Archives For Credit Crisis

I was reading about Ray Lewis last night and one of the articles I read about him was in a PDF version of a magazine. Paging through the magazine, I came across an add for a mortgage broker who offered the following:

Advocate Mortgage Capital


This was from a magazine published in 2007.

I know it was bad but looking back at things through this ad made me realize just how silly things had become.

Irronically, this bussiness’ website URL came up dead.

Overall, I think Allan Sloan does a nice job with this short piece on myths regarding the credit crisis.

The myths:

Myth No. 1: The government should have done nothing.

Myth No. 2: The government bailed out shareholders.

Myth No. 3: The Volcker Rule will save us.

Myth No. 4: Taxpayers are off the hook for future failures.

Myth No. 5: It’s the government’s fault.

He is a little too easy on the government’s involvement in my opinion. While I don’t think the government was totally responsible, they do share in the blame. They created the incentives for companies to do what they did.

Here is a follow-up article if you’re interested.

Read this over the weekend:

Reviving Real Estate Requires Collective Action

What does he mean by “collective action”? Well, here’s one idea, which I find scary:

ROBERT C. HOCKETT, a Cornell University law professor, has outlined another approach, which uses the principle of eminent domain, to solve this collective action problem. Eminent domain has been part of Western legal tradition for centuries. The principle allows governments to seize property, with fair compensation to owners, when a case can be made that such seizure serves the public interest.

Traditionally, we think of eminent domain law as applying to land and buildings. For example, a government can use eminent domain to seize real estate along a proposed new highway route so the highway can be built in a nice straight line. It would be absurd to expect the government to bargain with each property owner to buy a strip of land along the proposed highway route and to have to redirect the highway around a farm whose owner refused to sell. That is common sense.

But eminent domain law needn’t be restricted to real estate. It could be applied to mortgages as well. Governments could seize underwater mortgages, paying investors fair market value for them. This is common sense too. The true fair market value for these mortgages is arguably far below their face value, given the likelihood of default, with its attendant costs.

Professor Hockett argues that a government, whether federal, state or local, can start doing just this right now, using large databases of information about mortgage pools and homeowner credit scores. After a market analysis, it seizes the mortgages. Then it can pay them off at fair value, or a little over that, with money from new investors, issuing new mortgages with smaller balances to the homeowners. Taxpayers are not involved, and no government deficit is incurred. Since homeowners are no longer underwater and have good credit, they are unlikely to default, so the new investors can expect to be repaid.

The original mortgage holders, the investors in the new mortgages, the homeowners and the nation as a whole will generally be better off. There will surely be some who may not agree, like the holdout farmer opposing the highway, but eminent domain ought to be able to push ahead anyway.

So if eminent domain can move from land and buildings to mortgages, where else could it move to? I don’t know about you guys but this scares me.

But, beyond that, how would such a strategy work? Seems like a confusing mess once you consider the fact that we don’t know who owns the mortgages in the first place. And, who are these new investors going to be?

I have said it many times but we should have just let the people’s homes go into foreclosure and let the market it work it out instead of all these “fixes” to try to get people to stay in homes they can’t afford. Let’s get these people out of their homes, let the prices fall to a point where people will buy them again and start over that way. Of course, my way won’t get any votes for politicians.

This makes me ill:

Bank of America Offers Principal Reductions to 200,000 Homeowners

A select group of struggling mortgage borrowers are about to get an offer that sounds too good to be true. Executives at Bank of America say they will begin mailing 200,000 letters offering certain customers mortgage principal reduction.

…eligible borrowers could get as much as $150,000 knocked off the balance of their mortgages. It is all part of the $25 billion settlement reached this year between federal and state agencies and the nation’s five largest mortgage servicers over fraudulent foreclosure document processing (so-called “robo-signing”).

Responsible people get nothing.

Regardless, I’m ready to get this stuff behind us.

More on the Housing Settlement

February 10, 2012

According to this morning’s WSJ, banks have reached an agreement over alleged foreclosure abuses (the WSJ’s wording). The settlement is for $25 billion. Details aren’t hammered out but in general, it will…

• Provide $17 billion to borrowers at risk of foreclosure.

• Offer reductions in loan principal and other assistance to qualifying homeowners.

• Includes a provision that will let some homeowners who are current on payments refinance mortgages even though they owe more than their homes are worth.

Oh, and there’s this…

In addition, the deal will provide cash payments to other borrowers who went through foreclosure during the past four years. These people will be eligible to receive around $1,500 to $2,000.

Those of us who were RESPONSIBLE get nothing.


December 28, 2011

One thing I have learned over the years is that every decision has consequences. If I choose to spend my entire savings on a new car and then the air conditioner breaks, I have to live with the consequence of spending all my savings on the new car and will have to figure out a way to pay to fix my air conditioner. Unfortunately, those in elected office don’t seem to face the same consequences for their decisions.

Case in point: HUD quotas and government-sponsored agencies (GSEs). HUD quotas and GSEs drove the housing crisis. From The Financial Crisis on Trial (WSJ):

For the first time in a government report, the complaint has made it clear that the two government-sponsored enterprises (GSEs) played a major role in creating the demand for low-quality mortgages before the 2008 financial crisis. More importantly, the SEC is saying that Fannie and Freddie—the largest buyers and securitizers of subprime and other low-quality mortgages—hid the size of their purchases from the market. Through these alleged acts of securities fraud, they did not just mislead investors; they deprived analysts, risk managers, rating agencies and even financial regulators of vital data about market risks that could have prevented the crisis.


The GSEs began acquiring large numbers of subprime and other low-quality loans in the mid-1990s, as they tried to comply with the government’s affordable-housing requirements—quotas for mortgage purchases imposed by the Department of Housing and Urban Development (HUD) under legislation enacted by Congress in 1992.

These quotas initially required that, of all the loans bought by Fannie and Freddie in any year, 30% had to have been made to borrowers earning at or below the median income in their communities. The quotas, however, would increase—they rose to 40% in 1996, 50% in 2000, and 55% in 2007. HUD also added and raised quotas for “special affordable” loans that were to be made to borrowers with low or very low incomes (in some cases a mere 60% of the area median income).

In other words, the government essentially created the demand for subprime mortgages and then when everything imploded, they hauled in all the evil bankers for questioning. This is typical.

Please note that I am not taking the bankers’ side on this. I am not saying that bankers and loan originators were not greedy. What I am saying is that HUD’s desire for affordable housing was the match that lit the fire.

About 4 million homeowners who may have been improperly foreclosed upon in 2009 and 2010 are getting an opportunity to have their cases reviewed. Whether they will be reimbursed is up to the same lenders who are accused of moving too swiftly to seize their homes.

The Office of the Comptroller of the Currency said Monday that mortgage services will begin sending out letters this month that ask borrowers if they want their case reviewed.

The nation’s 14 largest mortgage servicers — including Citibank, Bank of America, JPMorgan Chase and Wells Fargo — were ordered to offer to review cases after the government found that some rushed the foreclosure process without carefully reviewing documents. Source: 4 million foreclosures subject to review

FOUR MILLION! That’s a large number. Piecing together stats for 2008 – 2010 via Google search, I was able to come up with roughly 10,000,000 foreclosure filings over those three years (Sources: 2008, 2009, and 2010). So, 4,000,000 reviews implies roughly 40% of all foreclosure filings. That’s a lot! How much is this going to cost? Who’s going to pay?