About a year later, another builder bought the homes and finished them off.  The walls were filled with bird nests and droppings.  Some places were black and damp, but I'm pretty sure the workmen just drywalled over it all.  I've always hoped that no one with severe allergies bought those things.

M has found a property that brings the whole critter issue up to a whole new level however.  He sent me the listing for the property at 36452 N. 105th Pl., Scottsdale, AZ. [MLS# 4333227] Here's a picture of this 4,759 sq. ft. beauty:

The listing says:

REO, Sold AS-IS, Home is incomplete in the beginning of construction, great for picking your own floor plan and upgrades. Beautiful mountain views, gated community, club house, community pool.

The Realtor comments states however:

[Realtor Remarks:  Please see documents tab to submit an offer.  Lockbox code XXXX. Buyer to verify all facts and figures. BEWARE OF BOBCAT LIVING IN PROPERTY.]

That's bad marketing.  Clearly the listing should have said, Enjoy viewing abundant wildlife from the comfort of your own living room. [After all, how many homes come complete with a watering hole in the front entryway?]

The property is listed for $350K, for those of you looking to REALLY get back to nature.

The clear and present danger posed by this deranged edifice built on the unstable foundation of subprime mortgages was not foreseen by the chief executives of America’s premier banks. It was not foreseen by government regulators, by Treasury officials or by the Fed. It was foreseen, however, by a handful of investors, who were aghast at the madness they saw on the Street and who used their prescience to make a fortune off the financial system’s calamitous meltdown. … – from Michiko Kakutani's review¹ of "The Big Short: Inside the Doomsday Machine", by Michael Lewis

I think Doom and Doomers were pretty much focused on just warning people as the risks become more and more compelling and obvious.  So were we also idiots for failing to enrich ourselves in the process?

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[1]: "Books of The Times: Investors Who Foresaw, and Jumped on, the Meltdown", by Michiko Kakutani, New York Times, March 14, 2010.

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Alas at some point along the way Ian's old man severely lost his way and became … an Arts nerd?

There was the time back on June 16, 2004 when the Chronicle-Herald picked up a stale wire story and I awoke to find …

"Orlando Bloom Named World's Sexiest Actor"

emblazoned all the way across page E1 of my breakfast newspaper.  I couldn't stop laughing for a week.

That was followed by a year and a half painstakingly constructing a Spenserian sestina to demonstrate the application to D-chiro-inositol of a radical new strategy for cyclitol specification, but for today perhaps it will be just as well if I limit the fun and games to a pair of ghazals inspired by one of the Gray Code examples in Knuth.  They're actually two of the draft sections for a long sequence of celebrations of our neighbourhood catch basins I've been working on titled Empire of Drains.

            Pawns

Be my sword you fat French spade, mucking to the prize.
Glow harder, swifter, smaller, oh spark struck in my father's eyes.

I found the willow wands unasked but they'll look nice
on the mantle, fire crackling, skirts rustling; tinkling of father's ice.

Outside, together, raise the picnic table, praise the cross.
How warm it is to shelter and forgather at my father's house.

Who wants to carry a caldron, mince mushrooms, memorize a curse?
Not I, a diamond scepter let me bear on father's horse.

But maybe it's for me when others judge the case.
If I could spell, would it disturb my father's ease?

Let me bear tankards while the children all carouse.
I see his club, there's no one in this awful house.

Locked fast inside the cockpit; see, this finger knows
I need to scream and dive upon my father's house.

Awake pentacle and float above my cloud. You'll rise
to when you rain like shekels, dancing in my father's eyes.

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            More Pawns

Despite the love no resting in my mother's arms.
I drained that cup for nation (Mother's) harm.

Burn this stick, I'll show you what I am.
Dentistry accorded with my mother's aims.

Sing out, out! It won't contain, this room.
Dance seven-times-seventy-times around my mother's home.

Ring-scores on glass sparkle in the gloom.
Last night I dreamed of mother, home.

Let them perceive a black sizzling when we come.
And what's for this night's supper mother, ham?

They came for singing, but I'll entertain the dome.
Tap wands, pull bunnies till my mother come.

Break in, the gate, I need to dig that loam.
The brush awaits let burn my mother's umb.

Smart toilet – what coin would operate, what alms?
Brush off this straw, then set me in my mother's arms.

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John Wise McLeod

The state's money problems are so bad that lawmakers are getting eviction notices and calls from collection agencies about their offices back home.

At least five state senators say they've piled up so much unpaid rent, sheepish landlords are asking them when the government plans to make good on its bills.

"He said, ‘Ira, I'm sorry,'" said Sen. Ira Silverstein, D-Chicago, recalling a visit from his landlord delivering an eviction notice. "And what am I going to do? I can't argue with the man."

While none of the lawmakers has actually gotten the boot yet, they are getting a taste of the frustratingly slow pace at which the state pays bills as it careens toward a $13 billion budget hole. It's a pain that's magnified exponentially for school districts, drug rehabilitation counselors and businesses awaiting tax refunds.

