Bank Holding Companies

Overview

Most U.S. banks are owned by bank holding companies (BHCs). The Federal Reserve supervises all BHCs whether the bank subsidiary is a state member, state nonmember, or national bank. This section provides information to assist in deciding whether and when to form a BHC.

Bank Ownership by BHCs

Currently, about 84 percent of commercial banks in the U.S. are part of a BHC structure. Relatively few BHCs, however, are formed by banks while the bank itself is in the organizational phase. Typically, the formation of a BHC is made at some future point in the bank's operations.

The following charts demonstrate the prevalence of BHC ownership of banks in the U.S.:

• Bank Ownership by BHCs December 1980 to December 2007
• Bank Ownership by BHCs Based on Bank Assets: December 31, 2007

More than 75 percent of small banks with assets of less than $100 million are owned by BHCs, while this percentage increases to 100 percent for large banks with more than $10 billion in assets. About 60 percent of minority-owned banks are owned by BHCs.

Judging from the large number of BHCs, the question for most banks appears to be when to form a BHC, not whether. It should be noted, however, that some banks have been acquired by a BHC, as opposed to having made an active decision to form their own BHC.

Starting in 1980, only six out of 202 new banks opened with BHCs, or about 3 percent. But by 1985, this percentage had jumped to about 18 percent, with 56 out of 306 new banks forming BHCs. The percentage continued to increase slightly over the next decade, and since the mid-1990s, it seems to have stabilized near 25 percent. In 2007, for example, 40 out of 162 new banks opened under a BHC structure. View the accompanying chart for more detailed information.

Should an Organization Form a BHC?

There is no easy answer to this question. Each organization is unique and should make its own determination.

The Federal Reserve is neutral on the question of whether banks should form BHCs, and it does not actively market or encourage the formation of BHCs. The BHC provides a structural alternative that may be appropriate given a bank's circumstances, priorities, and business plan. The Federal Reserve will consider BHC applications if they meet the established financial and managerial standards.

The Fed has taken steps over the years to streamline the applications process and to reduce regulatory burden in supervision and reporting, particularly for small BHCs. To the extent possible, the Federal Reserve wants to take regulatory burden out of the equation, so organizations can base their decision strictly on business considerations.

Pros and Cons of BHC Formation

Pros

A BHC has the ability to raise capital in forms other than common stock. The prime example of this is the issuance of trust preferred securities (TPS). The ability to issue TPS has been a main driver of many BHC formations over the past 10 years. View the accompanying chart for more information on a TPS transaction.

The advantages of TPS include the following:

• The instrument is a relatively low-cost source of tier 1 capital owing to the tax treatment.
• The subsidiary bank ends up with new common equity (if this is the purpose of the TPS issuance)—an advantage from the bank regulator's point of view.
• There is no dilution to the BHC's existing shareholders.
• Investment bankers often pool a trust preferred issuance, which provides funding to 10 or 12 small BHCs. The pooling aspect has served to open the trust preferred market to BHCs that might otherwise find the transaction and marketing costs too high.

For a de novo organization, however, the issuance of TPS is something to plan for several years down the road. The TPS market has not been receptive to issuances by new organizations that have no track record. A BHC in satisfactory condition might begin to consider issuing TPS as assets approach $100 million.

Finally, it is important to note that the TPS market has been shrinking due to the general market turmoil stemming from the subprime mortgage crisis, resulting credit crunch, and other factors. TPS investors are now harder to find, and required interest rates have increased substantially. However, the recent disruption of the TPS market is likely temporary.

Another factor in favor of forming a BHC is that BHCs have considerable latitude in assuming or incurring debt. This might be done, for example, to fund a capital injection to the subsidiary bank or to pay for an acquisition. Debt is always limited, however, by the BHC's demonstrated debt servicing and retirement capability. Also, substantial levels of debt in a de novo organization are discouraged.

BHCs also increase flexibility in merging with or acquiring additional banks. In addition to merging a bank into a BHC's subsidiary bank, a BHC can acquire an additional bank and operate as a multibank BHC. A BHC can also establish or acquire nonbank subsidiaries and operate them as entities separate from the bank.

Finally, even if the organization has no immediate plans to use the BHC in any of the ways discussed above, there is a school of thought that argues for establishing the BHC anyway—to act as a safeguard in case it is needed in the future.

Cons

For a de novo organization, there are additional costs and more complexity in the start-up phase associated with the formation of a BHC. Also, there are ongoing costs related to Federal Reserve supervision and reporting requirements, despite the Federal Reserve's efforts to minimize these burdens. Additionally, a BHC may be subject to additional cost and regulation related to Security and Exchange Commission (SEC) registration. However, SEC registration is not required if the BHC stock is sold through a private offering or sold only to residents of the BHC's home state.

Another con is that a de novo BHC would likely need to increase the organization's initial capital offering by at least several hundred thousand dollars in order to provide working capital for the BHC. (It is important to anticipate the BHC's funding needs because a de novo bank will not be able to pay dividends for the first few years.)

Based on the above considerations, BHC formation is often deferred until there is a clear purpose or need for it.

Policy Statement on Small Bank Holding Companies

In the 1980s, the Federal Reserve issued an important policy statement on small BHCs, which is Appendix C to Regulation Y. The policy statement recognizes the importance of community banking in the financial system and affords certain advantages to facilitate ownership and transfer of small banks by BHCs. A 2006 revision of the policy statement increased the asset threshold for a small BHC from $150 million to $500 million.

Small BHCs are exempt from the consolidated BHC capital guidelines to which larger organizations are subject. The capital adequacy of small BHCs is based on the bank's capitalization, just as if the BHC were not present. This means that the BHC, within reasonable parameters determined by its ability to service and retire debt, can use lesser forms of capital, or debt funding, to provide (for example) equity capital to the bank or to help fund an acquisition. In addition, small BHCs also enjoy simplified reporting requirements.

Application Process

The formation of a BHC requires the prior approval of the Federal Reserve through a formal application process, which, over the years, the Federal Reserve has streamlined and simplified. Most applications by well-run BHCs are acted on within 30 days.¹ Some noncomplex proposals are processed in just 15 days.² And the simplest proposals, such as engaging a de novo in a permissible nonbank activity, require only an after-the-fact notice.³

Given a proposal to form a de novo bank that meets the financial and managerial standards of the bank's regulators, a related application to establish a de novo shell BHC over the bank usually raises few issues.

Once the initial application is approved, additional applications are required in the future if the BHC proposes to acquire additional banks or engage in nonbanking activities. Each application is evaluated under established financial, managerial, and competitive standards. Generally, well-run organizations in satisfactory condition receive approval to expand, while others are discouraged.

Bank Charter Decision Within a BHC Framework

To establish a commercial bank, the organizers can file for either a national or state charter, and if they file for the state charter, they have a further option as far as being a member of the Federal Reserve or a nonmember. The chart above shows that all bank charter types are compatible within a BHC framework.

A BHC can be formed over a commercial bank regardless of the bank's charter type or member/nonmember status, and the policies, regulations, and supervision and reporting requirements for BHCs are not dependent on the bank charter type.

However, the BHC is always supervised by the Federal Reserve at the federal level, and if the organizers elect to become a state member bank, the Federal Reserve is also the federal supervisor at the bank level, rather than the OCC or FDIC. Therefore, some BHC organizations choose the state member bank charter in order to simplify regulatory relationships at the federal level. The Federal Reserve is then the single federal regulator responsible for supervision at both the BHC and bank levels.

Review Growing Shareholder Value for more information on BHCs, the legal framework, regulatory reporting requirements, and financial holding companies. View the accompanying chart on bank charter decision within a BHC framework.

Is ForeclosureGate Sloppy Paperwork or Push Button Financial Fraud?

Foreclosure Expert Confirms Mortgages Pledged Multiple Times, Not Actually Securitized, Document Problem Is Really a System of "Push Button Fraud"

Yesterday, I showed that mortgages were fraudulently pledged to multiple buyers at the same time.

Today, foreclosure expert Neil Garfield (former investment banker, trial lawyer and board member of several financial institutions) confirms this, explains that the loans were not actually securitized, and the whole "sloppy paperwork" excuse is really an attempt to explain away a system of push-button fraud:

The game was to move money under a scheme of deceit and fraud. First sell the bonds and collect the money into a pool. Second take your fees, third take what’s left and get it committed into “loans” (which were in actuality securities) sold to homeowners under the same false pretenses as the bonds were sold to investors. By controlling the flow of funds and documentation, the middlemen were able to sell, pledge and otherwise trade off the flow of receivables several times over — a necessary complexity not only for the profit it generated, but to make it far more difficult for anyone to track the footprints in the sand.

Foreclosuregate Goes Beyond the Banks

Jamie Dimon, CEO of JPMorgan Chase, suggested last week that if the foreclosure verification problem was not fixed within a few weeks, it would probably be mean bad news for everyone.

