Saturday, September 29, 2007

FDIC Shuts Down NetBank Due to Defaults

AP Business Writer

NetBank Inc., an online bank with $2.5 billion in assets, was shut down by the government on Friday because of an excessive level of mortgage defaults.

It was the largest savings and loan failure since the tail end of the industry's crisis more than 14 years ago. Federal regulators appointed the Federal Deposit Insurance Corp. as a receiver for Alpharetta, Ga.-based NetBank.

Customers with less than $100,000 deposited with NetBank will be protected by FDIC insurance.

While dozens of mortgage companies have closed due to soaring defaults of home loans made to borrowers with weak, or subprime, credit, those problems previously had occurred among non-bank lenders such as New Century Financial Corp. NetBank, in contrast, is federally regulated.

Loose mortgage standards in recent years — especially among lenders catering to subprime borrowers — have resulted in a spike in home loan defaults.

Bert Ely, a banking consultant based in Alexandria, Va., said NetBank was in "deep trouble" before the subprime mortgage market's woes accelerated this year. Regulators, he said, "should have closed it a long time ago."

While some Internet-only banks are successful, he said, operating one without retail branches can be a difficult strategy to maintain.

The FDIC said Friday that $1.5 billion of NetBank's insured deposits will be assumed by ING Bank, also a major online bank that is part of Dutch financial giant ING Groep NV. ING will pay $14 million for the deposits and receive 104,000 new customers.

NetBank, which had no physical branches, sustained significant losses last year "primarily due to early payment defaults on loans sold, weak underwriting, poor documentation, a lack of proper controls, and failed business strategies," the Office of Thrift Supervision said in a statement.

The FDIC said NetBank had $2.5 billion in total assets and $2.3 billion in deposits as of June 30.

The OTS oversees about 830 savings and loan institutions, or thrifts, ranging in size from giants like Seattle-based Washington Mutual Inc. to small community banks. By law, thrifts must have at least 65 percent of their lending in mortgages and other consumer loans.

The last major thrift to be closed by regulators was Superior Bank of Hinsdale, Ill. It had total assets of $1.9 billion and was shut down in July 2001. Its failure has so far cost the FDIC's insurance fund an estimated $273 million.

In June 1993, regulators shut down Western Federal Savings and Loan Association, which had total assets of $3.8 billion. That thrift's owners included former Treasury Secretary William Simon and former Federal Reserve Board Vice Chairman Preston Martin.

NetBank had reached a deal to sell its deposit accounts and other assets to privately held EverBank of Jacksonville, Fla., but EverBank announced this month that the deal fell through.

EverBank in July completed its acquisition of NetBank's mortgage servicing business, and the FDIC said Friday that EverBank will purchase about $700 million in mortgage loans.

"Customers of NetBank should have confidence and security knowing that they will have access to their insured funds in a timely and orderly manner," FDIC Chairman Sheila Bair said in a prepared statement.

The FDIC insures bank deposits of up to $100,000.

NetBank had $109 million in deposit accounts that exceeded the FDIC limit. Those customers will become creditors in NetBank's receivership, the FDIC said.

The FDIC has a toll-free number for customers affected by the failure:1-888-256-6932.

Thursday, September 27, 2007

Crime or commerce?

Recently an article in the AJC reported that in Cobb County and other places people were being fined for hiring Mexicans to help them with household tasks such as cleaning gutters or moving furniture. It seemed that in some instances people were being fined for merely speaking with someone who was Mexican.

It’s a sad commentary on the state of affairs in this country when some city council declares it is a crime to employ a person for the purpose of some menial labor such as yard work or moving furniture. How is it a crime for two adults to agree upon an hourly amount for a specified task for the duration of several hours? It’s not a crime it is commerce!

Under the auspices of this kind of perverse logic how many kids throughout the country would now be in violation of the law for mowing neighborhood yards for pay? Are we now under the burden of being required to maintain workman’s comp insurance for the neighborhood kid who mows grass in the summer? Are little old ladies going to be subject to fines for hiring the next door neighbor’s kid to paint her eaves?

But wait, that’s not the rub is it? The rub is that the prospective worker is Mexican and the person needing the help is a gringo. Would the cops even have given a second glance had the two people involved both been white or black? I don’t think so.

The so-called crime is really guilt by association. What it boils down to is that now it is a crime for white/blacks to co-mingle with Mexicans. The insinuation is that the only reason any two people of mixed nationalities would have to converse with one another is for the sole purpose of a labor transaction and even if it is how is that a crime?!

Does the mere discussion of work invoke the penalty? Can we be fined for asking someone what time it is? If no money has been exchanged and no labor performed then the so called crime never took place. At least when police put a female officer disguised as a prostitute on the street to catch would-be “Johns” she is wearing a wire and the conversation and the agreed upon amount are recorded on tape. And prostitution is an illegal act. Since when did blowing leaves become illegal? Where is the evidence, the taped conversation, the parcel of drugs? How can this be left to stand? It’s beyond unconstitutional, it’s immoral.

Georgia seems to be regressing back to the fifties, when a black man could get locked up or worse for being seen talking to a white woman. How is society wronged by two adults agreeing to a set price for a set task of honest work? The law is the crime and it should be challenged in court, yesterday.

The disingenuous excuse of it being a safety hazard is the argument of a child. Enforce the loitering laws if crowds gather. Arrest people for trespassing if they are on private property. Tying up police officers in stake-outs waiting for gringos to pull up in vehicles near a crowd of Mexicans is a waste of resources and tax money. It’s also racial profiling at it’s worst. These laws must be repealed.

Wednesday, September 26, 2007

the fraud that is ethanol

The price of corn per bushel has doubled in the past year, which is great for grain farmers – but not-so-good for livestock producers that count on cheap, corn-based feed for their cattle, hogs and poultry.

AFP reports that “registered Angus breeder Jim Skinner said soaring grain and fuel prices have led to a 40 percent rise in expenses.”

And we all know the main cause of the inflated price of corn – everyone say it together now – ethanol. That’s right.

“Ranching consultant Bob Loucks has added his voice to the chorus of critics claiming the government is unfairly underwriting ethanol at the expense of animal producers, in essence pitting one agricultural sector against another,” the AFP continues.

“Ethanol sucks,” Kevin Kerr put bluntly. “Corn is overbought on the weekly and daily price charts and there is a decent size gap below the market, close to the 50% correction level.”

Many factors are working together that could dampen the over-enthusiasm that traders have been showing corn, including a lower crude price, an oversold U.S. dollar, and harvest pressure.

And the AP reports that ethanol stocks fell yesterday across the board, with several reaching 52-week lows. “A glut of product, limited blending capability and high corn prices continue to overshadow recent enthusiasm about the industry.”

