foreclosures

Massive Justice Department Attack on Banks?

by Hans Bader on September 2, 2011 · 15 comments

in Bailout Watch, Economy, Legal

A monumentally-destructive Justice Department attack on banks may soon occur. Earlier, I wrote about how the Obama Justice Department is now forcing banks to make risky loans (in the name of “fair lending”), thus planting the seeds of a future financial crisis. In response, I received an e-mail from a former Justice Department lawyer who told me that the Justice Department’s HCE (Housing and Civil Enforcement Section, Civil Rights Division) is planning to block foreclosures across America (“across the whole [banking] sector”), even for irresponsible deadbeats who deserve to be foreclosed upon, citing racial disparities in foreclosure rates (which generally exist between black and white borrowers due to causes unrelated to intentional discrimination — as the Supreme Court has observed, racial disparities often occur for reasons completely unrelated to racist decision-making, as it has noted in cases like Richmond v. J.A. Croson Co., Watson v. Fort Worth Bank & Trust,  and United States v. Armstrong).

He wrote that “there is a unit in the HCE section headed by a nut running this. They are next going to BLOCK foreclosures based on this theory. It is part of an administration wide-strategy to stop foreclosures.  I’ve heard from people who have participated in the internal meetings.” He also asked that I not print his name yet, but allowed me to pass on the content of his e-mail.

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Voodoo Economics Behind Government Demand for Mortgage Write-Downs by Big Banks

by Hans Bader on June 14, 2011 · 3 comments

in Bailout Watch, Economy, Legal, Regulation, Stimulus to Nowhere

In 2010, Obama administration allies proposed a trillion-dollar bailout for those lucky mortgage borrowers whose loans were owned by the government-backed mortgage giants Fannie Mae and Freddie Mac — including wealthy borrowers who have no difficulty paying their mortgage — in order to increase their disposable income and temporarily pump up the economy through the next election. Now, Obama administration officials such as Associate Attorney General Tom Perrelli are trying to achieve the same goal on a much smaller scale in settlement talks with the nation’s four biggest banks. Perrelli is demanding that they reduce the mortgages of certain favored underwater borrowers (many of whom are underwater because they didn’t make a substantial downpayment, the way thrifty people do), using the banks’ unrelated foreclosure paperwork violations as a pretext (benefiting lucky borrowers who were never foreclosed upon, much less treated improperly in any way).

But as Mark Calabria notes, this demand makes no sense at all economically. Any mortgage write-off that increases the disposable income of borrowers will reduce the disposable income of investors whose mortgage-backed securities are worth less after mortgages are partly written off. The government’s demand reflects irrational, magical thinking, a kind of voodoo economics. This  proposed rip-off of investors would not create any wealth or income, but rather merely redistribute wealth and income from investors to borrowers (reducing the disposable income of the suddenly poorer investors), discouraging future investment.

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Federal Government and State Attorneys General Push Arbitrary Mortgage Bailout

by Hans Bader on March 16, 2011

in Bailout Watch, Economy, Features, Legal, Property Rights

Post image for Federal Government and State Attorneys General Push Arbitrary Mortgage Bailout

Back before the election, intellectuals with ties to the Obama administration proposed a trillion-dollar bailout for some (but not all) underwater mortgage borrowers, as a way to increase consumer spending.

Last week, The Washington Post reported that bureaucrats at the newly-created Consumer Financial Protection Bureau (CFPB) want to do something similar on a smaller scale. Their proposal would require banks to write off part of the mortgages of certain (but not all) mortgage borrowers who owe more on their mortgage than their house is worth. Worse, they would require mortgage servicers to write off loan principal on loans owned by other institutions, like pension funds, violating their property rights.

Virtually all of America’s pension funds own mortgage-backed securities. Pension funds that millions of people rely on for their retirements would lose billions of dollars due to reduced mortgage value. These demands are contained in a 27-page proposed settlement sent to the banks by the CFPB, the Justice Department, and state attorneys general who sued the banks over their recent foreclosure documentation lapses. Such demands flout court rulings like Louisville Joint Stock Land Bank v. Radford (1935), which overturned a federal law that wiped out mortgage value.

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Honeycomb House: A Fresh Foreclosure Horror

by Kathryn Ciano on November 11, 2010

in Economy, Legal, Regulation

Problems with empty, foreclosed, or otherwise house-poor homes no longer stop at suburban sprawl; now mosquito and wildcat infestations threaten to lower real estate values for your penny on the block. When folks who gambled past their means to stretch a mortgage to its limit can’t afford to maintain their houses, the infrastructure starts to crumble.