It isn't just the rent that's the problem:

"When they can't pay the rent of a Senate office, there's no way they're going to be able to pay the hundreds of millions of dollars in bills that they have back due," Duffy said. "It just shows what a tragic crisis we're in and how far out of hand this is."

The recourse to defaulting mortgage borrowers. [slide 12] I think we … and I was brought up to date of some recent changes in Alberta that make it even more uniform across Canada. In this country roughly half the States allow recourse, half bar it, but even in the States where recourse is allowed, it doesn't seem to be pursued very often. And I think we've seen in some of the European countries, and Denmark is one that comes to mind, one of the strengths of the Danish system is, not just recourse, but aggressive pursuit of delinquent borrowers. // And that's what's key. It's not just having recourse, but it's making sure you go after them. And I think to some extent this reflects maybe one cultural difference between Canada and the US. And it is that Canada, at least in terms of housing finance, seems to have more of a creditor orientation whereas the US, given its populist history has long had a much more of a bias towards and tilt towards debtors. And I think where you see this particularly is with regard to recourse. – Bert Ely, a couple of paragraphs below the 1:15:00 point of Sub VI Hotel

When the bubble at The World burst last fall, Europeans fled for their lives, famously leaving the keys right in their luxury cars at the airport parking lot.  Could a similar situation be unfolding in slow motion in the American south-west?

It was lucky I spent yesterday finishing up Bert Ely's presentation from Sub VI Hotel, because today twist's old friend Hubble Smith from the LV Review-Journal is lead author on a must read article on strategic default trends in Nevada.  NV's a recourse State, but CA isn't.  Are former Californians going to have to flee back down Route 15 to escape the consequences of their failed flips?  And would those NV judgments be enforceable in CA, creating back-door recourse?  The gang at AEI is pretty hot on federally imposed standards for recourse and they're talking NV standards, not CA.

LV R-J: "Underwater homeowners leave behind mortgages, but lenders can still come calling: Moral, social variables play role in predicting defaults"

A subsidiary of Goldman Sachs Group filed more than 50 lawsuits against Las Vegas homeowners in one month last year. Some experts say the litigation could signal the beginning of a Wall Street backlash against defaulting borrowers.

[bankruptcy attorney Philip] Goldstein expects short-sellers to face a flood of collection actions in the coming few years. Second-mortgage lenders, especially, are aggressively pursuing borrowers.

Because I do wade through so much drivel in the course of a day, something has to be pretty awful for me to take note of it.  This "exceptional" piece however, caught my eye. I challenge anyone to figure out the thesis of Tiger Woods Practices in Isleworth FL, Nation's 2nd Worst Housing Market:

The recently scandalous Tiger Woods has finally picked his golf clubs back up. The golfer returned to the playing fields in Florida, in a neighborhood called Isleworth, a luxury golf community outside of his Orlando home. Not a coincidence, the golf course is headed by golf legend Arnold Palmer, who is also hosting Woods' first possible return championship, the Arnold Palmer Invitational.

Tiger took a break from the golf world after his personal life became top news last November. Golfing took a hit because Woods always drew in high revenue and attention, but his absence allowed other golfers to get a taste of victory.

"At this point, we still don't know," stated Scott Wellington to the associated press. "He has until next Friday to commit. But it was a busy day, for sure. We had a lot of calls, a lot of interest and we sold some tickets. It was interesting."

Florida was hit almost as hard as California when the housing market crashed. As of February, Florida had the second highest foreclosure rate in the nation with 54,032 houses under foreclosure. The 2009 fourth quarter negative equity estimates ranged around 47.8 percent of all present mortgages.

Isleworth, is in Orange County, which has faired better than others in Florida, but Orange County is still in sixth place in the state for highest foreclosure numbers. Isleworth represents true Floridian luxury. Membership of the country club is by invitation only. Looks like they haven't rescinded Woods' membership like some of his advertisers have.

My theory is that the original article was only supposed to be about Woods possible return to golf, but some editor said the article wasn't long enough.  The reporter was told to add two more paragraphs. With no more information on Woods available, she wrote about the location- and its foreclosure rate. The information lengthened the article, but left her with no discernible thesis.

It does give one pause though. Traditionally when a location is talked about, you expect a discussion of things like climate, economy, schools, etc. Are we starting to hit the point that when we discuss a locale we discuss the foreclosure rate- even in an article about golf? In the future can we expect the following types of comments?

• So Sally moved to Colorado. What's the foreclosure rate there these days?
• How can you consider vacationing in Las Vegas? What about all those foreclosures?
• Smith is an amazing quarterback, especially considering the foreclosure rate of his hometown.
• Pleasanton is a lovely town with tidy homes, well manicured lawns and hardly any foreclosures.

Maybe it's not quite that bad yet. Maybe this is just an example of truly terrible writing. Then again, maybe it's a sign of things to come.

Just in the last couple of days it's become possible to think about the Second District as a self-governing sovereign entity.  The approximate model would be a high Renaissance  Italian mercantile city state like Florence.  Indeed it's even possible that if, as Susan Bies proposed around 2005, the US Congress were to put the Fed Board in charge of the great Wall Street banks, it would profoundly alter the state of the financial (and real) world.