Now, with stories of evictees breaking into foreclosed homes, and fearful articles in The New York Times suggesting that buyers should steer clear of foreclosures until things are sorted out, it is difficult to imagine the situation will resolve fully within a month.

According to realtytrac data cited in a recent AP article, 24% of nationwide second-quarter sales were foreclosures. In Nevada, it was 56% of sales. In Arizona and California, it was more than 40%, and in Rhode Island, Massachusetts, Florida, and Michigan, foreclosure sales amount to more than a third of total sales.

With some companies either extending closing dates or suspending foreclosure sales outright, and with buyers now increasingly wary of foreclosed properties -- and who will have more difficulty finding title insurance -- home sales should fall significantly in the next month or two.

Do the math, and it's ugly, and not just for real estate professionals.

The math
Being unoccupied can be tough on a house. Pipes develop leaks that go unfixed, leaks turn into mold, critters tear up insulation, and windows break and let the weather in to ruin carpet. Foreclosure properties often need some serious work. According to a Realtytrac survey conducted late last year, more than half of buyers willing to purchase foreclosed homes were willing to pay 20% or more of the purchase price on repairs and remodeling.

According to a separate Realtytrac survey, there were 248,534 properties in the foreclosure category (bank-owned, in default, or scheduled for auction) that were sold in the second quarter. At an average sale price of $176,871, this amounts to roughly $44 billion.

If buyers of foreclosed properties spent 20% of the purchase price on repairs and upgrades, this amounts to around $9 billion dollars of home improvement and repair that could be lost or deferred per quarter at current sales rates.

In their most recent annual report, Lowe's (NYSE: LOW) estimated the size of the home improvement market at roughly $560 billion in product demand and installed labor opportunity. At $9 billion a quarter, adjusted a bit for seasonality, it seems plausible that foreclosures spurred repair and remodeling activity accounts for as much as $35 billion a year of the current home improvement market, or roughly 6% of the total market.

If half or a third of foreclosure sales disappear or are pushed into future quarters, it follows that home improvement sales could see a fall of 2%-3%.

Impact
A 2%-3% sales reduction sure doesn't sound huge, but what would that kind of reduction do to Home Depot (NYSE: HD)? Analyst consensus predicts year-over-year sales growth of 1.8% for the October quarter and 0.8% for the January quarter. Those numbers could wind up negative. Both top line and bottom line will likely have to be adjusted.

Home improvement suppliers may be hit as well. Among other things, building supplier Masco (NYSE: MAS) makes plumbing supplies and fixtures, paints including anti-mold Kilz, and windows. On the second-quarter conference call, management frequently mentioned that a particular area of strength was coming from the repair/remodel end of the business -- plumbing, windows (helped by the tax credit), and paint. I seems likely they could lose some of that momentum.

If it's not good, it's bad.
Putting an exact value on the impact of reduced or delayed foreclosure sales takes a lot of guesswork, and it isn't going to be precise, but you don't need to count raindrops to know you need an umbrella. We know that some portion of total sales at home improvement companies is driven by foreclosure remodeling and repair, and we know that some portion of that is going away, and that those reduced revenues were not priced in a month ago.

Slowing sales aren't good for the shareholders or employees of home improvement-related companies. Worse, it means some of the plumbers, electricians, handymen, and many, many others could face another winter with a little less work.

The newest mess seems pretty devoid of good news. It might mean fines for the banks, and work for the attorneys, but it won't likely have people back in their old houses. In the near term, it will cost jobs and won't do the recovery any favors.

The only bright spot is that at some point in the future, there will be more work to be done. Houses don't fix themselves -- if anything, they get worse. The longer they sit, the more work there will be, either for contractors or bulldozers.

The War On America Begins

With the selection of Obama as the current ringmaster, who has been tasked with bringing down the curtain on the Republic, of what was the USA: These last two years have been torn by moment after moment in which the public has waited to finally see the governments' real intentions behind all the false starts and broken promises that have emanated from the demands of this obscene monster on the Tarnished House by the criminally-compliant-congress. Rohm is gone now, along with two of the other criminals that brought us to the brink of financial disaster; but yesterday the existence of H. R. 4646 was made public. And finally this long-delayed battle over The War on America is becoming clear. The Debt Free America Act calls for a 1% tax to be paid for every monetary transaction whether in cash or by check with every bank or financial institution in the US. This bill is slated to be 'approved' during the Christmas vacation, to keep it as secret as possible in order to finish the transfer of wealth from all citizens to the banks and the government. "The bill is HR-4646 introduced by US Rep Peter DeFazio D-Oregon and U S Senator Tom Harkin. It is now in committee and will probably not be brought out until after the Nov. Elections. Page 9 states the House and Senate shall convene no later than November 23, 2010 and Page 11 states the vote on passage shall occur no later than December 23, 2010." It is clear that IF this gets 'on-the-books' the actual rate of interest will be subject to the same unnoticed changes that were used to virtually destroy "credit cards' by giving the banks the right to arbitrarily raise the rate of interest-without cause-and would be solely at the discretion of the institution, without regard for the account holders or their right to know how much they will be arbitrarily charged at any given time. Here is a portion of the proposed bill H. R. 4646. Read the whole bill in this link below. (1) "`SEC. 4501. IMPOSITION OF TRANSACTION FEE. `(a) In General- There is hereby imposed on every specified transaction a fee in an amount equal to 1 percent of the amount of such transaction. `(b) Specified Transaction- For purposes of this chapter-- `(1) IN GENERAL- The term `specified transaction' means any transaction that uses a payment instrument, including any check, cash, credit card, transfer of stock, bonds, or other financial instrument. `(2) TRANSACTION- The term `transaction' includes retail and wholesale sales, purchases of intermediate goods, and financial and intangible transactions. `(c) Liability for Fee- Persons become liable for the fee at the moment the person exercises control over a piece of property or service, regardless of the payment method. `(d) Collection- The fees will be collected by the seller or financial institution servicing the transaction and shall be paid over to the Secretary. In the case of a person who fails to collect and pay over the fee as required under this subsection, such person shall become liable for the fee not so collected and paid over." The image above refers to this government's not-so-silent partners, in creating this Republic-Ending move that will complete the wealth-transfer which has been at the heart of everything from 911 to all the multi-trillion-dollar-wars that have massively eroded this nation's ability to remain a sovereign nation. One reader responded: "This will not pass. If it does you will see a run on the banks that will make the Great Depression look like an ATM withdrawal. And it will take only a matter of days to happen. If everyone starts losing money at 1% per transaction so much for people using banks (checks, transfers, deposits, withdraws, etc). WE would be a cash or barter society (no more control at the top or the Fed.). I can't see paying a tax to pay my rent ($15.50 every month, $186 per Year) and other bills. Furthermore, that means that the daily spot market where banks borrow billions every day for the reserve margin call should technically also be charged. Shit, the tax on the money they borrow could pay the Nation Debt by next year @ 1% per transaction. Besides: The RICH FOLKS WOULD NOT PUT UP WITH IT. CEO'S required to lay down $100,000 or more to deposit their pay checks. I think they would have their senators out of office toot-sweet!!!!" All of this probably came about just because the public has remained so virtually silent for far too long-about every single thing this government continues to do to us each and every day: And believe it or not it all began with that first USA PATRIOT Act which was all about stealing your money ­ and had almost nothing to do with terrorism or national security. But the public, just like the congress that passed it at 4 in the morning; did NOT READ the PATRIOT ACT! So this wealth-transfer masquerading as a national-security requirement became law. BTW the act itself was written as far back as the 1970's by Rumsfeld & Cheney, two of our most infamous Zionist loyalists, when they were working for The Ford Administration, which also installed Rockefeller as Jerry's appointed Vice President to bring the power of the banks to their present state-of-play: While insuring the untouchable position of big oil, and big energy as part of the Military Industrial War machine. That's why it took almost no time at all to create the PATRIOT Act, after Cheney met with the major players who's first act as VP was to create the super-and still secret American Energy Policy that has been behind all the wars and the so-called disasters from Katrina to Deepwater Horizon and Haiti, as well as possibly even the floods in Pakistan. It was a great little scheme that the public slept very soundly thorough-and now we are going to have to pay for all of it! Read the PATRIOT ACT at the link below: your bank accounts can be seized without notification if you are " suspected" of whatever the government might think-and you don't have the right to challenge it, or even to be told about it by the bank in question. (2) The shot at Lexington heard round the world supposedly began the American War forIndependence (That did not succeed in severing the monetary dependence on Old World England), but it did give us the framework of a separate fledgling state in the world. Perhaps this obvious attempt to control the actual health & wealth of every ordinary person might serve as a metaphorical shot, in the coming crackdown, on this criminal-cabal today that has tried to take over the US government, lock, stock and barrel? If this doesn't wake the slumbering-herd which the public has become and turn them into angry wolves looking for the redress of real grievances ­ then maybe nothing will! kirwanstudios@sbcglobal.net Debt Free America Act http://thomas.loc.gov/cgi-bin/query/z?c111:H.R.4646: USA PATRIOT ACT http://epic.org/privacy/terrorism/hr3162.html BACKGROUND: The Fifth Dimension http://www.kirwanesque.com/politics/articles/2010/art84.htm

The MERS Edifice Quavers.... And threatens to crumble into dust....