Clearly, some people are catching on to the fraud that is ethanol...but that’s not going to stop the government for dumping money into the industry. They’ve already thrown billions of dollars of taxpayer money at ethanol – so even if you’ve known all along what a fraud ethanol is, you’re still ‘invested’ in it.

Keep reading to learn about 4 rock solid safeguards against the hailstorm of hype ahead:

Tuesday, September 25, 2007

Mattel Official Delivers an Apology in China

September 22, 2007

Mattel, the world’s largest toy maker, apologized in China yesterday for its recalls of nearly 20 million Chinese-made toys this summer.

According to news accounts, Thomas A. Debrowski, Mattel’s executive vice president for worldwide operations, apologized to China for harming the reputation of Chinese manufacturers.

American politicians and others reacted in turn with criticism that Mattel was kowtowing to China, where the company manufactures 65 percent of its toys, many in partnerships with Chinese vendors.

Mattel challenged the news accounts of Mr. Debrowski’s meeting in Beijing, saying that they had mischaracterized his remarks. Mattel sent Mr. Debrowski to the meeting to apologize to consumers in China, not to manufacturers there, a spokeswoman said.

Mattel said in a statement: “Since Mattel toys are sold the world over, Mattel apologized to the Chinese today just as it has wherever its toys are sold.”

Mr. Debrowski’s remarks were not intended to address harm that has come to the reputation of Chinese-made products as Mattel and other companies recalled millions of toys, the spokeswoman said.

The company, long known for its high-quality manufacturing, is having a difficult time keeping critics at bay. Mattel was not the first to recall toys made in China this year because of lead paint, but its recalls have been the largest and most noticed. Retailers, media companies and government officials in the United States, Europe and China have expressed concern over the recalls. And analysts say the recalls have caused many consumers to worry about toys made in China.

Mr. Debrowski met yesterday at the office of Li Changjiang, the head of the General Administration of Quality Supervision, Inspection and Quarantine, in Beijing. Mr. Li pointed out to Mr. Debrowski that a large part of Mattel’s profits come from factories in China, according to the news reports.

“Our cooperation is in the interests of Mattel, and both parties should value our cooperation,” Mr. Li said, according to an account of the meeting by The Associated Press. “I really hope that Mattel can learn lessons and gain experience from these incidents.”

Chinese officials told Mr. Debrowski at the last minute that they would meet with him only if reporters could be invited, according to someone familiar with the meeting.

Mr. Debrowski’s comments at the meeting created a furor of criticism in the United States.

“It’s like a bank robber apologizing to his accomplice instead of to the person who was robbed,” Senator Charles E. Schumer of New York said in an interview. “They’re playing politics in China rather than doing what matters.”

In a draft of the remarks that Mr. Debrowski planned to make at the meeting, he clarified that 17.4 million of the nearly 20 million units recalled this summer were magnetic toys. Those toys, though produced in China, were recalled because of a design mistake by Mattel.

“Mattel does not hold Chinese manufacturers responsible for the design in relation to the recalled magnet toys,” according to Mr. Debrowski’s planned remarks, which Mattel released.

When Mattel recalled the magnetic toys in mid-August, the company said that those recalls were not caused by Chinese vendors, separating them from the more than 80 other styles of toys that were recalled because they were tainted with lead paint.

“They really mixed these issues,” said Dara O’Rourke, an associate professor of labor and environmental policy at the University of California, Berkeley.

Mr. O’Rourke said that Mattel had been more focused on public relations than on fixing its problems. He said that Mattel used China as a scapegoat for its own problems and that the toy maker is now paying the price.

“There’s no question that Mattel is still completely committed to operating in China and needs those factories,” he said. “There was a lot of scapegoating China, but I would argue that this was caused by a system that is designed to push down costs and speed up delivery. There are root causes and Mattel is behind those.”

Mattel executives said throughout the last six weeks that they recalled more units than necessary because they were being conservative. But Mr. Debrowski’s remark at the meeting that the recalls were “overly inclusive” was also controversial because it implied that Mattel was admitting that it had made the problem in China look larger than was actually the case.

While Mattel executives have blamed their vendor partners, they were saying in August that China was not to blame.

“I can’t say that it’s necessarily a China problem, because as I said we’ve been in China many, many years, and we haven’t had any problems. I think it’s a problem where you’ve got a vendor that wants to break the rules,” Mr. Debrowski said on Aug. 22. “A vendor can break the rules anywhere he wants to, in the United States or China.”

Management experts said that Mattel was in a difficult position with the messages that company executives have to deliver to keep its partners happy.

“They have relationships with suppliers; they have relationships with customers; they have relationships with governments and with investors,” said Steven Eppinger, the interim dean and a professor at the Sloan School of Management at the Massachusetts Institute of Technology. “But they cannot give them different messages.”

Mr. Eppinger said that it was more difficult to maintain good relationships with vendors abroad and that communications could be misunderstood more easily.

Monday, September 24, 2007

Collecting of Details on Travelers Documented

U.S. Effort More Extensive Than Previously Known

By Ellen Nakashima
Washington Post Staff Writer
Saturday, September 22, 2007; A01

The U.S. government is collecting electronic records on the travel habits of millions of Americans who fly, drive or take cruises abroad, retaining data on the persons with whom they travel or plan to stay, the personal items they carry during their journeys, and even the books that travelers have carried, according to documents obtained by a group of civil liberties advocates and statements by government officials.

The personal travel records are meant to be stored for as long as 15 years, as part of the Department of Homeland Security's effort to assess the security threat posed by all travelers entering the country. Officials say the records, which are analyzed by the department's Automated Targeting System, help border officials distinguish potential terrorists from innocent people entering the country.

But new details about the information being retained suggest that the government is monitoring the personal habits of travelers more closely than it has previously acknowledged. The details were learned when a group of activists requested copies of official records on their own travel. Those records included a description of a book on marijuana that one of them carried and small flashlights bearing the symbol of a marijuana leaf.

The Automated Targeting System has been used to screen passengers since the mid-1990s, but the collection of data for it has been greatly expanded and automated since 2002, according to former DHS officials.

Officials yesterday defended the retention of highly personal data on travelers not involved in or linked to any violations of the law. But civil liberties advocates have alleged that the type of information preserved by the department raises alarms about the government's ability to intrude into the lives of ordinary people. The millions of travelers whose records are kept by the government are generally unaware of what their records say, and the government has not created an effective mechanism for reviewing the data and correcting any errors, activists said.

The activists alleged that the data collection effort, as carried out now, violates the Privacy Act, which bars the gathering of data related to Americans' exercise of their First Amendment rights, such as their choice of reading material or persons with whom to associate. They also expressed concern that such personal data could one day be used to impede their right to travel.

"The federal government is trying to build a surveillance society," said John Gilmore, a civil liberties activist in San Francisco whose records were requested by the Identity Project, an ad-hoc group of privacy advocates in California and Alaska. The government, he said, "may be doing it with the best or worst of intentions. . . . But the job of building a surveillance database and populating it with information about us is happening largely without our awareness and without our consent."

