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The Perfect Storm brewing - Mortgage Meltdown

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Michael

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Joined: Mar 22, 2002
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Posted: Dec 11, 2007 - 02:58 PM
Post subject: The Perfect Storm brewing - Mortgage Meltdown

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2007/12/09/IN5BTNJ2V. DTL

MORTGAGE MELTDOWN
Interest rate 'freeze' - the real story is fraud
Bankers pay lip service to families while scurrying to avert suits, prison

New proposals to ease our great mortgage meltdown keep rolling in. First the Treasury Department urged the creation of a new fund that would buy risky mortgage bonds as a tactic to hide what those bonds were really worth. (Not much.) Then the idea was to use Fannie Mae and Freddie Mac to buy the risky loans, even if it was clear that U.S. taxpayers would eventually be stuck with the bill. But that plan went south after Fannie suffered a new accounting scandal, and Freddie's existing loan losses shot up more than expected.

Now, just unveiled Thursday, comes the "freeze," the brainchild of Treasury Secretary Henry Paulson. It sounds good: For five years, mortgage lenders will freeze interest rates on a limited number of "teaser" subprime loans. Other homeowners facing foreclosure will be offered assistance from the Federal Housing Administration.

But unfortunately, the "freeze" is just another fraud - and like the other bailout proposals, it has nothing to do with U.S. house prices, with "working families," keeping people in their homes or any of that nonsense.

The sole goal of the freeze is to prevent owners of mortgage-backed securities, many of them foreigners, from suing U.S. banks and forcing them to buy back worthless mortgage securities at face value - right now almost 10 times their market worth.

The ticking time bomb in the U.S. banking system is not resetting subprime mortgage rates. The real problem is the contractual ability of investors in mortgage bonds to require banks to buy back the loans at face value if there was fraud in the origination process.

And, to be sure, fraud is everywhere. It's in the loan application documents, and it's in the appraisals. There are e-mails and memos floating around showing that many people in banks, investment banks and appraisal companies - all the way up to senior management - knew about it.

I can hear the hum of shredders working overtime, and maybe that is the new "hot" industry to invest in. There are lots of people who would like to muzzle subpoena-happy New York Attorney General Andrew Cuomo to buy time and make this all go away. Cuomo is just inches from getting what he needs to start putting a lot of people in prison. I bet some people are trying right now to make him an offer "he can't refuse."

Despite Thursday's ballyhooed new deal with mortgage lenders, does anyone really think that it can ultimately stop fraud lawsuits by mortgage bond investors, many of them spread out across the globe?

The catastrophic consequences of bond investors forcing originators to buy back loans at face value are beyond the current media discussion. The loans at issue dwarf the capital available at the largest U.S. banks combined, and investor lawsuits would raise stunning liability sufficient to cause even the largest U.S. banks to fail, resulting in massive taxpayer-funded bailouts of Fannie and Freddie, and even FDIC.

The problem isn't just subprime loans. It is the entire mortgage market. As home prices fall, defaults will rise sharply - period. And so will the patience of mortgage bondholders. Different classes of mortgage bonds from various risk pools are owned by different central banks, funds, pensions and investors all over the world. Even your pension or 401(k) might have some of these bonds in it.

Perhaps some U.S. government department can make veiled threats to foreign countries to suggest they will suffer unpleasant consequences if their largest holders (central banks and investment funds) don't go along with the plan, but how could it be possible to strong-arm everyone?

What would be prudent and logical is for the banks that sold this toxic waste to buy it back and for a lot of people to go to prison. If they knew about the fraud, they should have to buy the bonds back. The time to look into this is before the shredders have worked their magic - not five years from now.

Those selling the "freeze" have suggested that mortgage-backed securities investors will benefit because they lose more with rising foreclosures. But with fast-depreciating collateral, the last thing investors in mortgage bonds ought to do is put off foreclosures. Rate freezes are at best a tool for delaying the inevitable foreclosures when even the most optimistic forecasters expect home prices to fall. In October, Goldman Sachs issued a report forecasting an incredible 35 to 40 percent drop in California home prices in the coming few years. To minimize losses, a mortgage bondholder would obviously be better off foreclosing on a home before prices plunge.

