Category: Finance

Least Shocking Factoid of the Day

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It turns out that the Federal Housing Administration is ill-equipped to handle the explosion in mortgage loans that it is handling as a result of the private banks pulling back:

The Federal Housing Administration may be under-equipped to manage its exploding market share, according to an internal audit released last week. The report gave the FHA poor marks for its steps to screen lenders that are allowed to sell loans backed by the federal agency.

The FHA’s market share has grown sharply as the private mortgage market collapsed over the past two years, and the FHA now insures around one-quarter of all U.S. mortgages, up from around 2% in 2006. The FHA doesn’t actually make loans, and instead insures lenders against losses. To make FHA-backed loans, lenders and brokers must apply to the FHA to become certified by the agency.

The audit, by the inspector general for the Department of Housing and Urban Development, found that the agency was under-equipped to manage a big inflow in applications by lenders to make FHA-backed loans. The number of FHA-approved lenders more than tripled in 2008 to around 3,300 from 1,000 in 2007.

Gee, you think?

The people what cheated honest folks during the housing boom are going where the money is.

It’s another example of why the entire 60+ year focus on supporting home ownership of our government should be abandoned.

It gives us suburban sprawl, global warming, housing bubbles, mortgage fraud, and various other mishugas, all of it bad….He said from his home, which he bought with a mortgage, in a suburb of Baltimore, MD.

Insider Trading Wiretap May Be Result of Terror Investigation

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On top of his arrest for insider trading, Raja Rajaratnam now faces a civil suit over his alleged funding of the Tamil Tigers terror group.

Mr. Rajaratnam is a Tamil born in Sri Lanka, and he has given to organizations that have later been shut down and accused of funneling money to the LTTE, so it is hardly surprising that he was the subject of a wiretap.

My older post does not mention Tamil tiger link, but suggests that the introduction of wiretaps against Wall Street crooks is a good thing.

Unfortunately, it now appears that the wiretaps may not be a case of regulators choosing a tool to pursue fraud, but just an a terror investigation revealing a different crime.

Yet More Fed Ass Covering

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Gee, I guess that they aren’t done with trying to pretend that they care about the ordinary folks, because the Federal Reserve has now issued pay guidelines for banks, allegedly in an attempt to reduce risk.

I’ve had multipule posts about the Fed doing this so that they can keep or expand their regulatory purview, including that essay that I sent to the WaPo, and they just keep doing it.

Well, at least it makes my essay that much more timely.

Accountability on Wall Street, My Ass!!!

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Have you heard the latest? John Meriwether is setting up a new hedge fund.

Just who is John Meriwether, you ask?

Why he is a noted hedge fund manager, he:

  • Established Long term Capital Management
    • Which imploded in 1999, threatening to take down the entire financial system, until Alan “Bubbles” Greenspan used the Federal Reserve to bail his ass out.
  • Established JWM Partners.
    • Which he closed 3 months ago after losing 44% of his investors’ money.

So, after all that, he’s STILL in line to get to play with billions of dollars of other people’s money, and skim 2% of the principal, and 20% of any profits (HAH!!!) that he might earn.

Will no one rid us of these parasites?

I’m not suggesting murder, but I am saying that if I was on a jury, I would vote to acquit.

Change I Don’t Believe In

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So, it now appears that the Obama administration is promising to restrict pay for senior executives at the big banks that got TARP bucks:

Responding to the growing furor over the paychecks of executives at companies that received billions of dollars in federal bailouts, the Obama administration will order the companies that received the most aid to deeply slash the compensation to their highest paid executives, an official involved in the decision said on Wednesday.

Under the plan, which will be announced in the next few days by the Treasury Department, the seven companies that received the most assistance will have to cut the cash payouts to their 25 best-paid executives by an average of about 90 percent from last year. For many of the executives, the cash they would have received will be replaced by stock that they will be restricted from selling immediately.

