FedUpUSA

Archive for April 2nd, 2011

Federal Reserve punishes savers by subsidizing big banking bailouts – Two largest U.S. banks offer a paltry 0.05 annual percentage rate while increasing service fee charges and upping loan interest rates. S&P 500 not cheap.

The challenge most Americans are facing is first, trying to save money.  If that hurdle is accomplished the next tougher question becomes where the money should be placed.  The Federal Reserve by default with a negative interest rate policy has punished savers at the expense of massive debtors.  The Fed for many decades since the 1960s had held the Fed funds rate over 5 percent.  What this also meant was that Americans if they decided to step aside from the risky stock market would at least yield a decent return in U.S. Treasuries.  Those days seem to be long gone with the funds rate near zero.  Banks are using their easy access to the Fed to borrow cheap and to lend at much higher rates.  They are also borrowing cheap and investing in global stock markets.  The two biggest banks in the U.S. give depositors merely a place in the bank’s digital vault and pay almost no interest.

Savings accounts the new virtual mattress

Bank of America, the largest U.S. bank in assets offers the below interest rate for depositors:

The annual percentage yield is 0.05%.  In other words, if you had $10,000 saved in Bank of America in this savings account you would end up with $50 after one year.  At the same time the average credit card rate is over 14 percent and mortgage rates are still above 5 percent.  This margin is enormous and it is little wonder why banks are doing so well while many Americans are struggling financially.  Bank of America isn’t the only one offering this low rate:

JP Morgan Chase offers the same rates.  After taking over Washington Mutual with free checking they are now charging customers with less than $5,000 or other caveats a $10 or higher monthly service fee.  There goes that $50 assuming you even have $10,000 to begin with.  We already know that 1 out of 3 Americans don’t even have a penny to their name saved.  What use is it charging these monthly fees especially when these are the banks that were bailed out to help protect consumers?  The bailouts appear more and more a method for these banks to pickpocket what is left in the wallets of Americans leaving only lint and a penny if you are lucky.

The Federal Reserve is content moving this way because it forces prudent savers into a precarious situation.  Either you are forced to gamble in the overpriced and casino like stock market or suffer terrible rates that will dissolve after inflation is induced.  Even the dubious headline inflation rates will tear apart that 0.05 percent savings rate so you are losing money by having it sit there.  The stock market rally is largely on bailout funds and speculation.  Take a look at the current P/E ratio:

Part of this is orchestrated.  The Federal Reserve is doing everything within its power to get people to spend or speculate in the stock market and hopefully over time create enough inflation to devalue our current debts.  This is why mortgage lending has gotten tougher (aside from government backed loans), getting a credit card is now for credit worthy customers, and getting a small business loan is much more stringent.  The purpose is to work through the current banking led fiasco by pushing on the debt to working and middle class Americans through lower savings rate and a push for higher inflation.  The gamble that most have to take is whether they want to compete with high frequency traders and Wall Street investment banks that have little vested interested in long-term company sustainability.  They can be in and out.  Buy and hold in this current model is tantamount to playing craps at a casino.  This is why last May the stock market fell 1,000 points in a matter of minutes for no apparent reason (we still have no clear answer).  Someone robs a bank for $50,000 and it is front page news but somehow the stock market loses over $1 trillion in wealth in a minute and it is buried in the press?

The challenge for Americans trying to save money with a per capita income of $25,000 after daily expenses is a challenge.  Many younger workers are facing a prospect of a dwindling Social Security future so what will be left for retirement?  The days of sustained 10 or 15 percent stock market gains are largely gone thanks to the technology bubble and real estate bubble.  Those gains were simply unsustainable and even Bernard Madoff struggled to get those returns after a certain point and he wasn’t exactly doing things above board.

What people forget is that there is nothing Federal about the Federal Reserve.  It is a quasi-governmental agency largely designed to protect the big banking sector.  The American people cannot audit the Fed in a live meaningful fashion yet this institution has the ability to conduct massive trillion dollar bailouts at the behest of the banks.  If you really think about it, the Fed has done its job since their hidden mission is to protect the giant banking interests.  In that they have succeeded but the cost will be shouldered by the American public.

People think that the bailouts have somehow concluded.  This is not the case.  There are close to $6 trillion in random programs that the Fed and U.S. Treasury are still involved in but we have no way of knowing exactly what is in these programs because there is no ongoing audit:

As your purchasing power falls in the next few years just remember that is your little way of contributing to the big bank bailouts.

My Budget360

Here’s the banks’ counterproposal for a servicing fraud settlement. I can sum it up in two words: drop dead.  Or two letters:  F.U. This proposals is so pathetically thin that it’s not a good faith counterproposal. This document only deals with servicing standards–nothing in it whatsoever about penalties, modification quotas, etc. But even on servicing standards it is a bunch of empty promises to have internal controls and try harder. 