NY Fed Implicated in the Accounting Fraud at Lehman

by Jesse

Quite a bombshell from Yves Smith of Naked Capitalism tonight. [this was posted late Thursday evening - JM]

I wonder if the US mainstream media will ignore and dismiss it as they did the exclusion of the Wall Street banks from European debt sales in response to their fraudulent CDO sales. Is there a 'reverse gear' on the Voice of America?

In response, let's see if Chris Dodd puts the Consumer Protection section of the financial reform legislation under the control of a private organization,the Fed, which is owned by the institutions it is supposed to be regulating, and which is now implicated in the failure and fraud that helped to trigger the recent financial crisis.

The senior Republicans on the committee have insisted that it be. Originally Senator Dodd seemed to be going along with that in the spirit of bipartisan support for the monied interests and the financial lobbyists. That would be the perfect Orwellian twist to an increasingly surreal decline in the observance of the Constitution and the rule of law.

And then of course there is Turbo Tim, knee deep again in messy conflicts of interest and crony capitalism. The "CEO defense" claiming attention deficit disorder and blissful aloofness is in fashion among highly paid US executives. Considering Mr. Geithner's record, even in the execution of his own tax returns, the incompetence defense might be plausible. But it then calls into question the judgement of the person who subsequently appointed Tim to be the head of the most powerful financial organization on earth, the US Treasury.

Call the New Yorker. Time for another media PR blitz, but this one is for the Chief.

Naked Capitalism
NY Fed Under Geithner Implicated in Lehman Accounting Fraud

Quite a few observers, including this blogger, have been stunned and frustrated at the refusal to investigate what was almost certain accounting fraud at Lehman. Despite the bankruptcy administrator’s effort to blame the gaping hole in Lehman’s balance sheet on its disorderly collapse, the idea that the firm, which was by its own accounts solvent, would suddenly spring a roughly $130+ billion hole in its $660 balance sheet, is simply implausible on its face. Indeed, it was such common knowledge in the Lehman flailing about period that Lehman’s accounts were such that Hank Paulson’s recent book mentions repeatedly that Lehman’s valuations were phony as if it were no big deal.

Well, it is folks, as a newly-released examiner’s report by Anton Valukas in connection with the Lehman bankruptcy makes clear. The unraveling isn’t merely implicating Fuld and his recent succession of CFOs, or its accounting firm, Ernst & Young, as might be expected. It also emerges that the NY Fed, and thus Timothy Geithner, were at a minimum massively derelict in the performance of their duties, and may well be culpable in aiding and abetting Lehman in accounting fraud and Sarbox violations.

We need to demand an immediate release of the e-mails, phone records, and meeting notes from the NY Fed and key Lehman principals regarding the NY Fed’s review of Lehman’s solvency. If, as things appear now, Lehman was allowed by the Fed’s inaction to remain in business, when the Fed should have insisted on a wind-down (and the failed Barclay’s said this was not infeasible: even an orderly bankruptcy would have been preferable, as Harvey Miller, who handled the Lehman BK filing has made clear; a good bank/bad bank structure, with a Fed backstop of the bad bank, would have been an option if the Fed’s justification for inaction was systemic risk), the NY Fed at a minimum helped perpetuate a fraud on investors and counter parties.

This pattern further suggests the Fed, which by its charter is tasked to promote the safety and soundness of the banking system, instead, via its collusion with Lehman management, operated to protect particular actors to the detriment of the public at large.

And most important, it says that the NY Fed, and likely Geithner himself, undermined, perhaps even violated, laws designed to protect investors and markets. If so, he is not fit to be Treasury secretary or hold any office related to financial supervision and should resign immediately…

Read the rest of the story here.

Posted by Jesse at 11:05 PM

Category: accounting fraud, blame for financial crisis, financial corruption, financial reform, New York Federal Reserve

This week's rather comforting Reuters report¹ was, as usual, based on the weekly update from the NY Fed's H.4.1 table site.² Here is Doom's updated CSV version³ of the agencies and treasuries foreign central bank holdings data set.

The flatlines are creeping ever closer to the limits of Flatland. The combined holdings are now $20.615 billion above the benchmark Dec 16th '09 figure, with most of that accounted for by a rise in Treasury Debt (the agencies number presently lies almost exactly $2 billion under the standard).

Treasury Debt holdings are up for a sixth straight week, but the $3.326 buy was less than half of last week's

Agencies rose $2.059 billion, almost matching last week's figure. Its stability over the last half year has bordered on the comic; its net move over the last 25 weeks is now a bit less than $1 billion.

*Agen-FM: continuing thanks go to Chris Puplava whose version of the Fed MBS holdings graph led me to conclude that those holdings may be masking a more marked drop in cenbank agencies holdings than the official dataset was admitting to.  Indeed, reducing the agencies number by the amount of the Fed's MBS holdings seems to give a more plausible narrative through the first part of '09 than the red line does.

