Supreme Court Sinks More Homeowners into Permanent Debt

dead_economy-300x199New Orleans    In a startling unanimous decision, the US Supreme Court overturned an 11th Circuit Court of Appeals decision finding in favor of Bank of America that even bankruptcy protection does not allow underwater homeowners the ability to escape the obligations of second mortgages.  The impact of the decision allows zombie banks to continue operating on the basis of balance sheets reflecting virtually lifeless real estate holdings and makes these beleaguered homeowners into walking dead debtors with virtually no hope of a second chance.The Supreme Court once again reminds Americans that the Constitution is fundamentally about property rights and that the sanctity of a contract trumps all vestiges of common sense.

Generally speaking, a home is commonly classified as “underwater” if the value of the outstanding mortgage is 25% higher than the current market value of the home.  Remember the mortgage we are talking about here is the first mortgage.  The second mortgage is satisfied after the first is fulfilled.  Many of these second mortgages are home improvement loans.  Others arose from the need to finance children’s education or medical emergencies by attaching what has historically been the primary asset creating citizen wealth for the vast majority of low and moderate income families in the country.   Bank of America in their court filings estimated that there were 2.1 million underwater homeowners with second mortgages at the end of 2014.   Others like Zillow estimated that there are still 8 million homeowners who are underwater and most real estate experts estimate that it is likely that half of them have some kind of “second” on their homes.  This is not an insignificant problem in either the economic recovery or the hope for narrowing the equity gap.

Of course not all of these families had declared bankruptcy, partially because banks and others have done an amazing job over recent years with Congress in making bankruptcy both harder to achieve for desperate families and less valuable as a chance for a clean slate and a second chance.  Filing for bankruptcy does not allow someone to wipe out a mortgage debt or a student loan debt for example.  The mortgage obligation is what forces an underwater homeowner into foreclosure.  The best hope for the debtor is that surrendering what used to be an asset to the bank, calls quits to that debt.  In 2007 and 2008 when ACORN was negotiating with big banks and mortgage loan servicers as the implosion began, I was at some of those meetings.Executives then believed that they would just have to wipe out their second mortgage portfolios as worthless.

The Supreme Court’s decisions says, “no way, you’re stuck.”Hey, some day in the by and by, real estate values may go back up, allowing the loan to be collected.  Some of these properties are so far underwater that it won’t be a year but a generation for that to happen.  For the banks paying a dollar on that loan every 90 days allows them to still call it a performing loan, helping their zombie balance sheets, and leaving the debtor, desperate for a clean start, carrying even more weight. The Justices say, “dude, it’s a contract, didn’t you get that?”  The debtors, like millions of others, were on the merry-go-round being pushed by these same bankers and promoters in the real estate bubble into these sucker bets.  These weren’t contracts as much as cons.

Only death relieves some of these debts.It’s already legal for 25% of someone’s social security to be attached.  Now the Supreme Court has just locked another ball and chain onto untold numbers of families with little hope for the future but dragging the weight behind them, sentenced to a life as walking dead, not in debtors’ prison, but in a permanent debtors’ probation of sorts with little or no chance of escape.

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Johnny Cash – Folsom Prison Blues (Live)

For Banks the Party Never Stopped

indexHouston        Seven years after the wheels started coming off the bank’s mad money train, it seems clear that settlements for mortgage abuse, which is euphemism for fraud, Dodd-Frank legislation, and what should have been the awesome weight of having collapsed the US and world economy and upended the lives of millions, have essentially been water off a duck’s back for the banking industry and Wall Street.

Let’s just tick off a few recent cases in point.

  • The City of Los Angeles, yes, not the Justice Department, SEC, or Federal Reserve, sued Wells Fargo for pressuring employees in its retail bank with sales quotas to fraudulently enroll people in new customer accounts without their approval.  Plain and simple, shake and bake, no permission needed.
  • Two big banks rather than settling for some hand slaps and big fines, Nomura, a Japanese bank, and the Royal Bank of Scotland, both presumably figuring their home country customers probably didn’t give much of a flip about whether or not they had packaged bad mortgages in the USA, went to trial claiming the dog-ate-their-homework, the economy did it, not them.  The judge found against these miscreants and essentially said their behavior was disgusting.
  • And of course there is the whole cabal of banks that engaged in price fixing and chicanery to fudge the LIBOR rate for interbank and corporate lending including HSBC, JP Morgan Chase, Citi, and a rogues’ gallery of the biggest banks in the world.  Their fines are in the billions, and reportedly they are going to finally have to actually plead guilty as institutions.

