The Big Shadow

The Valley's political jurisdictions -- cities and counties -- have shown themselves to be big banks' biggest suckers. Nobody's much surprised that Stockton recently declared bankruptcy nor will they be particularly surprised if Modesto and Merced follow shortly. The three cities, aside from being the seats of adjoining counties, have been and remain at or just outside of the epicenter of the foreclosure-rate disaster in the nation. It was an illusion that the tremendously productive agriculture in the northern San Joaquin Valley would be any buffer at all against the busted housing boom, an illusion that was believed only by naive, well-meaning peopld who just couldn't believe how unstable such an economy is. The illusion of economic security through agriculture was never shared by farmers. The proof of this is the land the boom grew on -- farmland, and more often than not, prime farmland.
Badlands Journal editorial board
Another Obama Fleecing
The Foreclosure-to-Rental Boondoggle
“The national housing market took a hit in the latter half of 2011, falling to new lows not seen since the housing crisis began six years ago, according to data out Tuesday by S&P/Case-Shiller Home Price Indices……The index is down 33.6 percent from its peak in mid-2006.”
– Washington Post
The reason that housing prices have dipped only 33.6 percent in the United States instead of 60 percent as they have in Ireland, is because the big banks have been keeping inventory off the market. If the millions of homes–that are presently headed for foreclosure–were suddenly dumped onto the market, prices would plunge and the biggest banks in the country would be declared insolvent. That’s why the banks have slowed the flow of foreclosures. According to Amherst Securities Group’s Laurie Goodman, “….2.8 million borrowers haven’t made a payment in over a year. Add that to the over 450,000 real estate owned (REO) units and you have approximately 3.2 million that are in the shadows. We are liquidating about 90,000 homes a month. That’s about 36 months of overhang; a really shocking number.” (See the whole interview here.)
Indeed, it is shocking, but what’s more shocking is that the banks are allowed to game the system this way and get away with it. New home buyers are paying hundreds of thousands of dollars more than they would be if the banks were not manipulating inventory, so there are real victims in this scam. . And is it really conceivable that Fed doesn’t know that nearly 3 million people are living in their homes for free? Of course, they know; they’re in on it too. The bankers even have a name for this arrangement; they call it “squatters rent” and they estimate it costs them an extra $60 billion per year. They would rather pay that hefty sum then foreclose quickly and have to write down the losses which would leave them broke.
Some readers will probably dispute the claim that housing prices could dip 60 percent in the US as they have in Ireland. These skeptics may want to read a new study titled “Housing, Monetary Policy, and the Recovery” released by the chief economists from the country’s two largest banks (Find it here.)
On page 29 of the report, the authors conclude that it would take “a 57% fall in housing prices would in our accounting sense eliminate housing overhang”. Their second projection estimates that it would take “a 68%” drop. So, if you bought a house in 2005
 for $400,000. That house would currently be worth $128,000, a big enough loss to poke holes in anyone’s retirement plans.
So, what should the government do? Should they force the banks to release the backlog homes so prices can adjust quickly and new buyers won’t feel like they’re being gouged? But–if they do–what happens to all the people who bought homes in the last few years who suddenly discover they’re underwater? Won’t that create a whole new wave of foreclosures?
The best approach would be to reduce the principle on the mortgages of the people who are presently in some stage of foreclosure and make the banks pay for the losses. That would slow the stream of foreclosures to a trickle, stabilize the housing market, and force many of the banks into Chapter 11, which should be real goal of any mortgage modification program. The banks were the perpetrators of this gigantic mortgage laundering scam and continue to pose a threat to the financial security of every American. Dismatling the TBTF banks should be the nation’s highest priority.