The first point about this counterproposal is simply to note what’s absent from it:

(1) nothing about principal reductions

(2) nothing about second liens and conflicts of interest

(3) nothing about MERS (reserved for later)

(4) nothing about in-sourced vendor fees or force-placed insurance to affiliates. This makes the fees and force-place insurance sections pretty meaningless. 

(5) nothing about pyramiding of fees.

I’m sure I’m missing a bunch of important points that aren’t addressed, but these seemed to be the most obvious ones. 

Next, it’s worth noting just how little it actually promises and how cagey the promises are.  For many points it does not promise results.  Instead, it promises “processes reasonably designed” or “procedures reasonably designed” to do something or another. Basically a lot of it boils down to promises to implement internal controls, reviews, and procedures to make sure things don’t happen again.

Put differently, this is the servicers’ saying “trust us.” Ummm, that’s the whole problem. No one trusts the servicers–not investors, not homeowners. 

Let’s look at some specific terms.  Orwell couldn’t have drafted these any better:

(1) Loan Modifications.  What do the banks propose to do in the section entitled “loan modifications”?  Principal reductions? Interest rate reductions? Forbearance? Nah.  None of that stuff.  Instead they says no fees for modifications and we’ll toss in a free overnight envelope. So the counterproposal to principal reduction mods is a free Fed-Ex mailer. 

(2) “Independent Review.”  Part of the document has a heading of “independent review.” One might have thought that was from a disinterested outside reviewer. Nope. It just means that there is an internal review by another reporting chain within the bank. This is a worthless promise. 

(3) Single point of contact. 

Servicer will provide a single point of contact (“SPOC”), which may be more than one person, to any first lien, owner occupied, borrower suffering a hardship through the loss mitigation processes…

Wait a sec.  What the hell is single-point of contact if it can be multiple people? A single phone number? A 1-800 number plus a loan ID accomplishes that. I get that SPOC is hard to do, but this sort of empty promise is insulting. It’s already the situation. Also notice how this is contingent on the “borrower suffering a hardship through the loss mitigation processes”–what does that mean?  Is that all borrowers or just ones with some unspecified special circumstances in the bank’s discretion? 

(4) End of Dual Track Process.  A major complaint has been that banks simultaneously proceed with foreclosure while negotiating loan mods.  So what do the banks propose to do about that here? They are offering that a loan will not be ”referred” to foreclosure if (a) all documentation necessary for a mod review is submitted and (b) a mod decision has not been made.  That’s a really small concession. Notice what it doesn’t cover.  It doesn’t mean that foreclosures in process will be halted, only that the process won’t be started.  There’s also the question of whether the referral will have magically “happened” before the documentation is received.  Oh wait, that document is an certified original, not an original certified copy, so your documentation isn’t complete. Sorry….

(5) Borrower portal for electronic document submission.  I actually like this idea and had this is something that the Congressional Oversight Panel had suggested in a foreclosure report. But there’s absolutely nothing that prevents servicers from doing this right now. This is hardly some big concession.  In fact, they’ve had just such a portal sitting in the garage for months via Hope Now. 

(6) Forgiveness of short sale deficiencies.  The banks are promising to try to forgive deficiencies associated with short sales. Uh, isn’t that what a short sale is–the bank agrees to take the sale price in satisfaction of the debt? So what does is actually being promised here? 

(7) Affidavits. The banks are promising that affidavits will be sworn out by affiants with knowledge of the facts and in compliance with applicable state law, etc. In other words, that they’ll comply with the law. Note how that differs from the AG proposal, which would have required various affidavits not only when required by law (as in judicial foreclosures), but also in nonjudicial foreclosures. A lto of commentators wrongly criticized the AG proposal for simply requiring compliance with the law without recognizing that it was expanding the affidavit requirement. The AGs were requiring something more; the banks are just saying that they’ll follow the law. Once again, “trust us.” 

(8) Chain of Title. I’ve saved my favorite for last. Here’s what the proposal says:

Servicer shall implement processes reasonably designed to ensure that Servicer has properly documented an enforceable interest in the promissory note and mortgage (or deed of trust) under applicable state law, or is otherwise a proper party to the foreclosure action (as a result of agency or other similar status), including appropriate transfer and delivery of endorsed notes (which may be endorsed in blank) and assigned moretgages or deeds of trust at the formation of a residential mortgage-backed security, and lawful endorsement and assignment of the note and mortgage or deed of trust to reflect changes of ownership, all in accordance with applicable state law.

My initial read was, wow, they’re saying that their going to make sure that chain of title is proper. But then I started to wonder about this. So it would require a process to document an enforceable interest. What does that mean? Does it mean that the servicer will provide the court with a statement of chain of title? That’s not what’s required, here, though. This seems to be an internal control process. 