Gilmore's file, which he provided to The Washington Post, included a note from a Customs and Border Patrol officer that he carried the marijuana-related book "Drugs and Your Rights." "My first reaction was I kind of expected it," Gilmore said. "My second reaction was, that's illegal."

DHS officials said this week that the government is not interested in passengers' reading habits, that the program is transparent, and that it affords redress for travelers who are inappropriately stymied. "I flatly reject the premise that the department is interested in what travelers are reading," DHS spokesman Russ Knocke said. "We are completely uninterested in the latest Tom Clancy novel that the traveler may be reading."

But, Knocke said, "if there is some indication based upon the behavior or an item in the traveler's possession that leads the inspection officer to conclude there could be a possible violation of the law, it is the front-line officer's duty to further scrutinize the traveler." Once that happens, Knocke said, "it is not uncommon for the officer to document interactions with a traveler that merited additional scrutiny."

He said that he is not familiar with the file that mentions Gilmore's book about drug rights, but that generally "front-line officers have a duty to enforce all laws within our authority, for example, the counter-narcotics mission." Officers making a decision to admit someone at a port of entry have a duty to apply extra scrutiny if there is some indication of a violation of the law, he said.

The retention of information about Gilmore's book was first disclosed this week in Wired News. Details of how the ATS works were disclosed in a Federal Register notice last November. Although the screening has been in effect for more than a decade, data for the system in recent years have been collected by the government from more border points, and also provided by airlines -- under U.S. government mandates -- through direct electronic links that did not previously exist.

The DHS database generally includes "passenger name record" (PNR) information, as well as notes taken during secondary screenings of travelers. PNR data -- often provided to airlines and other companies when reservations are made -- routinely include names, addresses and credit-card information, as well as telephone and e-mail contact details, itineraries, hotel and rental car reservations, and even the type of bed requested in a hotel.

The records the Identity Project obtained confirmed that the government is receiving data directly from commercial reservation systems, such as Galileo and Sabre, but also showed that the data, in some cases, are more detailed than the information to which the airlines have access.

Ann Harrison, the communications director for a technology firm in Silicon Valley who was among those who obtained their personal files and provided them to The Post, said she was taken aback to see that her dossier contained data on her race and on a European flight that did not begin or end in the United States or connect to a U.S.-bound flight.

"It was surprising that they were gathering so much information without my knowledge on my travel activities, and it was distressing to me that this information was being gathered in violation of the law," she said.

James P. Harrison, director of the Identity Project and Ann Harrison's brother, obtained government records that contained another sister's phone number in Tokyo as an emergency contact. "So my sister's phone number ends up being in a government database," he said. "This is a lot more than just saying who you are, your date of birth."

Edward Hasbrouck, a civil liberties activist who was a travel agent for more than 15 years, said that his file contained coding that reflected his plan to fly with another individual. In fact, Hasbrouck wound up not flying with that person, but the record, which can be linked to the other passenger's name, remained in the system. "The Automated Targeting System," Hasbrouck alleged, "is the largest system of government dossiers of individual Americans' personal activities that the government has ever created."

He said that travel records are among the most potentially invasive of records because they can suggest links: They show who a traveler sat next to, where they stayed, when they left. "It's that lifetime log of everywhere you go that can be correlated with other people's movements that's most dangerous," he said. "If you sat next to someone once, that's a coincidence. If you sat next to them twice, that's a relationship."

Stewart Verdery, former first assistant secretary for policy and planning at DHS, said the data collected for ATS should be considered "an investigative tool, just the way we do with law enforcement, who take records of things for future purposes when they need to figure out where people came from, what they were carrying and who they are associated with. That type of information is extremely valuable when you're trying to thread together a plot or you're trying to clean up after an attack."

Homeland Security Secretary Michael Chertoff in August 2006 said that "if we learned anything from Sept. 11, 2001, it is that we need to be better at connecting the dots of terrorist-related information. After Sept. 11, we used credit-card and telephone records to identify those linked with the hijackers. But wouldn't it be better to identify such connections before a hijacker boards a plane?" Chertoff said that comparing PNR data with intelligence on terrorists lets the government "identify unknown threats for additional screening" and helps avoid "inconvenient screening of low-risk travelers."

Knocke, the DHS spokesman, added that the program is not used to determine "guilt by association." He said the DHS has created a program called DHS Trip to provide redress for travelers who faced screening problems at ports of entry.

But DHS Trip does not allow a traveler to challenge an agency decision in court, said David Sobel, senior counsel with the Electronic Frontier Foundation, which has sued the DHS over information concerning the policy underlying the ATS. Because the system is exempted from certain Privacy Act requirements, including the right to "contest the content of the record," a traveler has no ability to correct erroneous information, Sobel said.

Zakariya Reed, a Toledo firefighter, said in an interview that he has been detained at least seven times at the Michigan border since fall 2006. Twice, he said, he was questioned by border officials about "politically charged" opinion pieces he had published in his local newspaper. The essays were critical of U.S. policy in the Middle East, he said. Once, during a secondary interview, he said, "they had them printed out on the table in front of me."

Milk higher

As high as gas prices are, milk is more expensive. And the high prices for both can be traced to the high cost of another commodity: corn.

Just a year ago, quite a few dairy farmers were calling it quits. The fuel and grain needed to run a dairy were getting more expensive, and farmers were getting such low prices for their milk that it was hard to make ends meet. So some cut back their herd sizes or sold off their cows and got out of the business altogether.

What a difference a year makes. Feeding cows still isn't cheap, but this year, milk prices are rising to near-record levels and farmers are hoping to see more income.

Higher milk prices mean customers are paying more at Amy Green's ice cream shop in downtown Lincoln, Neb. A small cone will set you back $3.50 before tax – up from $2.95 just a few months ago.

Green said she's now paying an extra $150 a week for the rich butterfat she uses to make old-fashioned, slow-churned ice cream.

"I've been serving ice cream for 23 years, and it's really hard for me to say that it will be $16 to a family of four for, you know, four cones. It just feels wrong. But I have no choice," Green said.

The retail price for a gallon of whole milk tops $3, and experts predict it will soon set a new record.

Several factors are creating a sort of "perfect storm" for milk prices this summer. Americans are drinking more milk. Add to that, droughts in major milk-producing countries like Australia.

But another key factor is the demand for ethanol, according to Chris Galen, a spokesman for the National Milk Producers Federation. Ethanol is increasingly being used as an alternative fuel for gasoline.

"Everyone is paying more for feed; and it's not just corn," he said, noting that the increase in corn plantings means there's less acreage available for soybeans and for alfalfa. "So the products that go into cows that make milk are much higher than they've typically been in the past."

One year ago, it cost about $2 for a bushel of corn. Now that price has nearly doubled.

