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WhaleMu – JP Morgan’s Next Surprise?
Cross-posted from nakedcapitalism.
In an admittedly strange twist of timing JP Morgan
, the same JP Morgan that just announced a surprise $2 billion loss caused by the “London Whale,” became the first and only of 26 banks disclosing subprime investor data to flip me the digital bird, refusing access to the public loan-level performance data for their Washington Mutual loans. WaMu, one of the most reckless subprime lenders, was swallowed whole by JPM and they’re having serious indigestion.
Nelson D. Schwartz and Jessica Silver-Greenberg of the New York Times verify that the purpose of the Chief Investment Office — the London Whale — is to offset risk caused by the Washington Mutual loans:
Under Mr. Dimon’s leadership, the chief investment office — which was responsible for the outsize credit bet — was retooled to make larger bets with the bank’s money, a former employee said. Bank executives said the chief investment office expanded after JPMorgan Chase’s 2008 acquisition of Washington Mutual, which added riskier securities to the company’s portfolio. The idea behind the strategy was to offset that risk.
It isn’t hard to figure out why JP Morgan doesn’t want anybody looking into and through their garbage. I have not been able to ascertain whether these reports are required under disclosure requirement Regulation AB (the law itself seems to say yes, but the experts I spoke to gave divergent readings). Whether they are or aren’t, JPM’s refusal — when everybody else cooperated speaks for itself.
As those loans sour, and they continue to rot like a dead skunk on a hot July day, the bets needed to offset the losses are increasing. It looks like the bank, peering into that portfolio they refuse to share, is becoming more than a little bit desperate. Like a compulsive gambler after a multi-day bender resulting in crippling losses they decided to double down rather than walk away, leading to their current whale of a surprise and likely a mirror-image follow-up for the WaMu losses this was supposed to offset.
For anybody who believes that JPM’s position is normal .. it isn’t. Twenty-six other banks quickly popped open the doors to their repositories, as they’re required to do. Perennial bad-boy Aurora Loan Services is the only other one that’s ignored my requests, though since it looks like they’ve sold their servicing operations the jury’s out whether their silence is purposeful or whether there’s nobody home on the other side of those requests.
Like I said, I’m not sure whether these disclosures are exempt. There are certainly many marked private, but they seem to be overwhelmingly CDOs and similar more exotic or clearly closely held instruments. I’ve never seen an entire series of MBS from an issuer that is exempt: even a few stray WaMu deals that ended up in other repositories are open to the public.
JP Morgan’s insistence that “[t]he site is maintained for JPMorgan Chase RMBS clients,” only, demanding that I include my JP Morgan Chase contact, may be legal but it is unprecedented. In context of their recent trading losses, the knowledge that those losses were to hedge against the WaMu losses, Dimon’s prior comments downplaying both losses, and strong analysis that the WaMu loans are some of the most impaired MBS it’s fair to conclude that JPM is hiding something in the basin of their loan outhouse.
I’ve spent the past couple months holed away downloading MBS data in bulk to enable investors, analysts, academics, government agencies, or whoever else wants to inspect performance information and project losses for every subprime loan trust. When finished, this week hopefully, I’ll have a veritable ABS MRI machine that can peer into the true health of the housing and housing finance market. It’s harder than it sounds: one of those projects where software engineers emerge from their digital caves after months, bleary eyed and long past due for a haircut but holding game-changing technology.
My database, which includes everything except WaMu loans thanks to Jamie, is finally almost finished. But even in preliminary form it is clear that the AAA-rated senior tranches — the ones that really were never supposed to take losses — are toast that’s burning worse by the day. Servicers, trustees, government officials have been doing anything to delay the inevitable losses but when people don’t pay their mortgages, and housing has declined by over 50% in many of their markets, there’s only so much accounting chicanery they can do: the money just isn’t there.
My suspicious are more grounded than tin-hat delusions we’ve been hearing from the housing is hot again crowd. R&R Consulting, a well-regarded structured valuation expert I work closely with conducted a portfolio-wide analysis of undisclosed (“limbo”) losses on RMBS. In a special in-depth report dated February 2012, long before JPM told me piss-off when asking for access to the more granular WaMu loan-level data, they reported that WAMU had the highest limbo loss level–about $810 million—in just one transaction. Repeat: experienced analysts dug this out even without loan level data. It sounds likely that it won’t be long until Dimon reports another ten-figure surprise that I’m sure he’ll apologetically pawn off on the US taxpayer.