The Obama administration has chosen an alternate course in its endless effort to appease the bank lobby. They’ve launched a Foreclosure-to-Rental program that’s aimed at severely reducing the backlog of unwanted homes on the banks books via bulk sales to private investors. The program–which is largely shrouded in secrecy– is being hyped as a common sense way to stabilize the housing market and to ‘lower monthly payments so responsible borrowers can stay in their homes.’ In truth, Obama is just helping the banks slash their mountainous inventory so they can avoid bankruptcy.
Here’s part of the announcement from the FHA:
“The Federal Housing Finance Agency (FHFA) today announced the first pilot transaction under the Real Estate-Owned (REO) Initiative, targeted to hardest-hit metropolitan areas — Atlanta, Chicago, Las Vegas, Los Angeles, Phoenix and parts of Florida.
With this next step, prequalified investors will be able to submit applications to demonstrate their financial capacity, experience and specific plans for purchasing pools of Fannie Mae foreclosed properties with the requirement to rent the purchased properties for a specified number of years.” (FHA)
So far,  2,500 Fannie Mae-owned properties have been sold to private investors. But–here’s the problem–”85% of the units are already being rented, and almost 60% of the units are on term leases.” (Calculated Risk) So, everything Obama said about the program was a lie. This isn’t a foreclosure-to-rental program; it’s a property-dump proffered to financial insiders who are getting cheap government financing to fatten the bottom line.
“The original idea behind the REO-to-rental program was to sell vacant REO to investors and only in certain areas. These investors would agree to rent the properties for a certain period, and that would reduce the number of vacant units on the market…. This offer doesn’t seem to match that goal,” says Calculated Risk.
Fancy that; another boondoggle-ripoff compliments of President Hopium. Who could have known?
Here’s a clip from the FHA’s Meg Burns:
“The pilot transaction very much gets at the issue at hand-helping to stabilize communities by keeping people in their homes where possible…This helps stabilize neighborhoods because many of the properties will continue as rentals instead of moving quickly to the for-sale market. In addition, it is easiest to price properties with renters already in place, which should help to attract investor interest. “ (Washington Post)
Sorry, Meg, don’t piss on my leg and tell me it’s raining. This is the old switcheroo pure and simple. The fact that the properties already have renters means that the investors will be raking in sizable returns from Day 1. That’s not the way the program was sold to the public. The American people have been hoodwinked again.
Here’s more from the FHA’s February 27 announcement:
“In order to ensure compliance with applicable securities laws and regulations, details of the sales announcement will be sent to prequalified investors per FHFA’s Feb. 1 announcement. Subsequently, investors who post a security deposit and sign a confidentiality agreement will gain access to detailed information about the properties. At that stage, interested investors must submit a comprehensive application, which will be reviewed by an outside firm. Only investors who are qualified through this rigorous process will be eligible to bid.”
Okay. So, John Q. Public–the little investor–is completely excluded from this massive transfer of real wealth to private equity, hedge funds and other deep-pocket Obama campaign contributors. That’s to be expected. But what’s the so called “confidentiality agreement” all about. Does Obama really think he can shower his dodgy friends with hundreds of billions of dollars in dirt-cheap property and keep the whole matter under wraps?
Dream on, Barry. And what about the financing? Are these cutthroat property scamsters digging into their own pile of cash to pay for these foreclosures or is Uncle Sugar providing 60, 70, 80, or 90 percent financing at rock-bottom rates of .01 percent? That’s what we want to know.
This is not how honest people deal with a crisis if they genuinely have the public’s interest at heart. This is just more-of-the-same fleece-job larceny that was perfected by the Bush claque. Wasn’t Obama going to change all that?
We are only half way through the foreclosure crisis. The experts predict there will be another 7 to 11 million mortgage defaults in the next few years. That means we need a game plan that will keep as many people in their homes as possible while reducing the vast overhang of supply that has left the market in a shambles. It’s a tough job, but it can be done provided the interests of the victims are placed above those of the banks. Fat chance of that, eh?
