Life takes us in many strange directions and wonderful discoveries. It never turns out the way we thought it would.
Thursday, September 30, 2010
Wednesday, September 29, 2010
Tuesday, September 28, 2010
My Giant Victories For 2010
"I hear the croaking of despair, the dark predictions of the weak; I find myself pursued by care; it matters not what ends I seek. My victories are small and few it matters not how hard I strive. But each day the fight begins anew and fighting keeps my hopes alive." My great victories this year were saving a friend's house from foreclosure and mine from foreclosure. Both victories were against all odds.
Monday, September 27, 2010
Bank Of America Stands Out For Poor HAMP Performance
Bank Of America Stands Out For Poor HAMP Performance
Bank Of America Stands Out For Poor HAMP Performance
First Posted: 09-27-10 12:30 PM | Updated: 09-27-10 12:30 PM
Bank of America stands out among the biggest mortgage servicers for an exceptionally poor performance under the Obama administration's Home Affordable Modification Program, according to data recently released by the government.
The eight largest servicers have offered an alternative mortgage modification to 44.5 percent of homeowners whose HAMP modifications have been canceled, but Bank of America has offered alternate mods to only 24 percent of the 148,129 homeowners whose trial modifications the bank canceled. For homeowners denied trial modifications, 31.3 percent have been offered alternate modifications by the Big Eight. Bank of America has offered alternate mods to just 11 percent of these folks.
"Bank of America seems to be stubbornly refusing to go along with the program," said Valparaiso University Law School professor Alan White, who first flagged Bank of America's standout performance in a Public Citizen blog post.
"BofA has also mastered the art of false hopes," wrote White. "It has converted only 26% of trial modifications to permanent ones, while servicers as a whole have achieved a rate of over 50% (still terrible, but it's all relative.) Over half of BofA's trial modifications are more than six months old, despite the fact that they are supposed to convert to permanent or be canceled after three months."
Bank of America did not immediately respond to a request for comment from HuffPost, but every month the bank puts out a press release touting its mortgage modification progress the day before the Treasury Department puts out its HAMP data. Bank of America boasted last week of its "industry-leading 79,859 completed modifications through the government's Home Affordable Modification Program." It has more permanent modifications than any other servicer, but that may be because the bank has an eligible pool of delinquent mortgages more than twice the size of every other servicer's (except Chase, which services 201,771 mortgages to BofA's 383,482).
The goal of HAMP, under which the government gives servicers $1,000 incentive payments to give eligible homeowners a five-year "permanent" modification after a three-month trial period, was to "enable as many as three to four million homeowners to modify the terms of their mortgages to avoid foreclosure." Treasury Department officials now shy from that goal as more people have been kicked out of the program than have been given permanent mods.
The Treasury Department has not fined a servicer for noncompliance with HAMP or even formalized a penalty scheme. The Government Accountability Office reported in June that Treasury's lack of penalties for bad servicers "risks inconsistent treatment of servicer noncompliance and lacks transparency with respect to the severity of the steps it will take for specific types of noncompliance."
Bank Of America Stands Out For Poor HAMP Performance
First Posted: 09-27-10 12:30 PM | Updated: 09-27-10 12:30 PM
Bank of America stands out among the biggest mortgage servicers for an exceptionally poor performance under the Obama administration's Home Affordable Modification Program, according to data recently released by the government.
The eight largest servicers have offered an alternative mortgage modification to 44.5 percent of homeowners whose HAMP modifications have been canceled, but Bank of America has offered alternate mods to only 24 percent of the 148,129 homeowners whose trial modifications the bank canceled. For homeowners denied trial modifications, 31.3 percent have been offered alternate modifications by the Big Eight. Bank of America has offered alternate mods to just 11 percent of these folks.
"Bank of America seems to be stubbornly refusing to go along with the program," said Valparaiso University Law School professor Alan White, who first flagged Bank of America's standout performance in a Public Citizen blog post.
"BofA has also mastered the art of false hopes," wrote White. "It has converted only 26% of trial modifications to permanent ones, while servicers as a whole have achieved a rate of over 50% (still terrible, but it's all relative.) Over half of BofA's trial modifications are more than six months old, despite the fact that they are supposed to convert to permanent or be canceled after three months."
Bank of America did not immediately respond to a request for comment from HuffPost, but every month the bank puts out a press release touting its mortgage modification progress the day before the Treasury Department puts out its HAMP data. Bank of America boasted last week of its "industry-leading 79,859 completed modifications through the government's Home Affordable Modification Program." It has more permanent modifications than any other servicer, but that may be because the bank has an eligible pool of delinquent mortgages more than twice the size of every other servicer's (except Chase, which services 201,771 mortgages to BofA's 383,482).
The goal of HAMP, under which the government gives servicers $1,000 incentive payments to give eligible homeowners a five-year "permanent" modification after a three-month trial period, was to "enable as many as three to four million homeowners to modify the terms of their mortgages to avoid foreclosure." Treasury Department officials now shy from that goal as more people have been kicked out of the program than have been given permanent mods.
The Treasury Department has not fined a servicer for noncompliance with HAMP or even formalized a penalty scheme. The Government Accountability Office reported in June that Treasury's lack of penalties for bad servicers "risks inconsistent treatment of servicer noncompliance and lacks transparency with respect to the severity of the steps it will take for specific types of noncompliance."
Sunday, September 26, 2010
Jack's Pearl Of Wisdom For Sunday Morning
http://letterdash.com/Tatamkulu/jacks-pearl-of-wisdom-for-sunday-morning-26-Sep-2010
Please copy and paste to your browser!
Please copy and paste to your browser!
Saturday, September 25, 2010
$2.7 Trillion In Lost Income Due To Bush Tax Cuts
So How Did the Bush Tax Cuts Work Out for the Economy?
David Cay Johnston | Sep. 24, 2010 08:02 PM EDT
The 2008 income tax data are now in, so we can assess the fulfillment of the Republican promise that tax cuts would produce widespread prosperity by looking at all the years of the George W. Bush presidency.
Just as they did in 2000, the Republicans are running this year on an economic platform of tax cuts, especially making the tax cuts permanent for the richest among us. So how did the tax cuts work out? My analysis of the new data, with all figures in 2008 dollars:
Total income was $2.74 trillion less during the eight Bush years than if incomes had stayed at 2000 levels.
That much additional income would have more than made up for the lack of demand that keeps us mired in the Great Recession. That would mean no need for a stimulus, although it would not have affected the last administration's interfering with market capitalism by bailing out irresponsible Wall Streeters instead of letting the market determine their fortunes.
In only two years was total income up, but even when those years are combined they exceed the declines in only one of the other six years.
Even if we limit the analysis by starting in 2003, when the dividend and capital gains tax cuts began, through the peak year of 2007, the result is still less income than at the 2000 level. Total income was down $951 billion during those four years.
Average incomes fell. Average taxpayer income was down $3,512, or 5.7 percent, in 2008 compared with 2000, President Bush's own benchmark year for his promises of prosperity through tax cuts.
Had incomes stayed at 2000 levels, the average taxpayer would have earned almost $21,000 more over those eight years. That's almost $50 per week.
The changes in average and total incomes are detailed on the next page in Table 1, the first of four tables analyzing the whole data.
Now that we have looked at the whole eight-year period, what does the new data show about 2008, the worst recession ear since the 1930s, show when compared to the peak year of 2007, when the average taxpayer made $63,096, which was 2.5 percent more than in 2000.
In only two of the eight Bush years, 2006 and 2007, were average incomes higher than in 2000, but the gains were highly concentrated at the top. Of the total increase in income in 2007 over that in 2005, nearly 30 percent went to taxpayers who made $1 million or more.
Now surely some will say that it is not fair to saddle George W. Bush and those who supported his tax cuts with the economic figures from 2001 and 2008. The first would be on the theory that President Clinton should be charged for that year (just as Bush should be charged with 2009, the first year of the Obama administration). The second is on less solid ground, but let's consider it for the sake of argument.
Just measuring the second through seventh years we find that total income was still nearly $2 trillion lower than if 2000 level income continued. Stacking the deck in President George W. Bush's favor does not change the awful performance or even soften it much.
The tax cuts cost $1.8 trillion in the first eight years, according to an analysis by the Tax Policy Center, whose reliability the last administration went out of its way to praise. Those cuts were heavily weighted toward the people candidate George W. Bush famously called "haves and the have-mores . . . some people call you the elite. I call you my base."
In the two years since 2008, the cuts' total cost grew to $2.3 trillion, the Tax Policy Center estimated.
One of every eight dollars of the tax cuts went to the 1 in 1,000 taxpayers in the top tenth of 1 percent, the annual threshold for which was in the $2 million range throughout the last administration. The only other large beneficiary was parents with children under 17 who make enough to pay income taxes, thanks to the $1,000-per-child tax credit Republicans started championing in the mid-1990s.
Now let's look at wages, the source of most people's income. In 2008 the average taxpayer made $58,000. That was $5,100 less than in 2007, a decline of 8.1 percent.
The number of taxpayers reporting any wages in 2008 was 1.26 million fewer than in 2007, a scary figure when you consider that most people do not expect to be out of work for an entire year and that the population grew by more than a percentage point. In August 42 percent of the unemployed -- 6.2 million people -- had been out of work for 27 weeks or more, the Bureau of Labor Statistics said. The average for all jobless workers was 33.6 weeks of unemployment, the equivalent of going from New Year's Day through August 23 without a paycheck.
The number of taxpayers with incomes below $100,000 with any wage income fell in 2008 by 1.8 million. Because married couples file many tax returns, this means more than 2 million people who worked in 2007 earned no wages in 2008.
Total wages in 2008 fell by nearly 4 percent, compared with a year earlier, for the 87 percent of Americans whose total income was less than $100,000. Since 2000, population grew more than wages.
Those reporting negative incomes quadrupled from less than 600,000 in 2000 to nearly 2.5 million in 2008. Their losses worsened slightly from -$64,000 on average to -$66,000.
The number of workers earning $500,000 or more in total income also fell, by just under 100,000 (or nearly 12 percent), but their average wage of $718,000 is still more than the average American earns in a decade at 2008 levels.
