Self-denial and cascading economic pandemics

Borrowers are Assessed Undisclosed Risk by Most Courts

Self-denial and cascading economic pandemics

The purpose of this article is to piggy back on the recent articles from dozens of economists who are yelling at the top of their lungs that we are deluding ourselves if we think acceptance of the status quo is self deluding and will lead to economic and societal chaos. The focus of my writing is on legal, moral, economic and accounting reasons for denying foreclosure as a remedy BEFORE assessment of the transaction and the risks that were withheld and with intentional misrepresentation (fraud) of the risk factors with inflated appraisals, and failure to disclose the real lenders, the fees earned and the parties involved.

This continues the discussion about whether we should be saying that borrowers should pay the debts AS CLAIMED or whether we should be asserting that borrowers are liable only for the risks they assumed and accepted. I again remind the reader that this issue has already been decided under Federal law. The Truth in lending Act and the
State deceptive lending acts spell it out quite clearly --- the borrower is to be informed, with enough time to process the information and seek professional advice about the terms, parties and details of their loan transaction. Most important amongst the disclosures is the requirement of disclosing the true lender; transactions by lenders with a pattern of engaging in such withheld disclosure are branded "predatory per se."

The horrid state of self delusion in our society is chronicled in Naked Capitalism. The basic thrust of a deep and broad analysis of our economy and the effect of major shocks is presented, documented and proven. The bottom line is that the deeper the shock and the longer it is allowed to persist, the harder it is for society to recover. Applying the principles enunciated in this article which expresses irreversible damage that occurs over weeks, the seven years of economic collapse endured thus far presents a high probability that the economy and our society will never be able to restart without widespread acceptance of changes in deeply held beliefs and presumptions. Pervasive self-delusion is clearly documented here as the major impediment of starting to repair, regroup, and take us from what is actually a continuing net decline to an actual positive growth curve.

Interpolating the data, it is obvious is that the state of our society and economy is improperly reported (self-delusion) in a vain attempt to maintain consumer confidence while those same consumers are short on cash, short on income, short on savings, suffering shrinking income, increasing costs, and are short on available credit. The current model, developed over 40 years, was to replace earnings with credit. This was a going out of business strategy. And that is what happened.

We now live with an unsustainable anomaly --- the financial and data intermediaries are thriving while the real parties in interest (buyer and seller of products or services) are not reaching sufficient levels of income and growth. This has led to an economy which shows that roughly half (46%) of "economic activity" comes from financial services, that supposedly intermediates capital and payments but now accounts for an out-sized share of GDP. If the reported figures are even close to being truthful from the financial services sector, our GDP should be at least $50 Trillion, based upon long-trusted ratios in which financial services typically account for about 16% of GDP, intermediating in commerce.

Only two conclusions are possible. One is self-denial in which we act as though the economy was in fact operating at a $50 Trillion level --- an obvious run for the edge of a cliff. The other is addressing reality, which is that the growth of the financial services sector from 16% of GDP standard to 46% of GDP as reported is fictitious and based upon false reports based upon fictitious transactions. This would mean that as a minimum the $17 Trillion in GDP would be adjusted downward removing 30% as mere smoke and mirrors.

With the real GDP thus set at around $10 Trillion and removing the veil from fictitious transactions, fictitious assets and fictitious liabilities, the too big to fail conglomerates would either sink or swim on actual water rather than the appearance of water.

Nowhere are these transactions more pandemic actions of self-denial than in the alleged mortgage bonds that are neither mortgages nor bonds. Nor are they owned by the intermediaries. The fictitious transactions in which ownership of those non instruments are booked as sales, commerce and part of GDP, once removed would necessarily cause compensating adjustments elsewhere in the economy. Profits reported by companies providing financial services would be reduced and past reports would be adjusted downward, resulting in lower stock prices for their stock and higher rates for them to borrow.

The corresponding credit entry would fall to homeowners who were punished by a system that had blamed them for taking on more risk than they could afford. In fact, the adjustment would recognize that the assumption and acceptance of excess risk was hidden under deceptive underwriting and lending processes --- thus created by the Wall Street banks who are the sole parties against whom the excess risk would be assessed. But first it must be acknowledged that in cases of widespread systemic fraud that neither the lender investors nor the homeowner borrowers were given any reasonable opportunity to assess or accept the excess risk and that therefore their contracts must be reconstructed from the totality of the circumstances rather than the recitations in instruments prepared by the Wall Street banks.

We do have enough information to know that neither the lenders nor the borrowers would have signed up for the highly complex deals being offered to them under the guise owing offered FOR them. Since that is axiomatically true based upon formal a studies and the 50 states Attorneys General and the myriad of state and federal agencies that have concluded that lending and servicing practices were wrong at origination and continue to be wrong.