Galen says when you pile that on top of high fuel prices and last year's low milk prices, it has been hard for the dairy industry to respond to the growing demand.

It's a warm summer afternoon on Lowell Mueller's dairy farm about 70 miles north of Lincoln. Wearing a red and white baseball cap and a short-sleeved plaid shirt, Mueller and a farmhand usher a new group of cows — eight at a time — into the small barn that holds his milking machines.

He considers himself one of the lucky ones because he grows his own corn, soybeans and alfalfa. But even he struggled last year to make back what he was spending to produce milk. Mueller says he's hoping things will improve this year.

"Milk prices are a little higher, but unfortunately our costs have gotten a little higher too. So it's always tough to keep up with all the escalating costs," he said.

Industry leaders predict milk prices could top out this summer at about $4.60 a gallon, which just might make a gallon of gasoline look like a bargain.

Sunday, September 23, 2007

Metro attorney admits to role in $20M mortgage fraud ring

Atlanta Business Chronicle - 1:23 PM EDT Friday, September 21, 2007

A Roswell, Ga., real estate attorney on Thursday pleaded guilty to conspiracy to commit bank, mail and wire fraud, bank loan application fraud, money laundering and wire fraud in a $20 million mortgage fraud scheme.

James F. Stovall III, 56, participated in scheme involving property flips orchestrated by one of his clients, "Reti Relocation Services Inc." From April 2000 to June 2001, Reti flipped some 50 properties in metro Atlanta in subdivisions such as Brookstone in Acworth; Windward and Seven Oaks in Alpharetta; and Towne Lake in Woodstock.

Reti would acquire properties and on the same day resell or "flip" them to straw borrowers, who were paid for participating in the transactions. Reti paid recruiters for locating straw borrowers, loan officers for preparing and submitting false loan applications and false qualifying documents, and appraisers for preparing fraudulent appraisals with inflated values submitted to lenders. Stovall closed nearly all of the same day fraudulent flips and failed to advise his clients, the lenders, of those flips, prepared false HUD-1 settlement statements that were submitted to the lenders, and moved the proceeds of the scheme through his escrow account and to off-shore bank accounts.

The fraudulent scheme involved the submission of false qualifying information and documents through the mails and the wire transfer of scheme proceeds. In the overall scheme, financial institutions and lenders were fraudulently induced to make loans totaling more than $20 million.

Stovall pleaded guilty to one count of conspiracy to commit bank, mail, and wire fraud, bank loan application fraud, and money laundering, and one count of wire fraud. He faces a maximum sentence of five years in prison and a fine of up to $250,000 on each count.

Sentencing has not been scheduled. Stovall will be sentenced by U.S. District Judge Thomas Thrash.

"We unfortunately continue to see some real estate professionals, such as attorneys and appraisers, who serve as gatekeepers of the system, instead ignoring their professional duty to participate in mortgage fraud schemes," said U.S. Attorney David E. Nahmias. "Given the well-known troubles in the mortgage industry and related financial markets, we will continue to aggressively investigate and prosecute such professionals who, out of pure greed, are willing to promote such fraud schemes in North Georgia."

Friday, September 21, 2007

The Credit Crisis is Just Beginning

By Jon D. Markman
Special to
9/21/2007 6:40 AM EDT

Satyajit Das is laughing. It appears I have said something very funny, but I have no idea what it was. My only clue is that the laugh sounds somewhat pitying.

One of the world's leading experts on credit derivatives (financial instruments that transfer credit risk from one party to another), Das is the author of a 4,200-page reference work on the subject, among a half-dozen other tomes. As a developer and marketer of the exotic instruments himself over the past 30 years, he seemed like the ideal industry insider to help us get to the bottom of the recent debt crunch -- and I expected him to defend and explain the practice.

I started by asking the Calcutta-born Australian whether the credit crisis was in what Americans would call the "third inning." This was pretty amusing, it seemed, judging from the laughter. So I tried again. "Second inning?" More laughter. "First?" Still too optimistic.

Das, who knows as much about global money flows as anyone in the world, stopped chuckling long enough to suggest that we're actually still in the middle of the national anthem before a game destined to go into extra innings. And it won't end well for the global economy.
Ursa Major
Das is pretty droll for a math whiz, but his message is dead serious. He thinks we're on the verge of a bear market of epic proportions.

The cause: Massive levels of debt underlying the world economic system are about to unwind in a profound and persistent way.

He's not sure if it will play out like the 13-year decline of 90% in Japan from 1990 to 2003 that followed the bursting of a credit bubble there, or like the 15-year flat spot in the U.S. market from 1960 to 1975. But either way, he foresees hard times as an optimistic era of too much liquidity, too much leverage and too much financial engineering slowly and inevitably deflates.

Like an ex-mobster turning state's witness, Das has turned his back on his old pals in the derivatives biz to warn anyone who will listen -- mostly banks and hedge funds that pay him consulting fees -- that the jig is up.

Rather than joining the crowd that blames the mess on American slobs who took on more mortgage debt than they could afford and have endangered the world by stiffing lenders, he points a finger at three parties: regulators who stood by as U.S. banks developed ingenious but dangerous ways of shifting trillions of dollars of credit risk off their balance sheets and into the hands of unsophisticated foreign investors, hedge and pension fund managers who gorged on high-yield debt instruments they didn't understand and financial engineers who built towers of "securitized" debt with math models that were fundamentally flawed.

"Defaulting middle-class U.S. homeowners are blamed, but they are merely a pawn in the game," he says. "Those loans were invented so that hedge funds would have high-yield debt to buy."
The Liquidity Factory
Das' view sounds cynical, but it makes sense if you stop thinking about mortgages as a way for people to finance houses and think about them instead as a way for lenders to generate cash flow and to create collateral during an era of a flat interest rate curve.

Although subprime U.S. loans seem like small change in the context of the multitrillion-dollar debt market, it turns out that these high-yield instruments were an important part of the machine that Das calls the global "liquidity factory." Just like a small amount of gasoline can power an entire truck given the right combination of spark plugs, pistons and transmission, subprime loans became the fuel that underlies derivative securities that are many, many times their size.

Here's how it worked: In olden days, like 10 years ago, banks wrote and funded their own loans. In the new game, Das points out, banks "originate" loans, "warehouse" them on their balance sheets for a brief time, then "distribute" them to investors by packaging them into derivatives called collateralized debt obligations, or CDOs, and similar instruments. In this scheme, banks don't need to tie up as much capital, so they can put more money out on loan.

The more loans that were sold, the more they could use as collateral for more loans, so credit standards were lowered to get more paper out the door -- a task that was accelerated in recent years via fly-by-night brokers that are now accused of predatory lending practices.

