In Parts One and Two I addressed the favored status of the ratings agencies in affecting all manner of financial instruments and investment decisions. But now, as an outgrowth of Dodd-Frank, the agencies’ impact appears to be on the wane. The new OCC regulations are figuratively airbrushing the ratings agencies out of the financial landscape. My third post on the agencies addresses the final insult, as the private sector snubs them.

The shenanigans that Moody’s and Standard and Poor’s pulled in the two years leading up to their massive ratings downgrades of 3Q 2007, have come home to roost.  At the same time that Dodd-Frank has smacked them down, it appears Wall Street is also now beginning to ignore them.  [In fact, one might wonder if legislative comeuppance was even necessary, inasmuch as the agencies are now receiving less and less attention from the very industry upon which their existence relies.  In short, it appears that we are witnessing a sort of Darwinian result, akin to what happened to the dinosaurs, who simply got too big for their own good. – PCQ] Continue reading “Ratings Agencies Get Their Comeuppance – They’ve Been Downgraded! [Part Three]”

Even the most heinous of financial crimes are usually – if not always – the bi-product of willing participants.  Admittedly, there may be only one “evil genius” in the mold of Bernie Madoff, but invariably there are many willing enablers.  These are the peripheral players to whom we might contribute some degree of culpability or at least benign neglect: Never asking the tough questions; uncritically following the crowd; accepting rewards for silence and moral passivity; and, putting introspection on auto-pilot.  ~PCQ

Background.  Before we get to “The Comeuppance,” we need to address what might be moralistically described as “The Pride before the Fall.”

Certainly, the boom and bust of the credit and housing markets of 2005-2007, can be attributed to many factors; there were multiple players and participants.  For example:

  • There was pressure by the federal government to extend the dream of homeownership to persons who deserved it, but could not afford it;
  • There was Wall Street’s securitization machine that encouraged the mass marketing of mortgages;
  • Fannie and Freddie, heretofore wildly successful quasi-public corporations that seemingly served the secondary mortgage market well, both played a role in their own demise;
  • There was the big investment banks’ creation of a Private Label secondary market, thus enabling home loans to be given to borrowers that Fannie and Freddie wouldn’t touch;
  • Added to this were the financial and real estate industries, which convinced themselves that property appreciation was like a perpetual motion machine, and would continue forever;
  • And then there was the American Public, whose insatiable appetite for homeownership turned them into lemmings, following one another over a financial cliff. Continue reading “Ratings Agencies Get Their Comeuppance – They’ve Been Downgraded! [Part One]”

Introduction.  On February 9, 2012, the U.S. Department of Justice issued a press release announcing the “landmark” $25 billion dollar settlement with five of the largest Big Banks.  On February 9, 2012 President Obama told the nation that the $25 billion settlement was:    “…about  standing up for the American people, holding those who broke the law accountable, restoring confidence in our housing market and our financial sector, getting things moving.”

But was it? Were those who broke the law held accountable and if so, how?  The purpose of this post is not to criticize the settlement or those who fashioned it.  Rather, my purpose is to examine a major financial component of the settlement, to determine if, as touted, those who “broke the law” will, in fact, be held “accountable.”

Background.  In June, 2010, Jeffrey Stephan, a low level employee at Ally Financial, admitted in deposition that he routinely signed hundreds of foreclosure notices daily without reviewing the underlying facts supporting the case.  This astounding practice, which was later revealed to be SOP in most Big Bank foreclosures, introduced a new verb into the American lexicon: “Robo-signing.”  While banking apologists were quick to characterize these acts as “technical paperwork problems,” no amount of spinning could erase the fact that people were being foreclosed out of their homes through the widespread use of fraudulent documents.

Over the following few months, we learned that a variety of laws were routinely being broken: (a) Documents were signed by persons who had no familiarity with the facts leading up to the underlying foreclosure; (b) Affidavits were sworn to as fact, when affiants had no knowledge of what they were swearing to; (c) Forged or falsified documents were regularly submitted into court as a part of judicial foreclosures; (d) notaries routinely violated state notarization laws; and (e) official titles, such as “Assistant Vice President,” were handed out to low level employees or subcontractors, to sign legal documents, as if acting in an official capacity.

Shortly after the revelations, the attorneys general of all 50 states joined together to bring claims against five of the largest banks for their servicing[1] misdeeds: (1) Bank of America Corporation, Charlotte, North Carolina [together with BAC Home Loans Servicing, formerly Countrywide Homes Loans Servicing LP, Calabasas, California]; (2) Wells Fargo & Co., San Francisco, together with Wells Fargo Bank NA, Des Moines, Iowa; (3) JPMorgan Chase & Co., New York, along with JPMorgan Chase Bank NA, Columbus, Ohio;  (4) Citigroup Inc., New York, along with CitiMortgage, O’Fallon, Missouri; and (5) Ally Financial Inc., Detroit [formerly GMAC], along with GMAC Mortgage LLC, Fort Washington, Pennsylvania, and GMAC Residential Funding Co. LLC, Minneapolis.