For anybody asking “um — isn’t this over — didn’t all this fall apart back in 2008?” the answer is not really. That mega-meltdown was really a mini tremor caused by the lower and smaller tiers of these securities; last time junior visited to stir things up but this time papa’s walking down the street carrying a mean look and a big stick. That’s because the mezzanine level tranches of most bubble-era MBA are either gone or guaranteed to be gone — finally eaten up by current or pending losses — leaving the lower AAA tranches to take their place as the bearer of losses. This was never supposed to happen. Everybody knew that CDOs created from the lower tranches were risky, even if the ratings agencies said otherwise, but nobody thought the meltdown would last this long that the actual top tranches would be nicked. But the data couldn’t be clearer: those bottom level A-class tranches of yesterday are the new bottom level M-class tranches of yesterday.
All this is surprising because these same MBS tranches have been on fire lately. Hedge funds bought them for very little when nobody wanted them — setting their own price — and now they’re selling them back at steep gains because housing is peachy again, never mind the enormous amount of shadow inventory. Hopefully the buyers of these same securities aren’t being set up, again, because nobody would be stupid enough to fall for that same trick, again. Hopefully.
It is these lower tranches and other derivative products, which are by definition exponentially smaller than the more senior securities like the ones JPM is hiding (well, before the banks multiplied them several times over using credit default swaps) that blew up the world economy in 2008.
I’m guessing that it is the inevitable meltdown of what remains of the AAAs (the amount outstanding has been reduced considerably by refis) that has been at the impetus for the housing cheerleaders. By refusing to move their foreclosures forward, then refusing to take title, then refusing to REO those homes, the trusts don’t have to recognize the losses because, ya’ know, the abandoned and dilapidated properties will magically double in value as long as we hold our breath and wish.
My mountain of data that shows loss severity in excess of 100-percent is not uncommon. When we look at the loans, compare similar loans from those who report them more honestly, multiply the average severity by pending reported and, um, overlooked foreclosures, then it becomes clear that the lowest rated AAA’s are toast. This reaffirms the report by R&R Consulting report that $175 billion of loan level losses had not been allocated to the trusts. Whoops!
Jamie Dimon admitted his $2 billion loss “plays right into the hands of a bunch of pundits out there” on his conference call explaining his stinky. Dimon went on to call the losses “egregious” and “self-inflicted.” In light of the London Whale it is clear that when it comes to sky-high risk, like JPM’s WaMu exposure, the bank has adopted an advanced risk management strategy: telling researchers to piss off then hiding.
Au revoir Allonhill: OCC Finally Pulls The Plug
I first wrote about massively conflicted OCC foreclosure review firm Allonhill on nakedcapitalism, here:
http://www.nakedcapitalism.com/2011/12/michael-olenick-the-administration-likes-foxes-in-charge-of-henhouses-%E2%80%93-proof-that-occ-foreclosure-reviews-are-a-sham.html
Gretchen Morgenson picked it up for the NYT, here:
http://www.nytimes.com/2011/12/25/business/foreclosure-relief-dont-hold-your-breath-fair-game.html
Took a few months but now the OCC has reacted; Allonhill’s finished:
http://www.occ.treas.gov/news-issuances/news-releases/2012/nr-occ-2012-74.html
Sue, meet David J. Stern. He can tell you what happened to his sham company DJSP after I showed his investors he was grossly misleading them.
To Sue Allon, and all those out there like her:
http://www.youtube.com/watch?v=rY0WxgSXdEE&feature=relmfu
Updated: That last part where the OCC arrogantly proclaims “The decision does not reflect on the quality of work performed to date by Allonhill” is bunk. Of course it does. Every Aurora/Allonhill file needs to be reviewed by a genuinely independent auditor. Send the bill for the re-reviews to Sue Allon, to John Walsh who signed off on allowing Sue Allon to review her own work, or to Aurora who thought they’d get away with their latest sleazy trick. Whoever .. as long as it isn’t US taxpayers. But obviously they need to start from scratch.
