Looking Out From the Garage

Probably not...

But that doesn't mean that people aren't trying it... and it doesn't mean that people aren't getting in trouble for it.

Here is the way it works (and it all sounds so legit...):

• Mr. and Mrs. Consumer buy a house and get a mortgage from MonsterMegaMortgageCompany (MMMC).
• MMMC sells their mortgage to Investor Pool #1.
• Then it is bundled and sold to IP#2... and #3 and #4 over a span of a few years.
• Mr. & Mrs. Consumer start having problems, and despite everything they are facing foreclosure.
• To try to get help they contact a "Foreclosure Mitigation" Law Firm that fights the foreclosure by filing a "missing title" lawsuit.
• The law firm (or other entity) charges an up-front fee (maybe $2000) and then monthly fees (maybe $1000 or $1500)... as well as a contingency fee upon settlement of either 50% of the reduction or 75% or 80% of the value if the mortgage were completely eliminated.
• After stringing along Mr. & Mrs. Consumer for a few months or longer (collecting fees), they fail to actually prosecute the case.
• Mr. & Mrs. Consumer lose their home...

According to a few of the sources I looked at, their are no recorded examples of any suit of this type EVER being resolved in the consumer's favor.

The basis of the lawsuit is that if the mortgage holder can't produce the documents from the mortgage, it will be set aside and the consumer will own their property free and clear.  Sounds nice, huh?

Before getting sucked into something like this, here is a little more reading...

Source 1

Source 2

The State of California is going after one of the firms involved in this practice.  I would expect that there are similar cases in other states.

Times are tough...  scamsters know it, too

People being foreclosed on are all over the place.  They are vulnerable to people that approach them to "help."  There are a variety of scams and plans that mostly just revolve around generating a profit for the "helper."

Be careful!  There is help for many home owners that are in trouble... but the easy sounding solutions often aren't what they are cracked up to be.  If it sounds too good to be true, it likely is...

I would love to lose my mortgage, too... but this isn't the way...

from LaneBailey.com

This is from the AP. 

Residents of foreclosed properties in Chicago and other parts of Cook County don't have to worry about deputies forcing them out. Sheriff Tom Dart says that starting Thursday his office won't take part in evictions.

Here is a link to the story. 

on the face of it, I am offended that the Sheriff in Cook County is refusing to do his job.  And that is specifically and exactly what is going on here.  I'm sure it isn't fun... and I have accompanied Sheriff's Deputies on a Foreclosure Eviction... but that is not the point.  The point is that the mortgage holder has a legal right to repossess the property.  The Sheriff standing in the way is breaking the law... that he has sworn to uphold. 

But there is more to it...

I may be an unsympathetic meanie... but I am also logical.  First of all, I can see that in the case of renters that have been making their rental payments on time... those that the Sheriff of Cook County is trying to protect... they are the victims.  They did what THEY were supposed to do.  The owner didn't do what THEY were supposed to do. 

But, as an officer of the court, the Sheriff NEEDS to be held in Contempt of Court and go to jail... that is what the "Rule of Law" means...  If not for the Rule of Law, we have Anarchy. 

But I think there ARE some things that CAN be done. 

• I think that the owners/landlords of these properties that are taking the rental payments and not paying the mortgage are defrauding the tenents.  And I think that they need to be charged.  And jailed if found guilty.  After a few dozen of these folks go to jail, there will be a shift in how landlords view their cashflow. 
  
• There is NO reason that the Sheriff's Office can't determine if the person that answers the door is the mortgage holder (kick them out) or a renter (let them stay while a solution is found).  So, why not kick out the people that aren't renters instead of giving a break to people that can't afford to live in the house. 
  
• Banks are missing a BIG opportunity here.  If there is a renter in the house, they should rejoice and cultivate that renter.  They have two different options that would accomplish the goals of the bank and the occupant. 
  
  • Let them continue to rent, but pay the bank instead of the foreclosed former mortgage holder.  The bank is getting income on the outstanding loan...  They could even sell the property WITH the renter to investors.  I would bet that there would be a whole new category of investors that would step up to take performing properties.
  • Sell them the house.  They are making their payments.  they have shown a level of responsibility that the "owner" failed to show. 
    