The goal of the freeze may be to delay bond investors from suing by putting off the big foreclosure wave for several years. But it may also be to stop bond investors from suing. If the investors agreed to loan modifications with the "real" wage and asset information from refinancing borrowers, mortgage originators and bundlers would have an excuse once the foreclosure occurred. They could say, "Fraud? What fraud?! You knew the borrower's real income and asset information later when he refinanced!"

The key is to refinance borrowers whose current loans involved fraud in the origination process. And I assure you it was a minority of borrowers whose loans didn't involve fraud.

The government is trying to accomplish wide-scale refinancing by tricking bond investors, or by tricking U.S. taxpayers. Guess who will foot the bill now that the FHA is entering the fray?

Ultimately, the people in these secret Paulson meetings were probably less worried about saving the mortgage market than with saving themselves. Some might be looking at prison time.

As chief of Goldman Sachs, Paulson was involved, to degrees as yet unrevealed, in the mortgage securitization process during the halcyon days of mortgage fraud from 2004 to 2006.

Paulson became the U.S. Treasury secretary on July 10, 2006, after the extent of the debacle was coming into focus for those in the know. Goldman Sachs achieved recent accolades in the markets for having bet heavily against the housing market, while Citigroup, Morgan Stanley, Bear Sterns, Merrill Lynch and others got hammered for failing to time the end of the credit bubble.

Goldman Sachs is the only major investment bank in the United States that has emerged as yet unscathed from this debacle. The success of its strategy must have resulted from fairly substantial bets against housing, mortgage banking and related industries, which also means that Goldman Sachs saw this coming at the same time they were bundling and selling these loans.

If a mortgage bond investor sues Goldman Sachs to force the institution to buy back loans, could Paulson be forced to testify as to whether Goldman Sachs knew or had reason to know about fraud in the origination process of the loans it was bundling?

It is truly amazing that right now everyone in the country is deferring to Paulson and the heads of Countrywide, JPMorgan, Bank of America and others as the best group to work out a solution to this problem. No one is talking about the fact that these people created the problem and profited to the tune of hundreds of billions of dollars from it.

I suspect that such a group first sat down and tried to figure out how to protect their financial interests and avoid criminal liability. And then when they agreed on the plan, they decided to sell it as "helping working families stay in their homes." That's why these meetings were secret, and reporters and the public weren't invited.

The next time that Paulson is before the Senate Finance Committee, instead of asking, "How much money do you think we should give your banking buddies?" I'd like to see New York Sen. Chuck Schumer ask him what he knew about this staggering fraud at the time he was chief of Goldman Sachs.

The Goldman report in October suggests that rampant investor demand is to blame for origination fraud - even though these investors were misled by high credit ratings from bond rating agencies being paid billions by the U.S. investment banks, like Goldman, that were selling the bundled mortgages.

This logic is like saying shoppers seeking bargain-priced soup encourage the grocery store owner to steal it. I mean, we're talking about criminal fraud here. We are on the cusp of a mammoth financial crisis, and the Federal Reserve and the U.S. Treasury are trying to limit the liability of their banking friends under the guise of trying to help borrowers. At stake is nothing short of the continued existence of the U.S. banking system.

Sean Olender is a San Mateo attorney. Contact us at insight@sfchronicle.com.

leidelaohu

Wonder Wit

Joined: June 11, 2007
Posts: 3781

Status: Offline

Posted: Dec 11, 2007 - 04:20 PM
Post subject: Re: The Perfect Storm brewing - Mortgage Meltdown

Michael wrote:

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2007/12/09/I N5BTNJ2V.DTL

Could we talk Andrew Cuomo into running for president, by any chance ?

Michael

Moderator

Joined: Mar 22, 2002
Posts: 5292

Status: Online!

Posted: Dec 12, 2007 - 11:09 AM

More

MORGAN STANLEY ISSUES FULL US RECESSION ALERT
By Ambrose Evans-Pritchard
The Telegraph
December 11, 2007
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/12/11/cnus a111.xml

Morgan Stanley has issued a full recession alert for the US economy, warning
of a sharp slowdown in business investment and a "perfect storm" for
consumers as the housing slump spreads.

In a report "Recession Coming" released today, the bank's US team said the
credit crunch had started to inflict serious damage on US companies.

"Slipping sales and tightening credit are pushing companies into liquidation
mode, especially in motor vehicles," it said.