I’ve been posting way too little but…
There’s a reason. Not an excuse, a reason. Soon enough I’ll have a data set that will shine the light into the darkest corners in a way that’s never been. But as I’ve been working with others to code the toughest aggregation project I’ve ever worked on I haven’t forgotten about my readers, or my writing, and I’ll be out of hibernation — both here and on nakedcapitalism — soon enough.
Until then here’s a quote from Steve Jobs that’s keeping me going:
“Time is limited, so don’t waste it living someone else’s life. Don’t be trapped by dogma, which is living with the results of other people’s thinking. Don’t let the noise of other’s opinions drown out your own voice. And, most important, have the courage to follow your heart and intuition; they somehow truly already know what we want to perform. Everything else is second.. Stay hungry. Stay foolish. I’ve always wished that for myself, and now I wish that for you. Stay hungry. Stay foolish.”
For those looking for more pragmatic advice on the markets check out any entity that has exposure to bubble-era AAA-rated sub-prime MBA tranches. Then short the crap out of them, or at least get out. You wouldn’t believe what I’m seeing as the data rolls in .. unless, of course, you would.
Steve Jobs:
Back soon.
Woody Guthrie: The Jolly Banker
Not nearly enough time to write lately thanks to my ongoing enormous data project but came across this Woody Guthrie song I thought I’d share.
Since it’s almost Passover/Easter it’s worth pointing out the ancient Israelite’s found themselves jammed-up due to a government that “didn’t remember.” So, whereas the new material is always interesting it’s always good to take the opportunity to remember that we’ve been here before.
I don’t know if Woody’s copyright is still there. If so maybe they’ll ask me to take it down, but something tells me Woody would jump out of his grave and start singing it himself if he could.
Click here to hear Woody singing the song.
The Jolly Banker
My name is Tom Cranker and I’m a jolly banker,
I’m a jolly banker, jolly banker am I.
I safeguard the farmers and widows and orphans,
Singin’ I’m a jolly banker, jolly banker am I.
When dust storms are sailing, and crops they are failing,
I’m a jolly banker, jolly banker am I.
I check up your shortage and bring down your mortgage,
Singin’ I’m a jolly banker, jolly banker am I.
When money you’re needing, and mouths you are feeding,
I’m a jolly banker, jolly banker am I.
I’ll plaster your home with a furniture loan,
Singin’ I’m a jolly banker, jolly banker am I.
If you show me you need it, I’ll let you have credit,
I’m a jolly banker, jolly banker am I.
Just bring me back two for the one I lend you,
Singin’ I’m jolly banker, jolly banker am I.
When your car you’re losin’, and sadly your cruisin’,
I’m a jolly banker, jolly banker am I.
I’ll come and forclose, get your car and your clothes,
Singin’ I’m jolly banker, jolly banker am I.
When the bugs get your cotton, the times they are rotten,
I’m jolly banker, jolly banker am I.
I’ll come down and help you, I’ll rake you and scalp you,
Singin’ I’m jolly banker, jolly banker am I.
When the landlords abuse you, or sadly misuse you,
I’m jolly banker, jolly banker am I.
I’ll send down the police chief to keep you from mischief,
Singin’ I’m jolly banker, jolly banker am I.
OCC Hack (er, head) John Walsh Is Gone
The Senate apparently appointed somebody else.
Who? It doesn’t matter, as long as it’s not the worst regulator in US history.
Here’s a story about Walsh, his OCC, and me:
Walsh defended the conflict, even as Aurora was being quietly sold to Nationstar. Walsh was then just as quietly fired. That’s a shame because if I didn’t still have some liberal blood in me I would have advocated an old fashioned tar and feathering, or at least handcuffs.
My feelings towards Walsh’s well deserved place among the ranks of the unemployed:
Fannie & Freddie Signal Congress By Spending $600K at the MBA Convention
Oops, they did it again.
Mortgage Daily News reports Fannie and Freddie spent $600K in Oct., 2011 at the MBA’s annual convention. In 2010 they spent $640K on the same conference and Congress went ballistic. Apparently Fannie, Freddie, and the FHFA thought the outrage of our elected officials warranted a change, so they responded by reducing spending by a whole 6.25%.