The complaint filed by the A.G.s included claims of unfair and deceptive loan servicing, foreclosure processing, loan origination practices, violations of the False Claims Act and Servicemembers Civil Relief Act, as well as various charges relating to the treatment of homeowners in bankruptcy. Continue reading “The National Mortgage Settlement – Will The Big Banks Pass The Buck?”

“This case demonstrates that the notion that the bailed-out banks have somehow found God and have reformed their ways in the aftermath of the financial crisis is pure myth,” Neil Barofsky, former special inspector general of the Troubled Asset Relief Program.

There’s an interesting story on the May 30, 2012 Bloomberg website.  It involves Sherry Hunt, who is a country girl, has a working class background, married at 16, and no college degree.  Growing up, she fished, hunted, raised horses and was a fan of Marty Robbins[1] and Buck Owens.[2]   She spent 30 years working her way up the corporate ladder. She has now found herself the recipient of a $31,000,000 reward under the federal False Claims Act.  Perhaps the story doesn’t have the sex appeal of a Karen Silkwood movie, but at least Sherry Hunt lived to receive her money.  Here’s the Cliff Q-Notes summary of the Bloomberg article. Continue reading “Citibank’s $158.3M Settlement With Feds…Just Banks Being Banks”

Introduction.  Well, it’s been nearly five years since the 3Q 2007 collapse of the credit and housing markets.  How time flies!  Are we having fun yet?  According to the Regional Multiple Listing Service (“RMLS™”) for the Portland Metro area, comparing January – April 2012 [the latest reporting period available at this time] with January – April 2011, closed sales increased 13.1%, pending sales were up by 17.5%, and total time on the market decreased 18.3%.  These are all good signs, as far as they go.

But there’s much more to the story; there are more troubling statistics that belie the cheerier numbers: April’s 2012 housing inventory was a dismal 4.7 months, compared to 7.2 in April, 2011.  In effect, there are fewer homeowners entering the market, and what’s available is being snapped up.  This is confirmed by the January – April, 2012 new listing numbers; they were down 9.7% compared the same period in 2011.  [Although I’ve not gone behind the housing inventory numbers, I suspect what’s happening is the lower priced homes, e.g. short sales and REO sales (i.e. bank inventory), are flying off the shelf, and higher-end properties and equity sales are languishing. – PCQ]

But the most sobering statistic is that over the same four month period, 2012 versus 2011, there is less than a 1% difference in both median sales price and average sales price.  At the peak of the Portland Metro market in August, 2007, the average home price was was $355,000.  Today it stands at $262,000.  From September 2007 to the present time, Portland Metro housing prices have been on a steady decline.  According to the RMLS™, annual average sale prices were as follows: 2007 – $342,900; 2008 – $330,300; 2009 – $289,900; 2010 – $282,100; 2011 – $263,300.  So for half a decade, Portland area housing, as measured by average price, has been in a dead calm, adrift and rudderless. Perhaps 2012 will yield better results. Time will tell. Continue reading “2005 – 2007: Big Bank Securitizations, Easy Credit, MERS, Housing, and the Foreclosure Crisis (Part One)”

“To the dismay of many of Obama’s supporters, nearly four years after the disaster, there has not been a single criminal charge filed by the federal government against any top executive of the elite financial institutions.” Daily Beast, May 6, 2012.

The Story. A few days ago, an interesting post appeared on the news and opinion website, Daily Beast.  It was taken from a Newsweek article, a magazine that is trying valiantly to remain both relevant and solvent in the digital age.  With Tina Brown at the helm of both, many of Newsweek’s cover stories have become decidedly controversial and unrepentantly left-leaning.  And with the assistance of the Beast, this news aged magazine – one year short of becoming an octogenarian –  gets more attention than it would if it just ended up at your local dentist’s waiting room.  But, I digress…. Continue reading “Big Banks – Too Big To Jail?”

“Wells Fargo’s conduct is clandestine. Rather than provide Jones with a complete history of his debt on an ongoing basis, Wells Fargo simply stopped communicating with Jones once it deemed him in default. At that point in time, fees and costs were assessed against his account and satisfied with postpetition payments intended for other debt without notice. Only through litigation was this practice discovered. Wells Fargo admitted to the same practices for all other loans in bankruptcy or default. As a result, it is unlikely that most debtors will be able to discern problems with their accounts without extensive discovery.”