The number of people reporting incomes of $200,000 or more but legally paying no federal income taxes skyrocketed in the second Bush term. A decade ago it was fewer than 1,500 taxpayers; in 2000 it was about 2,300. This high-income, tax-free group jumped to more than 11,000 in 2007 and then doubled in 2008 to more than 22,000.
In 2008 nearly 1 in every 200 high-income taxpayers paid no federal income tax, up from about 1 in 1,500 in 1998.
The share of high incomes that were untaxed increased more than sevenfold to one dollar of every $166.
The Statistics of Income data on tax-free, high incomes severely understate economic reality because they exclude deferral accounts, including those of hedge fund managers with billion-dollar incomes who can legally report no current income and borrow against their untaxed gains to live tax free.
Table 1. 2008 Average Incomes Fell Well Below 2000 Level
The one bright spot in the SOI data at Table 1.4 was that the number of people making $100,000 to $200,000 grew significantly between 2007 and 2008. Their ranks increased by 393,465, or 3 percent, to more than 13.8 million taxpayers.
This truly is good news, because most of the increase had to be people who worked their way up into six-figure incomes from 2007 to 2008.
We know this because fewer than 160,000 taxpayers fell out of the $200,000-and-up income groups. Even if we assume that every one of them fell into the $100,000-$200,000 class, that still leaves 233,000 taxpayers who joined this income group. These 233,000 taxpayers must be people who increased their incomes enough to get them above the $100,000 line. And we know that they did it mostly through becoming more valuable workers, because this group relies on paychecks for more than 77 percent of its income.
But despite that one sliver of good news about low six-figure incomes, the data show overwhelmingly that the Republican-sponsored tax cuts damaged our nation.
Examining performance against the promises, what do we find? Overwhelming evidence that the tax cuts of 2001 and 2003 made us much worse off.
Table 2. More Taxpayers, Less Revenue
Ignore the cynics who say the Republican leaders on Capitol Hill, in Wasilla, and on the airwaves care only about the rich. I don't believe that. I think they are captive to economic theories few of them understand and that are simplistic in the extreme. I take them at their word, that they truly believe their policies will produce broad benefits for all, but accepting that does not diminish the fact that the policies these Republicans promote also produce massive tax savings for the superrich who finance their campaigns.
The question to ask is whether their policies worked as promised. Have they even come close? Where is the prosperity -- and where was it in the Bush years, when massive increases in both military and discretionary spending provided a chronic stimulus to the economy?
Table 3. 2007 to 2008: Fewer Jobs, Less Money (Mostly)
The hard, empirical facts:
The tax cuts did not spur investment. Job growth in the George W. Bush years was one-seventh that of the Clinton years. Nixon and Ford did better than Bush on jobs. Wages fell during the last administration. Average incomes fell. The number of Americans in poverty, as officially measured, hit a 16-year high last year of 43.6 million, though a National Academy of Sciences study says that the real poverty figure is closer to 51 million. Food banks are swamped. Foreclosure signs are everywhere. Americans and their governments are drowning in debt. And at the nexus of tax and healthcare, Republican ideas perpetuate a cruel and immoral system that rations healthcare -- while consuming every sixth dollar in the economy and making businesses, especially small businesses, less efficient and less profitable.
This is economic madness. It is policy divorced from empirical evidence. It is insanity because the policies are illusory and delusional. The evidence is in, and it shows beyond a shadow of a reasonable doubt that the 2001 and 2003 tax cuts failed to achieve the promised goals.
So why in the world is anyone giving any credence to the insistence by Republican leaders that tax cuts, more tax cuts, and deeper tax cuts are the remedy to our economic woes? Why are they not laughingstocks? It is one thing for Fox News to treat these policies as successful, but what of the rest of what Sarah Palin calls with some justification the "lamestream media," who treat these policies as worthy ideas?
The Republican leadership is like the doctors who believed bleeding cured the sick. When physicians bled George Washington, he got worse, so they increased the treatment until they bled him to death. Our government, the basis of our freedoms, is spewing red ink, and the Republican solution is to spill ever more.
Those who ignore evidence and pledge blind faith in policy based on ideological fantasy are little different from the clerics who made Galileo Galilei confess that the sun revolves around the earth. The Capitol Hill and media Republicans differ only in not threatening death to those who deny their dogma.
How much more evidence do we need that we made terrible and costly mistakes in 2001 and 2003?
Figure 1. High-Income Paying Zero Tax 1998-2008
The number of individual income tax returns showing adjusted gross income of $200,000 or more, but no income tax liability, has been rising rapidly in recent years.
Table 4. 2008: Fewer Jobs, Lower Pay
(With Exceptions in Bold)
Comments (3)
Warren Buffett, billionaire, pays a total tax rate (federal, state & local) of
0.2% of his income and investment gains. A typical single person earning a
minimum wage pays taxes amounting to 22% of her wages, a 100-fold higher rate
than Mr. Buffett’s.
The top 1% in the US have gone from owning 22% to 40% of the nation's wealth in
the last thirty years. This is largely due to the tax cuts for the wealthy
investor class, started under Reagan, continued under Bush. They were supposed
to encourage investment and strengthen the economy. Since then, the average
annual GDP growth dropped by one-quarter.
The favored tax treatment for investments and the wealth concentration that
resulted leads to the demand for investments exceeding the supply of worthy
investments ... (Econ 101) ... Investment bubbles ... Recessions ... All but
the wealthiest are at risk of losing their jobs, homes, retirement savings.
Buffett himself says his taxes are far to low. Bill Collins, a millionaire,
writes: "Those of us who have the greatest ability to pay are not being asked
to. I am not keen on being part of the freeloader class."
For more, including a proposal for comprehensive tax-reform that would have
everyone pay their fair share, cut middle class taxes by thousands a year, cut
the deficit, and fix the economy by balancing the tax incentives for investment
and work see http://fairsharetaxes.org/
Posted by Pete Gemsbock on Sep. 25, 2010 at 09:52 AM
"when compared to the peak year of 2007, when the average taxpayer made
$63,096, which was 2.5 percent more than in 2000."
I thought the average salary within the US is around $30,000. For household
incomes it was around $60,000 in 2009-10.
I'm not an economist, but did you mean average household income?
Posted by Lunarstudio Renderings on Sep. 25, 2010 at 09:54 AM
So the money drained from the US economy by depending on foreign manufactured
cars, electronics and other consumer goods and the dependence on imported
energy instead of domestic supplies had no effect on incomes?
It seems to me that lack of real production rather than juggling paper in
Washington and New York is the cause of the drop in incomes.
Posted by Mike Williams on Sep. 25, 2010 at 10:09 AM
Comment
David Cay Johnston | Sep. 24, 2010 08:02 PM EDT
The 2008 income tax data are now in, so we can assess the fulfillment of the Republican promise that tax cuts would produce widespread prosperity by looking at all the years of the George W. Bush presidency.
Just as they did in 2000, the Republicans are running this year on an economic platform of tax cuts, especially making the tax cuts permanent for the richest among us. So how did the tax cuts work out? My analysis of the new data, with all figures in 2008 dollars:
Total income was $2.74 trillion less during the eight Bush years than if incomes had stayed at 2000 levels.
That much additional income would have more than made up for the lack of demand that keeps us mired in the Great Recession. That would mean no need for a stimulus, although it would not have affected the last administration's interfering with market capitalism by bailing out irresponsible Wall Streeters instead of letting the market determine their fortunes.
In only two years was total income up, but even when those years are combined they exceed the declines in only one of the other six years.
Even if we limit the analysis by starting in 2003, when the dividend and capital gains tax cuts began, through the peak year of 2007, the result is still less income than at the 2000 level. Total income was down $951 billion during those four years.
Average incomes fell. Average taxpayer income was down $3,512, or 5.7 percent, in 2008 compared with 2000, President Bush's own benchmark year for his promises of prosperity through tax cuts.
Had incomes stayed at 2000 levels, the average taxpayer would have earned almost $21,000 more over those eight years. That's almost $50 per week.
The changes in average and total incomes are detailed on the next page in Table 1, the first of four tables analyzing the whole data.
Now that we have looked at the whole eight-year period, what does the new data show about 2008, the worst recession ear since the 1930s, show when compared to the peak year of 2007, when the average taxpayer made $63,096, which was 2.5 percent more than in 2000.
In only two of the eight Bush years, 2006 and 2007, were average incomes higher than in 2000, but the gains were highly concentrated at the top. Of the total increase in income in 2007 over that in 2005, nearly 30 percent went to taxpayers who made $1 million or more.
Now surely some will say that it is not fair to saddle George W. Bush and those who supported his tax cuts with the economic figures from 2001 and 2008. The first would be on the theory that President Clinton should be charged for that year (just as Bush should be charged with 2009, the first year of the Obama administration). The second is on less solid ground, but let's consider it for the sake of argument.
Just measuring the second through seventh years we find that total income was still nearly $2 trillion lower than if 2000 level income continued. Stacking the deck in President George W. Bush's favor does not change the awful performance or even soften it much.
The tax cuts cost $1.8 trillion in the first eight years, according to an analysis by the Tax Policy Center, whose reliability the last administration went out of its way to praise. Those cuts were heavily weighted toward the people candidate George W. Bush famously called "haves and the have-mores . . . some people call you the elite. I call you my base."
In the two years since 2008, the cuts' total cost grew to $2.3 trillion, the Tax Policy Center estimated.
One of every eight dollars of the tax cuts went to the 1 in 1,000 taxpayers in the top tenth of 1 percent, the annual threshold for which was in the $2 million range throughout the last administration. The only other large beneficiary was parents with children under 17 who make enough to pay income taxes, thanks to the $1,000-per-child tax credit Republicans started championing in the mid-1990s.
Now let's look at wages, the source of most people's income. In 2008 the average taxpayer made $58,000. That was $5,100 less than in 2007, a decline of 8.1 percent.
