Archive for August 28th, 2011
There has been much digital ink spilled on the Foreclosuregate (or if you prefer, Fraudclosuregate) story over the last couple of years, but one thing has been only touched upon lightly – if at all.
That is the underlying “low-level” fraud that is unspoken in many of these actions.
There’s a general principle under the law when one desires to bring a lawsuit – the principle of injury. That is, you can’t sue me because you think I’m ugly. You need to show actual economic damage in order to obtain the relief you seek. There are many examples where civil courts have reached a conclusion that indeed the facts support the case but there’s been no showing of economic harm and thus the plaintiff gets awarded one penny.
There has been an astounding lack of credulity on this matter of economic injury in these foreclosure suits. In fact, I’ve yet to see a foreclosure complaint that alleges actual economic injury.
Instead, they all allege it’s cousin, lack of payment.
But lack of payment isn’t necessarily economic injury.
Let’s say that you hit me in your car. You have insurance and so do I. My medical treatment costs $20,000, and you’re ruled entirely at fault in the collision. We’ll assume for the moment I have no “pain and suffering” damages nor lost time at work and thus no lost income – that is, we have a neat and tidy case where the total economic harm is $20,000. I cannot sue you unless my economic injuries are not paid for through some other means.
If your insurance company pays the medical bill, I no longer have economic harm, thus I cannot win anything in a lawsuit. Likewise if my insurance company covers the bill (unless it jacks up my insurance rates or somehow otherwise damages me.) Finally, you might just hand me $20,000, which moots my pending lawsuit immediately as once again, I have no economic harm.
When a mortgage loan is packaged into one of these “securities” and then all sorts of protection and credit enhancement are taken against it, it is no longer a simple matter of saying that because you didn’t pay, there are economic damages in the amount of your lack of payment. In fact, there may be no economic damage sustained by the entity that is suing you at all!
Take the instance of a “credit default swap.” Remember that a CDS is not an insurance contract. That is, it typically will not contain things like a right of subrogation or set-aside (the ability to go after the cause(s) of the payment under the CDS contract or pursue other assets of the defaulter in court) but rather is a pure “payment for event” sort of agreement. Well, if that CDS payment moots the economic damage, does the alleged foreclosing party still have standing to eject you from your house?
Let’s follow this through an MBS. For simplicity sake we will assume it is comprised of 1,000 loans. Let us further presume that 10% of those loans default.
Ok, can you foreclose on those homeowners?
Remember, to be able to sue for a remedy in civil court, you must show economic harm. A breach without economic harm brings no right of recovery! Being pissed off is not economic harm, and neither is non-payment unless the party suing you, directly or through an agent, suffers a loss.
Well, in the base case you’d probably say “yes”. But who can sue? Normally the PSA delegates this authority to the servicer or their agent. Again, however, the underlying facts to be pled in a lawsuit that permit recovery must demonstrate economic harm.
The key question: Were the certificate holders economically harmed when all of the payment flows are accurately accounted for?
Well, that does depend now, doesn’t it? The super-senior holders might not be, because of their credit protection. More-junior holders might be harmed, but then the question turns on an accounting – was there credit protection bundled with the tranche or did they purchase it individually? Was their position actually damaged as a consequence of your non-payment?
Hmmmm…. looks like we need an accounting here of the trust and the actual economic harm, right? This does not mean, by the way, that one must show any particular amount of harm, beyond the general threshold of “materiality”, to sustain a foreclosure.
But what if there is no harm at all because of these credit enhancements and swaps, and in fact foreclosure is actually a double-dip – that is, double recovery?
In that case all such foreclosures are fraudulent. Not because of a lack of paperwork and not because someone “should” or “should not” get a free house – but simply because the entity bringing the suit not only didn’t suffer a loss, they stand to gain rather than recover a loss through doing so.
Can I ask why we don’t see both pleadings where a securitized loan defaults alleging actual economic harm and an accounting of how that’s arrived at, rather than its surrogate – the allegation that you didn’t pay?
Federal Reserve Chairman Ben Bernanke went before reporters this morning in a scheduled press conference, but neglected to insure a recovery from the recent economic collapse, much to the chagrin of Wall Street.
Bernanke did not say what the Fed would be doing in the months to come to help rebuild the American economy, and acknowledged in fact that the road to recovery has been “much less robust” than the Federal Reserve had hoped.
Many on Wall Street had expected today’s scheduled press conference to announce another round of quantitative easing, which while having its own fair share of critics, would most likely stimulate markets, serving as a welcoming change to the volatility that has plagued Wall Street during recent weeks.