And threatens to crumble into dust....

Yes, this is a draft. But it is coming from a law school's scholarly paper mill - not exactly the sort of place you want to ignore. A few good cites will set the table for those willing to dig into what's really not that hard to understand...

In the mid-1990s mortgage bankers decided they did not want to pay recording fees for assigning mortgages anymore.11 This decision was driven by securitization—a process of pooling many mortgages into a trust and selling income from the trust to investors on Wall Street. Securitization, also sometimes called structured finance, usually required several successive mortgage assignments to different companies. To avoid paying county recording fees, mortgage bankers formed a plan to create one shell company that would pretend to own all the mortgages in the country—that way, the mortgage bankers would never have to record assignments since the same company would always “own” all the mortgages.12

What do you call an artifice designed to evade the payment of taxes - which these fees are?

They incorporated the shell company in Delaware and called it Mortgage Electronic Registration Systems, Inc.13

Even though not a single state legislature or appellate court had authorized this change in the real property recording, investors interested in subprime and exotic mortgage backed securities were still willing to buy mortgages recorded through this new proxy system.14

What do you call selling something to someone that claims an ownership right as an inherent part of the bargain - indeed, it's the only consideration that is offered in exchange for money, yet the state legislatures have not ratified this as proper, and in fact the county and state legislatures say it is not?

Because the new system cut out payment of county recording fees it was significantly cheaper for intermediary mortgage companies and the investment banks that packaged mortgage securities. Acting on the impulse to maximize profits by avoiding payment of fees to county governments much of the national residential mortgage market shifted to the new proxy recording system in only a few years. Now about 60% of the nation’s residential mortgages are recorded in the name of MERS, Inc. rather than the bank, trust, or company that actually has a meaningful economic interest in the repayment of the debt.15 For the first time in the nation’s history, there is no longer an authoritative, public record of who owns land in each county.

Oh yes there is. It's at the county, where it always was.

Both the MERS-as-an-agent and the MERS-as-an-actual mortgagee theories have significant legal problems. If MERS is merely an agent of the actual lender, it is extremely unclear that it has the authority to list itself as a mortgagee or deed of trust beneficiary under state land title recording acts. These statutes do not have provisions authorizing financial institutions to use the name of a shell company, nominee, or some other form of an agent instead of the actual owner of the interest in the land. After all the point of these statutes is to provide a transparent, reliable, record of actual—as opposed to nominal—land ownership.

Conversely, if MERS is actually a mortgagee, then while it may have authority to record mortgages in its own name, both MERS and financial institutions investing in MERS-recorded mortgages run afoul of longstanding precedent on the inseparability of promissory notes and mortgages.

Yep. Pick which way you'd prefer to die on this one. Of course Banks don't seem to care about these pesky things called laws.... and haven't for quite some time. How successful this will be on a forward basis is an interesting question (and one I'll explore to some degree later in this piece.)

As a practical matter, the incoherence of MERS’ legal position is exacerbated by a corporate structure that is so unorthodox as to arguably be considered fraudulent. Because MERSCORP is a company of relatively modest size, it does not have the personnel to deal with legal problems created by its purported ownership of millions of home mortgages. To accommodate the massive amount of paperwork and litigation involved with its business model, MERSCORP simply farms out the MERS, Inc. identity to employees of mortgage servicers, originators, debt collectors, and foreclosure law firms.22 Instead, MERS invites financial companies to enter names of their own employees into a MERS webpage which then automatically regurgitates boilerplate “corporate resolutions” that purport to name the employees of other companies as “certifying officers” of MERS.23 These certifying officers also take job titles from MERS stylizing themselves as either assistant secretaries or vice presidents of the MERS, rather than the company that actually employs them. These employees of the servicers, debt collectors, and law firms sign documents pretending to be vice presidents or assistant secretaries of MERS, Inc. even though neither MERSCORP, Inc. nor MERS, Inc. pays any compensation or provides benefits to them. Astonishingly, MERS “vice presidents” are simply paralegals, customer service representatives, and foreclosure attorneys employed by other companies. MERS even sells its corporate seal to non-employees on its internet web page for $25.00 each.24 Ironically, MERS, Inc.—a company that pretends to own 60% of the nation’s residential mortgages—does not have any of its own employees but still purports to have “thousands” of assistant secretaries and vice presidents.25

Oh Jesus. So I can have an official MERS Corporate Seal for $25 and start recording things? Uh, this is a wee problem, don't you think?

Never mind the logical fallacy of thousands of vice-presidents and assistant secretaries, none of which receive any renumeration from MERS in any form!

How can you be an employee - in any sense of the word - if you're not compensated? The entire premise of employment is that of a contract, which requires (as do all contracts) meeting of the minds, consideration and performance.

If consideration is lacking, then there is no employment status and that's that. Oops.

Worse, MERS may have literally "split the baby" and rendered millions of mortgages unsecured:

Typically, the same person holds both the note and the deed of trust. In the event that the note and the deed of trust are split, the note, as a practical matter becomes unsecured. Restatement (Third) of Property (Mortgages) § 5.4. Comment. The practical effect of splitting the deed of trust from the promissory note is to make it impossible for the holder of the note to foreclose, unless the holder of the deed of trust is the agent of the holder of the note. Id. Without the agency relationship, the person holding only the note lacks the power to foreclose in the event of default. The person holding only the deed of trust will never experience default because only the holder of the note is entitled to payment of the underlying obligation. Id. The mortgage loan became ineffectual when the note holder did not also hold the deed of trust.41

That's an actual holding of the Missouri Court of Appeals.

It gets worse.

If the growing line of cases asserting that MERS is neither a mortgagee nor a deed of trust beneficiary is correct, then courts must soon confront profound questions about the very enforceability of MERS’ security agreements. ... There is a compelling legal argument that loans originated through the MERS system fail to create enforceable liens.

.....

The mortgage industry has premised its proxy recording strategy on this separation despite the U.S. Supreme Court’s holding that “the note and the mortgage are inseparable.”66 If today’s courts take the Carpenter decision at its word, then what do we make of a document purporting to create a mortgage entirely independent of an obligation to pay? If the Supreme court is right that a “mortgage can have no separate existence”67 from a promissory note, then a security agreement that purports to grant a mortgage independent of the promissory note attempts to convey something that cannot exist.68

While this argument will surely strike a discordant note with the mortgage bankers that invested billions of dollars in loans originated with this simple flaw, the position is consistent with a long and hitherto uncontroversial line of cases. Many courts have held that a document attempting to convey an interest in realty fails to convey that interest when an eligible grantee is not named.69 Courts all around the country have long held: “there must be, in every grant, a grantor, a grantee and a thing granted, and a deed wanting in either essential is absolutely void.”70

Now consider this - assignments of the Grantee in blank are thus invalid too. Oh, yeah, they went there.

Nonetheless, in Chauncey, the trial court, intermediate appellate court and New York’s highest court all agreed that the attempt to convey an “in blank” mortgage failed.78 The Court of Appeals explained, “No mortgagee or obligee was named in [the security agreement], and no right to maintain an action thereon, or to enforce the same, was given therein to the plaintiff or any other person. It was, per se, of no more legal force than a simple piece of blank paper.”79

Double Oops.

And then, in a very nice throwback to something I wrote we get this:

In a stunning betrayal of the policies that ground the ancient statute of frauds principal commanding that we commit transfers of land interests to writing, mortgage bankers wrote millions of mortgage loans that did not specify who the actual mortgagee was. For over a hundred years, our courts have held that “legal title to real property may not be established by parole.”90

Oh yeah, I seem to remember this....

There's a reason that property law in most states require "wet signatures" and unbroken chains of assignment. It's the same reason that The Statute of Frauds requires (under most state legal codes) that all agreements to be performed over more than a year's time, or in which interest in real property is conveyed, must be in writing and bear an actual signature by the party so bound.

The reason for these requirements is that contracts pertaining to real estate, for large sums of money, or where performance is envisioned to stretch over long periods of time are usually of such import that if someone gets ripped off they are grievously harmed.

No, "electronic records" do not suffice. No, "the dog ate my homework" does not suffice either when one of the parties intentionally destroyed the originals, or intentionally used an electronic system so as to EVADE the requirements of the statute.

And grievous harm is exactly what has repeatedly occurred here.

The "conveyances" established by the so-called "electronic" passage of records where such is a part of a contract that falls under these statutes are VOID!