The number of taxpayers reporting any wages in 2008 was 1.26 million fewer than in 2007, a scary figure when you consider that most people do not expect to be out of work for an entire year and that the population grew by more than a percentage point. In August 42 percent of the unemployed -- 6.2 million people -- had been out of work for 27 weeks or more, the Bureau of Labor Statistics said. The average for all jobless workers was 33.6 weeks of unemployment, the equivalent of going from New Year's Day through August 23 without a paycheck.
The number of taxpayers with incomes below $100,000 with any wage income fell in 2008 by 1.8 million. Because married couples file many tax returns, this means more than 2 million people who worked in 2007 earned no wages in 2008.
Total wages in 2008 fell by nearly 4 percent, compared with a year earlier, for the 87 percent of Americans whose total income was less than $100,000. Since 2000, population grew more than wages.
Those reporting negative incomes quadrupled from less than 600,000 in 2000 to nearly 2.5 million in 2008. Their losses worsened slightly from -$64,000 on average to -$66,000.
The number of workers earning $500,000 or more in total income also fell, by just under 100,000 (or nearly 12 percent), but their average wage of $718,000 is still more than the average American earns in a decade at 2008 levels.
The number of people reporting incomes of $200,000 or more but legally paying no federal income taxes skyrocketed in the second Bush term. A decade ago it was fewer than 1,500 taxpayers; in 2000 it was about 2,300. This high-income, tax-free group jumped to more than 11,000 in 2007 and then doubled in 2008 to more than 22,000.
In 2008 nearly 1 in every 200 high-income taxpayers paid no federal income tax, up from about 1 in 1,500 in 1998.
The share of high incomes that were untaxed increased more than sevenfold to one dollar of every $166.
The Statistics of Income data on tax-free, high incomes severely understate economic reality because they exclude deferral accounts, including those of hedge fund managers with billion-dollar incomes who can legally report no current income and borrow against their untaxed gains to live tax free.
Table 1. 2008 Average Incomes Fell Well Below 2000 Level
The one bright spot in the SOI data at Table 1.4 was that the number of people making $100,000 to $200,000 grew significantly between 2007 and 2008. Their ranks increased by 393,465, or 3 percent, to more than 13.8 million taxpayers.
This truly is good news, because most of the increase had to be people who worked their way up into six-figure incomes from 2007 to 2008.
We know this because fewer than 160,000 taxpayers fell out of the $200,000-and-up income groups. Even if we assume that every one of them fell into the $100,000-$200,000 class, that still leaves 233,000 taxpayers who joined this income group. These 233,000 taxpayers must be people who increased their incomes enough to get them above the $100,000 line. And we know that they did it mostly through becoming more valuable workers, because this group relies on paychecks for more than 77 percent of its income.
But despite that one sliver of good news about low six-figure incomes, the data show overwhelmingly that the Republican-sponsored tax cuts damaged our nation.
Examining performance against the promises, what do we find? Overwhelming evidence that the tax cuts of 2001 and 2003 made us much worse off.
Table 2. More Taxpayers, Less Revenue
Ignore the cynics who say the Republican leaders on Capitol Hill, in Wasilla, and on the airwaves care only about the rich. I don't believe that. I think they are captive to economic theories few of them understand and that are simplistic in the extreme. I take them at their word, that they truly believe their policies will produce broad benefits for all, but accepting that does not diminish the fact that the policies these Republicans promote also produce massive tax savings for the superrich who finance their campaigns.
The question to ask is whether their policies worked as promised. Have they even come close? Where is the prosperity -- and where was it in the Bush years, when massive increases in both military and discretionary spending provided a chronic stimulus to the economy?
Table 3. 2007 to 2008: Fewer Jobs, Less Money (Mostly)
The hard, empirical facts:
The tax cuts did not spur investment. Job growth in the George W. Bush years was one-seventh that of the Clinton years. Nixon and Ford did better than Bush on jobs. Wages fell during the last administration. Average incomes fell. The number of Americans in poverty, as officially measured, hit a 16-year high last year of 43.6 million, though a National Academy of Sciences study says that the real poverty figure is closer to 51 million. Food banks are swamped. Foreclosure signs are everywhere. Americans and their governments are drowning in debt. And at the nexus of tax and healthcare, Republican ideas perpetuate a cruel and immoral system that rations healthcare -- while consuming every sixth dollar in the economy and making businesses, especially small businesses, less efficient and less profitable.
This is economic madness. It is policy divorced from empirical evidence. It is insanity because the policies are illusory and delusional. The evidence is in, and it shows beyond a shadow of a reasonable doubt that the 2001 and 2003 tax cuts failed to achieve the promised goals.
So why in the world is anyone giving any credence to the insistence by Republican leaders that tax cuts, more tax cuts, and deeper tax cuts are the remedy to our economic woes? Why are they not laughingstocks? It is one thing for Fox News to treat these policies as successful, but what of the rest of what Sarah Palin calls with some justification the "lamestream media," who treat these policies as worthy ideas?
The Republican leadership is like the doctors who believed bleeding cured the sick. When physicians bled George Washington, he got worse, so they increased the treatment until they bled him to death. Our government, the basis of our freedoms, is spewing red ink, and the Republican solution is to spill ever more.
Those who ignore evidence and pledge blind faith in policy based on ideological fantasy are little different from the clerics who made Galileo Galilei confess that the sun revolves around the earth. The Capitol Hill and media Republicans differ only in not threatening death to those who deny their dogma.
How much more evidence do we need that we made terrible and costly mistakes in 2001 and 2003?
Figure 1. High-Income Paying Zero Tax 1998-2008
The number of individual income tax returns showing adjusted gross income of $200,000 or more, but no income tax liability, has been rising rapidly in recent years.
Table 4. 2008: Fewer Jobs, Lower Pay
(With Exceptions in Bold)
Comments (3)
Warren Buffett, billionaire, pays a total tax rate (federal, state & local) of
0.2% of his income and investment gains. A typical single person earning a
minimum wage pays taxes amounting to 22% of her wages, a 100-fold higher rate
than Mr. Buffett’s.
The top 1% in the US have gone from owning 22% to 40% of the nation's wealth in
the last thirty years. This is largely due to the tax cuts for the wealthy
investor class, started under Reagan, continued under Bush. They were supposed
to encourage investment and strengthen the economy. Since then, the average
annual GDP growth dropped by one-quarter.
The favored tax treatment for investments and the wealth concentration that
resulted leads to the demand for investments exceeding the supply of worthy
investments ... (Econ 101) ... Investment bubbles ... Recessions ... All but
the wealthiest are at risk of losing their jobs, homes, retirement savings.
Buffett himself says his taxes are far to low. Bill Collins, a millionaire,
writes: "Those of us who have the greatest ability to pay are not being asked
to. I am not keen on being part of the freeloader class."
For more, including a proposal for comprehensive tax-reform that would have
everyone pay their fair share, cut middle class taxes by thousands a year, cut
the deficit, and fix the economy by balancing the tax incentives for investment
and work see http://fairsharetaxes.org/
Posted by Pete Gemsbock on Sep. 25, 2010 at 09:52 AM
"when compared to the peak year of 2007, when the average taxpayer made
$63,096, which was 2.5 percent more than in 2000."
I thought the average salary within the US is around $30,000. For household
incomes it was around $60,000 in 2009-10.
I'm not an economist, but did you mean average household income?
Posted by Lunarstudio Renderings on Sep. 25, 2010 at 09:54 AM
So the money drained from the US economy by depending on foreign manufactured
cars, electronics and other consumer goods and the dependence on imported
energy instead of domestic supplies had no effect on incomes?
It seems to me that lack of real production rather than juggling paper in
Washington and New York is the cause of the drop in incomes.
Posted by Mike Williams on Sep. 25, 2010 at 10:09 AM
Comment
Friday, September 24, 2010
The Shape Of Warfare To Come-Israel Or The US Attack's Iran's Nuclear Program
Stuxnet worm causes worldwide alarm
By Joseph Menn and Mary Watkins
Published: September 23 2010 19:39 | Last updated: September 23 2010 19:39
No one knows the ultimate goal of the Stuxnet computer worm, which has infected an unknown number of industrial controls worldwide and can stealthily give false instructions to machinery and false readings to operators.
It could destroy gas pipelines, cause a nuclear plant to malfunction, or cause factory boilers to explode. Perhaps it already has.
It is also unclear whether it can be effectively rooted out. Many companies may not even know that they have it.
What is clear, though, is that warnings by private experts and some former government officials – that the electricity grid and other critical industries were highly vulnerable to malicious hacking – were on target, and that a new era of computerised assaults had begun.
“This is very, very scary,” said Joe Weiss, a veteran US industrial control safety expert, adding that Congress needed to give utility regulators the authority to mandate protection measures.
Stuxnet is the first known worm to target and tamper with industrial controls, in this case through a common industrial programme sold by Siemens, the electronics and engineering group. The worm has been most active in Iran, suggesting it as the location for the target, but Indonesia, India and Pakistan have also reported infections, according to Symantec, a technology security provider.
Security researchers who have been working for more than a year to decrypt and disentangle the program have become increasingly alarmed. A combination of factors is prompting this concern: the new category of target, multiple levels of sophistication that they say points to a national government as the sponsor, and the difficulty in combating the threat due to poor communication between computer experts and industry officials.
The researchers have recently been able to decipher what rogue commands are being given to the control software, but they cannot tell what impact those commands have without knowing what equipment is on the receiving end.
So far, said Symantec expert Liam O’Murchu, analysts have not even been able to learn what sector Stuxnet is after, only that there is a target and that it must be valuable.
“We have all the blocks of code but we can’t tell what it means on a real system,” he added.
If nuclear energy or the electricity grid is involved, the worm would therefore have added resonance, as the US and other countries have invested in the so-called “smart grid”, which would connect more industrial operations to the internet. A core problem is that the specialised controls for electricity, transportation, and other critical functions are typically less protected than corporate computer networks, and are often connected to standard machines.
Stuxnet didn’t even rely on the master computers – those that run the targeted Siemens control systems – being hooked up to the internet. It spread initially via handheld drives that are inserted into computer USB ports. It then exploited a number of previously unknown holes in Windows, the operations software, by running itself automatically on PCs without any action from the user.