The government also announced on Friday that the economy grew at a rate of only 1 percent last month, which while staggering, is an improvement from the 0.4 percent increase America saw during the first quarter of 2011. Bernanke responded acknowledging that “The economic healing will take a while, and there may be setbacks along the way.”
Karl Denninger of the Market Ticker says that quantitative easing would do little to help right now, and adding that it didn’t do anything the last time either. “I don’t see why the market is looking for him to do more of what didn’t work,” said Denninger, who adds that there is no benefit at to a third QE.
The chairman remained oddly optimistic, however, adding that “the healing process should not leave major scars.”
Obviously Bernanke has not noticed that the number of unemploymed Americans continues to stay at a tally exceeding 400,000. Following his speech, the Dow Jones Industrial Average dropped over 200 points, but saw resurgence later in the day.
We should, you know, especially when the head of the IMF spews crap like this:
As we all know, a major cause of the crisis was too much debt and leverage in key advanced economies. Financial institutions engaged in practices that magnified, disguised and fragmented risk, while households borrowed too much.
Right. There’s the admission. But let’s remember that without the financial institutions households could not have borrowed too much. It’s somewhat like a crack addict – you can want all the crack you want, but if nobody is selling it you’re not going to be smoking it.
So where is the accountability for those institutions? Oh, it’s missing – indeed Christine calls for more theft from you through public balance sheets to prop these jackasses up!
Put simply, while fiscal consolidation remains an imperative, macroeconomic policies must support growth. Fiscal policy must navigate between the twin perils of losing credibility and undercutting recovery. The precise path is different for each country. But to meet the credibility test, each country needs a dual focus: a primary emphasis on durable measures that will deliver savings tomorrow which, in turn, will help to create as much space as possible for supporting growth today—at least by permitting a slower pace of consolidation where possible. For instance—measures that change the rate of growth of entitlements, health or retirement.
Monetary policy also should remain highly accommodative, as the risk of recession outweighs the risk of inflation. This is particularly true as (i) in most advanced economies inflation expectations are well anchored; and (ii) pressures from energy and food prices are abating. So policymakers should stand ready, as needed, to dive back into unconventional waters.
Micro-level policy actions to relieve balance sheet pressures—felt by households, banks, and governments—are equally important. We must get to the root of the problem. Without this, we will endure a painful and drawn-out adjustment process. Structural reforms will surely help boost productivity and growth over time, but we should take care not to weaken demand in the short term.
In a word, no. What should be done is to impose the corporate death penalty on those institutions that cannot cover their own debt loads. We should force the bad debt into the open and default it. We must return to a sustainable level of public and private debt, and in the United States that’s about half of what’s outstanding right now.
Pretending that we can “grow” out of this is a lie. We cannot. To do so we would need to double GDP over the next decade, and yet do so without taking on one penny of additional debt anywhere in the system. That amounts to 7% growth each and every year for the next ten, with zero additional debt. That exceeds any long-run GDP growth the United States has experienced on a debt-adjusted basis at any point in the modern era and as such is simply not going to happen.
The dreams of political fools must accede to mathematical and historical facts, and on this point the data is clear – we cannot grow out of this. We must instead consolidate out of it and accept the economic pain that will result.
First, sovereign finances need to be sustainable. Such a strategy means more fiscal action and more financing. It does not necessarily mean drastic upfront belt-tightening—if countries address long-term fiscal risks like rising pension costs or healthcare spending, they will have more space in the short run to support growth and jobs. But without a credible financing path, fiscal adjustment will be doomed to fail. After all, deciding on a deficit path is one thing, getting the money to finance it is another. Sufficient financing can come from the private or official sector—including continued support from the ECB, with full backup of the euro area members.
Again, no. There is no reason on God’s Green Earth that those nations with reasonable fiscal policies should subsidize those who do not. Since the Euro zone failed to put in place actual incentive and punishment mechanisms for those nations that fail to act in a reasonable fashion there is now only one reasonable outcome – those nations must default and those entities that lent them money they cannot pay must lose part or all of that investment.
After all, lending money is an investment and comes with risk. This is why you earn a return; removing risk makes it not an investment at all but rather a tax.
Second, banks need urgent recapitalization. They must be strong enough to withstand the risks of sovereigns and weak growth. This is key to cutting the chains of contagion. If it is not addressed, we could easily see the further spread of economic weakness to core countries, or even a debilitating liquidity crisis. The most efficient solution would be mandatory substantial recapitalization—seeking private resources first, but using public funds if necessary. One option would be to mobilize EFSF or other European-wide funding to recapitalize banks directly, which would avoid placing even greater burdens on vulnerable sovereigns.