Many have argued that part of the problem was the legal double standard that found law enforcement playing paddy cake with the criminal enterprise that banking has become rather than prosecuting them aggressively from the top down.  If anything was administered more than simple detention, it was from the bottom-up.  The bigger the guy at the top of the bank, the bigger and more obscene the paycheck continued to be.

More proof that bad behavior and thuggery is the norm in banking is emerging in a new study as well.   According to the Andrew Ross Sorkin at The New York Times,

“...about a third of the people who said they made more than $500,000 annually contend that they ‘have witnessed or have firsthand knowledge of wrongdoing in the workplace.’  Just as bad:  ‘Nearly one in five respondents feel financial service professionals must sometimes engage in unethical or illegal activity to be successful in the current financial environment.’”

Such statements take your breath away.  Not only has it not gotten better, it may have gotten worse!   And, the President wonders why Senator Elizabeth Warren is willing to go to the wall on a trade bill that had hardly interested her until she noticed the language leading her to believe that it would allow even more transnational banking criminality?

There oughta be a law, but there probably are plenty of them, just no one seems to care, and the party goes on, and we all pay for it.

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The Beermats – A Workers Song

Is Affordable Housing Being Crucified by Inequality

IKEA home in Sweden

IKEA home in Sweden

New Orleans      Increasingly it seems that we are going to have to decouple the issue of home ownership and affordable housing at least in the traditional sense of small footprints in the dirt with picket fences around them.  Home ownership due to harder loan standards, tighter credit, and the Great Recession has now fallen to 63.9% at the end of 2014, lower than at any point in the last 20 years.  A recent survey found that nine of the top eleven metro areas now have a majority of renters compared to homeowners led by Miami, New York, Boston, San Francisco, Houston, Washington, Dallas, and Chicago.

The trend towards “executive” cities like Seattle, Vancouver, London, and many others where housing  costs are atmospheric has foreclosed any opportunity for regular working families to consider home ownership in the classic, outdated “American Dream” sense of the term, unless they are willing and able to purchase cooperative apartments or condominiums.  Even while moving that dream off the shelf, the affordable housing crisis remains unabated unless we embrace some change.

How about manufactured housing?  I’ve got to admit I like my time living in Airstreams, and I’ve become friendly towards trailers. The Economist had nice things to say about “system-built” housing recently which also caught my eye:

“…system-built housing does not have to be shoddy or impersonal. Huf Haus of Germany has been building high-end prefabricated housing since 1912.  Adatahaus, a British firm specializes in homes that can be reconfigured as a family’s needs change.  IKEA of Sweden sells flat-pack houses that can be customized.  Furthermore, big companies can help people to self-build a personalized home while enjoying economies of scale:  Cemex of Mexico provides self-builders with access to cheap fixtures and fittings, and cheap finance, as well as cement.”

Ok, maybe not everyone’s cup of tea, but poking through Craigslist last night I saw a corrugated metal-sided and roofed structure on higher ground towards the Gulf of Mexico that looked beckoning.  Just saying.

Where would you site such housing?  Interestingly there is already a controversy breaking out in East New York on Mayor DeBlasio’s plan to protect affordable housing in that area, which many residents see as gentrification.  We’ve talked about the double-edged sword of “market rates” before, when the inequality of wages and wealth has perverted the market.  The deal that ACORN made in Brooklyn for over 2000 units of housing around the train tracks at Atlantic Yards has still not produced on that promise after more than a decade.

There’s vacant land though in many cities crying for company.  Turkey assembled 1600 square miles equal to 4% of the country’s urban area when  the national housing agency bought land from other state agencies.  China puts the hurt on developers sitting on property to force the issue by imposing a 20% tax on the value of land parcels left undeveloped for more than a year.

Meanwhile rent levels of 30% or more of income and mass numbers of roommates has become the norm in many cities.  One estimate has more than 20 million paying more than 30%.Looking at average rents in mid-south cities like Houston, New Orleans, Dallas, and Little Rock, we found the numbers on the average between $650 to $750 per month.  To make that nut an individual would need to make between $12 and $16 per hour if they were going to live by themselves.