That in itself would be an impressive feat. But it was just the staging area for the real mission. Stuxnet then copied itself to thousands of other machines, in each case looking to see if a certain configuration of the Siemens programme was in place.
If the worm found that it was, it then used stolen digital certificates meant to authenticate new software – another extreme rarity – and burrowed more deeply.
Stuxnet checks for certain condition readings in some types of industrial function. If it finds what it wants, it can give new orders. So far no “back door” has been found that would allow for additional remote control by the authors.
David Emm, a senior security researcher at Kaspersky, the internet security company, said the way Stuxnet was operating was “potentially indicative of involvement by a government, because of the level of sophistication”.
It would have taken a team of 10 specialised programmers about six months of full-time work to complete, Mr O’Murchu said, and some would have needed detailed knowledge of the target industry.
Copyright The Financial Times Limited 2010. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the we
By Joseph Menn and Mary Watkins
Published: September 23 2010 19:39 | Last updated: September 23 2010 19:39
No one knows the ultimate goal of the Stuxnet computer worm, which has infected an unknown number of industrial controls worldwide and can stealthily give false instructions to machinery and false readings to operators.
It could destroy gas pipelines, cause a nuclear plant to malfunction, or cause factory boilers to explode. Perhaps it already has.
It is also unclear whether it can be effectively rooted out. Many companies may not even know that they have it.
What is clear, though, is that warnings by private experts and some former government officials – that the electricity grid and other critical industries were highly vulnerable to malicious hacking – were on target, and that a new era of computerised assaults had begun.
“This is very, very scary,” said Joe Weiss, a veteran US industrial control safety expert, adding that Congress needed to give utility regulators the authority to mandate protection measures.
Stuxnet is the first known worm to target and tamper with industrial controls, in this case through a common industrial programme sold by Siemens, the electronics and engineering group. The worm has been most active in Iran, suggesting it as the location for the target, but Indonesia, India and Pakistan have also reported infections, according to Symantec, a technology security provider.
Security researchers who have been working for more than a year to decrypt and disentangle the program have become increasingly alarmed. A combination of factors is prompting this concern: the new category of target, multiple levels of sophistication that they say points to a national government as the sponsor, and the difficulty in combating the threat due to poor communication between computer experts and industry officials.
The researchers have recently been able to decipher what rogue commands are being given to the control software, but they cannot tell what impact those commands have without knowing what equipment is on the receiving end.
So far, said Symantec expert Liam O’Murchu, analysts have not even been able to learn what sector Stuxnet is after, only that there is a target and that it must be valuable.
“We have all the blocks of code but we can’t tell what it means on a real system,” he added.
If nuclear energy or the electricity grid is involved, the worm would therefore have added resonance, as the US and other countries have invested in the so-called “smart grid”, which would connect more industrial operations to the internet. A core problem is that the specialised controls for electricity, transportation, and other critical functions are typically less protected than corporate computer networks, and are often connected to standard machines.
Stuxnet didn’t even rely on the master computers – those that run the targeted Siemens control systems – being hooked up to the internet. It spread initially via handheld drives that are inserted into computer USB ports. It then exploited a number of previously unknown holes in Windows, the operations software, by running itself automatically on PCs without any action from the user.
That in itself would be an impressive feat. But it was just the staging area for the real mission. Stuxnet then copied itself to thousands of other machines, in each case looking to see if a certain configuration of the Siemens programme was in place.
If the worm found that it was, it then used stolen digital certificates meant to authenticate new software – another extreme rarity – and burrowed more deeply.
Stuxnet checks for certain condition readings in some types of industrial function. If it finds what it wants, it can give new orders. So far no “back door” has been found that would allow for additional remote control by the authors.
David Emm, a senior security researcher at Kaspersky, the internet security company, said the way Stuxnet was operating was “potentially indicative of involvement by a government, because of the level of sophistication”.
It would have taken a team of 10 specialised programmers about six months of full-time work to complete, Mr O’Murchu said, and some would have needed detailed knowledge of the target industry.
Copyright The Financial Times Limited 2010. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the we
Thursday, September 23, 2010
Wednesday, September 22, 2010
Wall Street's $12.8 Trillion Dollar Heist
Comment is free
Cif America
Wall Street's greatest heist: the Tarp
The notion that without the $700bn bailout we would be reduced to bartering was a ruse by the banks to get taxpayers' money
(59)
Tweet this (40)
Comments (89)
Dean Baker
guardian.co.uk, Monday 20 September 2010 23.00 BST
Article history
Women carrying boxes leave the Lehman Brothers headquarters in New York on 15 September 2008. The day the investment bank choked by the credit crisis and falling real estate values, filed for bankruptcy Photograph: Louis Lanzano/AP
Two years ago, the top honchos at the Fed, Treasury and the Wall Street banks were running around like Chicken Little warning that the world was about to end. This fear-mongering, together with a big assist from the elite media (thatis, NPR, the Washington Post, the Wall Street Journal, etc), earned the banks their $700bn Troubled Asset Relief Programme (Tarp) blank cheque bailout. This money, along with even more valuable loans and loan guarantees from the Fed and FDIC, enabled them to survive the crisis they had created. As a result, the big banks are bigger and more profitable than ever.
Now, the same crew that tapped our pockets two years ago is eagerly pitching the line that their bailout was good for us. It may be the case that the history books are written by the winners, but that doesn't prevent the rest of us from telling the truth.
Let's step back to where we were two years ago. The huge investment bank Bear Stearns had collapsed. So had Fannie Mae and Freddie Mac, the mortgage giants. Lehman Brothers, the fourth largest investment bank had also gone down. AIG, the country's largest insurer, had been put on life support by the government.
At this point, Merrill Lynch, Morgan Stanley and Goldman Sachs, the three remaining independent investment banks, all faced runs that would quickly sink them without government intervention. Citigroup and Bank of America, two of the three largest commercial banks, were also almost certainly insolvent. Many other banks also faced insolvency, especially if they took big losses on their loans to other institutions that were about to go bankrupt.
This was when the Wall Street boys made their mad rush for the public trough. They enlisted everyone that mattered in the effort, including Treasury secretary Henry Paulson, Federal Reserve Board chairman Ben Bernanke, and Timothy Geithner, then the head of the New York Federal Reserve Bank.
The line was that the economy would collapse if congress did not immediately rescue the banks. They were prepared to make up anything to save the banks in their hour of need. Bernanke was probably caught in the biggest fabrication when he told congress that the commercial paper market was shutting down.
If true, this would have been disastrous, since most major companies rely on selling commercial paper to meet their payroll and other routine expenses. If this market shut down, it would mean that even healthy businesses could not pay their workers and suppliers, which would quickly cause the whole economy to grind to a halt.
Bernanke did not bother to inform congress and the public that he had the ability to single-handedly support the commercial paper market. He waited until the weekend after congress approved the Tarp to announce that he would establish a special Fed lending facility to buy commercial paper.
In reality, the Fed almost certainly had the ability to keep the economy going by sustaining the system of payments, even if the chain of bank collapses was allowed to run its course. In the 1980s Latin American debt crisis, the Fed had an emergency plan to seize the money centre banks, and keep them operating, if a default by a major Latin American country pushed them into insolvency.
By the time of the Lehman crisis, the financial markets had been severely stressed for over a year. The first major bank collapse had occurred more than six months earlier. It would have required a degree of unbelievable incompetence and/or irresponsibility for the Fed not to have devised a similar emergency plan to keep the systems of payments operating in a worst-case scenario.
Furthermore, even if the Fed had been as incompetent as many claim, it would not have taken long for it to improvise a system whereby certain payments would be prioritised and the system of payments would again be up-and-running. The notion that we would be sitting in a 21st-century economy and reduced to barter payments was an invention of the bank lobby to get the taxpayers' money.
The first Great Depression was the result of a decade of failed policies, not a single bad mistake at its onset. There was absolutely nothing that we could have done back in September-October of 2008 that would have required that we experience a decade of double-digit unemployment. The spectre of a "second great depression" is a fairy tale invented by the bank lobby to make the rest of us feel good about having given them our money.
We are also supposed to feel good that the vast majority of the Tarp money was repaid. This is another effort to prey on the public's ignorance. Had it not been for the bailout, most of the major centre banks would have been wiped out. This would have destroyed the fortunes of their shareholders, many of their creditors, and their top executives. This would have been a massive redistribution to the rest of society – their loss is our gain.
It is important to remember that the economy would be no less productive following the demise of these Wall Street giants. The only economic fact that would have been different is that the Wall Street crew would have lost claims to hundreds of billions of dollars of the economy's output each year and trillions of dollars of wealth. That money would, instead, be available for the rest of society. The fact that they have lost the claim to wealth from their stock and bond holdings makes all the rest of us richer, once the economy is again operating near normal levels of output.
Instead, we have the same Wall Street crew calling the shots, doing business pretty much as they always did. The rest of us are sitting here dealing with wreckage of their recklessness: 9.6% unemployment and the loss of much of the middle class's savings in their homes and their retirement accounts.
And the lackeys of the Wall Street crew are telling us that we should be thankful that we didn't have a second Great Depression. Maybe we don't have the power to keep the bankers from picking our pockets, but we don't have to believe their lies.
Cif America
Wall Street's greatest heist: the Tarp
The notion that without the $700bn bailout we would be reduced to bartering was a ruse by the banks to get taxpayers' money
(59)
Tweet this (40)
Comments (89)
Dean Baker
guardian.co.uk, Monday 20 September 2010 23.00 BST
Article history
Women carrying boxes leave the Lehman Brothers headquarters in New York on 15 September 2008. The day the investment bank choked by the credit crisis and falling real estate values, filed for bankruptcy Photograph: Louis Lanzano/AP
Two years ago, the top honchos at the Fed, Treasury and the Wall Street banks were running around like Chicken Little warning that the world was about to end. This fear-mongering, together with a big assist from the elite media (thatis, NPR, the Washington Post, the Wall Street Journal, etc), earned the banks their $700bn Troubled Asset Relief Programme (Tarp) blank cheque bailout. This money, along with even more valuable loans and loan guarantees from the Fed and FDIC, enabled them to survive the crisis they had created. As a result, the big banks are bigger and more profitable than ever.