I shouldn’t be writing. I’m backed up with arguably the most complicated and important data aggregation project I’ve ever been involved in. When finished I’ll be pushing out chart’s that make CR’s chart fascination look benign.
But I can’t help but to take a few minutes and digitally ink a few words about this.
Fannie Mae and Freddie Mac just stuck up the middle-finger to you, Congress, and to the American’s that you’re supposed to represent. Will you finally do something meaningful about it?
Unlike many I don’t think that Ed DeMarco is evil incarnate. I think that he’s doing his best given the constraints of HERA but he’s dealing with two unruly, entitled, dishonest beasts who hold themselves above the law, who have shown that they can’t be regulated, and who need to be unwound.
Let’s finally change HERA, the law that funds these monsters. Let’s admit we can’t mend it, and finally end it.
It’s time for Congress members to stand, Reagan-style, in front of their headquarters and scream “Fellow members of Congress, tear down these organizations.”
This isn’t a Democrat nor Republican problem: Fannie and Freddie have become the vision of an equal-opportunity contemptuous monster. They’re like the child of parents who bitterly divorced and who later realizes he can play them off one another, listening to neither, while repeatedly spending wildly on their credit-cards then sneering when called out.
Speaking of children, my own son is in a public charter-school math and science program where three years of honors high-school math are required before starting high-school. His class is the first where Hon. Algebra II wasn’t offered in summer-school because of budget cuts, so they took the class online. Teachers confirm that the whole group has struggled substantially more in pre-calc and now calc classes than their predecessors who had a real teacher for what is, for eighth graders, a tough class.
Congress, why don’t we have enough money to fund honors math classes for our brightest kids — the one’s who have proven by working their asses off that they’re the future one-percent types that pay all those taxes — but we do have $180 billion to fund these reckless, worthless, market-destroying organizations.
Here’s a blueprint to burn down Fannie Mae and Freddie Mac:
1. Over 3-6 months auction the portfolio, the loans they own, at whatever the private market is willing to pay. Allow people to “buy” their houses out of the pool at auction value plus a small administrative fee, and the rest go to private investors. Leave the guarantees intact since they’re contractual obligations. If people scream this is “illegal,” that it’s some type of taking, then just stop funding them, call Fannie and Freddie’s own loans when they miss a payment, and allow a bankruptcy judge to do what the Constitution contemplates should be done to bankrupt organizations. Since Fannie and Freddie executives advocate for fast foreclosures I’m sure they’ll be enthusiastic at their own organizations quick liquidation; they can quickly pack and leave, with no severance.
2. Create a new organization to continue the guarantees, albeit on a ramp-down period of 5-8 years until the private market can find it’s footing. That is, for the first 48 months the guarantee program will continue as-is, though with first-loss provisions for originators, then over the next 36 months the maximum volume of guarantees would be reduced by 1/36th of the volume from the first 48 months. Then .. they’re gone; nothing but a bad memory of failed social experiment that caused immeasurable suffering.
That’s it. Loans will be held by private organizations who have shown they have a substantially lower 12-month re-default rate, who are willing to write down principal when they realize it is in their bests interests, and who — while they’re far from perfect — are a lot better than the GSE’s.
Don’t leave them around to “create standards” for new technical infrastructure, their latest gambit. That’s best left to a consortia of private businesses. Plenty of people, myself included, would love to compete for this work by creating private businesses that will do this more competently and even more transparently than the GSE’s, since we’re not exempt from disclosure laws and have to answer to market forces.
With this latest move the GSE’s have set the stage for their own well-deserved execution. Now the question is whether our legislators will have the backbone to do what’s needed. Any legislator, from either party, that won’t cooperate deserves to lose their jobs this fall.
State of the American Economy: RepoGames, by Spike TV
Like many middle-aged men working on financial analysis I woke up in the middle of the night last night with heartburn. While waiting for a Tums or three to work their magic I turned on the TV and discovered a television reality show that could be as defining to our times as “Linda Green” was to foreclosure fraud, RepoGames by Spike TV.