Check out this video of a bee-infested house where the walls are now completely filled with honeycomb.

Here’s honey dripping down from the hole in the wall for the electrical socket:

(Photo from KSBW, via BLDGBLOG)

If you’re thinking an apiary home might come with sweet side benefits, consider the tree house of horror that would be  a West Nile Virus-filled mosquito breeding ground of a swimming pool. Or an abandoned house filled with bobcats.

That’s exactly what happened in the last mortgage crisis of 2008. Southern California suffered a series of abandoned swimming pools becoming homes to thousands of mosquitoes and their disease-breeding larvae:

[N]eglected pools are breeding grounds for mosquitoes, which can carry diseases like West Nile virus. This at a time when the economic downturn has left local governments with less money to fight this potentially deadly foe, and legal obstacles posed by foreclosures and bank failures can slow what efforts are being made.

“We’re seeing a sharp spike in abandoned pools and the mosquito problems that are attendant to it. I haven’t seen it to any extent approaching this [previously],” said Joseph Conlon, technical adviser for the American Mosquito Control Association in Jacksonville. “In the past, we’ve had people abandon their home or go on vacation. It was just a case of bad neighbors. In this case, it’s driven economically.”

Or imagine calling animal patrol to report a “baby mountain lion” living in the house next door, only to discover that a family of bobcats has taken over the abandoned house.

Banks are doing the best they can to keep up with the problem. But banks are not real estate brokers; they cannot hold hundreds upon thousands of foreclosed, abandoned homes.

Allowing people to live in these homes doesn’t do them any favors, as they squat and wait out the bank (or the next market dip) without caring for their homes. But perhaps there’s some value to warm bodies keeping mirrors fogged around the house, rather than letting the state of nature creep back in.

Agree or disagree with lending practices, do watch the video clip; it’s fascinating to see the wild side creep back in around the cracks of civilization, and man battling beast like we’re in some kind of  Garcia Marquez novel!

Foreclosure Moratorium Would Impose Huge Losses on Taxpayers

by Hans Bader on October 27, 2010

in Bailout Watch, Economy, Legal

“Taxpayers and the federal government would be among the biggest losers if officials heed calls from some legislators and homeowners rights groups to stop millions of foreclosures across the country because of possible paperwork problems,” reports the Washington Times. “The Treasury Department is majority owner of one of the biggest mortgage companies, Ally Financial, formerly GMAC.”

“Despite much political posturing over improperly assigned foreclosure documents, ‘robo’ signatures and other irregularities . . . there does not appear to be any substantive questions’ about the legal rights of banks and investors to foreclose against long-delinquent homeowners in most cases,” said Ed Pinto, a mortgage analyst and former chief credit officer for Fannie Mae (a position he held back in the days before it began buying up and mislabeling vast numbers of subprime mortgage loans, leading to its current taxpayer bailout).

A moratorium would also impose huge losses on investors and retired people.  As noted earlier, if your 401(K) has shrunken recently, it may be due to falling bank stocks, like Bank of America stock, which has fallen from over $19 a share to less than $12 a share over the last six months.   Many if not most 401(K)s indirectly own Bank of America stock, through their mutual fund holdings.  Its stock value has fallen due to the possibility that paperwork errors and securitization may thwart repossession of homes though foreclosure.   Law professor Richard Epstein says a halt to foreclosures would be a disaster for “prudent borrowers and lenders,” while AOL’s Marty Robins says it would delay “economic recovery” and increase mortgage “interest rates.”  A news story illustrated the negative ripple effects of halting foreclosures.  Bank of America also reported a $10 billion loss due to restrictions on debit cards contained in the 2010 Dodd-Frank Act, restrictions that will also harm consumers.

Your Shriveling 401(K): Thank Financial Red Tape and the Foreclosure Furor

by Hans Bader on October 19, 2010

in Bailout Watch, Deregulate to Stimulate, Economy, Legal, Regulation

If your 401(K) has shrunken recently, it may be due to falling bank stocks, like Bank of America stock, which has fallen from over $19 a share to less than $12 a share over the last six months.   Most 401(K)s indirectly own Bank of America stock, because its stock is held both by most large diversified mutual funds, and by most index funds.

Bank of America just reported a $7.3 billion loss due to $9.87 billion in costs resulting from the restrictions on debit cards contained in the 2010 Dodd-Frank Act backed by the Obama administration.  (Those restrictions will also result in sizeable costs being passed on to consumers, while benefiting certain politically-connected businesses.  Other provisions in the Dodd-Frank Act not only harm banks and the economy, but are resulting in the return of some checking account monthly fees and per-check fees, while another costly law called the CARD Act is leading to the return of annual fees on some credit cards.)