Affordable housing is possible, but not without living wages and a strategy that values citizen wealth and family security as more important than a picket fence.

More Evidence Emerging of the Big Banks Role in Mortgage Meltdown

0New Orleans      If there is anyone over the age of 10 years old that has any doubt that the pure and simple, unchecked greed of banks caused the mortgage meltdown triggering the Great Recession, please read, and listen carefully.   Information now coming out on the dealings between Morgan Stanley, the Wall Street behemoth that acted as the primary financier, facilitator, and purchaser of tranches from high-flyer New Century whose fall in 2007 signaled that the party was over make it crystal clear that they funded the mess until it broke the economy and almost bankrupted them as well.  Follow the big money and the trail becomes impossible to miss.

Reports are emerging from of all places an ACLU lawsuit, representing some buyers who lost their homes,  of emails and other information that has come from the discovery process.  Morgan Stanley tried to squash the suit, but a federal judge has now ruled that there is more than enough to push the matter forward.  The Justice Department and local prosecutors are also smelling blood in the water and predicting that Morgan Stanley will settle for a pretty penny before summer gets too hot.

Once again resources and their availability from Morgan Stanley seem to have been irresistible to New Century.  I’m in danger of starting to develop a global theory of how money and resources more than any other factor moves – or halts — not only too much of the work of social change but virtually all of what we see in not only this mess, but also tech, research, medicine, and a lot of other fields, so that’s a warning of things to come.

In this case,  Morgan Stanley was the biggest buyer of New Century subprime loans from 2004 to 2007, about $42 billion worth, and insisted that they wanted packages that were heavily weighted towards adjustable rate, ARM loans, or what the New Century CEO and co-founder once referred to in a negotiating session with ACORN and his own personal situation as “drinking his own Kool-Aid.”  Oh, and make sure they have pre-payment penalties as well, ok?  Risk and compliance factors low on the Morgan Stanley totem pole, in other words, not at the trading desks where sales are sex and everything else is road kill,  and were consistently ignored, even when the big bosses knew better.

According to a report in the New York Times

another lower-ranking due diligence officer, Bernard Zahn, who wrote detailed emails to both Ms. [Pamela] Barrow [a top diligence officer] and Mr. [Steven] Shapiro [head of the trading desk] explaining, in increasingly urgent terms, problems with the loans they had bought.  “It isn’t ‘just a couple of typos or ‘mistakes’ as it was suggested, the more we dig, the more we find.”  Ms. Barrow congratulated Mr. Zahn: “good find on the fraud :).” But rather than pursuing his findings, she immediately went on: “Unfortunately, I don’t think we will be able to utilize you or any other third party individual in the valuation department any longer.”

Hard to miss that message.   You can ask, just don’t tell.

Barrow in another exchange was pretty clear about what they thought of the quality of their borrowers as well, when she…

wrote to a colleague in 2006 sarcastically describing the “first payment defaulting straw buyin’ house-swappin first time wanna be home buyers.” “We should call all their mommas,” Ms. Barrow added in the email. “Betcha that would get some of them good old boys to pay that house bill.”

Well, yeah, and if loan affordability had ever been a criteria rather than bonuses and greed on Wall Street, millions might not have suffered. How do you explain all of that and what you did to your mommas and papas, Morgan Stanley big whoops?

New and Better Mortgage Lending Standards Maybe

rs-2New Orleans               The press is making a big deal of Mel Watt’s comments as the chief housing regulator at the Federal Housing Finance Agency to the Mortgage Bankers Association’s convention in Vegas.  He claims he has a new plan to loosen up the rules so that banks finally lend some money to first-time buyers and lower-and-middle income borrowers.  There’s a problem though.  The bankers are applauding, but there are no real details to the plan available, so what’s the story here?  Frankly, I don’t trust this.

Too much of this seems like a suck-up to the bankers and the equivalent of a “get out of jail” quickly ticket for them to blame their fast and loose behavior on the borrowers, which has been part of their narrative since the meltdown of the Great Recession.  Under the so-called “plan,” the housing finance agency would ease up on the rules that require the banks to buyback mortgages “that show evidence of fraud or other flaws in the underwriting process.”  Supposedly the buyback now would be based on the ability of the feds and the prosecutors to prove a “pattern of misrepresentations and inaccuracies.”  Furthermore the bank rip-offs would have to be “significant” enough to have disqualified the borrower from a Fannie Mae or Freddie Mac guarantee on the loan.