Continuation of Foreclosures based upon an untrue assumption of risk sharing as expressed by instruments based upon false pretenses will only continue the pattern of self deception and the resulting pandemic of economic decay and decline.

Subprime Borrowers With Best Credit Score Denied Help

Flipping unbelievable.. they create the mess, and we still are the ones paying for there mistakes. When does this abuse end?

Travis Armstrong, a long-haul trucker, has made his mortgage payments for six years and has a credit score of about 800 that would entice most lenders. Because he owes more than his home is worth and his debt lacks federal backing, he’s stuck paying 7.5 percent interest, almost twice the rate of new loans.
U.S. President Barack Obama has failed to win Congressional backing for his proposal to expand eligibility for government-backed refinancing nationally to include people with mortgages like Armstrong’s. The only inroad so far -- a $10 million pilot program that began last month in Oregon that will purchase mortgages out of bonds and refinance them -- won’t help Armstrong, though. He lives about 14 miles (23 kilometers) from the only county accepting applications.

 

As the U.S. real estate recovery accelerates into its second year, home prices are still 26 percent below the 2006 peak and almost 10 million people are underwater, or owe more than their houses are worth. Photographer: Jim R. Bounds/Bloomberg

10:18

July 12 (Bloomberg) -- Timothy Sloan, chief financial officer of Wells Fargo & Co., talks about the company's second-quarter profit and outlook for the bank's mortgage business. Sloan talks with Trish Regan, Adam Johnson and Sanford C. Bernstein analyst Brad Hintz on Bloomberg Television's "Street Smart." (Source: Bloomberg)

 

Four years after the peak of the foreclosure crisis, Treasury has spent only a fifth of the $38.5 billion of funds from the Troubled Asset Relief Program, or Tarp, set aside for housing. Photographer: Joe Raedle/Getty Images

“It’s OK to skip payments and get help, or walk away and let the bank foreclose, but I’m stuck with no help ’cause I keep making my payments every month,” Armstrong said in a mobile phone interview from Interstate 64 in Illinois as he headed to Oregon. “It feels like the world has forgotten about people like me.”
As the U.S. real estate recovery accelerates into its second year, home prices are still 26 percent below the 2006 peak and almost 10 million people are underwater, or owe more than their houses are worth. While some of the hardest-hit regions such as Phoenix and Las Vegas are rebounding the fastest, cities like Cleveland are struggling to keep pace with national gains.

‘Uneven Healing’

Federal efforts to put the rebound on firmer footing and boost the economy by helping subprime borrowers like Armstrong so far have fallen short, said Diane Swonk, chief economist at Chicago-based Mesirow Financial Inc.
“The housing market is healing, but it’s healing unevenly,” said Swonk. “Part of clearing out the bottom and keeping the momentum of the recovery going is putting underwater loans on firm ground.”
Expanding eligibility for the government’s Home Affordable Refinance Program, or Harp, is at the top of the White House’s agenda for housing. The effort is dubbed ‘Where’s my refi?’’ Treasury, which funds the nation’s anti-foreclosure efforts, supports the program, said Andrea Risotto, a spokeswoman. Four years after the peak of the foreclosure crisis, Treasury has spent only a fifth of the $38.5 billion of funds from the Troubled Asset Relief Program, or Tarp, set aside for housing.

‘Out There’

“This is where you get to the heart of the subprime lending problem -- these expensive private loans where people kept paying,” Swonk said. “It’s easy to forget they are still out there.”
Borrowers who refinanced through Harp in the first quarter had an average interest-rate reduction of 2.1 percentage points and will save about $4,300 in the first 12 months of the new loan, according to mortgage financier Freddie Mac. Much of that cash goes right into the economy, said Christopher Mayer, a professor at Columbia Business School in New York.
“There’s a real benefit to the overall economy when people refinance their mortgages and put money into their pockets to spend,” said Mayer. A refinancing “also puts household balance sheets on firmer ground,” he said.
The economy grew at a 1.8 percent pace in the first quarter, a number revised downward from the previous estimate of 2.4 percent, the Commerce Department said June 26. The rate in the second quarter probably slowed to 1.6 percent, according to the average estimate of about 86 economists in a Bloomberg poll.