Summarizing, a repo-man shows up with his tow-truck driver to repossess cars. Debtors are called out and asked if they’d rather play a game; answer three out of five questions correctly and the show pays off the car loan. Answer incorrectly and the human gorilla, who goes by the name Tom DeTone, screams at the tow-truck driver to take the car away. For each correct or incorrect answer they raise or lower the car on the tow truck.
Even though I work with a lot of reporters, including those who work in television, I’ll admit that I don’t normally watch TV. But it’s impossible for RepoGames to not catch one’s attention.
RepoGames is easy: the tow-truck driver and a bunch of people with video cameras show up to repossess a car. The thug in charge makes it clear this is a “legal” repossession. Ignoring that he’s ignoring a sizable portion of the Fair Debt Collection Practices Act, he explains to debtors he will take their car or they can try to answer three of five questions; answer three correctly and the show will pay off the car.
It’s not clear if “pay off” means pay the alleged arrears or the entire loan but at this point nobody, including your humble author, really cares; debtors always go for the game show.
Questions are mind-numbingly easy, to the point I wish I had a car loan so that I could try to qualify to default and have this show pay it off. Remember the show “Let’s make a deal?” where the top prize, which almost nobody won, was a car? Well, at 2-3AM, on this show, lots of people win cars. But more than a few lose them too — the family jalopy — with lots of cameras filming.
After each wrong answer the primary thug screams to the tow-truck driver “raise it up,” and he obliges by raising the to-be repossessed car. One has to wonder why they don’t know the answers to these questions, if if that might be the reason the repo-man is there.
I didn’t watch for long but RepoGames is one of those TV shows where a little bit is enough. One man, trying to save what looked like an old beater, pulled out a stack of $100 dollar bills and offered to repay whatever he owed. ”Here’s $5,000; leave me be.” Wearing sunglasses, at night, he answered “a little bit of this and a little bit of that .. whatever” when asked what he did for a living.
As the repo-man faced the camera and sais “that’s one shady character,” I’ll admit I agreed, especially since it looked like his stack of money was more than enough to buy a car just like the one being repossessed. In any event, the shady character, with the help of his girlfriend (understatement – she answered every question), “won” back his car. Who’d have thought being able to answer the question “What happens in ____, stays in _____” would win a free car?
The mother of seven children, who had to take them out of the van being repossessed, wasn’t so lucky. She missed two questions then went on streak by answering “Banks are closed on Dec. 25th in honor of who’s birthday?” correctly. But when she blew the fifth question off went her car, leaving her to question how she’s transport her children and me to wonder if we wouldn’t better off doing like the European’s and broadcasting soft porn, or nothing, in the middle of the night.
Any heartburn I had from whatever I’d eaten went away replaced by a different form, questioning how the world’s most prosperous country could have so quickly devolved into this type of dreck. Worse, even though I’m an outspoken consumer advocate focused on reforming predatory lending, I found it a little bit fun.
Like most in the collection industry, at least until they find their own job outsourced to India, “DeTome” is self-righteous about his work. He never stops to question whether the repossession might be the result of a double-digit interest rate, predatory lending, or stupidity by entering into auto finance loans with terms that used to be considered usurious until we all but eliminated usury laws (thanks, South Dakota).
DeTome follows the meme there’s nothing unusual about the economy and writes on Spike’s website:
God, we’re bad, as Americans. If you don’t make your payments, you have to expect that we’re going to come to your door and repossess your car. People need to live within their means. But we’re Americans, and we don’t do that. We want nicer things, and we live outside our means. People don’t really realize how badly they’re going to damage their credit rating for the next five to seven years. In high school, we need to learn about finance and not cooking or weightlifting. – Tom DeTone
Yep .. we’re bad. For treating one another like cattle and chattel, while sacrificing our humanity for cheap thrills.
Congratulations To My Close Friend Lynn Szymoniak, Toughest Anti-Fraud Attorney In the US
http://www.reuters.com/article/2012/03/12/us-usa-housing-settlement-idUSBRE82B1A020120312
As part of the foreclosure fraud settlement reached with the fifty state attorney general’s one name stands out, mainly because it’s a woman I’ve stood with for years working on these issues, my close and dear friend Lynn Szymoniak who will receive a well deserved $18 million as a lead whistle-blower.
I know the settlement has taken its lumps but now that it’s out there’s one point especially that needs to be highlighted.