But Bank of America’s stock value has fallen more due to the recent furor over foreclosures and the possibility that paperwork errors and securitization may thwart foreclosures against defaulting mortgage borrowers.  Bank of America temporarily halted foreclosures in all fifty states.  Leading law professor Richard Epstein explains how a permanent halt to foreclosures would be a disaster for “prudent borrowers and lenders,” as “those purchasers who bought homes out of foreclosure proceedings may well be forced to defend their titles against the original borrowers who went into default.”  At AOL News, Marty Robins gives additional reasons why a halt to foreclosures is a bad idea that would delay “economic recovery,” wipe out bank capital, reduce their “lending capacity,” and increase “interest rates” on mortgages.  A Washington Post story illustrates the negative ripple effects on the economy and ordinary citizens of halting foreclosures.

Bank of America stock fell more than 4 percent today after the New York Fed and others threatened to sue Bank of America to force it to repurchase $47 billion in mortgage securities that soured.  (Earlier, the Fed pressured Bank of America into buying a collapsing Wall Street investment firm whose failure it perceived as threatening the economy.   And the New York Fed, then headed by Timothy Geithner, used the AIG bailout to make billions in unnecessary payments to politically-connected financial firms that didn’t even need the money. )

Earlier this month, perhaps to appease politicians, Bank of America suspended foreclosures in all 50 states after sloppy paperwork in some foreclosures became apparent.  Now, it’s trying to resume foreclosures in 23 states, after a review disclosed no examples of innocent homeowners being foreclosed upon by it.  But state attorneys general smell blood and are pressing the banks not to resume foreclosures at all.

Stop Coddling Mortgage Deadbeats

by Hans Bader on October 14, 2010

in Bailout Watch, Economy, Legal, Politics as Usual, Property Rights, Regulation

Right now, there’s a big manufactured outrage over the fact that at a few banks, paperwork errors occurred in foreclosures.

The Wall Street Journal summarizes it well:

A consumer borrows money to buy a house, doesn’t make the mortgage payments, and then loses the house in foreclosure—only to learn that the wrong guy at the bank signed the foreclosure paperwork. Can you imagine? The affidavit was supposed to be signed by the nameless, faceless employee in the back office who reviewed the file, not the other nameless, faceless employee who sits in the front. The result is the same, but politicians understand the pain that results when the anonymous paper pusher who kicks you out of your home is not the anonymous paper pusher who is supposed to kick you out of your home. Welcome to Washington’s financial crisis of the week.

At CNBC, John Carney has an insightful column entitled “Let’s Not Start Lionizing the Anti-Foreclosure Deadbeats.”

Dismissing foreclosure actions based on technicalities that have nothing to do with whether a borrower defaulted on a loan will lead to negative “consequences” for borrowers in the future, like much more costly handling of paperwork, that will likely lead to increased closing costs for people purchasing a home.  “Total war over missing paperwork” is a bad thing for honest borrowers and lenders alike.

As The Journal notes,”Now President Obama is refusing to sign a previously noncontroversial measure to have states recognize notarized documents from other states,” vetoing it last week simply because one possible use of this measure would be to speed foreclosures otherwise slowed by interstate red tape.  At the liberal publication Slate, Stephen Sachs explains why that bill was a good idea for reasons having nothing to do with mortgages or foreclosures, and how it will promote interstate commerce and protect honest creditors.  Sachs notes, “The vetoed bill wasn’t aimed at the housing crisis. It was introduced back in 2005 and passed the House with bipartisan support in December 2006.”

I was an outspoken critic of the 2008 bank bailout at the time it was being pushed through Congress (I called it “unconstitutional,” “dangerous,” and “unnecessary”), and I completely understand and share public outrage at mismanaged banks that ended up being bailed out.  But I don’t understand why people think the bailouts should be compounded by letting deadbeat borrowers avoid hundreds of billions of dollars in unpaid mortgages without consequences — which would be the result of a permanent foreclosure freeze — at the expense of healthy banks that never wanted a bailout and repaid their “bailout” in full with interest.   (Healthy banks like BB&T that didn’t need or want any bailout were pressured by the Treasury Department into accepting a bailout loan along with their unhealthy competitors, so that the public would not know which banks really needed a bailout, resulting in a possible run on those banks).