Then there's the little problem with REMICs that don't actually have title because MERS claims to (well, sometimes)

And, all rights to a mortgage loan must be deposited into the trust for it to achieve tax exempt status under federal REMIC law—which does not contemplate the use of a proxy mortgagee. Yet, despite claiming sole ownership of mortgages sold to investors, in documents regularly recorded with county officials these same institutions maintain that MERS is the sole owner of the mortgage. The chain of financial institutions linking originators to securitization depositors collectively want to have their lien and sell it too.

That should go over well with the IRS.

Communities around the country have elected and hired county recorders to act as their custodian of property rights. Those recorders who agree the MERS system poses a threat to real property records have an obligation arising from their office to reclaim and restore faith in land title records. While some individual county recorders may reasonably feel reluctant to take on a powerful national system backed by some of the nation’s largest financial institutions, this is precisely what they were hired to do. If county recorders do not protect county real property records, who will? A pathway to reclaiming authority over real property records could involve joining with other recorders to raise a unified voice. State and national county recorder trade associations could have a significant impact on pending cases by submitting amicus curiae briefs. Courts are likely to respect county recorders’ expertise in maintaining and preserving transparent records, both because of recorders’ experience but also because of their democratic mandate. Even more to the point, county recorders should consider appealing to the courts directly to stop financial institutions from recording false documents. In lawsuits to recover unpaid recording fees counties could hire private counsel on contingent fee agreements that would place no financial burden county taxpayers.

Yep.

It is time to take this edifice and throw it in the trashcan, after forcing its members to fix all the titles they have damaged - at their expense - and record true and correct assignment information.

Oh wait - that's a problem isn't it..... what if the assignments never actually happened, and the REMICs hold an empty box? Why that could get messy..... Hmmmm....

Finally, the nation’s judges should recognize that, despite crushing caseloads, mortgage foreclosure cases are no longer routine matters. Putting the short term consequences of enforcing the law to the side, surely jurists will know that ratifying a security agreement which does not specify a true grantee—when never authorized by state legislatures or Congress to do so—is poor lawmaking. Perhaps we should not be too surprised that the mortgage finance industry’s bacchanal of “pump-and-dump” mortgage origination happened to coincide with a bizarre and unsustainable theory of land title ownership. But, ratifying a standard industry practice of conveying rights to realty without specifying a true grantee will inevitably cause hidden liens, cases of exposure to double liability, and fraud.

My only comment: IT ALREADY HAS.

Time to shut this crap down AND force all the not-conveyed paper back where it belongs - on the securitizers, whether it be the sponsor or whoever - and force them to eat it.

WE HAVE RESOLUTION AUTHORITY UNDER DODD-FRANK AND IT IS TIME TO USE IT.

Fannie, Freddie May Draw $363 Billion, FHFA Says

Fannie Mae and Freddie Mac, the mortgage-finance companies operating under U.S. conservatorship, could draw a total of $363 billion in Treasury Department aid through 2013 if the housing market worsens, the Federal Housing Finance Agency said.

The FHFA, which oversees the government-sponsored entities, offered the estimate today as the worst-case in an analysis modeled on the stress tests conducted on the nation’s biggest banks last year. The actual total cost to taxpayers under the regulator’s most dire scenario would be $259 billion, because almost 30 percent of the funds would come back to Treasury as dividend payments on its holdings of senior preferred stock.

Under the best-case scenario, which assumes a strong near- term recovery in the housing market, the total cost to taxpayers would be $221 billion, or $142 billion after dividends. A middle-ground scenario would require total aid of $238 billion, or $154 billion after dividends. So far the companies have drawn $148 billion and returned $13 billion in dividends to Treasury.

“These projections are intended to give policy makers and the public useful snapshots of potential outcomes for the taxpayer support of Fannie Mae and Freddie Mac,” FHFA Acting Director Edward J. DeMarco said in a statement released with the report. “The results reflect the potential effects of a limited set of hypothetical changes in house prices.”

Brink of Collapse

Regulators took control of Washington-based Fannie Mae and Freddie Mac of McLean, Virginia, in September 2008 after losses stemming from the subprime mortgage crisis pushed them to the brink of collapse. Since then, the two companies have used U.S. aid to buy and guarantee home loans while Washington policy makers weigh an overhaul of the mortgage-finance system.

“The Obama administration has made clear that the current structure of the government’s role in housing finance, while necessary in the short-term to provide critical support to a still-fragile housing market, is simply not acceptable for the long-term,” Jeffrey Goldstein, Treasury’s undersecretary for domestic finance, said in a statement.

Nearly 90 percent of the companies’ losses are behind them, with most attributable to loans made before the government took control, Goldstein said.

Fannie Mae and Freddie Mac funded more than 62 percent of new mortgages in the first half of this year, according to Inside Mortgage Finance, a trade publication in Bethesda, Maryland.

‘Good Grasp’

The FHFA analysis, which relies heavily on housing-price projections, presents an incomplete picture of the risks facing Fannie Mae and Freddie Mac, said Karen Shaw Petrou, managing director at Federal Financial Analytics, a Washington-based research firm.

“The report provides a sense of the GSEs’ likely cost to taxpayers, but nowhere near a definitive picture of it,” Petrou said in an analysis of the report.

The range of the FHFA’s projections “suggests the agency doesn’t have a very good grasp on the GSEs’ losses going forward,” said Guy Cecala, chief executive officer of Inside Mortgage Finance.

The Congressional Budget Office calculated last year that Fannie Mae and Freddie Mac would need $389 billion in federal subsidies through 2019. The White House Office of Management and Budget said in February that aid could total as little as $160 billion if the economy strengthens.

Other estimates are higher. Sean Egan, president of Egan- Jones Ratings Co. in Haverford, Pennsylvania, said a 20 percent loss on the companies’ loans and guarantees could lead to a $1 trillion taxpayer bailout.

Mass Strike in France Hits Bankers' Pension Heist

PARIS, Oct. 15—Millions of people have marched in the streets of cities throughout France since early September, to demonstrate against the pension reform that French President Nicolas Sarkozy is trying to ram through, to satisfy the bankers. Solidarité et Progrès (S&P), the political party led by Lyndon LaRouche's co-thinker in France, Jacques Cheminade, a candidate for the French Presidency, has been deploying nationwide to give orientation to this mass-strike ferment. This social ferment in France is only the most extensive of the process erupting all over Western Europe, in protest against brutal austerity demanded by the European Central Bank and the IMF, in tandem with its ongoing massive bailouts of the international banking system. Yet, the key to their success lies outside Europe, in the United States, where a shift to eliminate the speculative bubble, with the reimposition of FDR's Glass-Steagall banking reform, can uniquely create the conditions for a global recovery. The response to the LaRouche movement's organizing in Europe, shows that there are ample political forces who would move to revive the Glass-Steagall policy there, and abandon the drive for fascist austerity. Through a well-organized series of national demonstrations and days of action, which follow more and more closely upon one another, the main trade unions are exerting tremendous pressure on the government to entirely drop the reform, which is now before the National Assembly. And the mobilization has been growing in both numbers and in fighting spirit, going from 2 million to 3.5 million participants, at four national demonstrations which took place Sept. 7 and 23, and Oct. 2 and 12. Most importantly, at the more recent demonstration, university as well as high school students joined the demonstrations, en masse, bringing all their ideals and energy into the fight. If the nominal issue of the protests is the pension reform, the more profound motivation is the recognition by the demonstrators that Sarkozy is moving to re-establish the old feudalism, i.e., the dictatorship of the financial oligarchy, which was defeated in United States by President Franklin Roosevelt, in the 1930s and '40s, and in France, by President Charles de Gaulle and those of the National Council of the Resistance who fought the Nazis, and founded a new French Republic after the Second World War. The IMF Demands Austerity While the pension system is, like the rest of the economy—and for the same reasons—in bad shape, the current pension reform has been dictated to the French government by the markets and their financial arm, the International Monetary Fund. Massive bailouts of the banks, since the beginning of the crash in 2007, have dug huge deficits and indebtedness in national budgets; and now, the banks are demanding that, in order to maintain the AAA rating of their sovereign debt, nations make deep cuts in social spending. IMF Managing Director Dominique Strauss-Kahn, and his advisor Olivier Blanchard, have made repeated calls in recent months for France to apply brutal austerity measures in two areas in particular: social security and pensions. Claiming that the deficit of the pension system will reach €43 billion in 2018, and €100 million in 2050, the government has moved to extend the age at which people can retire, from 60 to 62 years. This applies to those who have completed the payments necessary to receive the benefit of a full pension, which is reached after 40.5 years of work. For those who have not completed payments into the system, the age of retirement will be raised from 65 to 67 years! Not only is this outrageous looting of the population by the bankers, since public funds have been siphoned to pay for the bailout of the banks, but the reform is particularly unjust for the weakest. Among them are women, who, because of rearing children, have often worked on and off, and therefore, have not completed their payments into the pension system. Others, in a precarious state, for example, are those who have experienced extended periods of unemployment, and senior citizens, who, because of early retirement, are in the same situation. Adding to the injustice, is the fact that the average pension for women is €850 per month, which is 62% that of men, while their average wage is 80% that of men. While the government is blaming the deficit of the pension system on the inversion of the demographic pyramid, i.e., the greater portion of aged in the population, the fundamental causes of the crisis can be found in the follies of the Boomer generation now in power, which destroyed the physical economy by abandoning a scientific, high-technology, and industrial orientation, and handing the economy over to finance capital. While the unions have been doing a good job in mobilizing the population, as long as they limit their action to the issue of pensions, they might succeed in getting some compromises, or even the defeat of the law, but they will solve nothing, even in the short term. Because, as LaRouche repeats relentlessly every day, it is the entire financial system which is crashing; and nobody will be able to organize a good deal for himself, a warm place to hide, during this crisis. Mass Organization by S&P This is the message Solidarité et Progrès has been delivering successfully in this mass strike. In a leaflet, of which some 200,000 copies have been distributed nationwide since September, S&P ridicules the government's justifications, by showing that the creation of 2 million jobs that would be produced by a great projects approach, would increase national wealth by 3%; this, with the reduction of the huge unemployment payroll now carried by the government, would be enough to solve the so-called pension crisis. However, stresses S&P, only a full reorganization of the international banking system through the reestablishment of the Glass-Steagall law, which was abrogated in France, by Jacques Delors in 1984, will allow us to move in that direction. The large banners calling for a Global Glass-Steagall, and fighting against financial fascism, attracted quite a lot of attention from demonstrators happy that S&P was present with its own slogans, and from others wanting to know what in the world is Glass-Steagall! Add to this, the fact that, as the mass-strike process develops, more and more supporters of S&P, many of the Boomer generation, but also youth, are rising to the occasion, and moving to give political leadership to their country. In the Paris area, as many as 20 supporters have actively joined veteran S&P members in these demonstrations, and are moving to take responsibility for further activities. The pattern has been similar in the region of Brittany, where S&P has been present in demonstrations at the main cities throughout this large region, as well as in Rhone-Alps, two areas where S&P has permanent organizations. Other supporters deployed on their own in Lorraine, Normandy, the South, and the Southwest.

