the credit industry.

If the financial crisis worsens significantly, we would then expect that the Republican persuaders will have to make more concessions regarding legislation and federal sanctions, although we would still expect that these will be minimal.

On the other hand, if the Democrats win in November, persuasion will be dead and war will be declared.  Force would be used against the financial markets and credit industry on a major scale.

We could then see a comprehensive and sweeping legislative overall of the entire credit and banking industry even more extenstive than the Securities and Exchange Act.