Those institutions that cannot raise private funds must be closed. No European should stand for any attempt to force them to cover the bad bets of private companies that have been more than happy to pocket the profits. Such acts, if attempted, should be met with open resistance using any means necessary as they are open declarations of war.
Not all wars are initiated with the discharge of firearms. Some are initiated with briefcases, suits and dresses. But all initiations of force are deserving of the same response.
Third, Europe needs a common vision for its future. The current economic turmoil has exposed some serious flaws in the architecture of the eurozone, flaws that threaten the sustainability of the entire project. In such an atmosphere, there is no room for ambivalence about its future direction. An unclear or confused message will add to market uncertainty and magnify the eurozone’s economic tensions. So Europe must recommit credibly to a common vision, and it needs to be built on solid foundations—including, for example, fiscal rules that actually work.
This is absolutely true. But such negotiation must take place free of the use of force. If the use of force to bail out private institutions is the means by which these negotiations are “entered” or “maintained”, then the people of Europe must rise and forbid such actions – again, by any means necessary.
In the United States, policymakers must strike the right balance between reducing public debt and sustaining the recovery—especially by making a serious dent in long-term unemployment. A fair amount has been done to restore financial sector health, but house price declines continue to weaken household balance sheets. With falling house prices still holding down consumption and creating economic uncertainty, there is simply no room for half-measures or delay.
Baloney. House prices rose for thirty years at an unsustainable rate. This is not a ten year problem and won’t be fixed that way. In particular:
First—the nexus of fiscal consolidation and growth. At first blush, these challenges seem contradictory. But they are actually mutually reinforcing. Credible decisions on future consolidation—involving both revenue and expenditure—create space for policies that support growth and jobs today. At the same time, growth is necessary for fiscal credibility—after all, who will believe that commitments to cut spending can survive a lengthy stagnation with prolonged high unemployment and social dissatisfaction?
Revenue and expenditure are easy problems. The government cannot provide that which we are unwilling or unable to pay for with current tax revenues. Period. That’s the beginning and end of this, and it’s not that hard to figure out. We simply must stop screwing around and deal with the facts – our government has promised things that our people have not been asked to pay for.
It may be that we’re unwilling to pay. If that’s the case then we cannot have those things. It’s that simple.
Second—halting the downward spiral of foreclosures, falling house prices and deteriorating household spending. This could involve more aggressive principal reduction programs for homeowners, stronger intervention by the government housing finance agencies, or steps to help homeowners take advantage of the low interest rate environment.
Nonsense. Those institutions that unreasonably lent against nothing but speculative fervor must be forced to eat their losses. If this blows them up then so be it. Home prices must come down. It is specifically this problem – the attempted prevention of a normal market adjustment that is 30 years in the making – that is causing our difficulties. This abuse of leverage is not limited to homes – it also infests medical care and college educations, to name two parts of our economy. It must end – everywhere – if we are to return to a stable and prosperous economic environment for everyone, not just a handful on Wall Street.
It is rather amusing to watch the IMF chair speak of “consolidation” and “sustainability” when in fact the IMF has a nearly-unbroken record of exploiting a crisis for its own aggrandizement and the protection of the banksters. The people of this nation and indeed the world would be far better off without these jackals. Banking’s essential purpose in the clearing of payments does not have to intersect with the building and maintenance of Ponzi Schemes that are nothing more than a way to asset-strip the populace.
Five Rules to Remember When Dealing with Real Estate Agents; Why are New Home Sales So Low? How Big is the Pool of Eligible Home Buyers?
A reader asked me to comment on historically low mortgage rates and their effect on housing. He asked because Realtors are telling him mortgage rates prove now is a “great time to buy”.
That comment prompted me to write Five Rules to Remember When Dealing with Real Estate Agents
Rule Number One
Real estate agents will always say “Now is a Great Time to Buy” no matter what the trend of prices, mortgage rates, or inventory.
Here are some phrases to expect depending on current conditions.
- Prices are going up, better act fast.
- Alternatively, prices are falling, homes won’t last long at these prices.
- Interest rates are going up, better buy quick before you get priced out.
- Alternatively, mortgage rates are falling, they won’t go much lower.
- Inventory is huge. It’s a buyers’ market.
- Alternatively, Inventory is shrinking fast. Don’t let your dream home pass you by.
Rule Number Two
Unless you specifically have a buyers’ agent negotiating on your behalf, the agent represents the seller.