Double the Stimulus: Your Tax Dollars at Work

Ag Secretary Defends Dropping Potatoes From Federal Food Program for Low-Income Mothers

(CNSNews.com) – Agriculture Secretary Tom Vilsack says there is nothing wrong with eating potatoes in moderation, even though the federal Women, Infants and Children (WIC) program – one of the largest federal food assistance programs – is now finalizing an interim rule that bars participants from buying potatoes with their federal dollars.

The U.S. Dept. of Agriculture also is limiting potatoes in the federal School Lunch Program.

When CNSNews.com posed the question -- "Is there anything wrong with eating potatoes in moderation?" -- Thursday to Vilsack at the National Press Club in Washington, D.C., he responded, "No," but then quipped to the room full of reporters, “Potatoes are a source of ethanol, I'm sure.” Vilsack had been speaking on the issue of biofuels production.

“The quick answer to this is that studies have shown that WIC participants are already purchasing potatoes in sufficient quantities. There’s no need to encourage purchasing of potatoes because they’re already purchasing sufficient quantities. That’s why it’s not in the supply,” Vilsack added.

The WIC program, which is operated by Vilsack’s USDA in conjunction with state agencies, has drawn fire for including “fresh fruits and vegetables” but not white potatoes in food packages given to low-income mothers – and it won’t allow federal vouchers to be spent on potatoes.

The exclusion of potatoes stems from a reccomendation in a report from the National Academy of Sciences' Institute of Medicine. The recommendation was “made to encourage consumption of other fruits and vegetables," according to Christine Stencel, a spokeswoman for the Institute of Medicine.

Stencel told CNSNews.com that the IOM was charged with bringing WIC packages in line with the latest dietary guidelines, which "all kind of say that we need to encourage greater varieties of fruit and vegetable consumption in this country."

"White Potatoes are pretty widely consumed in America, so WIC participants are getting the benefits, the nutritional benefits that are in white potatoes," Stencel said. "The recommendation about not using the WIC packages to purchase white potatoes is mainly to promote the purchase and consumption of a greater variety of fruits and vegetables.

"The research shows that we Americans are generally consuming too few of those dark green leafy vegetables -- orange, yellow, red ones, et cetera. So that’s the main reason. It’s not saying that potatoes don’t have their own nutritional value, it’s just people are getting those benefits already.”

Potato growers, meanwhile, complain that the federal government is unfairly singling out potatoes because “healthy food” advocacy groups have lobbied the federal government.

Tim O’Connor, president and CEO of the United States Potato Board, said the USDA’s WIC decision is misguided and counter-productive to the goal of promoting healthy eating habits among women and children.

“It’s a preposterous decision by both the Institute of Medicine and the USDA,” O’Connor told CNSNews.com.

“Regardless of the level of consumption of potatoes by participants, if you read the details of the WIC program there are ingredients of specific concern that women and their young children in the program are not consuming enough and those primary ones are focused around nutrients that potatoes are an excellent source of,” he added. “I wish I could get into their head and understand their reasoning because it doesn’t hold water. Scientifically, it makes no sense.”

Chris Voight, executive director of the Washington State Potato Board told CNSNews.com that the Ag Department’s move sends the wrong message to consumers.

“What does it mean when they (WIC) say ‘OK, we’re going to let you use your WIC dollars to purchase all the fresh fruits and vegetables you want -- except potatoes?’” Voight said. “It makes it sound like potatoes are not nutritious. That’s what we’re very concerned about.”

John Keeling, president of the National Potato Council said the decision will ultimately end up hurting poor mothers not only by depriving them of important nutrients but also by limiting options economically.

“The problem for the WIC mothers” said Keeling “is that you’re taking a nutrient-dense vegetable that for $3.80 can provide nutrition and satisfying food for their kids for a week and you’re taking that away from them as an option.”

Even with the new explanation from Vilsack, Potato growers and their advocates do not see a good reason for singling out potatoes for exclusion from government food programs.

“I’m sure that they’re also buying apples, bananas and lettuce, said Voight “They’ve got to be buying other produce items and yet they’re only excluding potatoes? That seems very discriminatory.”

The federal WIC program provides food to low-income mothers designed to meet the special nutritional needs of infants and children up to five years of age who are at nutritional risk.

Rasmussen: Only 25% Prefer a Government With More Services, Higher Taxes

Rasmussen Reports:

Most voters (65%) say they prefer a government with fewer services and lower taxes rather than one with more services and higher taxes. A new Rasmussen Reports telephone survey finds that only 25% of Likely U.S. Voters favor a government with more services and higher taxes instead.

Consistent with past polling, most Republicans (86%) and the majority (77%) of voters not affiliated with either political party prefer a smaller government, while most Democrats (50%) favor a more active one. But nearly one-third (32%) of Democrats now like a government with fewer services and lower taxes.

As is often the case, there is a noticeable divide between the Political Class and Mainstream voters: 70% of the Political Class supports more services and higher taxes, while 78% of Mainstream voters prefer fewer services and lower taxes.

[Survey Question: "Generally speaking, would you prefer a more active government with more services and higher taxes or a smaller government with fewer services and lower taxes?"]

Getting Real About Real Estate

David Galland interviews real estate professional Andy Miller, Miller Frishman Group