Buyers of these credit risks in CDO form were insurance companies, pension funds and hedge-fund managers from Bonn to Beijing. Because money was readily available at low interest rates in Japan and the U.S., these managers leveraged up their bets by buying the CDOs with borrowed funds.

So if you follow the bouncing ball, borrowed money bought borrowed money. And then because they had the blessing of credit-ratings agencies relying on mathematical models suggesting that they would rarely default, these CDOs were in turn used as collateral to do more borrowing.

In this way, Das points out, credit risk moved from banks, where it was regulated and observable, to places where it was less regulated and difficult to identify.
Turning $1 Into $20
The liquidity factory was self-perpetuating and seemingly unstoppable. As assets bought with borrowed money rose in value, players could borrow more money against them, and it thus seemed logical to borrow even more to increase returns. Bankers figured out how to strip money out of existing assets to do so, much as a homeowner might strip equity from his house to buy another house.

These triple-borrowed assets were then in turn increasingly used as collateral for commercial paper -- the short-term borrowings of banks and corporations -- which was purchased by supposedly low-risk money market funds.

According to Das' figures, up to 53% of the $2.2 trillion of commercial paper in the U.S. market is now asset-backed, with about 50% of that in mortgages.

When you add it all up, according to Das' research, a single dollar of "real" capital supports $20 to $30 of loans. This spiral of borrowing on an increasingly thin base of real assets, writ large and in nearly infinite variety, ultimately created a world in which derivatives outstanding earlier this year stood at $485 trillion -- or eight times total global gross domestic product of $60 trillion.

Without a central governmental authority keeping tabs on these cross-border flows and ensuring a standard of record-keeping and quality, investors increasingly didn't know what they were buying or what any given security was really worth.
A Painful Unwinding
Here is where the U.S. mortgage holder shows up again. As subprime loan default rates doubled, in contravention of what the models forecast, the CDOs those mortgages backed began to collapse. Because these instruments were so hard to value, banks and funds started looking at all CDOs and other paper backed by mortgages with suspicion, and refused to accept them as collateral for the sort of short-term borrowing that underpins today's money markets.

Through late last month, according to Das, as much as $300 billion in leveraged finance loans had been "orphaned," which means that they can't be sold off or used as collateral.

One of the wonders of leverage is that it amplifies losses on the way down just as it amplifies gains on the way up. The more an asset that is bought with borrowed money falls in value, the more you have to sell other stuff to fulfill the loan-to-value covenants. It's a vicious cycle.

In this context, banks' objective was to prevent customers from selling their derivates at a discount, because they would then have to mark down the value of all the other assets in the debt chain, an event that would lead to the need to make margin calls on customers who are already thin on cash.

Now it may seem hard to believe, but much of the past few years' advance in the stock market was underwritten by CDO-type instruments that go under the heading of "structured finance." I'm talking about private-equity takeovers, leveraged buyouts and corporate stock buybacks -- the works.

So the structured finance market is coming undone; not only will those pillars of strength for equities be knocked away, but many recent deals that were predicated on the easy availability of money will likely also go bust, Das says.

That is why he considers the current market volatility much more profound than a simple "correction" in prices. He sees it as a gigantic liquidity bubble unwinding -- a process that can take a long, long time.

While you might think that the U.S. Federal Reserve can help prevent disaster by lowering interest rates dramatically, as it did Wednesday, the evidence is not at all clear.

The problem, after all, is not the amount of money in the system but the fact that buyers are in the process of rejecting the entire new risk-transfer model and its associated leverage and counterparty risks.

Lower rates will not help that. "At best," Das says, "they help smooth the transition."

Thursday, September 20, 2007

What a crock!

“Some local brokers who attended Yun’s talk blamed the media for giving the perception that the market is bad, which in turn hurts foreign investment who base real estate choices on media input. Others attributed the market downturn to the overzealous mortgage firms and the bottoming-out of subprime lending.”

Saying media attention caused the downturn in the mortgage industry is like blaming an eye witness for a car crash.

Tuesday, September 18, 2007

Food fight divisive for farm lobby

The Nation's Business: Food fight divisive for farm lobby
Corn farmers lobby for ethanol as producers of meat and dairy products push back

By Christopher Leonard
Associated Press
Published on: 09/18/07

St. Louis —- As a chief advocate for corn farmers across the country, Rob Litterer will be working the halls of Congress this fall to push for increased ethanol production. But he's facing stiff opposition from what on the surface seems an unlikely source —- the farm lobby.

The burgeoning ethanol industry is creating a wave of prosperity for rural towns throughout the Midwest, but the energy bonanza is also pitting farming groups on separate sides of the fence.

Corn farmers are pushing for more ethanol production as the industry creates an enormous new market for their crop, giving prices the kind of lift they haven't seen in years. But the corn farmer's win is the hog farmer's loss. Meat, dairy and other food producers are pushing back against the ethanol boom as higher grain prices cut into their already slim profit margins.

So as Litterer, the incoming president of the National Corn Growers Association, visits with members of Congress in coming months, he knows that meat and dairy lobbyists will be close behind.

"There is no question they have a policy that they are opposed to an increase," Litterer said. "But I don't think their opposition carries any water."

The tension between grain producers and food producers is roiling agricultural markets around the world as high oil prices spur governments to subsidize food-based fuels such as ethanol and biodiesel.

The Mexican government this week put a cap on tortilla prices after prices shot up between 20 percent and 30 percent over uncertainty that there would be enough U.S. corn available for export. Brazil will ask the World Trade Organization to formally investigate U.S. farm subsidy programs —- including payments for ethanol production. Brazil is the second-largest producer of ethanol in the world after the United States but is the No. 1 exporter of the fuel, which in Brazil is mainly made from sugar cane.

The political waves —- and their effect on government policy —- can mean life or death for the budding biofuels business. Ethanol and biodiesel served a niche market before the U.S. government imposed a mandate —- called the Renewable Fuel Standard —- requiring the United States to use 7 billion gallons of renewable fuels by 2012.

This fall, Congress will consider a new fuel standard that could boost production as high as 36 billion gallons by 2022. But the future of that bill is uncertain because of the food fight shaping up.

"It's very true that the agricultural lobby will speak with a louder voice if it's saying the same thing. In that sense, it's been a less united voice than it has in the past," said Pat Westhoff, an economist at the University of Missouri.

Westhoff said it's inevitable that a rise in corn prices will increase the cost of food. Corn and its derivatives, such as corn syrup, are staples for a variety of foods, including soft drinks and wheat bread.

But a $6 billion increase in the cost of corn —- which amounts to about $1 a bushel —- would still only raise food costs about 1 percent, he said.

A Lobbyist for the Rich...

A Lobbyist for the Rich...