Now, the same crew that tapped our pockets two years ago is eagerly pitching the line that their bailout was good for us. It may be the case that the history books are written by the winners, but that doesn't prevent the rest of us from telling the truth.
Let's step back to where we were two years ago. The huge investment bank Bear Stearns had collapsed. So had Fannie Mae and Freddie Mac, the mortgage giants. Lehman Brothers, the fourth largest investment bank had also gone down. AIG, the country's largest insurer, had been put on life support by the government.
At this point, Merrill Lynch, Morgan Stanley and Goldman Sachs, the three remaining independent investment banks, all faced runs that would quickly sink them without government intervention. Citigroup and Bank of America, two of the three largest commercial banks, were also almost certainly insolvent. Many other banks also faced insolvency, especially if they took big losses on their loans to other institutions that were about to go bankrupt.
This was when the Wall Street boys made their mad rush for the public trough. They enlisted everyone that mattered in the effort, including Treasury secretary Henry Paulson, Federal Reserve Board chairman Ben Bernanke, and Timothy Geithner, then the head of the New York Federal Reserve Bank.
The line was that the economy would collapse if congress did not immediately rescue the banks. They were prepared to make up anything to save the banks in their hour of need. Bernanke was probably caught in the biggest fabrication when he told congress that the commercial paper market was shutting down.
If true, this would have been disastrous, since most major companies rely on selling commercial paper to meet their payroll and other routine expenses. If this market shut down, it would mean that even healthy businesses could not pay their workers and suppliers, which would quickly cause the whole economy to grind to a halt.
Bernanke did not bother to inform congress and the public that he had the ability to single-handedly support the commercial paper market. He waited until the weekend after congress approved the Tarp to announce that he would establish a special Fed lending facility to buy commercial paper.
In reality, the Fed almost certainly had the ability to keep the economy going by sustaining the system of payments, even if the chain of bank collapses was allowed to run its course. In the 1980s Latin American debt crisis, the Fed had an emergency plan to seize the money centre banks, and keep them operating, if a default by a major Latin American country pushed them into insolvency.
By the time of the Lehman crisis, the financial markets had been severely stressed for over a year. The first major bank collapse had occurred more than six months earlier. It would have required a degree of unbelievable incompetence and/or irresponsibility for the Fed not to have devised a similar emergency plan to keep the systems of payments operating in a worst-case scenario.
Furthermore, even if the Fed had been as incompetent as many claim, it would not have taken long for it to improvise a system whereby certain payments would be prioritised and the system of payments would again be up-and-running. The notion that we would be sitting in a 21st-century economy and reduced to barter payments was an invention of the bank lobby to get the taxpayers' money.
The first Great Depression was the result of a decade of failed policies, not a single bad mistake at its onset. There was absolutely nothing that we could have done back in September-October of 2008 that would have required that we experience a decade of double-digit unemployment. The spectre of a "second great depression" is a fairy tale invented by the bank lobby to make the rest of us feel good about having given them our money.
We are also supposed to feel good that the vast majority of the Tarp money was repaid. This is another effort to prey on the public's ignorance. Had it not been for the bailout, most of the major centre banks would have been wiped out. This would have destroyed the fortunes of their shareholders, many of their creditors, and their top executives. This would have been a massive redistribution to the rest of society – their loss is our gain.
It is important to remember that the economy would be no less productive following the demise of these Wall Street giants. The only economic fact that would have been different is that the Wall Street crew would have lost claims to hundreds of billions of dollars of the economy's output each year and trillions of dollars of wealth. That money would, instead, be available for the rest of society. The fact that they have lost the claim to wealth from their stock and bond holdings makes all the rest of us richer, once the economy is again operating near normal levels of output.
Instead, we have the same Wall Street crew calling the shots, doing business pretty much as they always did. The rest of us are sitting here dealing with wreckage of their recklessness: 9.6% unemployment and the loss of much of the middle class's savings in their homes and their retirement accounts.
And the lackeys of the Wall Street crew are telling us that we should be thankful that we didn't have a second Great Depression. Maybe we don't have the power to keep the bankers from picking our pockets, but we don't have to believe their lies.
How Serious Is The GMAC Mortgage Problem?
TUESDAY, SEPTEMBER 21, 2010
How Serious is the GMAC Problem? Pretty Serious and Not Just GMAC
The news reports on GMAC Mortgage’s decision to halt evictions and foreclosure sales in 23 states, as originally reported by Bloomberg News, has generated keen interest in the mortgage and securitizaion communities. One reason is the oddly abrupt and broad nature of GMAC Mortgage’s action. GMAC Mortgage subsequently issued a rebuttal of sorts to the article. Not only did it fail to clairify matters, it is inconsistent with the actual notice it sent last week.
Various accounts have described how one officer of GMAC Mortgage’s servicing unit has admitted during testimony that, while he signs thousands of affidavits each month in order to affect steps in the foreclosure process, he does not have personal knowledge of certain critical facts in the affidavit which he asserts to be true. Reader Stupendous Man provided the text of Federal Rule 56 on affidavits (although the cases in question are in state courts, the same principles no doubt apply). Boldface ours:
A supporting or opposing affidavit must be made on personal knowledge, set out facts that would be admissible in evidence, and show that the affiant is competent to testify on the matters stated.
The key here is you can’t delegate creating affidavits to parties who weren’t close to relevant matter out of administrative convenience; you need to find people who were directly involved. And evidence in a number of foreclosure suits indicates that this problem not only extends well beyond GMAC, and is not a matter of matter of officers providing affidavits based on a review of copies of the paperwork in a transaction. As one attorney wrote:
It is beyond people signing things when they don’t see the “originals” These people don’t see shit. We have depositions from these folks, the only thing they are able to verify on the documents is what title they are supposed to use, from the particular servicer they are working for – Executive Secretary, Executive Vice President, Asst. Sec., etc…..
So there is evidence to support the notion GMAC was not alone in providing cooked up affidavits. The only question is how widespread this practice was at other servicers.
What are the implications of the GMAC Mortgage actions and how serious are the problems? GMAC Mortgage and similarly situated parties contend that there is nothing fundamentally wrong with their foreclosure process and this is simply a procedural issue which is readily curable. In contrast, advocates for borrowers in foreclosure have indicated that the questionable affidavits are only the “tip of the iceberg” and represent the beginning of the end for the foreclosure mills and the banks, servicers and trustees who have been seeking to exercise foreclosure under false pretenses. The heightened scrutiny and increasing interest by state attorneys general means we may finally get to the bottom of a long-running “he said-she said” dispute.
Let’s review the current state of play:
1. What is the problem with evictions and foreclosure sales that GMAC Mortgage is worried about?
Based on GMAC Mortgage’s press release, the action is limited to evictions and foreclosure sales in certain states, but its new foreclosures are not affected. It isn’t clear exactly what distinction they are making . Presumably, their concern relates to the affidavits they used to initiate the evictions in their foreclosure cases. If the affidavit is flawed, they want to get a new improved one in place before they take title to the property. Similarly, for properties where they have already taken title, if the affidavits which enabled the evictions were flawed, they may need to prepare a new affidavit that would allow them to demonstrate that they have good title prior to selling the property to third parties.
2. Is this problem curable? On the surface, concerns about flawed affidavits used in the eviction process of a foreclosure, seems a technical, legalistic issue. Certainly, GMAC Mortgage’s statements seem to give the impression that the issue is curable and will, in fact, soon be cured. Did GMAC Mortgage prepare the affidavits improperly due to weak procedural controls or economic expediency? If so, then it would seem like they would have to incur some additional cost and take some additional time to have the affidavits properly prepared and then the problem would not be fatal from a legal standpoint. The added expenses and longer time will cost the certificate holders in the MBS more money. Remember, securitizations have come to be modeled and price assuming a streamlined foreclosure process. Actually finding and involving the proper parties in the affidavit process will at a minimum be cumbersome, and could add meaningful costs.
Moroever, it is possible the affidavits were prepared improperly to remedy other problems in the related mortgage loan. If, for the purpose of the foreclosure, the servicer did not have the proper information but stated that they did anyway in the affidavit, this would be a far more serious problem. For instance, if the courts for a foreclosure required a particular party to be pursuing the foreclosure, but GMAC Mortgage did not have documentation supporting such ownership or right, was GMAC Mortgage misrepresenting the facts in the affidavit?
3. Is the problem limited to judicial foreclosure states? That does not seem credible, although GMAC may believe it needs only to remedy it in those states. GMAC Mortgage indicated that the action was only for states that use judicial foreclosure, or similar procedures.
In general, if the issue is limited to improperly documented affidavits, GMAC may be able to limit its response to the 23 states on its list. However, if the underlying documentation for its mortgages have problems in the chain of title, then the improper affidavits are just a manifestation of a deeper issue. By happenstance, I know of cases in a non-judicial foreclosure state not on GMAC’s list where GMAC took similar short cuts. Tom Adams and I have been in touch with a number of attorneys in the foreclosure world who have uncovered problems in non-judicial foreclosure states with inaccurate affidavits, including mis-statements about the parties to the foreclosure, the time of mortgage transfers, the status of the loan file and related issues. There is not good grounds to believe that GMAC had sufficiently different procedures in judicial versus non-judicial foreclosure states to believe their flawed procedures were limited to only judicial foreclosure states.
4. is the problem limited to GMAC Mortgage? GMAC Mortgage and other banks may hope to sell the story line that its problem is limited to a lone “rogue servicing officer.” Unfortunately, the servicing officer in question indicated in his testimony that he prepared 10,000 or more affidavits per month, so it strains credulity to think that GMAC management was ignorant of his actions.