This week the total US obligations number rose by $5.385 billion. While that's the forth sound positive result in a row, it's only slightly more than half last week's value.

Twist's ratios graphs edged up a bit.

The Setser graph components converged slightly in both components.

________________________

Notes and References

[1]: "Foreign central bank U.S. debt holdings rise – Fed", by Chris Reese, Reuters, March 11, 2010.

[2]: "H.4.1 Factors Affecting Reserve Balances", Federal Reserve Statistical Release (weekly), Federal Reserve Bank of New York.

[3]: The updated data set as a Comma Separated Value (CSV) file is here.

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embed from "Elizabeth Warren (with Charlie Rose) on Commercial Real Estate"

You can enjoy WaPo's ads over there, too

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WaPo: "Politics, shaky economy create no rush to restructure Fannie and Freddie"

"Any suggestion now about future changes could destabilize the market," said Karen Shaw Petrou, managing director of analysis firm Federal Financial Analytics and a longtime observer of housing finance policy. "The U.S. mortgage market is so fragile that all Treasury needs to say is 'boo' and it could fall apart."

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BL&BW (3/9): "AIG, Citigroup, Fannie Mae, Freddie Mac Shares Surge"

AIG jumped 13 percent to $32.77 at 4 p.m. in New York. Citigroup Inc. advanced 7.3 percent to $3.82 as Charles Gasparino of Fox Business Network said the U.S. may sell its stake in the bank within three months, without saying where he got the information. Fannie Mae climbed 5.9 percent to $1.07, and Freddie Mac increased 7.6 percent to $1.28.

The Buzz (CNN Money, 3/10): Bailout Rage? Citi, AIG, Fannie, Freddie Surging …

It seems more likely that investors, or shall I say traders, are making bets on rumors that so far have no basis in fact. There was scuttlebutt Tuesday, for example, that the SEC was going to ban or limit short selling in companies in which the government has a stake.

A Hampton woman is suing Bank of America, saying one of its contractors wrongly repossessed her home, padlocked the doors, shut off the utilities, damaged the furniture and confiscated a pet parrot, though her mortgage payments were on time.

Angela M. Iannelli, 46, suffered "severe emotional distress, embarrassment and ridicule" as a result of the company's "de facto foreclosure process and seizure proceedings," attorney Michael Rosenzweig wrote in the suit, filed Monday in Allegheny County Common Pleas Court.

The suit accuses Bank of America and its contractor, Ebensburg-based Snyder Property Services, of trespass, unfair business practices, defamation, libel and other offenses during the October foreclosure of Ms. Iannelli's home in the 5000 block of Fountainwood Drive. She is seeking an unspecified amount in compensatory and punitive damages.

Bank of America instructed Snyder Property Services to "enter, seize, padlock, 'winterize' and take possession" of Ms. Iannelli's house, the lawsuit said, cutting water lines and electrical wiring, pouring anti-freeze down her drains and "stealing" her pet parrot, Luke.

She returned home to find her locks had been changed, her furniture and carpets had been damaged, her belongings had been scattered and the bird missing. A notice on her door told her to contact Bank of America, which "initially falsely denied responsibility or knowledge of the invasion and refused" to help her, the suit said. The bank also acknowledged they knew the parrot's whereabouts, it said.

In further calls, Bank of America representatives told Ms. Iannelli they couldn't help her, told her to stop calling, said they were "tired of hearing from her" and put her on hold, told her to call back later and hung up on her, the suit said.

About a week later, Bank of America told her it had "made a mistake" and told her where she could find her parrot, but said she would have to travel to Ebensburg to retrieve it.

She eventually drove to Ebensburg to get her parrot back.

Mr. Rosenzweig said that, with the exception of one payment, Ms. Iannelli's mortgage payments had been on time. Bank of America had not sent her a notice of a 60-day deficiency nor given her 30 days to fix it, as state law requires, he said.

At this rate, Bank of America is going to need to open a Wrongful Foreclosure Department to deal with all of these gaffes.  Here's hoping that judges start throwing the book at them.  So far, Bank of America has not faced serious penalties for what amounts to home invasions.  If it were individuals doing these acts, they would be looking at jail time.  I'm not a big fan of more legislation, but the rights of individuals to be secure in a home where they are meeting their contractual obligations needs to be respected.

"Foreclosures weakened the effort, but overall, not all the housing that was put up was well thought out," said Michael K. Clarke, head of the Buffalo office for Local Initiatives Support Corp., a nonprofit agency that promotes community development. "There was insufficient coordination with the need for rental housing, and not enough emphasis on target areas that might demonstrate a more stable return. You can't sell new homes next to vacant ones, or sell houses to people who only qualify for financing by the skin of their teeth, and expect to have much success."

 

"We played musical houses with the housing in Buffalo," added Joseph E. Ryan, the former strategic planning director under former Mayor Anthony M. Masiello. "We have more houses than we need. People are coming from existing neighborhoods. It's not like they've been coming from out of town. It helps to destabilize neighborhoods."