Mr. Greenspan was an economic lobbyist for the rich, for large corporations and for Wall Street. That is the job of a Federal Reserve chairman these days. Like a good criminal defense lawyer or the ³expert witnesses² they hire, a good lobbyist makes a cover story believable. Mr. Greenspan crafted a myth that many people wanted to believe. The myth was that people ­ just about everyone ­ could get rich by going into debt, to buy property whose prices were being inflated by Federal Reserve policy of lowering interest rates and deregulating the financial sector to usher in a period of "wild finance."

Mr. Greenspan sponsored the confusion that increasing asset prices constituted ³wealth formation.² It was not the kind of wealth that Adam Smith meant in The Wealth of Nations. Posing as an enemy of ³inflation,² he tried to make people love one particular kind of inflation: asset-price inflation. The distinguishing feature of asset-price inflation ­ the bubble ­ is that it raised the price of property relative to labor¹s wages. This put the class war back in business ­ this time a class war by the financial sector against industry as well as against labor. It took more and more take-home wages to buy a house or a retirement income.

1) As the most vocal cheerleader for the Bubble Economy, Mr. Greenspan was more responsible than anyone else for loading the U.S. economy down with debt, leaving a legacy of negative equity in his wake. For almost the first time in history, people thought that they could get rich by borrowing to buy assets that were rising in price. This was the essence of America¹s Bubble Economy. Mr. Greenspan made America LOVE inflation ­ at least, asset-price inflation. The myth that he created was that people should treat their houses like a piggy bank. But borrowing is NOT like drawing down a bank account. It leaves a legacy of debt ­ that must be repaid. And while prices for real estate and stocks may go down, the debts remain in place. Lowering interest rates enabled a larger debt to be carried, by a given rental income. Lowering down payments, and even giving "reverse mortgages" where banks agreed to lend borrowers the interest, is what Hyman Minsky called the "Ponzi phase" of the credit cycle.

...and a Tax-Raiser

2) His main role as economic lobby for his financial clients was anti labor. Although he claimed to support cutting taxes to "spur markets," he played a major role in raising taxes for most wage-earners. He did this as head of the Greenspan Commission in 1982. The rhetorical ploy he suggested was to pretend that Social Security and health care should be treated as user fees, not as part of the overall budget. This freed the wealthiest tax brackets from having to finance Social Security for the bottom 90 percent of the population. Mr. Greenspan happily approved the Bush tax cuts of 2002 ­ but later, professed to be shocked, shocked, to find that there was gambling going on and the cuts on the higher tax brackets led to a large budget deficit, and recommended that the government cut back Social Security and medical care expenditures to pay for the tax cuts that benefited the upper brackets ­ his constituency.

3) In the above respects, Mr. Greenspan was the architect of dollar devaluation, by flooding the economy with low interest rates. He put short-term stock speculation and bank lending over the dollar¹s long-term stability. But then, finance always has lived in the short run.

Saturday, September 15, 2007

Queues as customers withdraw money

Queues as customers withdraw money

There were queues outside branches of Northern Rock as some customers rushed to withdraw their money from the troubled bank.

Despite being urged not to panic, fears over the lender's financial future were enough to send some people racing to safeguard their funds.

At a branch in Newcastle city centre, customers were queuing on to the pavement.

Savers said they were concerned for their investments following the news that the company had called on the Bank of England to help it through the crisis.

One customer said: "I'm not sure about this, even though they say it is going to be all right. If they are short of funds, what happens to our funds?"

Another customer, a pensioner who did not wish to be named, said she was withdrawing all her savings.

She said: "I have shares, and I have a Tessa and I'll keep those here but I'm taking out my savings as I'm worried."

Another woman, who was with her husband, said she was worried and added: "I want to spend my money before someone else does."

People in the queue burst out laughing when one staff member asked them: "Does anyone want to pay money in?"

Representatives from rival high street banks were spotted speaking to customers and handing out financial literature.

Can you say bank run?

The New York Times
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September 15, 2007

Credit Crisis Hits Lender in Britain

LONDON, Sept. 14 — Depositors of a big British mortgage lender, Northern Rock, rushed to withdraw money on Friday after the bank, unable to raise financing because of the tight credit market, turned to the Bank of England for an emergency loan.

Nervous investors also dumped Northern Rock shares, which fell 31 percent.

The bailout, analysts said, was the latest indication that the turmoil that began in the subprime market in the United States had expanded into other areas.

While other European banks have been hurt by investments in financial vehicles backed by subprime loans, Northern Rock said it had limited subprime exposure.

Instead, the bank ran into trouble because the tighter credit undermined its business model, which relied on financing mortgages by raising money in the capital markets, rather than depending on consumer deposits.

“The problems are potentially much wider now,” said Jonathan Loynes, an economist at Capital Economics, a consulting firm in London. “This means we have to worry about a wider range of institutions that aren’t directly involved in this credit crisis but are in a way innocent bystanders.”

The bailout came two days after the governor of the Bank of England, Mervyn King, warned that moves by other central banks, like the Federal Reserve and the European Central Bank, which have pumped additional liquidity into the system, could encourage “excessive risk-taking” by rewarding bad behavior.

The Bank of England emphasized Friday that Northern Rock would have to pay a premium to market interest rates for its emergency credit line, offered under the bank’s role as “lender of last resort.”

“Northern Rock is solvent, exceeds its regulatory capital requirement and has a good quality loan book,” the Bank of England, the Financial Services Authority and the Treasury said in a joint statement. But those words did not mollify some Northern Rock customers. Account holders lined up at many of the bank’s 70-plus branches, many of them reportedly withdrawing large sums.

Outside a branch in central London, Constance Hackford, a manager at an interior design company, weighed joining a line of about two dozen people. “I can’t imagine the Bank of England is going to let it fail — can they?” she said.

A spokesman for Northern Rock said Friday that the bank did not have any estimates yet of how much money had been withdrawn.

One reason Northern Rock customers may be nervous is that there is less protection for account holders in Britain than in the United States in case a bank fails. Deposits are insured up to £31,700, or about $64,000, compared with up to $100,000 in the United States.

Adam J. Applegarth, chief executive of Northern Rock, said account holders should not worry. “I’m a depositor with Northern Rock,” he said in a conference call. “Knowing that we have an uncapped facility with the Bank of England — you don’t get better than the Bank of England.” Because Northern Rock — and, perhaps, other British mortgage lenders — will have to pay more to raise money for loans, they will have to pass along higher rates to consumers, analysts say. That could cause a slowdown in lending, they added, which could act as a drag on the country’s housing market, which has soared over the last decade.

“Costs for first-time borrowers, already stretched in the affordability stakes, will rise substantially,” said Paul Mortimer-Lee, an economist at BNP Paribas. “First-time buyer activity seems pretty certain to show a sharp fall, which, since the whole market rests on the shoulders of the first-time buyer, is like throwing a spanner in the works of the whole market.”

There have been some signs of a slowdown. A survey released this week by the Royal Institute of Chartered Surveyors, a real estate group, showed that prices in August fell in more areas of Britain than they rose. Several banks have increased lending rates.