The point is that those solutions don't violate the Rule of Law, nor do they further victimize the renters that are actually following through on THEIR responsibilities. 

But, the reckless actions of the Cook County Sheriff fail to hold accountable those that are responsible.  For that, and for breaking the law, he needs to suffer the consequences.

I just couldn't help myself.  After seeing the polls, and the reports... and knowing that so much is missing from much of the coverage... 

The videos all together take about 10 minutes. And as a collection, they are pretty powerful.  Do they say that McCain did everything that possibly could have been done?  No, I'm sure that he could have introduces another bill in the Senate.  I'm sure that he could have pressed harder. 

The point is to simply state... emphatically... that the GOP introduced legislation to try to reign in Fannie and Freddie.  The President also tried to stop the use of the Community Reinvestment Act to force banks into giving loans that were unsound... but that was also defeated along party line votes, multiple times. 

Some of these events happened prior to Obama's entry to the Senate in 2005... some after.  But to say that the GOP and John McCain were asleep at the switch is incredibly false.  In reality, the Democrats, including Obama blocks attempts by Bush, the GOP and McCain to take actions that might have thwarted this crisis before it started. 

Why isn't NBC reporting that?

The events of the last 24 hours are pretty interesting. 

If you have sworn off news because you don't want your optimism bubble popped, this is a little of what has happened...  John McCain has suspended campaigning and fund-raising in order to concentrate on the financial crisis from the halls of the Senate.  He also asked that Obama agree with him to delay the first debate for a couple of days so that both of them could be in DC rather than Mississippi prepping for a debate. 

Obama and McCain also issues a joint release regarding the financial crisis and points that they both feel need to be included in any "rescue" package...

To be fair, Obama reached out to McCain to talk about the joint release. 

But, here is where the post title comes into play... 

Barack Obama's response when McCain suggested that they go to DC to work instead of campaigning for a couple of days was "If they need me, they can call... we both have big planes."  I am so sorry, but there is NO way that sort of thinking can be considered leadership.  Frankly, it hearkens back to Obama's propensity to vote "Present" rather than taking an actual stand. 

The people of Illinois and Arizona hired Barack Obama and John McCain to do jobs.  Those jobs are representing their interests in the Senate.  We are currently facing a financial crisis that is regarded by both sides as dire.  How could anyone hired to do a job abdicate their responsibility so egregiously... so that they can interview for a different job? 

It's bad enough that Nancy Pelosi is going to send Congress on Vacation until after the elections at the end of the week... despite not have accomplished anything budgetarily... not to mention before they are sure that there will be legislative support to deal with the current crisis, but for Obama to think that the limits of his responsibility to his constituents is "If they need me, they can call me.  We both have big planes with our campaign slogans on the side." 

Seriously?  And this is the guy that "is better able to handle financial crisis?"

If you haven't already read Part I of this, please go back and read it...  I'll wait.

So, now that you are caught up, we can talk about ACORN and their use of the CRA to control the activities of banking interests. 

To start with, let's take a moment to talk about ACORN, or the Association of Community Organizers for Reform Now.  Reading over their Wiki entry, many folks will read their own spin into the text.  But there are a few things that stick out in my reading about ACORN.  To start with, they don't treat their own people the way they are telling others to treat them.  They filed for Minimum Wage Exemption is CA, citing that their employees couldn't understand the low wage workers they were helping if they were paid $4.25/hr (1995).  They fired workers for trying to organize a union within their ranks (2003).  The pushed for and got "Motor Voter" laws in many states.  Detractors of Motor Voter laws cited fraud opportunities.  In 2004, 2005, 2006, 2007 and 2008, ACORN employees have been caught submitting fraudulent voter information, and some have been sentenced to jail, as well as fined. 

And the next link in the chain is one of the groups that frequently partners with ACORN... Project VOTE.  They have also been accused of voter fraud, but have not been found guilty.  And of course Project VOTE's most famous Community Organizer was none other than Barack Obama. 