It's not only communities that are hurt, but the taxpayers that end up paying for these mistakes: [Thanks John!]

Home ownership in the United States ranks up there with motherhood and apple pie. The government has championed it for decades through tax breaks, mortgage guarantees and, most recently, the herculean task of keeping Americans in their homes after the housing market collapse. But government subsidies of the American Dream also have a darker side: when things head south, taxpayers end up stuck with the costs.

The government-run mortgage finance agencies Fannie Mae and Freddie Mac owned more than 131,000 properties between them at the end of 2009, according to recent annual filings. That’s roughly the equivalent of San Francisco’s owner-occupied housing stock. The two companies sold off nearly 200,000 units last year that they took over after owners defaulted. But despite those efforts, Fannie and Freddie owned substantially more units at the end of 2009 than they did a year earlier.

And things are set to get worse. Barclays Capital estimates the pipeline of severely troubled loans at around five million across the United States. Modification programs, which should help some borrowers stay in their homes, have also delayed the inevitable forfeiture of many others.

Fannie and Freddie end up owning properties because they provided guarantees for the benefit of mortgage investors. Between them, they back around $5 trillion of American home loans. Such support — once implicitly and now explicitly backstopped by the Treasury — has handed borrowers relatively low financing costs for years.

Now, though, the result is that aside from the huge financial burden they place on taxpayers, the two companies have been amassing foreclosed properties and, in a few cases, have become landlords.

But the Treasury wants to intervene in the effects of all this intervention:

Today we are providing a program update, including additional details on Foreclosure Alternatives and Home Price Decline Protection Incentives. Foreclosure Alternatives will help to prevent costly foreclosures by providing incentives for servicers and borrowers to pursue short sales and deeds-in-lieu of foreclosure in cases where a borrower is eligible for a MHA modification but unable to complete the modification process. This program will assist homeowners who cannot afford to stay in their homes by helping them to avoid foreclosure and relocate to a home they can afford. Building on insights developed by the FDIC, Home Price Decline Protection Incentives will provide additional payments based on recent home price declines, and therefore will incentivize additional modifications in areas where home prices have been falling. By increasing MHA modifications and the use of alternatives to foreclosure, we will reduce the negative impact of foreclosure, minimizing damaging costs for financial institutions, borrowers and communities.

This is to be accomplished by:

-Servicers may receive incentive compensation of up to $1,000 for successful completion of a short sale or DIL.

-Borrowers may receive incentive compensation of up to $1,500 to assist with relocation expenses.

-Treasury will also share the cost of paying junior lien holders to release their claims, matching $1 for every $2 paid by the investors, up to a total contribution of $1,000 by Treasury.

Question: If this program is such a great deal for servicers, borrowers and lien holders, why does everyone have to be bribed to do it? The claim has been that these programs are to keep homeowners in their homes, but this is paying them to leave. Have we hit the point that the government is merely intervening now for interventions sake?

March 9 (Bloomberg) — The Regional Bond Dealers Association asked the Financial Industry Regulatory Authority and Federal Reserve to end reporting of so-called agency debt trades until bank-affiliated brokers also must comply, saying some are seeking to avoid disclosures. – BL&BW¹

I don't think anything straightforward has happened on this story arc in almost two years.  The GSEs themselves have been quasi-nationalized.  Their debt now enjoys a  semi-explicit guarantee, so that when the Chairman of the House Banking Committee suggests that bondholders may have to take a haircut anyway spreads tighten to a multi-year record, which is just a bit counter-intuitive.

Meanwhile Treasury apparently can't legally offer support to the debt, but what they can do is offer the Enterprises unlimited support to some classes of their equity until the end of '12, which is conveniently after the next presidential election so their next move won't have to take into account, like voters … but heck, it's a totally risk free strategy.  Why? Because they won't have to actually do anything more until 10 days after the world ends on Dec 21st

But closer to home, the Fed's MBS purchase program is scheduled at the end of this month.  Now that sounds simple enough, right? Think again …

Reuters: "Fed to linger in agency MBS market after exit"

LATER: the cat said, "I never get involved in politics," and it's easy to see why. Hat tip to Implode-O-Land for this 3/9 MW-hosted press release from Judicial Watch:

"Obama Administration Tells Court Government-Run Fannie Mae and Freddie Mac Not Subject to Open Records FOIA Law"

"Apparently, American taxpayers are paying the tab for the collapse of Fannie and Freddie, but are not allowed to ask any questions about why it happened. When it comes to Fannie and Freddie, the Obama administration is saying, in effect, 'None of your business,'" said Judicial Watch President Tom Fitton. "Obama administration officials and their lawyers can argue until they are blue in the face that Fannie and Freddie are not federal agencies, but their reasoning is straight out of Alice in Wonderland. [hmmm... Igor thinks he's starting to see a trend here] There is nothing ambiguous about the government's absolute control of Fannie and Freddie. Which raises the question: What does the Obama administration have to hide?"

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[1]: "Banks Unfairly Avoid Debt Reporting Rule, Dealers Say", by Jody Shenn, Bloomberg / BusinessWeek, March 9, 2010.