Honorable Elizabeth W. Magner, U.S. Bankruptcy Judge, In Re: Jones v. Wells Fargo Home Mortgage, Inc.

Introduction. In understanding what happened in this case, it is important for the layman to understand the following:  All bankruptcies in the U.S. are governed by federal law.  The concept – though not necessarily the process – is simple: The moment one files for bankruptcy, an “automatic stay” is imposed.  This means that immediately upon filing a petition in bankruptcy, no creditor may attempt to recover any monies or seek other relief against that person [called the “debtor”] without court approval.  A trustee is appointed to administer the bankrupt’s estate.  Creditors, such as Wells Fargo, must then file a “proof of claim” with the court, setting forth the amount the debtor owes them as of the date he or she filed their petition.   A bankruptcy proceeding in which a “reorganization plan” or “plan” is filed with the court is known as a “Chapter 13” bankruptcy. If the plan is opposed by any creditors or the trustee, it must be worked out, or resolved by the Bankruptcy Judge.  Once “confirmed” by the Court, the debtor and all creditors must adhere to it.

Typically, a reorganization plan will identify who, what, when and how, creditors are to be repaid by the debtor.  Any variance from the plan has to first be approved by the bankruptcy court.  Some actions and events in bankruptcy lingo are occasionally referred to “post-petition” in order to signify that they occurred after the debtor filed for bankruptcy.  Events occurring before the debtor’s bankruptcy filing are referred to as “pre-petition.” The trustee is in charge of overseeing the operations of the final confirmed plan.

In the following case, Wells Fargo was one of the debtor’s creditors, and as such, had participated in, and was bound by, the confirmed plan.  As demonstrated below, the courts jealously guard debtors who seek federal bankruptcy protection.  Any deviation from a confirmed plan by the debtor’s creditors, especially intentional deviations, can result in severe sanctions.

Discussion. The Memorandum Opinion written by the Honorable Elizabeth W. Magner, U.S. Bankruptcy Judge, could have been completed in a few pages.  Instead, she decided to take 21 pages, setting out in detail, the conduct of Wells Fargo, that you sensed was not going to end well for this Big Bank. Continue reading “Slapdown! – In Re: Jones v. Wells Fargo Home Mortgage, Inc.”

No sooner did I post a piece about the evils of force-placed insurance [here], than American Banker interviewed Kevin McKechnie, executive director of the American Bankers Insurance Association (“ABIA”), about this sensitive subject.  This article is a must read, confirming in spades my contention that Big Banks are morally and ethically vacuous. And by the way, why is there an “association” for bankers’ insurance?  This sounds like a cabal that lurks in the shadows.  They tout their purpose as …”a full service association for bank-insurance interests, ABIA is dedicated to furthering the policy and business objectives of banks in insurance.”  Riddle me this Batman:  Banks lend money.  What ‘objectives’ do they have with insurance? So, herewith are some snippets of the interview with Mr. McKechnie about lender-placed insurance: Continue reading “Nuts and Dolts – Big Banks Defend Force-Placed Insurance”

FANNIE AND FREDDIE – SUCKLINGS ON THE PUBLIC TEAT

According to a 2009 Vanity Fair article, in the 1980s Fannie Mae was “…one of  the largest, most profitable companies in the world, with a stock-market value of more than  $70 billion…*** (By comparison, G.M. at its peak, in 2000, was worth only $56 billion.)”   Today Fannie’s share price is around 29¢, with a market cap of $359.5 million.

For the last ten years, both giant Government Sponsored Enterprises (“GSEs”), Fannie and Freddie, have seen their fortunes turn to dust.  In 2003, it was learned  that Freddie had misstated its earnings by $5 billion between 2000 and 2003. It was fined $175 million by the Office of Federal Housing Enterprise Oversight (“OFHEO”), an independent HUD regulator.  Next it was Fannie’s turn.  OFHEO also investigated Fannie Mae and reported that:

  • Between ” … 1998 to mid-2004, Fannie Mae reported extremely smooth profit growth … those achievements were illusions deliberately and systematically created by the Enterprise’s senior management with the aid of inappropriate accounting and improper earnings management.[1]
  • (T)he Enterprise also had serious problems of internal control, financial reporting, and corporate governance.
  • Fannie Mae engaged in excessive risk-taking, which included increased holdings of subprime and Alt-A private-label MBS and the use of derivatives to manage the interest-rate risk of GSE investment portfolios.
  • Those errors resulted in Fannie Mae overstating reported income and capital by an estimated $10.6 billion.”