Washington Post
Foreclosure settlement a failure of law, a triumph for bank attorneys…Barry Ritholtz. Ritholtz is chief executive of FusionIQ, a quantitative research firm. He is the author of “Bailout Nation” and runs a finance blog, the Big Picture...Washington Post
After many months of wrangling, a foreclosure settlement has been reached between 49 state attorneys general and a consortium of banks.
It is an epic failure of law and a triumph for bank attorneys.
It will accomplish little of value, as I’ll explain. First, let’s recall what the “robosigning” foreclosure scandal was all about.
Foreclosure is an extremely serious issue in American jurisprudence. As a nation of laws with strong respect for property rights, we have always treated this process appropriately. After all, having a sheriff forcibly evict a family that typically made a down payment, moved into a home, lived there for some years, made payments, etc., is disruptive — for the family, the lender and the neighborhood.
Foreclosure laws vary from state to state. However, all are specific and precise as to the legal steps that must be followed, from the homeowner’s initial delinquency onward. There are benefits to giving the homeowner a chance to “cure their default.” It is in everyone’s interest for the homeowner to catch up if possible.
We never want to see an innocent party “accidentally” evicted from a home. The legal system has evolved so this has become a “legal impossibility.” Imagine returning home from work or vacation to find the front door padlocked, the belongings strewn all over the block, a big orange sticker screaming “FORECLOSED” on the garage door, with an auction sign in the front lawn. Now imagine that this occurred even though you are not in default or even delinquent on payments. Thanks to the robosigning banks, this legal impossibility has happened repeatedly, even to homeowners who paid cash for their houses and had no mortgages. Imagine that — foreclosed with no mortgage.
Before any foreclosure can proceed, a lender must run through a checklist of specifics for the court to move forward. This review can take 45 to 120 minutes per file and addresses, for instance:
●When was the original loan made, and for how much?
●Who is the borrower? Who is the original lender?
●What is the address of the property?
●Which bank holds the mortgage note? Was the note transferred? When?
●When was the last payment made?
●How much is owed on the loan?
●Was the borrower notified of the delinquency? Default?
●Has the borrower been served notice? When, where and how?
Banks review these details to make sure there was not an administrative error. (Oops! We applied payments to wrong account!)
The banker who reviewed these files fills out and signs an affidavit, which is then notarized. It is the written equivalent of sworn testimony in court. Judges take affidavits extremely seriously. False affidavits bypass the entire fact-finding and legal process, and the result can be a miscarriage of justice. Anyone who lies on one commits perjury, a felony punishable by jail time.
At least, they used to get jail time.
Before the settlement, we learned that nearly every aspect of the robosigned documents was false. None of the details were ever reviewed. The signatures attesting to the review of the documents were fabricated — made by someone other than the person whose name was on the document. Neither person — the supposed signatory to the document nor the hired forger — ever validated the facts of each case. All of the safeguards put in place to make sure foreclosures were done correctly and legally were bypassed. Even the notary stamps were bogus — they were not real, and not signed by a notary to validate that the signer and the signature matched.
How did this happen? Instead of a careful review, people were hired to rubber-stamp hundreds of foreclosure documents an hour. Former burger flippers were paid $8 to $10 an hour to violate the law, file false affidavits and commit perjury. Some of the information was correct, but much of it was wrong — and none of it was verified for court purposes.
And now we have this grand settlement.
What will the impact be?
Economically, it will have no effect. The dollar amount is small relative to the U.S. economy. Indeed, the total impact of the settlement is less than one ten-thousandth of annual gross domestic product.
Then there’s the “math.” The number touted is $26 billion, but that’s wildly misleading. At most, it’s $6 billion, paid out by a consortium of banks. The other $20 billion is for capital write-downs for delinquent homeowners that were going to happen anyway. These were homes that the banks anticipated taking a $50 billion-to-$100 billion hit on. Only now, they get a tax benefit for it.
As far as the U.S. housing market goes, the impact will be minimal. About one out of five mortgages are underwater — meaning the house is worth less than is owed on it. Today, more than 11 million mortgages are underwater.