Rule Number Three
The agent has only two missions:
- To get you to buy something
- To get you to pay as much as possible so the agent make the largest commission possible
Rule Number Four
As a result of rules one, two, and three, it is imperative to be skeptical about anything positive your agent says.
Rule Number Five
It’s equally important, if not more important, to take cues from what the agent does not say. For example, if the agent does not say anything about the school district, it is probably a poorly rated school district. Also, don’t expect the agent to tell you if a crack house is next door, gangs have taken over a neighboring block, the tap water tastes like sulfur, or the street floods every April. At most, agents will only disclose what the law says they must.
How Big is the Pool of Eligible Home Buyers?
Here is a set of questions that will explain what is happening now.
How many people ….
- Don’t have a house?
- Want a house?
- Can afford a house, upkeep, and property taxes?
- Have a needed cash cushion in the bank?
- Have a decent down payment for a house?
- Have a salary that can support interest and principal payments even at these low rates?
- Are not scared s*less about the loss of a job, assuming they do want a house and meet the rest of the conditions?
Someone needs to meet all of those conditions before they will buy a new house. How many is that?
I just happen to have the answer.
New Home Sales at 1963 Levels
The Los Angeles Times reports New home sales drop to six-month low
Sales of newly built homes fell in July to the lowest level in six months, as the nation’s housing market continues to struggle.
Newly constructed single-family homes sold at a seasonally adjusted annual rate of 298,000, putting the industry on a pace to post the lowest annual sales since the Commerce Department began keeping data in 1963.
Is the eligible buyers’ pool getting bigger or smaller?
The trend says smaller, in spite of falling interest rates and falling prices. Many items on my 7 point list are more important than interest rates, notably 1, 2, 3, 5, and 7.
That is the psychology of the situation and I see little reason for it to change until the labor market changes first.
Mike “Mish” Shedlock
So many to choose from this week…. Buffett and BAC (which I already wrote on), Bernanke’s continued mendacity and of course the destruction of real liquidity in the markets due to all the gaming and schemes that the “Wall Street Capitalists” have engaged in over the last few years.
But today’s column is reserved for those topics I haven’t explored this week. We’ll begin with this:
The Elko County Sheriff’s Office was notified in July of possible sexual contact between David Ralph Anderson, 61, and a girl younger than 14.
According to Elko Justice Court records, the victim told investigators that on seven to 10 occasions between 2010 and this year, Anderson allegedly taught the victim about various sexual acts and had sexual contact in the form of touching each other’s genitals.
Alleged perverts aren’t anything special, right? Well, this one is. The article says he’s a TSA employee.
Still want to go through that security line to fly, do you? There wouldn’t be anything special about being a TSA employee that might be attractive to an alleged pervert, is there? Oh yeah, there is – you get to grope the balls of little boys and fondle little girls breasts, and it’s part of your job description.
Why do we allow this as citizens of this nation again?
You can never eliminate as a prospective matter all perverts – by definition until the first time they get caught, arrested, tried and (hopefully) imprisoned you don’t know they’re perverts. But you can refuse to create government-sponsored and mandated positions where people like this can molest thousands of kids as part of their job!
What sort of sick society have we become that we’re willing to subject not only ourselves but our kids to sexual abuse simply to exercise our constitutional right to travel? And don’t give me this “privilege” crap – you (as an adult) may be able to consent to being groped (legally) to get on a plane (the difference between sexual assault and simple sex is in fact consent) but the premise of someone being a minor is that they cannot consent as a matter of law and you cannot consent for them. Arguing that this is acceptable is identical to arguing that a parent should be able to “consent” to their child sleeping with an uncle – or anyone else for that matter. Disgusted yet? You should be – with yourself.
In the first runner-up slot for outrage of the week we have this regarding JP Morgan:
The U.S. Treasury Department announced an $88.3 million settlement with JPMorgan Chase & Co. (JPM) for apparent violations of international sanctions programs, including Cuban assets control and anti-terrorism regulations.
The Treasury said that JPMorgan through its correspondent banks maintained prohibited financial transactions with sanctioned entities in countries including Cuba and Iran.
The JPMorgan payment agreed upon by the Office of Foreign Assets Control, known as OFAC, involves “egregious” violations for five years, according to a Treasury Department statement.
JP Morgan, of course, sees it differently and called them “rare incidents”, unrelated and isolated.
Uh huh. Treasury says they were egregious violations of the law and went on for five years.