Fannie Mae paid a $400 million civil penalty and the Securities and Exchange Commission required that it restate its financial performance for 2002 through mid-2004.  Between that embarrassment and the forced departure of its CEO, Franklin Raines, and its CFO, Timothy Howard, Wall Street bailed, and its share price plummeted, reducing its market cap by tens of billions of dollars.

As the country reeled from what was initially referred to as the “Subprime Lending Crisis” – which we now know was not limited to just subprime loans – in an effort to restore confidence in housing, investor confidence in the credit markets and GSEs [which by then were circling the drain – PCQ], Congress enacted the Housing and Economic Recovery Act in July 2008.  In September 2008, the FHFA placed Fannie and Freddie in to conservatorship, where they remain today.  But together, the GSEs are  reminiscent of the zombies from Night of the Living Dead; they just refuse to die.

On March 28, 2012, the Office of Inspector General (“OIG”) issued a “White Paper” entitled “Assessment on FHFA’s Conservatorships of Fannie Mae and Freddie Mac. “

This White Paper should have been entitled “Obituary.”  There is something slightly macabre about two organizations on life support whose primary missions are to make their own funeral arrangements.  In the words of the OIG:

“…the conservatorships have been in place for over three years, and there is no end in sight. FHFA estimates that, by the end of 2014, between $220 and $311 billion in financial support will have been drawn from the Treasury, and FHFA’s Acting Director has stated that taxpayers are unlikely to be fully repaid for their support.”

The fact that Congress and the Acting[2] Director of the FHFA, Edward DeMarco, cannot even agree upon FHFA’s mission, does not bode well for the future of the GSEs.  Meanwhile, they have consumed 183 billion taxpayer dollars, as the Administration and Congress dither on what a secondary mortgage market structure should look like.

Citing the White Paper: “…a conservator’s goal is to continue the operations of a regulated entity, rehabilitate it and return it to a safe, sound and solvent condition….”  That doesn’t look like it will ever happen.  Yet, if no one pulls the plug, we could have Fannie and Freddie lingering on tax payer subsidized life support for decades.

Even Acting Director Mr. DeMarco is not optimistic, “[T]he Enterprises will not be able to earn their way back to a condition that allows them to emerge from conservatorship. In any event, the model on which they were built is broken beyond repair.”

OK, we get it.  We’ve watched this soap opera play out for ten years. It’s time to stop writing white papers and holding hearings.  Perhaps after the election, congressional leaders will grow spines and figure out a way to have a secondary market that works without taxpayer support.

[1] The reason for the “extremely smooth profit growth” was, according to the OFHEO, to mask “…their volatility *** giving the Enterprises the appearance of low-risk companies.” Its predictable earnings made Fannie a Wall Street darling. By achieving its predetermined financial goals, senior management was able to regularly hit bonus projections.  This isn’t to say Fannie lied about the money it was actually making.  Rather, what it did was secretly set aside profits for periods of slower revenue, thus making it appear as a smooth running machine, when it wasn’t.  This practice of concealing monies for later accounting periods became known as “Cookie Jar Accounting.”

[2] He is serving in this temporary capacity, since there is no agreement to confirm him for the permanent position.

 

Foreclosure today is not what it used to be.  In the past, banks and borrowers tried to avoid foreclosure, since it was a lose-lose proposition for both sides. Today, that is not the case.  With the advent of securitization, Big Banks discovered several things: (1) That they could make loans for which they were promptly repaid in the GSE secondary market or the private label secondary market; (2) That underwriting guidelines were unimportant if  Big Banks no longer kept these loans on their own books; (3) That they could make even more money servicing the loans they had already sold into the secondary market; (4) That servicing sketchy and poorly underwritten non-performing loans was far more profitable than servicing performing loans, since they could charge higher fees, pile on Draconian charges, split fees on force-placed casualty insurance, upcharge investors for the vendor costs they had advanced; (5) That through affiliated subsidiaries, they could actually create foreclosure companies to act as “successor trustees” in non-judicial foreclosure states; (6) And most significantly, Big Banks discovered that any damages resulting from their bad loans and exorbitant servicing charges, would ultimately be borne by others – either the investors who bought the private label junk they sold, or the American Taxpayer who picked up Fannie’s, Freddie’s, and FHA’s losses.  So today, there is a need to level the playing field.  Mandatory mediation may not be a “Silver Bullet” but it will hopefully serve as a tool to help level the playing field as homeowners try to extricate themselves from the mess the Big Banks created. Oregon’s Senate Bill 1552 is one such effort.  For a more detailed discussion of SB 1552’s terminology and forms, go to my earlier blog post here.  – PCQ Continue reading “Oregon’s Mandatory Mediation Law – The Timelines”