It’s worth keeping in mind that a $75 billion mortgage bailout program backed by the Obama administration actually ended up harming the real estate market and the economy.  Other Obama administration mortgage bailouts have involved giveaways to even high-income borrowers who were financially irresponsible and had mortgage payments that were not especially high as a percentage of their income.  Preventing foreclosures may also end up creating a class of bailout-seeking deadbeats who don’t pay their mortgages and then agitate for giveaways at taxpayer expense.

Economic Illiteracy and Stopping Foreclosures

by Alex Schibuola on October 11, 2010 · 1 comment

in Bailout Watch, Economy

Express, a publication of The Washington Post, notes that as a result of a stoppage in mortgage foreclosures: “Prices might stabilize because so many homes are penned up.”

The underlying logic is that:

(1) If there are fewer foreclosures today, then the supply of houses on the market will be reduced.

(2) If supply is reduced, prices will go up (or “stabilize,” i.e., not go down).

Their logic is sound, but they must follow through with the analysis. Yes, the foreclosures are delayed. But we know that they are coming eventually. Therefore in, say a year, we expect prices will decrease once the foreclosure process is re-initiated because those houses then show up on the market.

They [Express] imply that expected future prices are lower than today’s current prices. This won’t do however.

If sellers expect that prices will fall in the future, they will want to sell at today’s relatively higher prices. As a result more people start selling now which increases today’s supply and this brings down today’s prices. This will continue until future prices are equated with today’s prices. Why? Because if expected future prices are low relative to today’s prices more people would like to sell to capture the relatively higher selling prices of today.

A similar effect occurs on the demand side of the market: some potential home buyers expecting prices to fall in a year will wait to buy, until houses become relatively cheaper. Fewer home buyers today mean less demand today, and this entails lower prices today.

The main idea here is that expectations of future prices held by sellers and buyers affects today’s prices, such that future prices and today’s prices move to equality. In this case it means prices go down. The unfortunate take away from this is that the healing period is far from over.

Government Uses Takeover of Mortgage Giants to Deliberately Increase Their Massive Losses at Taxpayer Expense

by Hans Bader on January 5, 2010

in Bailout Watch, Economy, Politics as Usual, Precaution & Risk, Regulation, Sanctimony

The Wall Street Journal notes that the Obama administration has used the federal government’s bailout of mortgage giants Fannie Mae and Freddie Mac to do the exact opposite of what the federal government claimed it would do when it took them over a year ago.  It took them over in the name of winding down their risky loan portfolios, so they would stop running up losses at taxpayer expense.  But the Obama administration is deliberately making them run up huge losses to help out irresponsible borrowers who potentially might default on their mortgages.  “In today’s Washington, we suppose, it only makes sense that the companies that did the most to cause the meltdown are being kept alive to lose even more money.”

Over Christmas Eve, the Obama administration not only lifted the $400 billion limit on the bailout (and showered their CEOs with cash), but also ended “a key requirement of the 2008 bailout—that Fan and Fred begin shrinking the portfolios of mortgages they own on their own account, which total a combined $1.5 trillion.”

The Obama administration is now deliberately making them lose money:  “the government has directed both companies to pursue money-losing strategies by modifying mortgages to prevent foreclosures. . . Fannie reported last quarter that loan modifications resulted in $7.7 billion in losses.”

“Much of this is being done off the government books,” to hide the costs of the Obama administration’s record deficit spending.  And their CEOs are being paid a fortune, the Journal notes, because “Fannie and Freddie are exempt from the rules” limiting compensation at private banks.

The mortgage crisis was caused partly by the reckless government-sponsored mortgage giants Fannie Mae and Freddie Mac, and partly by the affordable-housing mandates imposed on them.

But Obama’s proposed financial rules overhaul does absolutely nothing about Fannie Mae and Freddie Mac, admits Obama’s Treasury Secretary, Timothy Geithner, even though he admits that “Fannie and Freddie were a core part of what went wrong in our system.”

And banks will now be pressured to make even more risky loans.  The House has approved Obama’s proposal to create a politically-correct entity called the Consumer Financial Protection Agency. “The agency would be in charge of enforcing the Community Reinvestment Act, a law that prods banks to make loans in low-income communities.”  The Community Reinvestment Act was a key contributor to the financial crisis.  But the Administration’s proposal would direct the new agency to enforce the Community Reinvestment Act without regard for banks’ financial safety and soundness.

Obama’s financial-regulation plan is “largely the product of extensive conversations” with two lawmakers responsible for the current financial mess, the corrupt Chris Dodd, and Barney Frank.

Another $75 billion in taxpayer money is already being wasted on mortgage bailouts that economists and real estate experts say is actually harming the economy and the real estate market.