There’s a rumor of approving loans with as little as 3% down payments, and maybe that’s a good thing, but who really knows without the details.

To me this looks like a bank stickup with the bankers holding the gun against the government’s head and refusing to make loans until they get enough promises that they are not going to have to pay billions in fines and buybacks if they rip-off their borrowers yet again.  My argument would once again focus on one of the least corrected causes of the meltdown:  brokers.

As long as lenders refuse to supervise their broker networks even while all of the incentives are left in place for brokers to act independently and to be paid at the point of production regardless of affordability of the loan to the borrower, the conditions remain in place for fraud and predatory behavior.  Allowing this much finger pointing away from themselves, lets the bankers juice up the market without any accountability.  Even better, but only for them, they’ll get to still blame the victims, rather than take responsibility for their own thievery.

We need a subprime market.  We need for low-and-moderate income families to have the choice of buying a home, if it makes sense for them financially.  But, do we really want to make it easier for bankers to look the other way and claim their hands are clean when they are financing the fraudsters?

Many of the advocates are applauding this so-called plan.  I’m hoping they know a lot more of the down-low than has been made public, because at this point it looks like a deal made on our knees with the bankers where we’re once again begging for money for our people and they, once again, are dictating the terms and setting the table for more mischief and mayhem.

Bank Redlining Increasing and Wealth Plummeting in Minority Communities

Seattle 1964

Seattle 1964

New Orleans        The Federal Reserve report on the continued decrease in lending to African-American and Hispanic families is unambiguous.  In 2013, 4.8% of total home loans were to African-Americans, 7.3% were to Hispanics.  In 2012, the numbers were only marginally better at 5.1% and 7.2% respectively.  As recently as 2006, before the real estate meltdown the numbers were almost 50% higher when combined, exceeding 20% of the total loans.

The other thing that is clear in the total failure of the Obama Administration to provide any real relief to so many homeowners is that citizen wealth for these same families has plummeted, putting more families underwater, owing more than the value of the loans in black and brown communities. While home values have declined about 10% in white communities, values have dropped by 20% in predominantly African-American neighborhoods and 26% in Hispanic-majority communities. It is virtually impossible not to conclude that banks are neither loaning, nor are they providing relief in such communities. If that’s not redlining, then let’s come up with a new name for it, because whether you say tomATo and I say toMAto, it’s all the same thing.

Reading the Wall Street Journal on this issue the only other thing that is crystal clear is that everyone responsible wants to point the finger somewhere else, usually at the government, rather than their own behavior, and muddy the water as much as possible, rather than moving to fix the problem with more rational policies and programs. The banks want to claim that they are raising credit scores higher than required because they don’t want to pay billions of penalties for their criminal behavior in robbing and fleecing both rich and poor. Does that sound like taking responsibility for your crimes and endeavoring to do better? Hardly!

And, how can blaming the lack of lending or relief to minority neighborhoods on these homeowners when every indication is that the roots of the securitization scandals were deeply set in speculation and largely white, middle-income and suburban communities? Count on the head of the Mortgage Bankers’ Association to voice the racism inherent in these new, whitewashed policies. David Stevens, their CEO, says the hammering of minority communities is “just simple math…tightening the credit has an unusually high impact on minority borrowers.” Stevens and the MBA are the lobbyists for bankers and banking in Washington, DC, so this is scary. They seem not to have gotten the memo that underlies the Federal Reserve report required by the Community Reinvestment Act and Home Mortgage Disclosure Act, which is the fact that they are supposed to be proving that they are doing better and doing everything possible to increase lending in minority areas, not just show up, and sign the attendance list.

Home ownership for lack of any better plan in place is still the largest source of wealth for lower income and minority communities so this level of inaction, blame shifting, and rationalizing puts the heavy fist of bankers on the scale to further increase the shift of inequality between the rich and poor, towards the rich. The underlying racism insures that lower income, minority communities by damn stay that way.

It’s not simple math. It’s simple racism, and that’s what the Federal Reserve is supposed to be stopping, not enabling, and it’s what these reports are supposed to be exposing for action, not simply noting in passing.