So far, mainstream press accounts have been limited to issues at GMAC Mortgage, which is a large servicer, but only a modest portion of the overall market. However, it is possible, that the root of the problem lies not with the servicer, but started with the sellers and the trustees in the mortgage securitization process. If the mortgage loans were conveyed in the securitization process in a way that clouded the title, the problem could be widespread, and borrower attorneys can provide a large body of evidence from cases in many states. Although GMAC appears to be the party ultimately responsible, it also works very closely with the foreclosure outsourcing firm, Loan Processing Services, so they or the foreclosure mills they retain may also bear some responsibility.
5. Are foreclosure problems limited to this sort of technical issue? The conveyance of real estate has a long legal history and is governed by state law. Numerous checks and balances are written into both the sale and the foreclosure process to ensure that the transfers are conducted properly and disputes over ownership are minimized. Part of the appeal of mortgage loans as an asset, back before the financial crisis, was that the procedures and laws for mortgage loans was well establishes, so owners or investors could take comfort that their interests were well protected.
Unfortunately, there is increasing evidence that the mortgage loan industry went off the rails during the bubble years. And if the issues underlying GMAC Mortgage action are a result of bad origination and closing procedures, rather than poor servicing, the problems may be much larger than inaccurate affidavits.
We will be watching on the GMAC Mortgage situation and related issues. GMAC Mortgage’s remarks today did not clarify matters, and their failure to come clean, and the obvious conflict between the claims in their press release and their own memo suggests other shoes have yet to drop. If these issues extend beyond GMAC Mortgage and inaccurate affidavits, the mortgage industry will be facing some deep and difficult problems.
More on this topic (What's this?)
Barron's: "Barely out of beta testing, Wikinvest's Portfolio tracker is already the most advanced portfolio manager online."
Why You Do Not Want to Invest in the “New” General Motors (Investment U, 8/31/10)
How Serious is the GMAC Problem? Pretty Serious and Not Just GMAC (Phil’s Stock World - Members S..., 9/21/10)
The Truth: Housing Bottom has Arrived... (Wealth Daily, 9/17/10)
Read more on General Motors, Foreclosure at Wikinvest
Topics: Banking industry, Credit markets, Legal, Real estate
How Serious is the GMAC Problem? Pretty Serious and Not Just GMAC
The news reports on GMAC Mortgage’s decision to halt evictions and foreclosure sales in 23 states, as originally reported by Bloomberg News, has generated keen interest in the mortgage and securitizaion communities. One reason is the oddly abrupt and broad nature of GMAC Mortgage’s action. GMAC Mortgage subsequently issued a rebuttal of sorts to the article. Not only did it fail to clairify matters, it is inconsistent with the actual notice it sent last week.
Various accounts have described how one officer of GMAC Mortgage’s servicing unit has admitted during testimony that, while he signs thousands of affidavits each month in order to affect steps in the foreclosure process, he does not have personal knowledge of certain critical facts in the affidavit which he asserts to be true. Reader Stupendous Man provided the text of Federal Rule 56 on affidavits (although the cases in question are in state courts, the same principles no doubt apply). Boldface ours:
A supporting or opposing affidavit must be made on personal knowledge, set out facts that would be admissible in evidence, and show that the affiant is competent to testify on the matters stated.
The key here is you can’t delegate creating affidavits to parties who weren’t close to relevant matter out of administrative convenience; you need to find people who were directly involved. And evidence in a number of foreclosure suits indicates that this problem not only extends well beyond GMAC, and is not a matter of matter of officers providing affidavits based on a review of copies of the paperwork in a transaction. As one attorney wrote:
It is beyond people signing things when they don’t see the “originals” These people don’t see shit. We have depositions from these folks, the only thing they are able to verify on the documents is what title they are supposed to use, from the particular servicer they are working for – Executive Secretary, Executive Vice President, Asst. Sec., etc…..
So there is evidence to support the notion GMAC was not alone in providing cooked up affidavits. The only question is how widespread this practice was at other servicers.
What are the implications of the GMAC Mortgage actions and how serious are the problems? GMAC Mortgage and similarly situated parties contend that there is nothing fundamentally wrong with their foreclosure process and this is simply a procedural issue which is readily curable. In contrast, advocates for borrowers in foreclosure have indicated that the questionable affidavits are only the “tip of the iceberg” and represent the beginning of the end for the foreclosure mills and the banks, servicers and trustees who have been seeking to exercise foreclosure under false pretenses. The heightened scrutiny and increasing interest by state attorneys general means we may finally get to the bottom of a long-running “he said-she said” dispute.
Let’s review the current state of play:
1. What is the problem with evictions and foreclosure sales that GMAC Mortgage is worried about?
Based on GMAC Mortgage’s press release, the action is limited to evictions and foreclosure sales in certain states, but its new foreclosures are not affected. It isn’t clear exactly what distinction they are making . Presumably, their concern relates to the affidavits they used to initiate the evictions in their foreclosure cases. If the affidavit is flawed, they want to get a new improved one in place before they take title to the property. Similarly, for properties where they have already taken title, if the affidavits which enabled the evictions were flawed, they may need to prepare a new affidavit that would allow them to demonstrate that they have good title prior to selling the property to third parties.
2. Is this problem curable? On the surface, concerns about flawed affidavits used in the eviction process of a foreclosure, seems a technical, legalistic issue. Certainly, GMAC Mortgage’s statements seem to give the impression that the issue is curable and will, in fact, soon be cured. Did GMAC Mortgage prepare the affidavits improperly due to weak procedural controls or economic expediency? If so, then it would seem like they would have to incur some additional cost and take some additional time to have the affidavits properly prepared and then the problem would not be fatal from a legal standpoint. The added expenses and longer time will cost the certificate holders in the MBS more money. Remember, securitizations have come to be modeled and price assuming a streamlined foreclosure process. Actually finding and involving the proper parties in the affidavit process will at a minimum be cumbersome, and could add meaningful costs.
Moroever, it is possible the affidavits were prepared improperly to remedy other problems in the related mortgage loan. If, for the purpose of the foreclosure, the servicer did not have the proper information but stated that they did anyway in the affidavit, this would be a far more serious problem. For instance, if the courts for a foreclosure required a particular party to be pursuing the foreclosure, but GMAC Mortgage did not have documentation supporting such ownership or right, was GMAC Mortgage misrepresenting the facts in the affidavit?
3. Is the problem limited to judicial foreclosure states? That does not seem credible, although GMAC may believe it needs only to remedy it in those states. GMAC Mortgage indicated that the action was only for states that use judicial foreclosure, or similar procedures.
In general, if the issue is limited to improperly documented affidavits, GMAC may be able to limit its response to the 23 states on its list. However, if the underlying documentation for its mortgages have problems in the chain of title, then the improper affidavits are just a manifestation of a deeper issue. By happenstance, I know of cases in a non-judicial foreclosure state not on GMAC’s list where GMAC took similar short cuts. Tom Adams and I have been in touch with a number of attorneys in the foreclosure world who have uncovered problems in non-judicial foreclosure states with inaccurate affidavits, including mis-statements about the parties to the foreclosure, the time of mortgage transfers, the status of the loan file and related issues. There is not good grounds to believe that GMAC had sufficiently different procedures in judicial versus non-judicial foreclosure states to believe their flawed procedures were limited to only judicial foreclosure states.
4. is the problem limited to GMAC Mortgage? GMAC Mortgage and other banks may hope to sell the story line that its problem is limited to a lone “rogue servicing officer.” Unfortunately, the servicing officer in question indicated in his testimony that he prepared 10,000 or more affidavits per month, so it strains credulity to think that GMAC management was ignorant of his actions.
So far, mainstream press accounts have been limited to issues at GMAC Mortgage, which is a large servicer, but only a modest portion of the overall market. However, it is possible, that the root of the problem lies not with the servicer, but started with the sellers and the trustees in the mortgage securitization process. If the mortgage loans were conveyed in the securitization process in a way that clouded the title, the problem could be widespread, and borrower attorneys can provide a large body of evidence from cases in many states. Although GMAC appears to be the party ultimately responsible, it also works very closely with the foreclosure outsourcing firm, Loan Processing Services, so they or the foreclosure mills they retain may also bear some responsibility.
5. Are foreclosure problems limited to this sort of technical issue? The conveyance of real estate has a long legal history and is governed by state law. Numerous checks and balances are written into both the sale and the foreclosure process to ensure that the transfers are conducted properly and disputes over ownership are minimized. Part of the appeal of mortgage loans as an asset, back before the financial crisis, was that the procedures and laws for mortgage loans was well establishes, so owners or investors could take comfort that their interests were well protected.
Unfortunately, there is increasing evidence that the mortgage loan industry went off the rails during the bubble years. And if the issues underlying GMAC Mortgage action are a result of bad origination and closing procedures, rather than poor servicing, the problems may be much larger than inaccurate affidavits.
We will be watching on the GMAC Mortgage situation and related issues. GMAC Mortgage’s remarks today did not clarify matters, and their failure to come clean, and the obvious conflict between the claims in their press release and their own memo suggests other shoes have yet to drop. If these issues extend beyond GMAC Mortgage and inaccurate affidavits, the mortgage industry will be facing some deep and difficult problems.
More on this topic (What's this?)
Barron's: "Barely out of beta testing, Wikinvest's Portfolio tracker is already the most advanced portfolio manager online."
Why You Do Not Want to Invest in the “New” General Motors (Investment U, 8/31/10)
How Serious is the GMAC Problem? Pretty Serious and Not Just GMAC (Phil’s Stock World - Members S..., 9/21/10)
The Truth: Housing Bottom has Arrived... (Wealth Daily, 9/17/10)
Read more on General Motors, Foreclosure at Wikinvest
Topics: Banking industry, Credit markets, Legal, Real estate
Tuesday, September 21, 2010
"Too Big To Fail Banks" Have $321 Billion In Bad Second Lien Loans On Homes
MAIN PAGE | US MARKETS » RESIDENTIAL REAL ESTATE
Home Equity Lines of Credit, the Next Looming Disaster?
Posted by Keith Jurow 09/07/10 8:00 AM EST
In a previous REAL ESTATE CHANNEL article, I discussed the madness of borrowing through home equity lines of credit (HELOC) during the bubble years. Now is a good time to take an in-depth look at these second liens and the dangers they pose for the housing market and the large banks.