The devil is in the details, and I simply believe this to be political theater.

There will be loopholes large enough to drive a truck load of cash through. I do not know what they are, but I believe this to be the case.

Barack Obama and Geithner/Summers have been steadfast in their continued support of Wall Street fat cats, and I do not expect this to change.

More Fun With the Mortgage Racket

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Calculated Risk Loan Securitization Diagram
Or Maybe a Description of N-Dimensional Space

Here’s a factoid that should surprise no one, securitized loans 500% more likely to be delinquent.

That a loan that you planned to offload on some poor schlub was executed with less due diligence than one you planned to hold onto, in part or in full, for the life of the loan.

Hoocoodanode?

In any case, it looks like that merry-go-round may be coming to an end, because it’s beginning to look like the Kansas decision that said that the electronic database of mortgages, MERS, has no standing in a foreclosure matter, which means that no one knows who has standing in a mortgage matter for about ½ of the mortgages out there is expanding, though I am not entirely sure whether or not this directly applies to MERS, but in Massachusetts, a ruling throwing out thousands of foreclosures has been reaffirmed, and it is clear that the Judge will have none of the banks counter arguments:

Despite the lender’s attempt to convince him otherwise, Judge Long came out (again) in favor of consumers:

The issues in this case are not merely problems with paperwork or a matter of dotting i’s and crossing t’s. Instead, they lie at the heart of the protections given to homeowners and borrowers by the Massachusetts legislature. To accept the plaintiffs’ arguments is to allow them to take someone’s home without any demonstrable right to do so, based upon the assumption that they ultimately will be able to show that they have that right and the further assumption that potential bidders will be undeterred by the lack of a demonstrable legal foundation for the sale and will nonetheless bid full value in the expectation that that foundation will ultimately be produced, even if it takes a year or more. The law recognizes the troubling nature of these assumptions, the harm caused if those assumptions prove erroneous, and commands otherwise.

Judge Long also had some choice words for lenders:

[T]he problem the [lenders] face (the present title defect) is entirely of their own making as a result of their failure to comply with the statute and the directives in their own securitization documents… What the plaintiffs truly seek is a change in the foreclosure sale statute (G.L. c. 244, § 14), which can only come from the legislature.

I think that the courts are looking at the situation, and deciding that the lenders and securitizers are people with huge legal resources who chose to ignore the law because of the cost, and that property law has developed over the past few century and so is very specific regarding the formalities of documentation for a good reason, just look at historical accounts of theft of deeds, forged property papers, etc.

In any case, I would also point you to the following document, which shows how many of these property transactions are actually fraudulent, with a person acting as an agent for both the seller and the buyer, non existent signatures, false notarization, etc.

Foreclosure Fraud – Guide to Looking up Public Records for Fraud
You can find the author’s blog here.

Economics Update

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Housing Start Graph Pr0n Courtesy of Calculated Risk


Foreclosure/Default Graph Pr0n Courtesy of The Big Picture

We are still not seeing any signs of inflation, with wholesale prices falling 0.6$ in September, largely on falling energy costs, so this is unlikely to repeat this month.

Also, the G20 country in the best fiscal position right now is Canada, and the Bank of Canada is keeping its benchmark rate at 0.25%, so it is declining to follow Australia’s lead.

In real estate, housing rose to 590,000, which was below expectations, and applications for housing permits fell.

In energy, the eight-day long rally has ended after briefly being about $80/bbl, though it’s likely just some profit taking.

8 Days is a long time in the commodities market.

Meanwhile, the dollar is up, largely on strong statements from various European central bankers and politicians about how they support a strong dollar.

Economics Update

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Commercial Real Estate Prices


Home Builder Confidence Graph Pron Courtesy Calculated Risk

Ummm…If you think that the real estate implosion is done, then you haven’t been following commercial real estate (CRE), where prices fell 3% in August, about a 42% annual rate,* though the year over year decline was “just” 32%, and it’s down 41% from its peak in 2007.