Mr. Applegarth said Northern Rock would cut back on issuing new loans, as well as cutting costs through a hiring freeze and other steps. The bank on Friday downgraded its profit outlook for this year and next year.

He said the bank, whose level of residential lending in the first eight months was 55 percent higher than a year earlier, had been more aggressive than some of its rivals in using “wholesale funding” rather than deposits to back its loans.

Northern Rock said it had £75 million ($152 million) in direct exposure to the subprime market, with £200 million ($405 million) in exposure to collateralized debt obligations, some of which is exposed to the subprime market.

Together, that represents less than one-quarter of 1 percent of the bank’s total assets, it said.

Northern Rock approached the central bank, Mr. Applegarth said, because of the “astonishing” conditions in the markets that it had used to raise financing, and because “we could see no end to this in the short term.”

Some analysts said Northern Rock could become a takeover target while others said the bank could emerge intact, assuming that credit problems ease.

While repossessions of homes have been rising in Britain, analysts said that Northern Rock has a generally sound mortgage portfolio. Fewer than one-half of 1 percent of the bank’s mortgage loans are more than three months in arrears, Northern Rock said; that is less than half the British industry average.

“We think there is a strong bank here, but with a vulnerability, which is its sources of funding,” said Matthew Taylor, an analyst at Fitch Ratings, which downgraded some of the bank’s credit ratings Friday.

Wednesday, September 12, 2007

John Talbott speaks

When John Talbott's controversial book, The Coming Crash in the Housing Market, hit store shelves in 2003, the real estate industry - and everyone else who stood to profit from the dizzying rise in U.S. home prices - gave it a hostile reception.

"Real estate agents didn't like it, mortgage brokers didn't like it, commercial bankers didn't like it, Wall Street didn't like it," he recalls.

"Even when I went on the talk-show circuit, you could tell the animosity in the anchor who was interviewing me because he had a big home and a big mortgage and didn't want anybody suggesting prices might go down."

Four years later, with the U.S. housing collapse unfolding exactly as he predicted, Mr. Talbott is enjoying a measure of vindication as the guy who first warned about the disastrous cocktail of adjustable-rate mortgages, reckless lending practices and lax oversight.

So, with subprime mortgage losses and credit woes now the No. 1 topic in the markets, what does the former Goldman Sachs investment banker see next for the housing market and the U.S. economy?

Well, if you thought things were bad now, just wait. Think bank failures, recession, soaring default rates, home prices plunging by at least one-third and layoffs rippling across the economy. The unwinding could take five to seven years before the housing market hits bottom, he says.

As a former Wall Street insider, Mr. Talbott has a better appreciation than most for how large financial institutions operate. And what he senses now is a massive effort to conceal the extent of the toxic sludge buried beneath some of the biggest names in the business.

"Everybody is hiding and not disclosing losses," he says. "They're all winking and nodding at each other because they've all got this stuff on their books."

With 40 per cent of some banks' assets invested in residential mortgages, they won't be able to conceal their losses forever. Faced with rising defaults, banks are already pulling back on lending. The lack of credit, in turn, will exert a major drag on the economy, which for years has been fuelled by easy money. That's why Mr. Talbott says a recession in the next 12 to 18 months is a certainty.

Banks most at risk for failure are those with a concentration of residential mortgages in Florida, California and New York, where prices rose the steepest and will fall hardest, he says. But even some of the biggest U.S. banks could be at risk, he says. Canadian banks are, thankfully, not as exposed to the problems.

The subprime meltdown has been described as a liquidity squeeze, which makes it sound like a temporary problem that can be cured with an injection of cash. But the problem is far more serious, he says.

"Giving a bank more cash doesn't solve the problem. What they're sitting on is huge losses and they can't recognize those losses without endangering their entire book equity and threatening bankruptcy and threatening a run on the banks."

What should investors do? Mr. Talbott, who owns no stocks or residential real estate, is a big fan of cash. The returns aren't great, but they're a lot better than losing 10 or 20 per cent.

When things get really ugly, that will be the time to buy stocks at bargain prices.

But we're not there yet. Not by a long shot, he says.

Senate OKs $1B to Repair US Bridges

1 Billion dollars appropriated for infrastructure repair in our own country, while we send hundreds of billions over to Iraq....what's wrong with this picture?

WASHINGTON (AP) — The Senate approved $1 billion on Monday to speed repair and replacement of America's crumbling network of bridges, six weeks after the Interstate 35W span collapsed in Minneapolis.

The Senate approved the funds on a 60-33 vote as the Senate began debate on a $104.6 billion measure funding transportation and housing programs for the budget year beginning Oct. 1.

"Our bridges are deteriorating far faster than we can finance their replacement," said Sen. Patty Murray, D-Wash., lead sponsor of the bridge-repair funds. "More than one in every four bridges on U.S. highways is rated as deficient."

If approved, the Democratic plan would boost federal funding next year for bridge repair and replacement by 20 percent, but would barely make a dent in the $65 billion nationwide backlog of bridge repairs identified by the Department of Transportation.

The underlying bill faces a veto threat from President Bush, however, for exceeding his request by $4.4 billion.

"Fully 27 percent of our 600,000 bridges have aged so much that their physical condition or their ability to withstand current traffic levels is simply inadequate," Murray said. "Roughly half of these deficient bridges — or about 78,000 bridges across the nation — are structurally deficient."

The infusion of bridge repair funds would be paid for by tapping the dwindling reserves of the highway trust fund. Gasoline tax revenues are coming in below estimates and are unlikely to be able to fund highway programs at the levels set forth by the 2005 highway bill.

Sen. Christopher Bond, R-Mo., countered that lawmakers "should not overreact to the Minnesota bridge collapse by spending more money ... than is available."

White House budget office spokesman Sean Kevelighan said the Bush administration opposes the idea since it would speed up the depletion of the highway trust fund.

The money would not go to replacing the fallen Minneapolis bridge; rather, it would be delivered to state highway departments according to a funding formula set by Congress two years ago.

Congress moved immediately last month to pass a law approving a $250 million replacement bridge. But that legislation simply authorized the bridge, but did not provide actual funding.

Amy Klobuchar, D-Minn., said Monday she would offer an amendment to pay for the Minneapolis bridge replacement during debate on the transportation spending bill.

"It would be ironic if the Congress provided $1 billion for bridge repair across the country and didn't fix our bridge," Klobuchar said. "That won't happen and that can't happen."

Sen. Norm Coleman, a Republican facing re-election next year, said the White House has made a commitment "that the money will be there."

Tuesday, September 11, 2007

Mortgage industry tanking

Sept. 10 (Bloomberg) -- The worst U.S. housing slump in 16 years may lead mortgage companies to eliminate almost 100,000 jobs, more than double the number already cut this year.