Then I read further. This would seem to giving a blessing to endorsement of notes in blank. As a generic matter, as I’ve said before, that’s fine. But if the PSA calls for something different, that’s a problem. So it looks as if the servicers are trying to use the settlement as a way to change the legal requirements regarding the transfers of mortgages. Neither the Feds nor the AGs have the power to grant that, however. 

There is this interesting language about “appropriate transfer and delivery of endorsed notes and assigned mortgages…at the formation of a residential mortgage-backed security.”  Is that a concession that transfers that occur after the closing date are invalid? I can’t imagine so, so I’m puzzled by this.

And then there’s the “all in accordance with applicable state law.” I might be seeing a problem where there isn’t one, but I worry that this is an attempt to change the applicable law in foreclosure litigation. The “applicable state law” phrase is used twice in this paragraph. First it is used in reference to the promissory note and mortgage. That would be the state law of the state where the property is located. But the state law governing the “appropriate transfer and delivery” of the notes and mortgages is not the state law of the property situs. It’s the state law of the state governing the PSA (most likely New York). The way this paragraph is phrased, however, one would think that “applicable state law” would refer to the same state both times its used, and by using it first in reference to the situs state for the property, it would prime a reader to think that the situs law governs the transfers. 

There are lots of other points to criticize with this counterproposal, but it’s hardly worthwhile doing so–it’s such an obvious in-your-face document that it’s really not worthwhile engaging with serious. This isn’t the basis for a good faith discussion of mortgage servicing reform. It’s simply another part of the banks’ strategy to run the clock and thereby avoid doing principal reductions–that’s what will cost them the big bucks, not a $20B fine.

Adam Levitin – CreditSlips

******************************************

Adam, this is a great analysis of what the banks have counter-offered to the 50 State Attorneys General; however, I wish you would have realized this was what would happen when the offer extended by the AG’s in the first place had absolutely no substance.  If you deal from a position of weakness, you will get hammered.

A Rasmussen poll says 57% Okay With Government Shutdown If It Leads to Deeper Budget Cuts

A majority of voters are fine with a partial shutdown of the federal government if that’s what it takes to get deeper cuts in federal government spending.

A new Rasmussen Reports national telephone survey finds that 57% of Likely U.S. Voters think making deeper spending cuts in the federal budget for 2011 is more important than avoiding a partial government shutdown. Thirty-one percent (31%) disagree and say avoiding a shutdown is more important. Twelve percent (12%) are not sure.

The legislators have avoided a shutdown by passing a series of stopgap budget bills, but several conservative Republicans now say they will not support any more of these measures. In the event of a shutdown, payments for things like Social Security, Medicare and unemployment benefits would continue.

Still, a plurality (44%) of voters thinks a partial shutdown of the federal government would be bad for the economy, down four points from February. Twenty-three percent (23%) say a shutdown would be good for the economy, while a similar number (22%) say it would have no impact, a seven-point increase from the previous survey.

I happen to think a government shutdown would be a good thing. People would find out the world will not end as Tim Geithner and the Obama administration seem to believe. Nor will the bond market fall apart as some at the Fed think.

However, it is ridiculous for Republicans to be in this situation over a measly $30 billion, less than 1% of the budget.

Mike “Mish” Shedlock
Global Economic Analysis

A chart from dshort.com of the Q-Ratio suggests stocks are remarkably overvalued.

You won’t hear anything about it from the mainstream financial media or the Federal Reserve, but this chart is screaming “stocks are extremely overvalued.” Please visit dshort.com’s excellent overview Market Valuation: The Message from the Q Ratio for additional charts of the Q Ratio, a measure of stock market valuation.

Although the mainstream financial media is touting low price-earnings ratios and permanently rising profits as the backdrop for a permanently bullish stock market, this chart reveals that stocks are more overvalued now than they were just prior to the Great Crash of 1929. Only the bubble of the dot-com era reached a higher extreme.

There is literally no reason to be bearish on stocks, at least in the mainstream media (“don’t fight the Fed,” etc. etc.), and there is always a chance that overvalued stocks can become even more overvalued (the “party like it’s 1999″ phenomenon).

What’s remarkable about this chart is the consistency of the highs and lows going back 100 years: the tops and bottoms are within a few ticks of each other, except for the dot-com bubble and the current bubble, both of which were blown by vast expansions of credit, State backstopping/intervention and leverage.

It’s also interesting to note that the Federal government and the Federal Reserve intervened so massively that the market wasn’t allowed to fall to previous cyclical lows. That further suggests that when the market overcomes the forces of intervention, it might fall below previous lows in a counter-reaction.

But not to worry–that’s “impossible.”

Of Two Minds