In 1990, following the real estate debacle of the 1980s, Andy Miller co-founded SevoMiller, Inc. The company provided workout services for major financial institutions throughout the country and also began buying and developing apartments, retail and office properties. From its founding to the present, the company’s acquisitions totaled over 30,000 apartment units, several million square feet of retail space, and numerous office projects throughout the country, including the states of Colorado, Arizona, California, Nevada, Illinois, Texas, Louisiana, Indiana, Oklahoma, Georgia, and Florida.
Employing over 500 people, SevoMiller also built, managed, marketed, leased, and sold commercial real estate for many institutions and third-party owners across the country. Clients included General Electric Credit, SunAmerica, and Huntington Bank, as well as many defunct banks, savings and loans, and private equity groups.
In 1994, Andy and Dave Frishman co-founded Realty Funding Group, a mortgage and finance company that has acted as a mortgage broker and mortgage banker for numerous commercial real estate projects across the U.S. RFG has provided financing for over $1 billion of commercial real estate. In 1998, Andy founded Rapid Funding, a commercial and residential hard-money lender that has loaned in excess of $200 million for land developments, shopping centers, office buildings, and construction loans on condominium buildings. In addition to sourcing and servicing real estate loans, Rapid Funding also handled its own workouts and sales.
Each of these companies founded or co-founded by Andy now operates as part of the Miller Frishman Group.
The following interview with Andy Miller is brought to you by The Casey Report, where readers seek big profits from big trends, and was conducted on Monday, October 11, 2010.
David Galland: Given the importance of real estate to the economy, it’s not surprising that we get a lot of questions about the sector. There’s a growing awareness of the problems with mortgage-backed securities and foreclosures, so let’s start there. What’s the buzz in the industry?
Andy Miller: Talking about single family, as opposed to commercial, the most visible news story is what happens with the “robo signing” scandal and the foreclosure moratorium.
The short answer is that we don’t know the full implications yet. A lot will depend on how inclusive this becomes in terms of which lenders will also adopt this moratorium, in how many states, and for how long? All those questions have yet to be answered, but as a generic comment, I’ll say this; if what happens results in a concerted effort to impede or stop or delay foreclosures throughout the country, it’s going to have a very, very big impact. It’s going to have an impact in some ways that are obvious, and some ways that aren’t so obvious.
We believe there are roughly 8 million loans now in some stage of default or foreclosure. If those 8 million loans are impeded, if the time that it takes to foreclose is extended, or if state attorney generals won’t let lenders start foreclosures, that will have serious repercussions.
Paradoxically, because it will reduce the number of foreclosures and short-sales coming to market, one of the things you may see is the home market improve slightly over the next three to five months. That may seem like a blessing to the politicians as it will certainly staunch some of the negative news headlines out there around foreclosures, but it doesn’t do you any good because ultimately the price paid for the short-term abatement in the news cycle could be high.
DG: Okay, so that’s a plus for the political optics of the situation, but what about the flipside?
AM: Well, for starters you have to ask what impact this will have in the mid to long term on the ability to sell mortgage-backed securities into the marketplace? If you’re an investor or institution that’s already loaded up on a bunch of mortgage-backed securities and your master servicers or your special servicers are saying, “We’re really stuck in this mire right now where we can’t foreclose or address our defaults,” how much more of this paper are you going to want to buy? I don’t think very much.
Now, the truth is that the Fed is buying a lot of these things, but at some point in time, it is going to need to divest itself of the trillions of dollars of mortgage-backed securities, and who’s going to want to buy those, and at what yields? I mean, if you know that with the swipe of a pen, an attorney general can impose a moratorium or somehow prohibit you from doing foreclosures, that has to have dire implications for the future of mortgage-backed securities.
DG: Then there’s the moral hazard.
AM: Absolutely. If you’re a hard-working person who has stayed current on your mortgage even at some hardship to yourself, and your neighbor who’s been living in his home for 12 or 15 months without making payments comes over to the barbecue on Saturday afternoon and tells you, “Oh by the way, my foreclosure has been blocked. It looks like I get to live here another 12 or 18 months scot-free,” does that encourage anybody else to do the same? It’s very hard to know, David, but it doesn’t do the market any good.
As you know, it’s my contention that the only thing that’s going to fix this situation is to let the free market deal with the issues so that prices can settle at their own level. All these machinations to manipulate foreclosures and/or prices and/or interest rates are only exacerbating the already bad consequences for the home market.
DG: What should concern investors in all of this?
AM: Frankly, we can’t know yet. There are too many variables still unsettled. What I would advise is that everybody should be acutely aware of what’s happening right now, and once we really know how much time this is going to take and what lenders are most involved, only then will we be able to interpret how bad this is going to be and what the risks are. But right now it’s unknown. It just doesn’t look very good.
DG: What about commercial real estate?
AM: In contrast with the residential housing market, on the commercial side everybody has the giggles. I’ve never seen anything like it. It’s a real paradox, because there’s a very active commercial market right now with all kinds of money entering the market and paying ridiculously high prices for assets, and it is almost as if the crisis never happened. In some cases, meaning some states and some product types, we are actually seeing commercial real estate prices at about what they were in ‘07.
DG: These are people looking to deploy their cash into tangible, productive assets?
AM: Yes. There’s a lot of institutional money on the sidelines earning no yield that is increasingly being deployed. A lot of this hot money has found its way into commercial real estate. There are very few individual buyers out there that are actually laying out their own money to buy product – this is mostly institutional money, which means the buyers are using other people’s money to chase product, and we see that acutely.
DG: You’ve discussed this point in the past interviews we’ve done in The Casey Report – that these institutional money managers are often given time limits during which they have to deploy the money they are entrusted with, or return it to the investors. And so the buying can become fairly indiscriminate. Do these chickens come home to roost at some point?
AM: Yes, absolutely. David, the commercial business is a mess. The fundamentals are not improving. We’ve talked about this before, but just to reiterate, you have to start by asking, what constitutes a recovery in commercial real estate?
Everybody is very convinced right now that we’re seeing a recovery. In commercial real estate, we can be specific in defining what that actually means. Recovery means one or more of three things are happening: either your rents are going up, your expenses are going down, or your vacancies are going down. That’s it.
In order for commercial real estate to be in recovery, one or more of those factors have to be present. That is a recovery. If you measure each section of the United States, if you look at all the various product types within those states, those fundamental factors are not improving, meaning there is no recovery happening. In fact, I would argue that they’re eroding.
DG: What about the banks? Recently money manager Chris Whalen made the case that despite being given essentially free money by the Fed, and lots of it, the big banks are still in deep trouble over their mortgage portfolios.
AM: The banks have been very fortunate because they’ve managed to squirrel away a lot of money into their reserves, at least those institutions that focus on the commercial side. This is not true on residential. On the commercial side, I think they are very heavily reserved for a lot of what they see as their problems. Most of the banks that I come into contact with feel very comfortable that they have adequate reserves, so that no matter what happens to commercial real estate, they believe they’re covered.
DG: I guess we’ll find out in time if they are.
AM: Yes, we will. Even so, I don’t think commercial is the big Achilles heel for these institutions right now because of the manipulations the federal government has undertaken. I think the real Achilles heel for all these banks, and for bond markets, is going to be the residential markets. Not to be overly dramatic, but this is a huge ticking time bomb. Things are getting worse, not better.
In fact, what we see now is that the distress is moving up the scale. The single-family home markets under $350,000 in a lot of the country are fairly sound. There is a pick-up in sales activity and lending. But when you get to the mid and the upper ends of the marketplace, there’s no upward mobility. In other words, people aren’t selling less expensive houses in order to trade up, which was very much going on in the housing bubble. In fact, people are having a very difficult time in the mid and upper ranges selling their homes.
For one reason: it is now very difficult to finance these homes without a large down payment. We’ve watched that situation closely and think that’s going to really exacerbate the problems in the market.
DG: There is a lot of discussion about the problems in loan origination documents. How serious a problem do you think this is? One reader wrote in that they know somebody who didn’t even have a mortgage on his house, but a lender tried to foreclose on it anyway. Are things really that screwy at this point?
AM: It’s certainly problematic, and there was a lot of sloppiness when these loans were securitized and sold off. Who knows where the original documents are or what shape they are in? I can tell you, however, that if you lose an original note and you have to file a foreclosure, it’s not the end of the world. You can have that addressed by a title company, but it’s expensive and it’s time consuming. But at this point we don’t know the extent to which documents are lost, poorly executed, or don’t exist.
For the time being, Bank of America has put a national moratorium on foreclosures. In order to understand how big a problem this really is, I think we have to wait and see who else follows suit, and how long this will last. If you take this to its nth degree and you assume that the worst case unfolds, it’s bad. It’s going to look good in the short run, but it’s really bad for the market, and it’s really bad for homeowners going forward.
DG: Obama’s refusal to sign the bill regarding electronic notarizations strikes me as being based as much on politics as anything. After all, ahead of an election, it wouldn’t do to be seen signing something considered supportive of foreclosures. So the administration has just kicked the can down the road, past the election.
AM: At this point I would judge every event and every news story that you see by just one criterion, and that is that the government is doing everything it can to slow down or impede the foreclosure process.
So whether the president signs something or doesn’t sign something, or says something or doesn’t say something, the intent is to do whatever it takes to impede or slow down this crisis. If there are losses to mortgage holders and investors, the politicians will try to turn this to their advantage by framing it as being that the banks and mortgage lenders deserve the losses because they’re the cause of this problem. That’s what you’re going to see, that’s what you’re going to hear, and it’s all intended to be a feel-good solution that makes everybody believe that our government is really looking out for us. Meanwhile, the SOBs that originated all these mortgages are going to get what they deserve.
DG: But ultimately this has to be resolved, that is unless the government is willing to give a bunch of people free houses.
AM: Years ago I said to you that what was happening in real estate was going to culminate in a big crisis, but that if it were to happen in a measured way that let the free market do what it does best, then the crisis would be less intense. But the latest developments are going to create a lot of intensity and only make things worse.
DG: What about Fannie and Freddie? They were right in the middle of creating the mortgage mess, and they are at this point de facto government institutions? Not letting them foreclose would seem to be setting the stage for another huge loss to taxpayers.
AM: The nice thing about being the federal government is that you can throw Fannie and Freddie under the bus and suffer no real consequences, at least not in the short term. For most people, that will look good.
The important thing for your readers to remember is that these aren’t solutions that do anything. These are solutions that have optics, that’s all. There’s an election coming up. The government wants people to feel good. They want everybody to feel like our government is really addressing these problems. They want it to seem to the public like the government cares. And that’s what this is, that’s what this is all about, in my opinion, and I think you’re going to see some really very, very undesirable, unintended consequences.
DG: And on that note, thank you very much for your time. Very interesting, as always.
AM: Happy to help out. Let’s talk again soon.
Staying in touch with the powerful trends sweeping the U.S. and global economy has rarely been more important. That’s where The Casey Report comes in. Co-editors Doug Casey, Bud Conrad, Terry Coxon, Don Grove, and David Galland make it their purpose each month to bring investors the facts about what’s really going on the economy and investment markets, as opposed to the daily bombardment of fictions you hear from Wall Street and members of the government. And one of their favorite investments for the near future is betting on rising interest rates. Read more here.