"Three-month dollar Libor spreads have jumped by 60 to 80 basis points over
the last month. High yield spreads have widened even more significantly. The
absolute cost of borrowing is higher than in June."

"As delinquencies and defaults soar, lenders are tightening credit for
commercial, credit card and auto lending, as well as for all mortgage
borrowers," said the report, written by the bank's chief US economist Dick
Berner. He said the foreclosure rate on residential mortgages had reached a
19-year high of 5.59pc in the third quarter while the glut of unsold
properties would lead to a 40pc crash in housing construction.

"We think overall housing starts will run below one million units in each of
the next two years -- a level not seen in the history of the modern data
since 1959," he said.

Although the US job market has apparently held up well, an average monthly
fall of 138,000 in the number of self-employed workers over the last quarter
suggests it may now be buckling. "Consumers face what could be a perfect
storm," said Mr Berner.

Bank of America closes fund

The partial freeze on subprime mortgage rates announced last week by US
treasury secretary Hank Paulson may help cushion the blow for some banks,
but it could equally backfire by adding a "risk premium" that drives even
more lenders out of the mortgage market.

Like Goldman Sachs, and Lehman Brothers, the bank no longer believes Asia
and Europe will come to the rescue as America slows.

It has slashed its 2008 growth forecast for Japan from 1.9pc to 0.9pc, and
warned that credit stress will weigh heavily on the eurozone.

Mr Berner said US demand is likely to contract by 1pc each quarter for the
first nine months of 2008, but the picture could be far worse if the Federal
Reserve fails to slash rates fast enough. It is betting on a quarter point
cut this week, with three more cuts by the middle of next year. "We expect
the Fed to insure against the worst outcome," he said.

Morgan Stanley is the first major Wall Street bank to warn that it is may
now be too late to stop a recession, though most have shifted to an
ultra-cautious stance in recent weeks.

The bank at first treated the August crunch as a "mid-cycle correction",
much like the financial storm after Russia's default in 1998. But the
collapse of the US commercial paper market has now continued for seventeen
weeks, suggesting a "fundamental deleveraging of the banking system."

Mr Berner -- known at Morgan Stanley as the "resident bull" -- is one of the
most closely watched analysts on Wall Street. While he began to turn bearish
last April as the credit markets turned nasty, the latest report is written
in tones that may is rattle the fast-diminishing band of optimists.

maximus1

Reacher

Joined: June 18, 2007
Posts: 225
Location: Jing'An
Status: Offline

Posted: Dec 12, 2007 - 08:55 PM

I hate reading about government interventions into this mess- such as the 'freeze' on ARMs - or massive liquidity injections. Every intervention is a bail-out measure - funded by taxpayers for the sole benefit of the people that acted wrongly. In the end, it takes away the incentive to behave properly in the first place, and we get into these messes more frequently and more drastically.

Both sides of those transactions deserve to be punished. Borrowers knowingly lying about their incomes and buying houses bigger than they needed or could afford deserve to face their reckoning (likely being evicted and going back to renting) - and banks that abetted in this fraud deserve to lose money on all those foreclosed upon homes. I'm sure some deserve jail time, but that's a longshot.

However, saying that the buyers of those repackaged mortgages deserve to be compensated for their losses is ridiculous. They are investors, and investing involves risk. Not everything just goes up. The fraud was extremely rampant in the US - and everyone knew what was going on. When mortgage companies actually advertise products where you don't need to prove your income, etc - it doesn't take much to understand what that means. Even if you're a foreigner that doesn't see these ads first hand, if you're in charge of investing billions of dollars and didn't know this - then you shouldn't be in charge of investing that money! Simple due diligence.

Even near multi-year highs, gold is a great investment considering how badly governments are misbehaving. And it's not just the US..

Missin
Reacher
Reacher

Joined: June 22, 2007
Posts: 245

Posted: Dec 12, 2007 - 09:59 PM

I'm glad I didn't buy a condo two years ago when I thought about doing so. Everyone kept saying how a person would pay less each month from buying a house compared to renting an apartmnet, but the calculations didn't indicate that for a $200k condo. Glad I missed this mess.

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I am back! (sounds of crickets cricketing...)

leidelaohu

Wonder Wit

Joined: June 11, 2007
Posts: 3781

Status: Offline