Last November, Obama, speaking to ACORN leadership said, “I've been fighting alongside ACORN on issues you care about my entire career. Even before I was an elected official, when I ran Project Vote voter registration drive in Illinois, ACORN was smack dab in the middle of it, and we appreciate your work.” Source.  And while I can't specifically attribute Alinskyian principles to Obama, this is an interesting quote from the same article. 

These Alinskyian principles are manifested in myriad, cynical ways. Obama unabashedly explained how he became “churched” in a 2007 speech:
It's around that time [while working as an organizer for the Developing Communities Project (DCP) of the Calumet Community Religious Conference (CCRC) in Chicago] that some pastors I was working with came around and asked if I was a member of a church. "If you're organizing churches," they said, "it might be helpful if you went to a church once in a while. And I thought, "I guess that makes sense."

But of course there is more.  If it was just a voter drive 16 years ago, I wouldn't think there was a strong connection.  But, Obama did more than just work alongside them in voter drives.  He trained ACORN staff and represented them on legal matters.  While he didn't do much in the way of trial work for them (or anyone else... he has tried exactly 0 cases...) he did background and was their attorney of record. 

The ties between Obama and ACORN are numerous, and some are vaporous, while others are pretty solid and appear with multiple sources.

And then there is Obama's neighbor and benefactor Tony Rezko.  He recruited Obama out of Law School to Miner, Barnhill & Galland.  Rezko wa a client of the firm and of Obama.  Although Obama denies doing "very much work, just six or seven hours" he has denied requests for any billing records. 

Rezko made millions, much of it from government funding of his projects...  He and close friends have donated at least $250,000 to Obama, and raised millions more for him.  Of course now Rezko is a convicted felon...

The bottom line is that Obama has a long history with some of the players that got us to where we are in the current housing crisis.  And of course, now, he is the one who thinks he has the way out... and perhaps he does.  Do the opposite of what he has been doing for the last 20 years.

Antoin "Tony" Rezko, Nadhmi Auchi, William Ayers, Bernadine Dohrn, Rashid Khalidi, Rev. Wright, Rev. Meeks, Rev. Otis, Father Pfleger and the TUCC, Louis Farrakhan... where does this all end?

I've been reading, which raises questions, which makes me search for answers, which means I have to do more reading.  Information surfing...  And, unlike surf surfing, with information surfing, one doesn't know where they will end up.  If you grab a board at the beach, you are supposed to end up at the sand. 

Let me tell you where I started...

I was looking at the beginnings of the sub-prime mortgage market, and how that situation came to be... and what I found was this. 

Banking in the 1970s, when CRA was passed, was a highly regulated industry in which small, local savings banks, rather than commercial banks, provided most home mortgages. Regulation prohibited savings banks from branching across state lines and sometimes even limited branching within states, inhibiting competition, the most powerful defense against discrimination. With such regulatory protection, savings banks could make a comfortable profit without doing the hard work of finding out which inner-city neighborhoods and borrowers were good risks and which were not. Savings banks also had reason to worry that if they charged inner-city borrowers a higher rate of interest to balance the additional risk of such lending, they might jeopardize the protection from competition they enjoyed.

Of course, that just begged me to learn more about the CRA.  And the CRA is the Community Reinvestment Act.  Originally passed under Cart in 1977, it basically allowed for banks to be "evaluated to determine if it has met the credit needs of its entire community" and then the results of those evaluations could be used to determine if a bank could expand, merge, or alter their business according to regulators. It was largely ignored and unenforced.

It was updated in 1994 under Clinton, with changes taking place January 31st, 1995 (that date is actually important).  Here is the Wikipedia entry regarding the Clinton era changes...

In 1995, as a result of interest from President Bill Clinton's administration, the implementing regulations for the CRA were strengthened by focusing the financial regulators' attention on institutions' performance in helping to meet community credit needs. These revisions with an effective starting date of January 31, 1995 were credited with substantially increasing the number and aggregate amount of loans to small businesses and to low- and moderate-income borrowers for home loans. These changes were very controversial and as a result, the regulators agreed to revisit the rule after it had been fully implemented for seven years. Thus in 2002, the regulators opened up the regulation for review and potential revision.