Remember, commercial mortgages typically come due after 5 years, so we are going to see a lot of folks defaulting on CRE mortgages as their time comes up, because they will be under water.

It’s no wonder that the National Association of Home Builders’ Confidence Index has fallen, particularly when juxtaposed with the expiration of the let’s reinflate the bubble first time home buyer’s tax credit at the end of November.

Note that to qualify for the credit, you must close before November 30, which means that if you buy now, you are starting to cut it close.

Still investors seem to be sanguine about economic prospects, as they are pulling out of US Treasuries and the dollar while crude oil hit a 1-year high.

*The joys of compound interest. 3% a month over 12 months is not 36%, it’s 1.0312=1.42=42%.

You Call This a Good Start

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A Rich Guy Being Frog Marched in Handcuffs
It makes me feel good

It appears that US Attorney for New York has come up with a new way to enforce the laws against stock fraud, by going after them as if they were members of organized crime, with things like court ordered wiretaps, which were used to bring an indictment against Raj Rajaratnam, the head of the Galleon Group hedge fund.

The thing is, it is organized crime, it requires an enormous amount of…well…organization to pull off insider trading schemes:

Mintz said the alleged $20 million scheme is the most elaborate insider-trading ring discovered since the 1980s when the government began using criminal laws to prosecute such allegations.

“This was an extensive web of insider trading built upon years of contacts and strategically placed people,” the former prosecutor said. “Typically, insider trading cases are much more narrowly focused on some significant deal that’s leaked from one or two sources. The more people who have knowledge, the more potential that the scheme will be uncovered.”

There are dozens of people involved who have to know what is going on, and who must either actively aid, or actively ignore the activity for it to go forward when it is much more than an individual who has foreknowledge of a single event and then buys or sells based on this, as was the case, for example, with Martha Stewart.

One thing to be noted here is that this is about what would be considered pennies, it amounts to about $20 million for a man worth well over a billion dollars, and so, on a deep level, it makes little sense: Why risk decades in jail for something that might net less than 2% of your total net worth.

Here is what going on, I think. Rajaratnam, and Galleon made their money through insider trading, and simply, he continued to do so once he was a made man.

One hopes that as prosecutors dig into this, they get more people to roll over, and they expand their investigation.

RICO, the Racketeer Influenced and Corrupt Organizations Act, as well as an aggressive use of aggressive asset forfeiture laws would spread the net further and wider.

The days of a Michael Millikan doing his 22 months and leaving prison fabulously wealthy should be a thing of the past.

Righteous

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Let’s add Dylan Ratigan to the list of people who belong in in the Legion of People You Really Do Not Want To F%$# With (LOPYRDNWTFW), which so far includes Rachael Maddow, Roger Ebert, Stephen Colbert, the folks at 4Chan, Alan Grayson, Jon Stewart, Jon Stewart, Jon Stewart, Jon Stewart, Jon Stewart, Jon Stewart, Jon Stewart, Jon Stewart, and (of course) Jon Stewart.

Here he completely owns US Chamber of Commerce head, and right wing hack, Tom Donohue.

More Ass Covering by the Fed

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As I have noted before, now that Congress is looking at having an agency dedicated to protecting consumers from the worst excesses of the banking industry, and the Federal Reserve Feels believes that this role belongs to it.

Of course, the history of the Fed over the past 40+ years is that they believe in dismantling consumer protections, so their record is less than stellar.

In response to numerous proposals which would make consumer protection more formal in financial markets, which they see as a reduction in their bailiwick, they have continued to make “a day lat and a dollar short” regulations in an an attempt to convince Congress that they do not need to assign this task to some other agency.

Case in point, is how, after decades of skyrocketing fees and increasingly punitive “overdraft protection” schemes, Bernanke and his merry band have decided to clamp down on overdraft fees:

The Federal Reserve is likely to soon pass new rules making it harder for banks to hit customers with fees for overdrawing their accounts, a top official told a Senate subcommittee Wednesday.