We can argue over whether Cuba should have sanctions upon it, or Iran for that matter. Nonetheless it is the law, and if you so much as move $5 to one of these prohibited entities you’re subject to huge fines and potential imprisonment.
When a big bank does it? Well gee, we’ll just issue a tiny little fine for five years of misconduct, indict nobody and imprison nobody, despite the fact that real people in real parts of the bank authorized and performed these transfers.
That is, real people broke the law – either intentionally or through willful blindness.
If the penalty for holding up a bank was simply paying a fine equal to the amount you stole, how many times would your corner bank be held up between noon and 4 PM every day?
That’s what I thought.
Then there’s this stupidity on Bernanke and “Fed activism”:
Advice from Ben S. Bernanke, scholar, to Ben S. Bernanke, Federal Reserve chairman: Be bold.
Really? What’s the record on “being bold”?
I count three successive chairmen who were in fact utter fuckups and trashed our long-run economic prosperity by putting in place economic and monetary theories that are trivially disprovable using nothing more than fifth-grade mathematics. That one of them received a PhD for advocating even more of the same crap is an outrage and indictment against so-called “higher” education. They were high all right, but elevation above the crowd in intellectual prowess most-certainly isn’t what is being referred to.
Other Fed chairmen also have been criticized for bold action. Volcker in the early 1980s pushed interest rates to a record 20 percent to target inflation above 13 percent. While prices eventually dropped, the economy fell into a 16-month recession in July 1981 after emerging from a six-month slump in July 1980.
Prices dropped? The hell they did. Even the government’s own twisted statistics do not show contraction in prices – that is, reversion to the mean. The Millennials may not remember this but I sure do and so do people older than I. Indeed, what happened was that the modern ponzi economic “expansion” born of the lie that credit growth is in fact economic growth (it is not; output must always grow faster than credit or mathematically you are eventually screwed!) was born, nurtured, fed and then exploded – twice – into full-blown economic crises from which we have not escaped and won’t until we stop running monetary and fiscal policies that have proven bereft of merit.
Not only is the mathematics clear on this but so is the empirical evidence – a 30-year unbroken track record of failure.
Greenspan, after the 2001 recession, slashed the Fed’s benchmark interest rate to 1 percent in late June 2003, the lowest since 1958, and held it there for a year in a bid to fend off what he called a remote chance of deflation. Critics blame him for inflating the housing bubble that burst in 2007 and thrusting the economy into recession by holding interest rates too low for too long.
Even so, Bernanke has presided over even more economic upheaval.
Yeah, and every bit of it was self-inflicted by himself and the two chairsatan before him.
Why doesn’t anyone talk about the 1920-21 deflationary recession? It would be called a Depression except that it didn’t last long enough to be classified as one. In terms of the delta on prices (some 37% at the wholesale level – downward!) and collapse in industrial output it was the most-violent that I can find a contemporary record on. The stock market was cut in half and unemployment soared.
The cause of the collapse was over-exuberant hiring post WWI and the release of a huge number of Army members back into the civilian labor pool.
What’s interesting is that there was a Presidential election and Warren Harding presided over nearly all of this. Harding received counsel to intervene from one Mr. Hoover – yes, that Mr. Hoover, who was at the time Commerce Secretary.
He refused that advice and the market and economy cleared within 18 months, posting the largest single-year industrial output gain ever in the history of the United States. Not only that but unemployment returned to the full-employment level as well.
Activism by the federal government and federal reserve works and a “hands off” policy of letting those who get in over their head with leverage, overcapacity and debt doesn’t, eh?
Isn’t selective memory – and how it’s used to block out the success of the government refusing to prop up idiots and swindlers alike a funny thing?
Oh, incidentally, there are nations who have figured out that the debt ponzi doesn’t work. Spain is one of them.
The amendment (to the constitution) calls for public debt not to exceed 60 percent of gross domestic product, though the ceiling may be breached in the case of “natural catastrophe, economic recession or emergencies.” The parties pledged to pass a separate law by June next year that will set a maximum structural deficit of 0.4 percent of GDP to be met by 2020, the same year the debt limit comes into effect.
0.4%, or in essence a balanced budget, and public debt may not exceed 60% of GDP.
The ruling party in Spain is the Socialist party. Even die-hard redistributionist political actors, if they look at the math and stop lying to themselves and the public, find the truth inescapable and ultimately come to the correct conclusion: You must pay for the government services you wish to receive, all of them, with current tax revenues – not promises to pay tomorrow.
Wake up America; it’s a disgrace that a socialist nation can and does out-think you at a fifth grade level of comprehension.