Part of the increase in home loans was due to increased efficiency and the genesis of lenders, like Countrywide, that do not mitigate loan risk with savings deposits as do traditional banks using the new subprime authorization. This is known as the secondary market for mortgage loans. The revisions allowed the securitization of CRA loans containing subprime mortgages. The first public securitization of CRA loans started in 1997 by Bear Stearns. The number of CRA mortgage loans increased by 39 percent between 1993 and 1998, while other loans increased by only 17 percent.

In 2003, the Bush Administration attempted to revisit the CRA, as provided by the changes under Clinton leadership (and during the pre-Republican Revolution, Democrat-controlled Congress).  Here is a story from the New York Times from that era.  At that time, the President's plan would have tightened regulation on Fannie and Freddie... but those were defeated.  

The proposal is the opening act in one of the biggest and most significant lobbying battles of the Congressional session.

After the hearing, Representative Michael G. Oxley, chairman of the Financial Services Committee, and Senator Richard Shelby, chairman of the Senate Banking Committee, announced their intention to draft legislation based on the administration's proposal. Industry executives said Congress could complete action on legislation before leaving for recess in the fall.

''The current regulator does not have the tools, or the mandate, to adequately regulate these enterprises,'' Mr. Oxley said at the hearing. ''We have seen in recent months that mismanagement and questionable accounting practices went largely unnoticed by the Office of Federal Housing Enterprise Oversight,'' the independent agency that now regulates the companies.

''These irregularities, which have been going on for several years, should have been detected earlier by the regulator,'' he added.

Of course, I couldn't let it end there...  Referencing the first article, it was noted that the CRA didn't really start to affect the mortgage world until the Clinton Administration.  When it was done, "community groups" could petition the banking regulators to hold up banks mergers, aquisitions or expansions for "low CRA scores."  And that is when things started to get ugly...

part 2...

There is a term that is going to become to new buzz in the current Wall Street crisis... and it is...

Mark-to-Market

Simply put, it is the the valuation of assets that a particular institution holds.  Let's say that a bank holds 1,000 shares of a stock called PU, and the per share price is $13.666.  It would be quite obvious that the asset is worth $13,666.  It makes absolute sense.  The banks SHOULD know the value of the assets that they hold. 

But there are some questions in Mudville...

Real estate.  The same rules are supposed to apply to real estate that is an asset to a bank (or mortage holder).  They have a loan out of the property, and it is only logical that they should know the value of the underlying property.  But that leaves questions... 

• What value should be assigned to the property?  The price it could fetch in 30 months?  30 days?  30 hours?  These are radically different numbers.
  
• How should the value be assigned?  Keep in mind that this isn't for houses that are foreclosed... this is for EVERY LOAN that the banks might have... almost EVERY HOUSE IN THE COUNTRY. 
  
• How often should this value be updated?  Once a year?  Quarter?  Month?  Daily?  We see neighborhoods that the price is moving all over the map... 
  

In effect, these could be deal killers for the Mark-to-Market model.  It is a great theory, but the practice could kill the very thing is serves to protect. 

And now a word from our sponsor(s)...

I want to interject a couple of people in here.  Each is brilliant, and I trust the judgement of each of these individuals.  And yet, I don't see them agreeing.  Matt Heaton, that's right, one of the Rain|Guys is a opinionated finance geek.  And his insights are nothing short of brilliant... and I do NOT agree with him on Mark-to-Market.  If you are not subscrided to and reading Matt's blog, you are shorting yourself.  Ken Cook is also a brilliant writer, and a secret combatant in the war against mortgage fraud.  He has insights into this that are simply lacking in many mainstream writers.  And he doesn't hold back. 

Back to the show...

Let's talk about the individual points above... 

The biggest and potentially ugliest part of Mark-to-Market is what value to assign a property.  Let's follow along with the current thought... 