Doom friend (and occasional antagonist) Bill is always worth a look, especially when he speaks to the GSEs and politics.  This is right in his wheelhouse.

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"Barney?"

by Bill Maloni

What is Barney Frank (D-Mass) thinking?

I’m sure I’m not the first person to wonder what, beyond his legendary intelligence and quick wittedness, causes the cerebral and sometime volatile Chairman of the House Banking Committee to stake out the policy positions he takes.

Recently, as the world now knows, Frank called for “abolishing” Fannie Mae and Freddie Mac. He soon will initiate congressional hearings to produce that desired legislative result.

The fact that the Obama Administration hasn’t reached the same fever pitched conclusion as Barney likely means that this atomization will not occur in an already volatile political year. Since moving forward in this regard—with no idea what to employ as a mortgage finance system replacement–is fraught with huge political and systemic mortgage business risk for the Democrats and the mortgage industry.

Last week, Barney’s took it upon himself to lob another grenade at the former GSEs and reminded investors that Fannie/Freddie debt and MBS securities were not the equal to Treasuries and that those who bought company securities could end up getting a financial “haircut,” or less money than they expected when they bought the bonds.

While legally and technically correct, what Barney said flies in the face of what the Treasury sales campaign to assure markets, i.e. that the former GSEs debt and securities are safe and the Treasury does stand with them, since the United States mortgage market—which right now is standing on Fannie’s and Freddie’s shoulders—relies on the two companies largely unfettered access to credit market.

Fannie and Freddie Still “It”

Like it or not, Fannie and Freddie alone are carrying out the secondary mortgage market policies that the Treasury wants performed and which the nation demands. The fact is, without Fannie and Freddie, the US would have no “conventional” secondary mortgage market where non-government guaranteed mortgage loans are securitized and sold throughout the world.

I can’t explain what was on Chairman Frank’s mind, but I don’t think that he was just “rattling the market’s cage, because he knows he can,” as some have suggested.

Barney—whom I suspect hasn’t changed much in the years—always was tough and ornery to lobby, the most difficult official to meet with and nail down on matters. His mind was always three steps ahead you. He was impatient and he didn’t suffer fools “gladly,” even when he agreed with you.

Tough and now likely GSE-hostile, I do not believe that Barney Frank is irresponsible and wanton.

He’s mad at Fannie and Freddie and that’s clear. His anger and “abolish” statements support that, but he understands that whatever system he designs it’s going to have to look a lot like what F&F looked like and produce much of what F&F produced.

He’s not going to throw the nation’s mortgage lending to the large commercial banks and their subsidiaries and have his name on that enabling legislation which would erode everything he has championed.

Can’t Just be The Feds

I don’t think Chairman Frank wants only the federal government lending for home ownership. I am sure that he wants private entrepreneurs and private money—not federal appropriations—doing most of the work to give Americans their share of the “American Dream.”

I imagine that he would like a new system which continues to take advantage of US financial products. i.e., bonds and securities backed by mortgages, which appeal to investors across the world and thus bring in dollars from overseas to meet US domestic mortgage needs.

Certainly he is joined in that by the nation’s homebuilders, Realtors, their employees and equipment suppliers, furniture, rug, window and appliance makers do and every other industry which supplies households with goods and services. That’s why the “homebuilding” segment of our economy has produced 20% or more of our gross national product.

Does he want to abolish the efficient secondary mortgage market the US enjoyed pre Paulson’s “Bush whacking” of Fannie and Freddie? I hope not.

Can he really have problems with dedicated national mortgage investors, which standardized mortgage products so that families in every community in the nation could enjoy the same mortgages and pricing? Does he want to do away with a market that regresses and shifts the supply and availability of mortgage money from international investors to domestic savers?

I suspect not.

Is he upset at the millions and millions of low-moderate and middle income homebuyers, with increasingly in black and Hispanic communities, which benefited from a mortgage system that D’s and R’s in Congress supported year after year? I doubt it, since Barney would consider them his “people.”

Can’t Rely on the Banks

He and his staff must realize that those loans never would have been made by a primary mortgage market system which had no mandatory fair lending goals. They were made when Fannie and Freddie used market pressures to originate those loans and in the process share the benefits of our nation with those traditionally ignored or left out.

All of this means if Barney is going to scuttle F&F, he just may end up recreating their clones.

Chairman Frank could be angry and aggravated because he long has supported Fannie and Freddie—when others in Congress didn’t—and he feels personally chagrined and disrespected by the GSEs for their dubious PLS subprime mistakes and all that it produced.

That’s understandable.

But it hardly is grounds for destroying a system which worked fabulously, until the bad GSE judgments by a few in power, drove faulty business decisions. Those same kinds of decisions were made by commercial and investment bankers across the world, with the results that many of them and their firms and officials–just like Fannie and Freddie and many of their employees–were forced out of business, lost jobs, earnings, and reputations.

I keep repeating that the “bad guys” are gone from the GSEs. Those who remain did not have their hands all over the stupid business decisions which have angered so many.