First, a link to the settlement. Each of the Big Four banks has the same verbiage, but I’m focusing on Bank of America. The language is the same but they’ve been the worst, plus it gives me a chance to make fun of Brian Moynihan’s “hand-to-hand” combat comment. [Note to Brian: next time you decide to pick a fight in a rowdy bar think twice about how it might end up.]
Besides the long (long, long, long) list of exclusions this one stands out the most:
“For avoidance of doubt, this Release shall not preclude a claim by any private individual or entity for harm to that private individual or entity, except for a claim asserted by a private individual or entity under 31 U.S.C. § 3730(b) that is subject to this Release and not excluded by Paragraph 11.” Appendix F – Pg. 40.
So, what does that mean exactly? It means that except for whistle-blower claims already settled servicers remain fair game .. for everybody. Securities fraud claims? They’re still there. Criminal liability? Still on the table. Clouded titles? Who knows if they’ll win but anybody who wants to win the next $18 million has the right to try.
I know the settlement terms have been described as “broad,” and they look broad at first blush, but nobody pointed out that the exclusion list looks just as broad. This settlement is about government entities settling on very specific terms, terms so narrow when the exclusions are factored in that it’s not clear whether banks signed this as a release, or whether they signed it as a promise to basically move on and start behaving.
I still haven’t hard Moynihan retract the hand-to-hand combat phase and finally say “OK – that was ill advised and didn’t work out so well,” then admit that his bank has behaved recklessly, irresponsibly, and shamefully, then express a genuine desire to grow up followed through with action.
There’s some I know are hopeless. Infamous crook David J. Stern still has a license in good standing to practice law in FL thanks to the FL Bar; might be time for a ballot initiative to strip them of their disciplinary authority. Palm Beach County Judge Meenu Sasser, who pushed the disgraceful rocket-docket while proclaiming “I don’t see any widespread problem” documents (oh yeah, and while sitting on an enormous amount of bank stock) can now see how respectable judges react to the cesspool Stern and his ilk filled her courtroom with. FL Rep. Kathleen Passidomo — who tried to fast-track the fraud through the court system — is unlikely to say she was wrong (the same Rep. Passidomo who suggested an 11 year-old asked to be gang-raped because she was dressed like a “prostitute”).
But maybe there’s hope the banks themselves will realize it’s in their own best interest to start working in good faith.
Bankers are tired. Investors want the private MBS market to come to life again, and there’s no reason that it shouldn’t except for uncertainty on the part of other investors that they won’t be defrauded .. again. But now it’s been made clear there is a path to accountability; the settlement left no ambiguity that investor lawsuits are wide open.
Responsible banks run by responsible bankers should welcome this settlement, but also those lawsuits, because they provide a path to a return of confidence that the rule of law, and the fundamentals of the free market, rule the US. In much the same way that the first step to fixing an abandoned home is to rid it of rodents smart, responsible, respectable bankers have to realize ridding the system of human rodents is good for the banking system, good for the economy, and ultimately great for them.
I can’t stress enough how much I am not “anti-bank,” but I am anti-fraud. Real business people can’t compete with fraudsters because it’s impossible to beat Madoff’s returns. They should use this settlement as an excuse to step out of the woodwork and start to scream as loud or louder than Lynn has been over these past years.
For the sake of the economy, the banking system, and the families — and no, when you’ve done this for a few years it becomes impossible to forget the families, even when mired in financial and legal data — let’s hope banks take the opportunity they’ve been given to change their ways and clean up their mess.
Common Financial Crisis Myths, Part I
Myth: The financial crisis was caused by irresponsible borrowers lying to banks.
Fact: On stated income loans, those without documents, banks either knew when borrowers were lying to them — and sometimes outright prodding them to do so — or could have easily found out with minimal due diligence. Loan originators did not want to find out though, because they planned to quickly flip the loan to somebody else in much the same way condo-flippers flipped condo. That is, originators — those who create loans — wanted to close them as much or more than borrowers. In any event, many bubble-era loans were full documentation loans.
Myth: Borrowers made out much better than banks when the bubble was rising.