• Properties need to be valued at "Fire Sale Prices."  Honestly, for the intent of the rule, nothing else makes sense... it is supposed to be the price the property could be sold at to quickly raise capital.
• Because the Mark-to-Market Value (M2MV) represents what the bank can recapture from the asset, it would be the max loan value... after all, that is all they can get back, it should be all they can put out...
• In neighborhoods where new buyers would likely NOT be able to come up with big down payments, the M2MV would get very close to the "retail" value of the property... 3-5% below. 
  
• If the "retail" price is only 3-5% above the M2MV, it isn't a fire-sale price any more... and so the M2MV would have to go down.
• The retail price would have to follow... because people that are likely buyers can't afford big down payments. 
  

The end result is that entry level neighborhoods (especially, but not exclusively) have their values destroyed, and the banks have depreciating assets that they are chasing down... and so they just flat out won't be able to lend to anyone that can't come to the table with less that 20% or some other SIGNIFICANT down payment. 

Not insignificantly would be the cost of doing this...  Think about it for a minute.  This isn't just for foreclosed properties, this is for every property subject to a mortgage in the entire country.  We are talking about something along the lines of 70 million homes, plus how ever many commercial properties have mortgages... maybe another 5 million.  75 million properties.  Currently even a bad BPO costs something like $40 and takes an agent about an hour.  But, that means that even at $40, we are talking about $3billion.  $3,000,000,000.  And truthfully, the commercial properties are going to cost a lot more than that. If we look at the cost of an appraisal, we are looking at something more like $250.  That would be $18,750,000,000...

At this point, Spencer Rascoff should be drooling... With $3billion, Zillow might be able to get within 20% of the price more than 80% of the time.  Maybe they could be THE biggest vendor in that field.  But, honestly, their valuations sucks.  They are fun to play with, but they are not nearly accurate enough to based loan decisions and the capital requirements of our finance system on. 

And that leads to the final issue...how often should these values be updated?  And think about the impact of that over a 30 year mortgage.  Are you willing to pay an extra $40/mo. (to be adjusted for future inflation) for future determinations of value?  Or $40/qtr?  Do you think that money should come out of the bank?  If it comes out of the bank, you can expect that your interest rate will be going up to cover it...  The final consumer WILL be the ones to pay the cost, regardless of what people in Chicago and Washington. DC say. 

Bottom line...

There absolutely NEEDS to be some value assigned to assets the banks are loaning on.  It makes sense.  But, I don't think that the Mark-to-Market model is appropriate for real estate.  It raises at least as many problems as it is designed to protect against.  With stocks or other traded assets, it makes sense.  Frankly, I don't know the absolute answer in this situation.

Did you see the post yesterday on Hot Topic? 

Unintended consequences of regulating mortgage brokers

Unintended consequences seem to be one of the themes I keep coming back to.  

Government, doing things that are designed to sound good for the news crews and the uninitiated, doesn't often accomplish the desired effect.  The foreclosure crisis "solutions" are another example.   Back to the subject at hand...

The regulation in question is surety bonds or net worth requirements, which are intended to keep mortgage brokers honest by assuring that they have some skin in the game—real assets that can be taken from them if they screw up. But in a National Bureau of Economic Research working paper, Morris Kleiner of the University of Minnesota and Richard Todd of the Federal Reserve Bank say this:

In particular, we find that tighter bonding/net worth requirements are associated with fewer brokers, fewer subprime mortgages, higher foreclosure rates, and a greater percentage of high-interest-rate mortgages. Although we do not provide a full causal interpretation of these results, we take seriously the possibility that restrictive bonding requirements for mortgage brokers have unintended negative consequences for many consumers.

The post poops on other aspects of the bill as well...

The bottom line is that another law, another program and some more regulations aren't always the best ways to tackle problems.  Sometimes, stepping back and taking stock is a better plan.  Doing nothing can actually be a valid plan. 

Perhaps some politicians ought to figure that out.  If someone really wanted to run on a plan of "change", perhaps a bigger change would be to stop making another agency every time somebody passes gas...