New strain of swine flu emerges

The H1N1 swine flu virus may be starting to mutate, and a slightly new form has begun to predominate in Australia, New Zealand and Singapore, researchers reported on Thursday.

More study is needed to tell whether the new strain is more likely to kill patients and whether the current vaccine can protect against it completely, said Ian Barr of the World Health Organisation Collaborating Centre for Reference and Research on Influenza in Melbourne, Australia and colleagues.

"However, it may represent the start of more dramatic antigenic drift of the pandemic influenza A(H1N1) viruses that may require a vaccine update sooner than might have been expected," they wrote in the online publication Eurosurveillance.

It is possible it is both more deadly and also able to infect people who have been vaccinated, they said.

Read Full Article

« UPDATE: Fannie, Freddie bailout could double in size to $360 Billion -- It Will Eventually Be $1 Trillion »

Yes, Barney is guilty. And so are the banks who packaged shit into shinola. We heard from another one of the guilty parties earlier this week:

• Franklin Raines On Foreclosure Fraud AND Mortgage Put-Backs - VIDEO

Steve Liesman interviews Yale Professor Dr. Robert Shiller of the Case-Shiller Index. Shiller maintains that if house prices continue their fall, as he expects, taxpayers could see a $1 trillion loss on Fannie and Freddie. Excellent clip.

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From Diana Olick at CNBC

So out of the blue this morning I get a bill for anywhere from $221 billion to $363 billion; it wasn't addressed to me alone, but as a taxpayer I tend to take these things very personally.

The "projected" bill came from the overseer of Fannie Mae and Freddie Mac, the FHFA (Federal Housing Finance Agency), which "released projections of the financial performance of Fannie Mae and Freddie Mac, including potential draws under the Preferred Stock Purchase Agreements with the U.S. Department of the Treasury." (You can read the full release here)

It's the bill for the bailout.

So far the Treasury has infused $148 billion to keep Fannie and Freddie afloat; this as their book of business from the height of the housing boom continues to bleed through every band-aid applied. The "projections" released today, "are intended to give policymakers and the public useful snapshots of potential outcomes for the taxpayer support of Fannie Mae and Freddie Mac," writes FHFA Acting Director Edward DeMarco in the release.

So as we approach election day and as we approach the Administration's promised January deadline for a GSE reform game plan, we get to look at some super scary scenarios of what the continuing mortgage mess is going to cost us all. There is a disclaimer: "The results do not define the full range of possible outcomes. This effort should be interpreted as a sensitivity analysis of future draws to possible house price paths."

Okay, now here we go.

The Deeper Second Recession assumes restricted access to credit, continued high unemployment and a reverse in the moderate rebound in home construction we saw in 2009. Peak-to-trough decline is 45 percent with the trough in Q1, 2012. From that trough, prices increase 11 percent through 2013. GSE bill: $363 billion.

• Continue reading

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Eventually the bailout bill will be $1 trillion:

Video: Steve Liesman with Yale Professor Robert Shiller

• CNBC with Robert Shiller -- $1 Trillion Scenario

• Total Cost Of Fannie, Freddie Bailout Could Reach $1 Trillion -- Bloomberg

For American taxpayers, now on the hook for some $145 billion in housing losses connected to Fannie Mae and Freddie Mac loans, that amount could be just the tip of the iceberg. According to the Congressional Budget Office, the losses could balloon to $400 billion. And if housing prices fall further, some experts caution, the cost to the taxpayer could hit as much as $1 trillion.

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Google accused of slashing $3billion from its tax bill through 'Double Irish' technique

Google was today accused of avoiding paying tax by funnelling its profits through low-tax countries.

In a series of complicated transactions known as a Double Irish or a Dutch Sandwich, the internet giant has managed to pay just 2.4 per cent of its overseas gains in tax.

The loopholes - which are legal - saved Google $3.1bn over three years by diverting cash through low-tax nations such as Ireland, the Netherlands and Bermuda.

Double Irish: By sending its overseas business through Ireland, Google's Dublin office helps the internet giant avoid high U.S. corporation tax rates

In the U.S., the corporate income tax rate is 35 per cent while in Britain, the firm's second-biggest market, it is 28 per cent.

'It’s remarkable that Google’s effective rate is that low,' Martin A. Sullivan told Bloomberg.

The tax economist who previously worked for the U.S. Treasury Department added: 'We know this company operates throughout the world mostly in high-tax countries where the average corporate rate is well over 20 per cent.'

The rate of overseas tax paid by Google was the lowest of the U.S.'s top five biggest technology firms - but it is not alone in using the tax avoiding methods.

Facebook Inc. and Microsoft Corp. are also known to use similar methods.

The use of countries which do not levy corporate income tax is not helping the U.S. Government as it attempts to close a $1.4 trillion budget deficit.

'Google’s practices are very similar to those at countless other global companies operating across a wide range of industries,' said Jane Penner, a spokesman for the Mountain View, California-based company.

Bankruptcy Judge Bombshell: I Never Approved The Sale Of Lehman To Barclays

Lehman may finally have found someone who will stand behind its argument that it was treated unfairly in its firesale and is owed billions of dollars.

Lehman execs have been somewhat successful in convincing Judge Peck, who will decide in January or February whether or not Lehman is owed money from Barclays, that he can overturn the final sale of Lehman to Barclays.

From Bloomberg:

“Let me be clear about one thing, Mr. Boies,” Peck told Barclays’ lawyer David Boies. “I never approved the clarification letter.”

Now Peck says that because Barclays got an extra $11 billion from Lehman, and he never knew about it, he never approved the final sale.

From Bloomberg:

U.S. Bankruptcy Judge James Peck said he never approved final documents for the sale of bankrupt Lehman Brothers Holdings Inc.’s brokerage to Barclays Plc.

The result could be that Peck overturns his original approval of the sale (on September 20, 2008), potentially so that it is determined null and void.

But that probably won't happen, according to another bankruptcy judge who spoke to Bloomberg.

Peck will be reluctant to overturn his entire sale order for “bankruptcy policy reasons."

« Franklin Raines On Foreclosure Fraud AND Mortgage Pool Put-Backs (CNBC Interview) »

The former swindling, bonus-sucking CEO of Fannie Mae would be better served by staying out of sight. Raines:

• "I don’t think a freeze would really accomplish much,” said Raines, who is currently the director of Exclusive Resorts. “The people who are facing foreclosure today on average, they haven’t made a payment in over a year—in some cases, two years.”

• "Housing is 20 percent of the economy. We are not going to have a real recovery until there is a recovery in housing," he said.

• “All we will be doing is slowing down an inevitable process where the homeowner isn't disputing that they haven’t paid," said Raines. “And we simply need to move on.”

Raines said that the cost to banks will be high, especially since they are already paying “significant costs to manage the foreclosures.”

Raines added that loans that remain out there should be restructured “so that we can get out of this mess of people who are having a drag on the economy, a drag on confidence by consumers.”

• “We need to have a major restructuring of the outstanding mortgages so that we can move forward with confidence and vigor,” Raines said.

Raines, who was Fannie Mae's CEO from 1994 to 2004, negotiated a settlement in 2008 with the Office of Federal Housing Enterprise Oversight, which oversees Fannie Mae, after the agency accused him of accounting irregularities while he was in charge.

Raines paid a $2 million fine and gave up stock options valued then at over $15 million, according to a consent order.

Foreclosures crush American dream

O'FALLON, Mo. • The telltale signs are spreading. An overgrown yard. Neighbors moving out at night. An orange St. Charles County Sheriff's eviction notice taped on a window.

At the latest home in the Briarchase subdivision to be threatened by foreclosure, only a dog would come to the front door. A woman tending a front yard nearby gasped at the news of another family hit.

Since the housing crisis took root in 2007, at least 17 homes in the subdivision and surrounding streets have been foreclosed on; eight of those have come since February. It's part of a national blight that threatens to consume more than 1 million homes this year.

Briarchase could be any suburban neighborhood, where, over the past decade, rows of cookie-cutter homes have replaced rows of grain and rolling pastures. The subdivision and the surrounding area illustrate how foreclosures have moved beyond bad loans and over boundaries. The housing crisis now is feasting on continued unemployment and homes whose values have dipped below the amount owed on them.