The settlement won’t affect the majority of these homes. Depending on which analysis you believe, the borrowers who receive a principle write-down will get $2,000 to $20,000 off their mortgage. This will not appreciably change the situation for most borrowers. They owe many tens of thousands more than the house is worth; some are hundreds of thousands of dollars behind in payments. Most will be as likely to default after this write-down as before. The impact on the overall underwater-mortgage issue is almost nonexistent.
The bigger issue is the economics of criminality. Most people who get caught committing crimes are punished. Commit a felony — if you run a bank — and your shareholders pay a monetary fine. Violating the law has merely become the banker’s cost of doing business.
Thus, the robosigning agreement has allowed the mass production of perjury. It has gone unrecognized and unpunished. It has made perjury a business expense, like travel or office furniture. The same reckless approach to giving loans to unqualified people was institutionalized, leading to another reckless approach to foreclosing homes.
We still don’t know who ordered these crimes, who is responsible for this, whether they still are in their jobs — or whether they are in a position of authority to do the same thing again.
Last, politically, the settlement reveals the corrupting influence of bank bailouts. Government is supposed to enforce laws equally and fairly. Instead, it is protecting its investments in rogue banks. They are committed to their original error and are loath to admit it. This is the reason that after a surgical accident, a new surgeon does the repair. He is objective and has nothing to hide. Conflicted governments, though, are focused on their reputation and reelection.
The robosigning agreement will serve as an exemplar to future generations of what not to do when confronted with failing banks.
Sacramento Bee
Stockton, facing bankruptcy, asks how it got to this point…PETER HECHT
STOCKTON -- For a city already reeling from a fiscal crisis, crime and the devastating effects of the housing meltdown, a damning rebuke last year came in cold type.
Forbes magazine -- for the second time in three years -- labeled Stockton as the nation's "Most Miserable City."
"This is the equivalent of bayoneting the wounded," protested Stockton City Manager Bob Deis, who was then new to his job.
Now, Stockton is trying to avoid becoming the nation's largest city to go bankrupt. Its city manager is laying the blame on a history of fiscal ineptitude, accounting errors and disastrous governmental decisions.
The City Council is to vote tonight on suspending $2 million in annual municipal bond payments and on seeking up to 90 days of mediation to settle its debts with creditors without winding up in Bankruptcy Court.
Battered like a hit-and-run victim, Stockton again finds itself grousing weakly over how it wasn't supposed to be this way.
This was the town that had remade itself as a destination for equity-rich home buyers from San Francisco, who fueled a residential building boom that tripled home values from 1998 to 2005. This was the place that did something with its underserved waterfront, when the city issued revenue bonds to finance a $127 million events center, including an arena, baseball park and waterfront hotel.
Now, overwhelmed bureaucrats are getting finger-wagging lectures from people such as Yolanda Flores, an accountant whose downtown tax preparation business is off by a half because of the collapsing regional economy.
Flores used to serve customers from Stockton's surging construction and real estate sectors. But her clients have homes in foreclosure and many need tax help in accounting for penalties and fees for cashing out their retirement accounts.
"It's just bad management," she said of the self-inflicted fiscal wounds enumerated last week by Deis. "If the city is running its household this way, I wouldn't want to be in that household. How much is this going to cost us?"
Deis said the city of 292,000 residents has $450 million in unfunded mandates for retiree health care costs, the result of "a Ponzi scheme" of a deal that locked the city into providing long-term coverage for employees, even those with minimal service time.
He said Stockton for years ran up huge civic deficits, wrongly betting on rising property tax revenues in the belief the housing boom and "hypergrowth would continue into the future."
The city's general fund has been overstated by $2.8 million, Deis said in a report to the City Council. For 2½ years, officials accidentally double-counted parking ticket revenues, he said, adding that Stockton faces a $20 million budget deficit this year that easily could double.