A Brief Explanation of HELOCs
A HELOC is quite similar to a business line of credit and has some similarities to a consumer credit card as well. Using the residence as security, a homeowner is given a line of credit with a prescribed limit upon which the borrower can draw at any time.
The homeowner receives a draw period of anywhere from five to ten years when funds can be drawn. During this draw period, the borrower is usually required to pay interest only. The rate is adjusted monthly and is pegged to the prime rate. The repayment period is typically ten to twenty years. The monthly principal payment is usually the outstanding balance at the end of the draw period divided by the number of months in the repayment period.
Because qualifying standards were based primarily on the equity in the home, HELOCs became nearly irresistible in those states where prices were rising rapidly in 2004-2005. Homeowners discovered that their home had actually become a money tree which they could shake almost at will.
Madness of HELOC Lending During the Bubble Years
Aided by the seemingly limitless desire of banks to lend money, homeowners opened an incredible number of HELOCs during the bubble years of 2004-2006.
Nowhere was the madness of HELOC borrowing more astounding than in California. During the two key years of 2004 and 2005, a total of 1.43 million HELOCs were originated in California just for the purchase of homes according to figures received from CoreLogic.
Wait a minute, you say. That's more than the total number of homes sold in California during these years. Correct. A total of 1.25 million existing single family homes were purchased in California in 2004-2005 according to the California Association of Realtors.
At first, these California HELOC numbers may be a little puzzling. However, they make sense when you consider the speculative mania that occurred during the bubble years. In my earlier REAL ESTATE CHANNEL article about investor speculation, there was an example of caravans filled with out-of-state speculators looking to buy investment properties in Austin. One was a young Californian who had sold a few of his Phoenix investment properties so he could roll his profits into Austin homes.
This is what thousands of HELOCs were used for in California. In 2004-2005, borrowers would take out a purchase HELOC to buy investment properties in other hot markets such as Las Vegas and Phoenix. While the loans were recorded as California HELOCs because the borrower's property was in California, the purchased home was actually in another state. CoreLogic provided the following HELOC origination numbers for California.
According to CoreLogic, an additional 868,000 HELOCs were originated in California during 2004-2005 as "cash-out" refinancings of previous HELOCs. These homeowners tapped their piggy bank house by refinancing their HELOC with a larger available credit line.
When the housing market finally collapsed in 2007, banks were slow to curtail their HELOC lending. Equifax reported that 4.6 million new HELOCs were originated in 2007-2008.
California was different. From a peak of nearly 92,000 in June 2005, purchase HELOCs had plunged to a mere 563 by December 2008. In March of this year, only 22 were closed throughout all of California. That's right - twenty-two. Unfortunately, the damage had already been done.
Massive Problem of Underwater Homeowners with HELOCs
Another earlier REAL ESTATE CHANNEL article cited an Equifax report that 13.6 million HELOCs were outstanding in September 2009. A phone update with Equifax on August 31, 2010 clarified that since September 2008, banks have reduced available lines of credit for HELOC users by $122 billion. Notwithstanding this tightening, there was still a total of $649 billion outstanding HELOC debt nationwide in July 2010 and 13.2 million HELOCs.
Although the average outstanding HELOC balance is roughly $49,000 now, this figure hides the real problem. The average HELOC written in California for residential purchase in 2004 was $150,000 and in 2005 was $139,000. Hundreds of thousands of Californians took out a HELOC and then refinanced it several times to pull cash out from their growing equity. Here is an example of how it worked from a recent post on IrvineHousingBlog:
"The original sales price is not clear from my records, but it looks as if the buyers paid about $1,200,000 in 1997. There was a $900,000 loan which I assume was 80% of the total purchase price. The original owners were a couple, and after the point where only the wife is on title in 2004 -- presumably after a divorce -- the HELOC abuse became truly remarkable.
On 3/11/2004 the wife appears alone on title, and the first mortgage is $999,800.
On 8/30/2004 she refinanced with a $1,000,000 first mortgage.
On 12/28/2005 she refinanced with a $2,170,000 first mortgage.
On 2/1/2006 she got a HELOC for $250,000.
On 8/22/2006 she refinanced with an Option ARM for $2,500,000.
On 11/15/2006 she opened a HELOC for $490,000.
On 8/1/2007 she refinanced with another Option ARM for $3,225,000.
On 10/22/2007 she opened a HELOC for $500,000.
Total property debt is $3,725,000.
Total mortgage equity withdrawal is $2,725,200 during a four-year stretch."
Of the 13.2 million outstanding HELOCs, it is not far-fetched to estimate that at least 95% of these borrowers are in "negative equity" when you add the first and second liens together. For California, the figure could be 98%.
The following situation, described on the advice blog, bills.com in November 2009, is quite common in California:
"I purchased my home in CA for $300K. I then refinanced in 2001 and pulled money out for upgrading the home - new home loan $480K. I refinanced again for a better interest rate (non-adjustable). In 2006, I opened a home equity line of credit to upgrade again (build a pool, etc.). My home equity line of credit is now at $248K. Total loans on home are today about $718K. I am in good standing with loan modification with the first but cannot afford to pay home equity line of credit."
You're probably wondering why the HELOC lender let the homeowner run up a loan balance of $248,000, especially since it was not even taken out until 2006 when home prices were already leveling off. Unlike first mortgages the vast majority of which were sold by lenders and securitized during the bubble years, second liens were kept on the balance sheet of the banks. But this was California where prices went in only one direction - up.
A sadder situation described on the same blog is that of a 62 year old California homeowner who purchased his house in 1975 for $38,000. He refinanced "3-4 times over the years" mainly for "personal use - cars, etc." The first lien is now $365,000. He opened the HELOC seven years ago and continually tapped into it. The outstanding balance on it had climbed to $265,000. Because the condo had plunged in value to only $350,000, this homeowner stopped making payments on the first mortgage four months earlier.
Nationwide, a growing number of "underwater" homeowners have already stopped paying on their first mortgage and many have halted payments on both the first and the HELOC. Some lenders are going after defaulting HELOC borrowers by asking a court to garnish the borrower's wages. Borrowers in this situation often pursue the option of filing for a Chapter 13 bankruptcy in which the judge has the option to reclassify the HELOC as an unsecured loan.
We need to keep in mind that HELOC loans are overwhelmingly second liens which stand in line behind the first mortgage in case of foreclosure. If a bank forecloses on the first mortgage of an underwater homeowner, the HELOC second lien holder is essentially wiped out. The HELOC becomes an unsecured loan and it is up to the lender to decide whether or not to try to work out some kind of deal with the borrower for a portion of the remaining balance.
In short sale situations where there is a first mortgage and a HELOC, the realtor often tries to negotiate with the HELOC holder to work out a discounted payoff on the HELOC that is acceptable. The HELOC lender has no leverage because if a foreclosure is pursued by the first mortgage holder, the HELOC is basically worthless.
One Texas realtor's website, shortsalestexas.net, actually provides advice on how to pursue these negotiations. He suggests offering 3% of the HELOC balance to the lender. If the lender balks, he counsels realtors not to offer any more than 5% of the balance. He claims that in his experience most lenders have accepted his initial offer.
Sea of Troubles Facing "Too Big to Fail" Banks
In mid-April of this year, the website housingwatch.com as well as others posted a summary of the sobering report issued by the research firm, CreditSights. The report warned that HELOCs were the next big problem for the large "too big to fail" banks.
Let's see why they might issue such a warning. Remember, there are currently $649 billion in HELOC loans outstanding. Three of the "too big to fail' banks reported a total of $321 billion in outstanding HELOC loans on their balance sheet in the second quarter 2010 Call Reports which came out a few weeks ago.
Does this mean that these banks have $321 billion in potentially worthless loans? You judge. On August 12, I spoke at length with the owner of a Utah-based firm whose business is buying HELOC and home equity loans from the large banks. His business is divided between secured second liens where the first mortgagee had not yet foreclosed and unsecured second liens in which the lender had already foreclosed.
It is a risky business because the borrowers have already defaulted and the bank has written off the debt. Unlike many other second lien debt collectors who have gone out of business, he has survived by buying only 1% of all the defaulted loans that are offered to him by the banks. In effect, he becomes the banker and his job is to work out new terms on a loan which is a small fraction of the original debt. The key to his success is coming up with terms that the borrower is willing to accept and make regular payments on.
Because the loan amount which these borrowers are willing to agree to is relatively low, this business owner made it clear that he will not pay much for a second lien regardless of the size of the outstanding loan balance. For unsecured second liens where the property has already been foreclosed, he will not pay more than $500 no matter what the size of the outstanding debt.
What this tells me is that most of the $321 billion in HELOCs loans owned by the "too big to fail" banks are probably worth no more than a few thousand dollars each if the borrower defaults. A growing number of HELOCs where the property has already been foreclosed and repossessed by the banks are worth perhaps $500 each.
It sounds incredible, doesn't it? Clearly, banks are recognizing the seriousness of the HELOC problem. According to an August 11 article published in the New York Times, banks charged off $19.9 billion of HELOCs in 2009 and another $7.88 billion in this year's first quarter. Those three "too big to fail banks" together charged off a total of $6.62 billion in HELOCs in the first half of 2010 as reported in their second quarter Call Reports.
The enormity of the HELOC disaster is well-illustrated by the example of a Phoenix attorney cited in that August New York Times article. He had been retained by nearly 300 new clients in the past year who were planning to walk away from their properties even though they could afford to pay the first mortgage - so-called "strategic defaulters." They all had home equity loans which ranged from $50,000 to $150,000.
Only 5% of these clients said they would continue paying their home equity loans no matter what. The other 85% of them said they would default on the second lien and worry about it "only if and when they were forced to."
It is truly worrisome to contemplate what could happen if this attitude continues to spread among the millions of underwater HELOC borrowers.
Click Here To See Prior News Posts By This Contributor »
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Home Equity Lines of Credit, the Next Looming Disaster?