Left behind is a wake of human drama and falling home prices that few Briarchase residents want to talk about publicly. The only thing that can kill the cycle is good, reliable income, but the jobless rate is unrelenting.

"This phenomenon is changing, and it's not just about low-income and minority neighborhoods," said Todd Swanstrom, a professor at the University of Missouri at St. Louis who has researched housing trends. "It's spreading because of the new cause of foreclosure — weak housing market, and unemployment has risen."

For those caught in the crisis, it will take time for the shame and frustration to settle, says Traci Turner, 44, who lived in the heart of Briarchase until her $165,000 home was foreclosed on in 2008. Let go from a customer service job at Verizon in Wentzville amid an ongoing fight with kidney disease, Turner said, she couldn't afford the $1,200 monthly house payments and had to walk away.

"I still have problems when I drive by," she said. "I feel like I failed. I feel like I let my kids down and everything."

People like Turner who built in the area were lured by the pride of new home ownership, good schools and the convenience of stores that shot up during the housing boom along Ronald Reagan Drive, just off Highway 40.

Standing out meant paying extra for brick on a two-story, country colonial home, or a walkout basement that opens to a community pond with a fountain. Beyond the asphalt path is a holdout farm with an old basketball rim bolted to the side of a red barn. These days, Greene's Country Store across the street pushes bird feeders to a new customer base, even selling Halloween costumes for small dogs.

After her foreclosure, Turner found a trailer park hidden by trees, separated by a fence from the new developments. The trailer park was still in the school district, and she didn't want to pull her son out. She pays $820 a month, plus an additional $80 in storage fees for the stuff that won't fit.

It's a roof over her head, but it has been a big adjustment. She particularly misses the new kitchen, the fireplace she never got to use, and the sense of solid shelter.

"When it storms," Turner said, "there is no basement to go to. I am always afraid I am going to get blown away in a tornado."

'BLOOD FROM A TURNIP'

Housing construction flourished in subdivisions like Briarchase just a few years ago, helping make O'Fallon one of the country's fastest-growing cities in recent decades. Then the bottom dropped out.

Building permits for new homes in the St. Louis region fell from a peak of 1,800 a month in 2003 to below 600 a month last summer. Unemployment in St. Charles County has more than doubled, to 8.4 percent, putting stress particularly on families who were already maxed out with two incomes. Many live just a blown engine or a broken leg away from not being able to cover monthly bills.

After three missed mortgage payments, the foreclosure clock can start ticking. And the rate of delinquent mortgage payments has been on the rise. In Missouri, the delinquency rate — 90 or more days of missed payments — rose from 1 percent of all mortgages in 2006 to 4 percent in 2009, according to the Mortgage Bankers Association. Illinois saw the figure rise from 1 percent to nearly 6 percent.

If you lost a job during the economic downturns of the 1980s and 1990s, you could still sell your house at a decent price. This time, it's much harder because so many foreclosed homes have glutted the market with discount prices.

And the corner bank where you got the home loan approved usually doesn't hold it anymore. Your loan has been bundled and sold to investors all over the world who also resell, creating a confusing web of impersonal third-party loan servicing companies to deal with in untangling one of life's biggest investments.

In Missouri, a home can be auctioned at the courthouse steps within just five months of nonpayment. The process can take up to a year in Illinois because foreclosure paperwork goes through the court system.

After auction, the eviction notices go out. In some cases, families leave behind personal belongings that are dumped on the front yard.

"It's a vicious cycle, but you can't get blood from a turnip," said St. Charles County Sheriff's Sgt. Mike Kinkade, who oversees evictions. "If a person doesn't have money, they don't have money. They are not going to pay the bills."

Evictions run the gamut of social classes.

"Some of the neighborhoods, you think, 'These are nice houses,'" he said. "You think, 'This would be a decent place to have your family.' But, you know, that doesn't have anything to do with people's personal problems. It just goes to show the reach of the bad economy."

emotional decisions

Families were once euphoric about the promise of building a new home on an empty Briarchase lot. There were still dirt roads, and the beginnings of the subdivision seemed to blend into the nearby farmland, residents said.

Potential buyers walked through display houses that Mayer Custom Homes and McBride & Son Homes used as models. They picked out a home style and different amenities they wanted to add, from wood floors to granite kitchen counters.

At least one of the display homes would eventually end up in foreclosure. So did the flagship house that Mayer used as an office before the company went out of business in 2009.

Few Briarchase residents directly affected by foreclosure are willing to share their story publicly. There's a sense of embarrassment, and a fear that an employer or friends will learn of their financial problems. Those who agreed to be interviewed offered a few details, but they asked that the Post-Dispatch not use their names.

There's a former manufacturing sales rep who paid $250,000 for a Briarchase home in 2008 but had lost a big commission, and saw other sales dry up with the economy. In 2009, she couldn't sell the house for $199,000. By early 2010, she'd spent $150,000 in savings and walked away to rent an apartment.

"I made a bad judgment call," she said. "It's kind of debilitating, self-esteem-wise."

There's a single mom who lost her job as a systems analyst at Citigroup and needed six months to find another job. Her home went into foreclosure, but she reworked her mortgage at the last minute and is in the clear — for now.

And there's a Boeing manager who is barely holding on to his four-bedroom home. Recently divorced, he's delinquent on his mortgage and said he can't afford the $2,875 monthly payments. He lost the income from his former spouse and is paying alimony. A home equity loan went toward a deck, a car and college tuition for kids. Now, he owes $295,000 on a house that is valued by the county at $271,000.

He started a business of his own, but he's still struggling.

"Time heals credit scores. I am not afraid of walking away," he said. "It's a business decision. It's not an emotional decision."

For those not in danger of losing a home, there is still the worry about what a spate of foreclosures is doing to property values. The Center for Responsible Lending estimates that property values in Missouri will drop by $5.8 billion between 2009 and 2012 because of foreclosures.

In Briarchase, undeveloped, grass-covered lots still sit empty, in an area that is already rich with "For Sale" signs in front of new houses. "Price Reduced" reads one sign on Briarchase Place. "New Price $10,000 Reduction," reads another right across the street.

"I am telling you, prices have absolutely plummeted," said subdivision resident Joan Hooley, taking a break from yard work on a recent morning. "It just makes me sick."

Peter Forder, 31, waiting for his daughter to be dropped off by a school bus, acknowledged that "we've been affected just like any other neighborhood."

A former broker for U.S. Mortgage, he used to help people get home loans. Many of them had poor credit, and Forder said he would warn them of the risks, but few listened.

"All they hear is 'I can get you a loan,'" he said. "You just knew that they weren't hearing you because they were still making the choice."

Asked how he felt about it now that he's watched the foreclosure crisis unfold in his neighborhood, Forder said adults make their own choices. And many people were happy to be getting into new houses. Even Forder, who moved from the Central West End, jumped in with the purchase of his $250,000 home in 2007. He'd paid 50 percent down, right before the bubble burst.

He, too, was confident house prices would keep climbing.

A few blocks away, Ryan Dick, 33, a graphic designer, has been trying to sell his house for a few months. Only two potential buyers have taken a look, despite price reductions. The family is going to take it off the market soon. It's not worth competing with foreclosures.

"Because we kept up with what we needed to do, it seems like we get punished," said Dick, who has one child and another on the way. "We'll wait until the second child comes. Hopefully the market will be better and we'll try again."

THE WINNERS?

The run of foreclosures has brought in a new crop of owners buying at bargain prices.

Brandon Armour, 26, a data analyst, and his girlfriend bought a foreclosed three-bedroom home in August for nearly $155,000 and just moved in. In 2004, it sold for $197,000. Armour said the six-year-old house didn't even look lived in.

"It's suburbia at its finest," he said from the front porch, cat padding by the door. "It's all a bunch of young families. This is the kind of place we are going to be in for a while. It's kind of perfect."

The allure of the area has not faded — the type of place where neighbors, sharing cigars and sipping beers, congregate in driveways as the kids play with plastic toy houses in the yard.

Near the entrance to Briarchase, Chris Richardson, 25, and his new wife bought a foreclosed home in February for $161,000. It was valued at nearly $255,000 four years ago. A plaque on top of the refrigerator reads "Happy Ever After." The original owner didn't hold back picking out amenities, including a double oven and vaulted living room ceilings .

"We just found a really good deal," said Richardson, a puppy in his arms. "We wouldn't have been able to afford anything like this."

He works as a loan processor for American Equity Mortgage, and he's kept a part-time job at Shop 'n Save that he's had since college.

"I see it both ways," he said, reflecting on the neighborhood. "I feel bad for the people who were talked into too good of a deal. Then, I know what I can afford. I am not going to overextend myself."

But if home values fall more, has he really won?

He's not worried. He thinks he bought at the bottom and speculates more people will buy, driving up the values.

It's the sentiment that residents had before him, those who planted their dreams in the same suburban patch.

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