Note that it appears that these rules will require that banks have customers positively affirm their desire to opt in to overdraft protection.

It’s amazing what the prospect of some regulatory competition will do to a bureaucracy.

Earlier posts on the subject here.

More Pigs Flying on Financial Regulation

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So, the politically connected academic who has made millions selling access to Wall Street banks, Larry Summers, has decided that real systemic regulation is necessary in the American financial system:

“Financial institutions that have benefited from government support can, should and must use this moment to think about what they can do for their country — by accepting the necessary regulation to protect the American people,” Summers said in remarks prepared for delivery at the Economist’s Buttonwood Gathering in New York. “There is no financial institution that exists today that is not the direct or indirect beneficiary of trillions of dollars of taxpayer support for the financial system.”

What’s more, his comments appear to be a part of deliberate push-back from the White House against the financial sector, where unnamed officials are describing themselves as “frustrated“.

Given who is working this issue *cough* Geithner and Summers *cough*, I have to conclude that this is being driven by political considerations, Obama has finally realized the depth and breadth of the anger against the banks and their lavish pay packages, and understands that there is a real political cost, one that will be born by the Democratic Party generally, and Barack Obama in particular, if the Wall Street banks continue to be what they are.

I’m Agreeing with Richard Shelby?

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It’s true. As a part of updating financial regulations, Senator Shelby is trying to change the way in which the presidents of the Federal Reserve district banks are selected, by removing the ability of the lending institutions subject to that Fed bank to nominate their new president, he correctly notes that, “Any institution that is going to be involved in any way picking their regulator is not good policy.”

As to the current governance structure:

Each of the 12 Fed district banks has a nine-member board that includes three bankers, three non-bankers chosen by banks and three non-banker directors picked by the Fed’s Senate- confirmed governors in Washington. The directors nominate a president who is approved by the Board of Governors. The presidents vote on interest-rate decisions on a rotating basis, with New York having a permanent vote.

The idea that banks can hand pick one of their primary regulators has always been a bad idea, so I would go further, and remove banks from selecting the directors of the regional banks too.

While we are at it, how about shortening the terms of members. It’s currently 14 years, and it’s too long, and makes the board far to unresponsive and insular.

Additionally, one of the controls on the behavior of the Fed is meaningful criticism of its actions in academic economic publications, but the central bank has control over most of the academic economic publications, because so many of the editors out there are also on the Federal Reserve payroll, so a legal injunction prohibiting anyone working for the fed from acting as an editor of an economics journal would be a good thing.

When Policy Creates Stupidity

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David Stevens, HUD’s Assistant Secretary of Housing and Federal Housing Commissioner, basically the head of the Federal Housing Administration, has drawn a line in the sand against legislation increasing the minimum downpayment for an FHA loan from 3.5% to 5%.

This is the same FHA, that has had its reserves sucked dry by increasing defaults on its mortgage (here and here), and now they are fighting against making their loans less likely to default.

The reason given? That, “limiting the pool of eligible home buyers could dampen a fragile housing recovery.”

This is an extension of two largely bipartisan policies:

  • The federal government has been pushing home-ownership aggressively for decades.
  • A desperate attempt to re-inflate the housing bubble.

Both policies have proven disastrous, but decisions are still being made on this basis.

It should be noted that this is the same FHA was spitting in the face of sanity for some time by allowing “seller funded downpayment assistance loans”, where the seller raised the price of the home in order to lend the buyer the money for the downpayment (!). It was called the Down-payment Assistance Program (DAP).

This procedure is one of the reasons that they are in a pickle now, because it made it too easy for people who could not afford house payments to buy a house.

Thankfully, Congress made this illegal, and they are now looking at a further tightening of lending standards, but just as in the case the DAP, they are fighting the change tooth and nail.