Exasperated, the man who once took umbrage at his city's "miserable" rating in Forbes magazine says Stockton's financial management is simply horrid.
"In my 32 years of managing finances for local governments, I have not heard of nor seen a situation such as this," he said.
Tim Cassidy, whose fourth- generation Cassidy's Jewelry and Loan long has been a bellwether for the local economy, said it's unfair to blame the city government for Stockton's morass.
Cassidy remembers when residential construction was booming and customers streamed in to buy -- not pawn -- jewelry, electronics and household goods. He recalls excitement over the arena and waterfront development, which hasn't been able to rescue a blighted downtown.
Stockton's median home price soared to $431,000 in 2005, but -- with one of the nation's highest foreclosure levels -- stands at less than $140,000 today. Local unemployment has climbed to more than 19 percent.
"I think what is going on here is reflected all over the nation," Cassidy said. "We were in boom times, and if the housing market hadn't collapsed, we wouldn't be in this situation. If people were still spending $400,000 and $500,000 on houses and paying taxes on them, we would still be prospering."
Stockton's city employees last year had their pay reduced 12 percent to 23 percent. The city cut 50 firefighter jobs and has reduced its Police Department from 441 employees in 2008 to 343. In the face of legal challenges from public labor unions, the city is seeking to extend up to $13 million in salary cuts or furloughs though the next fiscal year.
Marc Levinson, a Sacramento attorney specializing in bankruptcy and other financial restructuring cases, has been retained by the city to guide it in debt negotiations. He insists that the city will be "far better off" if it can avoid bankruptcy.
Merced Sun-Star
Our View: Stockton's fiscal woes a wake-up call
City pushed to brink of bankruptcy by poor money management and recession-related hardship.
Every local elected official should be paying close attention to what is happening in the city of Stockton today. Our neighbor to the north, California's 13th largest city with a population of approaching 300,000 people, is flirting with bankruptcy.
The City Council is expected to approve an eight-point plan this evening that calls for the city to suspend approximately $2 million in bond payments through the end of the current fiscal year. The plan also calls for the city to embark on two months of private discussions with its bond holders, city employee unions and any other creditors with at least $5 million in claims against the city to determine if parties can reach accommodations that will allow Stockton to avoid bankruptcy.
If the council agrees -- and it really has no other viable option -- Stockton will become the first city in the state to undergo the AB 506 process, a formalized mediation period designed to help jurisdictions restructure their debts and avoid municipal bankruptcy.
It does not mean that bankruptcy is off the table. If a majority of council members agree that the city will run out of cash before the 60-day mediation period ends or if the city faces a fiscal crisis that puts public safety, health and welfare in jeopardy, the council can declare a financial emergency and file a Chapter 9 municipal bankruptcy petition in federal court.
Stockton, like nearly every other jurisdiction in the state, has been hit hard by the recession and falling property values. Its unemployment rate of 15.9 percent is twice the national average, and its foreclosure rate is second in the nation, behind only Las Vegas.
But recession is not the only cause of the city's money troubles. Stockton embarked upon a spending spree in the early 2000s, borrowing money to build an arena for its hockey team and a stadium for its Single-A baseball team.
Even earlier, in the 1990s, the city's elected leaders approved an extraordinarily rich plan under which employees were granted health care benefits for life after as little as one month of service. Next year the city will pay more for health insurance for retirees than for current employees. Pensions were also enhanced beyond sustainable levels. In addition, the city's accounting practices were abysmal.
In recent years the city has managed to gain some concessions from its unions. For example, Stockton firefighters have agreed to reduce staffing from four people per engine to three -- the staffing level in Modesto and many places. Yet other unions, including the police, have taken the city to court to enforce pay raises and benefits the city agreed to in better times but can no longer afford.
Depending on how the courts rule, Stockton's estimated $20 million deficit could double and make bankruptcy unavoidable. Is the rest of the state paying attention?