Fact: Banks used the notes, the loans, as collateral for trading leverage. For every dollar a person borrowed a bank could borrow up to $40 for trading activities. This is called leverage, and excessive leverage by banks is the root cause of the financial crisis. Leverage tore down Bear-Stearns within weeks, went on to destroy Lehman, finished Merrill Lynch .. just like a family that borrows 40 times their annual earnings excessive leverage toppled banks.
Myth: Foreclosures are the result of free market forces.
Fact: But-for the bailouts people’s loans, every loan of every type, would have been sold for pennies on the dollar to new banks willing to renegotiate at steep discounts. Mortgages would have been purchased for 3-9 cents on the dollar, performing credit-card debt for a penny or two on the dollar, sub-prime dreck for virtually nothing. If a banker buys a $500K mortgage for $50K they can renegotiate it to $100K and make a mint of money. Everybody wins .. except for the bank that voluntarily and knowingly agreed to fund the loan, and who suffered the genuine free market repercussion of insolvency as a predictable result.
Maybe Myth: Without TARP we would have faced another Great Depression.
Fact: This isn’t clear, though it’s difficult to criticize those unwilling to gamble the world economy on theory. During the Great Depression there was no FDIC so when a bank failed people lost their money. This loss of middle-class money is what caused the Depression, because the middle-class had no money to spend on goods and services. But that was then; now middle-class accounts are protected by the FDIC. If debt was reduced through fire-sale auctions many big business would have failed, which would have been bad for India and China, where they outsourced jobs to at a frantic pace, but maybe not so much for the US, where small business has created most jobs. Much lower overall debt, thanks to the fire-sale auctions, combined with less competition from now-bankrupt large competitors may actually have been good for the economy. We’ll never know.
Myth: The majority of people foreclosed on are deadbeats, with sub-prime loans, who bought more home than they could afford.
Fact: The majority in default, by dollar volume, is by far prime loans, not sub-prime loans. These are largely people who fell on hard times, saw the value of their houses drop, saw their incomes drop, but did not see the cost of their loans drop due to non-market forces. There were (and remain) some condo-flippers, people using liar-loans to buy palaces, and other malarkey. There were also a great many dishonest mortgage brokers and crooked appraisers.
Myth: Foreclosures increase home prices.
Fact: I’ve debunked this more times than I can count. More inventory does not increase house prices. Recent house price gains are the result of less inventory, sometimes because of foreclosure pipelines slowed by Robogate, sometimes voluntarily on the part of the banks, but in any event fewer foreclosures means stable or higher home prices. That doesn’t mean we don’t have to find a floor for the housing market — we do — but we don’t have to view foreclosure as the only option available to make that happen.
Myth: People cheat; banks don’t.
Fact: Banks regularly cheat. When a person cheats a bank they go to prison; when a bank cheats a person the banker gets a bonus.
Myth: It’s a good idea to pay your second mortgage but default on your first if you cannot afford to pay both.
Fact: This is absolutely untrue. Your bank may say so but don’t listen (see the prior point about banks cheating). Except for first loans for a house you live in any loan above the value of a house can be discharged in bankruptcy, including second loans. Banks know that, and this gives borrowers much more leverage to renegotiate than banks will ever admit. Repeating: never, ever pay a second lien loan before paying your first.
Myth: Fight hard enough, buy a book, hire a non-lawyer “modification specialist,” and you’ll get a free house.
Fact: No, you’ll get kicked to the curb. Hire a high-quality, ethical foreclosure defense lawyer and they might win a modification, but free houses are extremely rare. Even when awarded, which is virtually never, banks can still often come back and demand some money for them. Your odds of ending up with a free house are probably better if you use your house payment to buy lottery tickets than arguing many of the theories I’ve heard (the lottery ticket quip is sarcasm: don’t try that either). Hire a licensed, ethical, and competent lawyer if you can’t afford your mortgage payment. Trying to negotiate with the bank yourself is usually an awful idea; call center workers tend to be sociopath like liars. Unless you’re a lawyer, and even then except in unusual circumstances, it’s usually best left to other lawyers.
Myth: The US is doomed; we’ll never dig out of this mess.
Fact: I know it seems awful but we’re not doomed. We’ll be OK, but it will take an honest dialog, hard work by public policy makers and bankers, and time. Right now time is the only one of those that seems to be substantively happening.