Posted by Keith Jurow 09/07/10 8:00 AM EST
In a previous REAL ESTATE CHANNEL article, I discussed the madness of borrowing through home equity lines of credit (HELOC) during the bubble years. Now is a good time to take an in-depth look at these second liens and the dangers they pose for the housing market and the large banks.
A Brief Explanation of HELOCs
A HELOC is quite similar to a business line of credit and has some similarities to a consumer credit card as well. Using the residence as security, a homeowner is given a line of credit with a prescribed limit upon which the borrower can draw at any time.
The homeowner receives a draw period of anywhere from five to ten years when funds can be drawn. During this draw period, the borrower is usually required to pay interest only. The rate is adjusted monthly and is pegged to the prime rate. The repayment period is typically ten to twenty years. The monthly principal payment is usually the outstanding balance at the end of the draw period divided by the number of months in the repayment period.
Because qualifying standards were based primarily on the equity in the home, HELOCs became nearly irresistible in those states where prices were rising rapidly in 2004-2005. Homeowners discovered that their home had actually become a money tree which they could shake almost at will.
Madness of HELOC Lending During the Bubble Years
Aided by the seemingly limitless desire of banks to lend money, homeowners opened an incredible number of HELOCs during the bubble years of 2004-2006.
Nowhere was the madness of HELOC borrowing more astounding than in California. During the two key years of 2004 and 2005, a total of 1.43 million HELOCs were originated in California just for the purchase of homes according to figures received from CoreLogic.
Wait a minute, you say. That's more than the total number of homes sold in California during these years. Correct. A total of 1.25 million existing single family homes were purchased in California in 2004-2005 according to the California Association of Realtors.
At first, these California HELOC numbers may be a little puzzling. However, they make sense when you consider the speculative mania that occurred during the bubble years. In my earlier REAL ESTATE CHANNEL article about investor speculation, there was an example of caravans filled with out-of-state speculators looking to buy investment properties in Austin. One was a young Californian who had sold a few of his Phoenix investment properties so he could roll his profits into Austin homes.
This is what thousands of HELOCs were used for in California. In 2004-2005, borrowers would take out a purchase HELOC to buy investment properties in other hot markets such as Las Vegas and Phoenix. While the loans were recorded as California HELOCs because the borrower's property was in California, the purchased home was actually in another state. CoreLogic provided the following HELOC origination numbers for California.
According to CoreLogic, an additional 868,000 HELOCs were originated in California during 2004-2005 as "cash-out" refinancings of previous HELOCs. These homeowners tapped their piggy bank house by refinancing their HELOC with a larger available credit line.
When the housing market finally collapsed in 2007, banks were slow to curtail their HELOC lending. Equifax reported that 4.6 million new HELOCs were originated in 2007-2008.
California was different. From a peak of nearly 92,000 in June 2005, purchase HELOCs had plunged to a mere 563 by December 2008. In March of this year, only 22 were closed throughout all of California. That's right - twenty-two. Unfortunately, the damage had already been done.
Massive Problem of Underwater Homeowners with HELOCs
Another earlier REAL ESTATE CHANNEL article cited an Equifax report that 13.6 million HELOCs were outstanding in September 2009. A phone update with Equifax on August 31, 2010 clarified that since September 2008, banks have reduced available lines of credit for HELOC users by $122 billion. Notwithstanding this tightening, there was still a total of $649 billion outstanding HELOC debt nationwide in July 2010 and 13.2 million HELOCs.
Although the average outstanding HELOC balance is roughly $49,000 now, this figure hides the real problem. The average HELOC written in California for residential purchase in 2004 was $150,000 and in 2005 was $139,000. Hundreds of thousands of Californians took out a HELOC and then refinanced it several times to pull cash out from their growing equity. Here is an example of how it worked from a recent post on IrvineHousingBlog:
"The original sales price is not clear from my records, but it looks as if the buyers paid about $1,200,000 in 1997. There was a $900,000 loan which I assume was 80% of the total purchase price. The original owners were a couple, and after the point where only the wife is on title in 2004 -- presumably after a divorce -- the HELOC abuse became truly remarkable.
On 3/11/2004 the wife appears alone on title, and the first mortgage is $999,800.
On 8/30/2004 she refinanced with a $1,000,000 first mortgage.
On 12/28/2005 she refinanced with a $2,170,000 first mortgage.
On 2/1/2006 she got a HELOC for $250,000.
On 8/22/2006 she refinanced with an Option ARM for $2,500,000.
On 11/15/2006 she opened a HELOC for $490,000.
On 8/1/2007 she refinanced with another Option ARM for $3,225,000.
On 10/22/2007 she opened a HELOC for $500,000.
Total property debt is $3,725,000.
Total mortgage equity withdrawal is $2,725,200 during a four-year stretch."
Of the 13.2 million outstanding HELOCs, it is not far-fetched to estimate that at least 95% of these borrowers are in "negative equity" when you add the first and second liens together. For California, the figure could be 98%.
The following situation, described on the advice blog, bills.com in November 2009, is quite common in California:
"I purchased my home in CA for $300K. I then refinanced in 2001 and pulled money out for upgrading the home - new home loan $480K. I refinanced again for a better interest rate (non-adjustable). In 2006, I opened a home equity line of credit to upgrade again (build a pool, etc.). My home equity line of credit is now at $248K. Total loans on home are today about $718K. I am in good standing with loan modification with the first but cannot afford to pay home equity line of credit."
You're probably wondering why the HELOC lender let the homeowner run up a loan balance of $248,000, especially since it was not even taken out until 2006 when home prices were already leveling off. Unlike first mortgages the vast majority of which were sold by lenders and securitized during the bubble years, second liens were kept on the balance sheet of the banks. But this was California where prices went in only one direction - up.
A sadder situation described on the same blog is that of a 62 year old California homeowner who purchased his house in 1975 for $38,000. He refinanced "3-4 times over the years" mainly for "personal use - cars, etc." The first lien is now $365,000. He opened the HELOC seven years ago and continually tapped into it. The outstanding balance on it had climbed to $265,000. Because the condo had plunged in value to only $350,000, this homeowner stopped making payments on the first mortgage four months earlier.
Nationwide, a growing number of "underwater" homeowners have already stopped paying on their first mortgage and many have halted payments on both the first and the HELOC. Some lenders are going after defaulting HELOC borrowers by asking a court to garnish the borrower's wages. Borrowers in this situation often pursue the option of filing for a Chapter 13 bankruptcy in which the judge has the option to reclassify the HELOC as an unsecured loan.
We need to keep in mind that HELOC loans are overwhelmingly second liens which stand in line behind the first mortgage in case of foreclosure. If a bank forecloses on the first mortgage of an underwater homeowner, the HELOC second lien holder is essentially wiped out. The HELOC becomes an unsecured loan and it is up to the lender to decide whether or not to try to work out some kind of deal with the borrower for a portion of the remaining balance.
In short sale situations where there is a first mortgage and a HELOC, the realtor often tries to negotiate with the HELOC holder to work out a discounted payoff on the HELOC that is acceptable. The HELOC lender has no leverage because if a foreclosure is pursued by the first mortgage holder, the HELOC is basically worthless.
One Texas realtor's website, shortsalestexas.net, actually provides advice on how to pursue these negotiations. He suggests offering 3% of the HELOC balance to the lender. If the lender balks, he counsels realtors not to offer any more than 5% of the balance. He claims that in his experience most lenders have accepted his initial offer.
Sea of Troubles Facing "Too Big to Fail" Banks
In mid-April of this year, the website housingwatch.com as well as others posted a summary of the sobering report issued by the research firm, CreditSights. The report warned that HELOCs were the next big problem for the large "too big to fail" banks.
Let's see why they might issue such a warning. Remember, there are currently $649 billion in HELOC loans outstanding. Three of the "too big to fail' banks reported a total of $321 billion in outstanding HELOC loans on their balance sheet in the second quarter 2010 Call Reports which came out a few weeks ago.
Does this mean that these banks have $321 billion in potentially worthless loans? You judge. On August 12, I spoke at length with the owner of a Utah-based firm whose business is buying HELOC and home equity loans from the large banks. His business is divided between secured second liens where the first mortgagee had not yet foreclosed and unsecured second liens in which the lender had already foreclosed.
It is a risky business because the borrowers have already defaulted and the bank has written off the debt. Unlike many other second lien debt collectors who have gone out of business, he has survived by buying only 1% of all the defaulted loans that are offered to him by the banks. In effect, he becomes the banker and his job is to work out new terms on a loan which is a small fraction of the original debt. The key to his success is coming up with terms that the borrower is willing to accept and make regular payments on.
Because the loan amount which these borrowers are willing to agree to is relatively low, this business owner made it clear that he will not pay much for a second lien regardless of the size of the outstanding loan balance. For unsecured second liens where the property has already been foreclosed, he will not pay more than $500 no matter what the size of the outstanding debt.
What this tells me is that most of the $321 billion in HELOCs loans owned by the "too big to fail" banks are probably worth no more than a few thousand dollars each if the borrower defaults. A growing number of HELOCs where the property has already been foreclosed and repossessed by the banks are worth perhaps $500 each.
It sounds incredible, doesn't it? Clearly, banks are recognizing the seriousness of the HELOC problem. According to an August 11 article published in the New York Times, banks charged off $19.9 billion of HELOCs in 2009 and another $7.88 billion in this year's first quarter. Those three "too big to fail banks" together charged off a total of $6.62 billion in HELOCs in the first half of 2010 as reported in their second quarter Call Reports.
The enormity of the HELOC disaster is well-illustrated by the example of a Phoenix attorney cited in that August New York Times article. He had been retained by nearly 300 new clients in the past year who were planning to walk away from their properties even though they could afford to pay the first mortgage - so-called "strategic defaulters." They all had home equity loans which ranged from $50,000 to $150,000.
Only 5% of these clients said they would continue paying their home equity loans no matter what. The other 85% of them said they would default on the second lien and worry about it "only if and when they were forced to."
It is truly worrisome to contemplate what could happen if this attitude continues to spread among the millions of underwater HELOC borrowers.
Click Here To See Prior News Posts By This Contributor »
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When looking for your next place to live, who in your household will do MOST of the property searches?
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