Policy makers shouldn’t let their personal peak destroy institutions which have shown their capacity to work and successfully perform a variety of desirable chores and which well could be superior to something “whiz bang and new” which their current frustrations breed.

Baby and bath water, wheat and chafe.

If the upcoming GSE hearings are fair, then the world should be shown not only what went wrong, but also the many, many things that Fannie and Freddie did right.

The Black and Hispanic caucuses, which heavily populate the House Banking Committee, should be particularly attentive to those facts, since they have firsthand knowledge of how fairly their constituents were and have been treated by the large commercial banks which presumably aspire to succeed Fannie and Freddie.

March 8 (Bloomberg) — A Federal Deposit Insurance Corp. plan to auction more than $1 billion in assets seized from failed banks next month, including a loan to build a W Hotel in Atlanta, may trigger writedowns that weaken lenders nationwide.

Almost half of the loans were originated by Silverton Bank N.A., whose collapse last May was the biggest in Georgia history. Community banks that joined Silverton in providing $80 million for the 237-room hotel and condominium complex, as well as backing for 39 other projects, could be forced to write down their stakes to reflect sale prices.

The auctions may have wider repercussions. Of the $41 billion in assets seized from failed banks held by the FDIC as of the end of January, $15.6 billion are real estate loans and about 4 percent of those involve participations by other lenders, according to agency spokesman Andrew Gray.

“These banks can’t believe that the regulator they pay to protect them is going to sell these loans to someone who can flip them and cause them serious losses,” said Robert Reynolds, a lawyer at Reynolds Reynolds & Duncan LLC in Tuscaloosa, Alabama, who represents 25 lenders that took part in financing the W Hotel. “Our banks just cannot believe they’re being treated in a way that ultimately hurts the FDIC’s insurance fund, because some of them are right on the edge.”

It's easy to understand the position of the lenders, who've been fighting writedowns ever since the housing market started to fizzle.  Auctions in this market are unlikely to fetch top dollar.

On the other hand, what's the FDIC supposed to do with all this stuff?  Auctions have the advantage of disposing of assets that might take years to dispose of otherwise, and writedowns at this point are unavoidable.

An auction might not be the best solution for all of these properties, but it's likely the only efficient way to unload most of them.  While the short term effect might be painful, until the air is out of the price bubble, the market is going to continue to be in bad shape, which will keep lenders in bad shape.

On the upside, better prices should translate into better market activity.  A price correction could be a good thing- for the lenders who manage to hang on long enough.

… Historically, the New York Fed has been among the most profitable shareholder-owned corporations in the world. Yet it keeps the details of its shareholders’ ownership information private. What we do know is that its owners include precisely those institutions it is tasked to regulate and supervise and those [it] has obviously failed to adequately supervise. Unlike the other District Banks of the Federal Reserve system, which have overseen their banks quite well, the New York Fed’s concentration of the largest banks, coupled with its unique role of managing the market operations of the entire Fed system, has built a culture where it sees itself as a market participant and peer to those firms it regulates. – Josh Rosner¹

Who owns the Federal Reserve Bank of New York?  The answer to that question isn't even controversial.  Heck, it's the law.²

… The question of ownership can still be addressed, however, by examining the legal rules for acquisition of such stock. The Federal Reserve Act requires national banks and participating state banks to purchase shares of their regional Federal Reserve Bank upon joining the System, thereby becoming "member banks" (12 USCA 282). …

So it's basically owned by the banks of the Second District, which comprises NY, some bits of NJ & CT bordering NYC and just for laughs a couple of honest to gosh American colonies, one of which has a population slightly larger than the State of Oregon (they don't call it the Empire State for nothing ).  Heck, Jamie Dimon is presently on the Board of Directors.

We're talking about the institutions of Wall Street, presently the most important concentration of financial and market muscle on the planet.  They're involved in everything from HFT / CoLo operations in the equities markets to the PPT to cooperation with the US intelligence community.  It's not even obvious that any mere bank regulator could even start to control this fratricidal inbred hairball.

Doomers learned in the course of an update to yesterday's Crack of Doom that five years ago Fed Governor Susan Bies was blocked in her efforts to centralize the Fed's bank supervision by then NY Fed Pres Tim Geithner.  Ben Bernanke is providing moral leadership but seems to have very little clout to rein in the Second District.  It's almost like he was a late 15th Century pope dealing with the Medici Bank in Florence.

Congress isn't having much more luck.³

The Fed could retain oversight of large bank holding companies under a scaled-back regulatory reform plan being considered in the Senate Banking Committee, lobbyists said.

So Chris Dodd's last ditch effort to impose independent bank regulation on Wall Street appears doomed which, as the folks at ZeroHedge are pointing out,⁴ is an international scandal and embarrassment.

[Nobel Prize winning economist Joseph] Stiglitz stressed that the Fed banks have clear conflicts of interest, since the banks are largely governed by a board of directors that includes officers of the very banks they're supposed to be overseeing …

And just to top it off, it was the banks of Wall Street that were disproportionately represented as recipients of support in the great bailout; a bailout largely orchestrated by … (three guesses) …. Has there ever been a bigger demonstration of Moral Hazard?