Retail Spending

Commerce Department figures issued yesterday showed American consumers are also keeping their buying in check for goods other than automobiles. Sales at retailers climbed 0.4 percent last month, short of the 0.8 percent gain that was the median estimate of 82 economists surveyed by Bloomberg.
“Another expansion to Harp when rates were at rock bottom would have given a big boost to the economy,” Mayer said. “With higher rates, the economic benefit becomes smaller.”
The start of the Oregon program to refinance private-label loans, those not guaranteed by Fannie Mae or Freddie Mac, came two weeks after rates rose from a near-record low of 3.35 percent in early May. The average for a 30-year fixed mortgage reached a two-year high of 4.51 percent last week after the Federal Reserve said it may begin tapering its bond buying program later this year. Costs are still near historic lows with the rate down from 6.8 percent in 2006, more than 10 percent in 1990 and 18.6 percent in 1981.
“We once thought that mortgage rates could never go below 5 percent, and now we think a rate of four and a half is high,” said Mesirow’s Swonk. “People would still save money and stabilize their finances by going down to anything around the 5 percent level.”

Investor Objections

While expanding Harp would benefit homeowners, it wouldn’t benefit investors, said Walt Schmidt, a mortgage strategist at FTN Financial. Bondholders in private-label securities would lose a paying loan, and potential buyers of government-backed securities would fear another mid-stream change in eligibility standards, he said.
“The fact that Harp was changed” would concern investors, Schmidt said. “After all, what would stop another revision to Harp to prepay their new security at some point in the future?”
The government created Harp in 2009 to add to its housing programs. The Home Affordable Modification Program, known as Hamp, helps homeowners who have fallen behind on mortgage payments renegotiate loan terms. There’s also Home Affordable Foreclosure Alternatives, or Hafa, to help owners sell homes for less than they owe and escape the remaining debt.

Harp Extended

For Harp, borrowers have to be current on their mortgages. They aren’t required to have the 20 percent equity in their properties lenders typically stipulate for a refinancing. The program was expanded in 2011 to include all government-backed mortgages -- instead of the limit to mortgages 25 percent or less underwater in the first version -- and some fees were lowered. The new version is called Harp 2.0. In May, the deadline for Harp was extended to 2015.
Sen. Jeff Merkley, an Oregon Democrat, has proposed legislation to refinance mortgages held in private-label bonds by setting up a national trust to purchase and refinance loans similar to the Great Depression’s Home Owners’ Loan Corporation that returned a profit to the Treasury after helping 1 million homeowners. The Oregon pilot program, confined to the state’s Multnomah County that includes the state’s capital of Portland, is similar to that proposal though on a smaller scale.

Oregon Model

“There have been many different programs like this discussed at the federal level, but none of them has gotten any traction,” Columbia’s Mayer said. “Oregon may end up being a model for some other states, and Treasury has generally been supportive, but the odds of a program on a national level are fairly low.”
The Oregon refinancing program uses funds from the Hardest Hit Fund, established by Treasury in 2010 to give $7.6 billion to the nation’s capital and 18 states that had price declines of more than 20 percent during the housing bust or had high unemployment during the financial crisis, including California, Arizona, Nevada, Ohio, Illinois, and North and South Carolina.
So far, only about 20 percent has been spent, according to Treasury data. Other states with the funds have shown interest in the Oregon program, and are free to copy it if they wish, said Risotto, the Treasury spokeswoman.
“The terms of the Hardest Hit funds allow participating states to share promising ideas like the Oregon program with each other,” Risotto said. “We’ve helped facilitate some of those conversations.”

Underwater Borrowers

While the real-estate market is gaining at the fastest pace since the height of the boom, the share of borrowers who owe more than their homes are worth was about 20 percent in the first quarter, down from 23 percent at the end of 2011, according to CoreLogic Inc. There’s a larger group that lack the 20 percent equity needed for a traditional refinancing.
In the first-quarter, the median price for a single-family home in metropolitan Portland gained 22 percent, about twice the national pace, according to the National Association of Realtors. Still, values there remain more than 20 percent below a 2007 peak. Someone who bought a $350,000 home then could be about $77,000 underwater today.
Someone who got a $350,000 mortgage in Phoenix that year probably is now more than $150,000 underwater, despite this year’s surge in prices. A borrower would have to contribute that amount of cash plus the funds needed to get a 20 percent equity stake to qualify for a non-Harp refinance.

Not Everyone

“People seem to think that because prices have gained, it means everyone is above water now, or close to it,” said Matt McHugh, a mortgage broker at Alliance Capital Partners in Portland. “It shows an amazing lack of understanding of what happened in these hardest-hit markets.”
Travis, the 57-year-old trucker, who bought his home in St. Helens, Oregon, in 2006 for $138,500 using a subprime mortgage, said he has been trying to refinance for two years without success.
“I have a good income, and I have a good credit score, but that won’t do me any good because I’m still $27,000 underwater,” said Travis. “No one will talk to me.”