——————-

[1]: "Has the New York Fed been serving the public trust? Has Geithner?", by Joshua Rosner, Ritholtz.com, February 3, 2010.

[2]: "Who Owns and Controls the Federal Reserve?", by Edward Flaherty, USA Gold, July 18, 1997.

[3]: "Critics hit U.S. Senate tilt toward Fed status quo", by Kevin Drawbaugh, Reuters, March 8, 2010.

[4]: "Nobel Prize-Winning Economist: Federal Reserve System is Corrupt and Undermines Democracy", ZeroHedge, March 4, 2010.

But in recent weeks, President Barack Obama has proposed regulating health-insurance rate increases, separating commercial banking from investment banking and prohibiting commercial banks from owning or investing in private-equity firms or hedge funds. – WSJ¹

I don't know whether it was the sudden realization that 8.8 earthquakes actually happen or what, but over the last few weeks there's been a major outbreak of sober people brushing aside the Panglossian fluff bunnies who have been dominating the discourse until now.

A post² at SeekingAlpha, for example, neatly encapsulates this new realism in just a pair of bullet points:

• We have spent more than we have earned, and one day will have to pay back the borrowed money we spent.
• Someone has to pay for the borrowing (unless we default), and those people will, at some point in the future, not have money to spend.

Greed is still king in the markets, but it's hard to see how this can last much longer.

UPDATE: except for³ …

Five years ago, one Fed governor sought to centralize supervision of the biggest banks in Washington. "I felt we were not being as effective as we could be," says Susan Bies, who has since left the board. "We didn't have a strong enough overall view of what was going on throughout the system." According to several people involved in the discussions, her effort was beaten back by Timothy Geithner, then president of the Fed bank in New York, which oversees some of the largest banks. Mr. Geithner, now Treasury secretary, declined to comment.

Wall Street's "let's be our own regulator" configuration still holds the gold medal in Moral Hazard (care to guess who are the NY Fed's secret shareholders?)

—————

[1]: "Economic Policy 'Nudge' Gives Way to a 'Shove' ", by Jonathan Weisman, Wall Street Journal, March 8, 2010.

[2] "Excess Government Debt: The Great Economic Lie", by Cynicus Economicus, SeekingAlpha, March 7, 2010.

[3] "Battle Inside Fed Rages Over Bank Regulation", by Jon Hilsenrath, Wall Street Journal, March 8, 2010.

We have just in the last year had the largest annual fall in real estate prices, hit the highest number of delinquent mortgages measured, witnessed a record 918,000 homes taken in foreclosure, and 11.3 million home owners now own negative-equity.

 

Case Shiller prices fell a record 19.1 percent versus the previous year in Q1 2009. Mortgage delinquencies are at a record high 15.02 percent (Q4 2009) according to the Mortgage Bankers Association — meaning an estimated 8.4 million families do not pay their most important bill. RealtyTrac reported a record of over 900,000 foreclosure repossessions in 2009, and estimates a record 3 million homes will experience a foreclosure event this year. First American counts 11.3 million homes with negative equity, and sees an additional 2.3 million homeowners on the edge of going overboard and under water.

 

Every element — falling prices, mortgage delinquencies, repossessed homes, negative equity — they all hit records in 2009.

. . .

Mortgages rates hit a record low in 2009 on Freddie’s index for a 30-year fixed rate and the average 4.9% in Q4 2009 is outstanding for affordability (please see the chart above). The Fed won with low rates what Robert Shiller called in the Wall Street Journal “the most dramatic turnaround” he has seen in home-prices since starting to watch them in 1987. The year-over-year loss in values shrank last year from a monster 19% in Q1 to a mousy 2.5% in Q4.

 

Fannie and Freddie now own the mother-of-all helocs. They can write themselves checks without consideration of their losses – an important fact given they will lose more money than anybody in the aftermath of the financial crisis.

 

Can the Fed and Fred and Fannie and Ben and Tim be beaten in their mission? Will they have the power to support current real estate prices even if only half of the bubble blow-up value has disappeared?

. . .

A twin train wreck of negative equity and mortgage delinquencies will collide with real estate prices. They deflate values. No one can predict the consequences. Strategic default will be a smart choice for many. Some will discover a home can be returned to the bank. Will the madness of equity-free crowds take arms against a sea of manic bubble prices?

 

If you want to refinance and the appraised value could be an issue, get your mortgage done now. This is especially true in the jumbo market.

 

If you want to buy real estate, beware and be warned. Your financial massacre may follow your purchase. You cannot reasonably buy in this environment except with aggressive price negotiations, a close study of national and local price trends, intelligent courage, and your eye lids burned off by what you read here. Fools rush in where wise men fear to buy.

Does this mean that no deals are out there, that no one should be purchasing real estate?  No.  It does mean however, that you'd better know what you are doing.  You've been warned.