As many as 20 percent of the nation's real estate loan officers and mortgage brokers will be fired, according to Josh Rosner, managing director at the New York investment research firm Graham Fisher & Co. That's in addition to the 10 percent reduction from December to July that thinned their ranks to 450,000 as investors stopped buying mortgages and lenders curtailed financing to avoid rising subprime defaults.

``Originations are going to decline dramatically,'' Rosner said. ``We are just at the front-end of seeing the large banks and investment banks start to cut their capacity.''

Countrywide Financial Corp. said Sept. 7 it will cut 10,000 to 12,000 jobs. Lehman Brothers Holdings Inc., the biggest underwriter of mortgage-backed bonds, and IndyMac Bancorp Inc., the second-biggest U.S. home-loan company, also announced job reductions last week.

At least 100 mortgage companies have sought buyers or halted lending since the start of 2006, according to data compiled by Bloomberg. A record number of Americans faced foreclosures in the second quarter, the Mortgage Bankers Association in Washington reported last week.

``When you're born in a boom, you generally die in a bust,'' Countrywide Chief Executive Officer Angelo Mozilo said in an interview after the Calabasas, California-based company announced the cuts eliminating about 20 percent of the 55,000 employees it had at the start of the year. ``Most of the companies that are gone have never been through a period like this.''

Shares Decline

Countrywide fell $1, or 5.5 percent, to $17.21 as of 4 p.m. today in New York Stock Exchange composite trading. The shares are down almost 60 percent this year.

Mortgage volume may drop to $1.8 trillion next year, the lowest since 2000, after a peak of $4 trillion in 2003, Moshe Orenbuch, an analyst at Credit Suisse Group, wrote in an Aug. 30 report. ``The housing market is unlikely to rebound until 2009,'' he said.

The job cuts at Countrywide almost doubled the total reductions announced since Aug. 1. First Magnus Financial Corp. fired all but 50 of its 5,500 employees when the Tucson, Arizona- based company closed last month. San Diego-based Accredited Home Lenders Holding Co. eliminated 1,600 positions; IndyMac of Pasadena, California, 1,000; Cleveland-based National City Corp., 1,300; and NovaStar Financial Inc. of Kansas City, 775.

Bear Stearns

Bear Stearns Cos., the second-biggest underwriter of mortgage-backed bonds, shed 240 mortgage jobs in mid-August. Lehman is firing 2,050. Both firms are based in New York. London- based HSBC Holdings Plc, Europe's largest bank by market value, removed 600 positions in the U.S. linked to the housing industry.

The mortgage industry's decline may have contributed to a drop of 4,000 U.S. jobs in August, according to a Sept. 7 report from the Department of Labor. The drop in nationwide employment was the first in four years.

``It's probably not going to be the last cut'' at Countrywide, said Sean Egan, managing director of Egan-Jones Ratings Co. ``You'll probably see some announcements over the next 30 days'' from other mortgage providers, he said.

``This overcapacity had to be taken out of the system before satisfactory returns could return to the business,'' Kerry Killinger, CEO of Seattle-based Washington Mutual Inc., said today at an investor conference in New York.

Pay Cuts

Employees remaining in the mortgage industry probably will have lower pay, including executives whose bonuses depend on profits and brokers who get paid on commission, said Bert Ely, an Alexandria, Virginia-based consultant.

``The slowdown is deeper than a lot of people thought,'' Ely said. ``I don't think there's anybody now, even the optimists, who think this will run its course by the end of the year. And this isn't something that's going to bounce back quickly.''

The contraction may also lead to lost jobs and income for mortgage appraisers, title-company clerks and settlement attorneys, he said. ``All kinds of people that feed off the origination activities are suffering cutbacks,'' he said.

Analysts at Merrill Lynch & Co. and UBS AG lowered their 2007 and 2008 profit estimates for Countrywide today, citing the deteriorating market for home loans. AXA, Europe's second-biggest insurer, cut its stake in Countrywide to 4.1 percent from 11.1 percent, the company said in a regulatory filing.

To contact the reporter on this story: Bradley Keoun in New York at .

Saturday, September 08, 2007

Mortgage crisis hits home

Mortgage crisis hits home

The Atlanta Journal-Constitution
Published on: 09/07/07

Just back from a July family vacation, Michele Bearden decided to catch up on the mail. The first envelope in the stack contained a letter from a real estate investor and a copy of a tiny newspaper notice.

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The wife and mother from suburban Gwinnett County stared in disbelief at the clipping: It announced that her house was in foreclosure. Bearden's lender planned to sell the family's home on the courthouse steps on the first Tuesday in August – just a few weeks away.

"That's how we found out," said Bearden, who for months had been locked in a conflict with the company that handles her mortgage payments.

Thousands of homeowners across Atlanta are facing the same dreadful prospect of losing their houses, the result of an epidemic of foreclosures moving through virtually every corner of the metro area.

The number of foreclosure sales scheduled for metro Atlanta properties tripled between 2000 and 2006, according to data supplied by Equity Depot, a private Atlanta company that provides foreclosure information to businesses.

More than 65,000 properties in 13 Atlanta counties faced foreclosure proceedings since January of 2006. In both July and August of 2007, properties scheduled for foreclosure in the 13 metro counties hit an unprecedented level: 5,000.

The uptick in foreclosures is tightly tied to another trend: the spread of subprime lending across the region. A high-interest, subprime loan financed one in every four home purchases in metro Atlanta in 2005, according to a Journal-Constitution review of federal mortgage lending data. In Georgia, subprime mortgages are nine times more likely than prime mortgages to be seriously delinquent or in foreclosure.

A real estate crisis caused by widespread mortgage failures is rippling through the country. Struggling Midwestern states have the highest foreclosure rates, and foreclosures are growing faster in Nevada, California and Florida than anywhere else. But Georgia has a serious problem, too. Only four states – Indiana, Louisiana, Michigan and Mississippi – had a higher rate of past-due mortgages than Georgia did in the second quarter of this year, according to a report released this week by the Mortgage Bankers Association.

The subprime mortgages that blanket the Atlanta region act like a foreclosure time bomb. That's because many families who opt for a high-interest, adjustable-rate mortgage qualify for the loan based on low payments available for the first year or two. Some families end up in trouble when a higher interest rate increases their monthly payment.

Many Atlantans believe they are immune to the effects of the mortgage meltdown. But even those in no danger of default are taking a hit. That's because every foreclosure pulls down the value of nearby properties. Houses become harder to sell. Refinancing becomes difficult, if not impossible, for many. Local governments may even be hurt, since property taxes are based on property values.

And we haven't even hit bottom yet.

"All of the projections are that it's only going to get worse in the next three months," said Dan Immergluck, a Georgia Tech associate professor who is an expert on foreclosure issues.

Poor neighborhoods hit hardest

The areas of metro Atlanta hit hardest by foreclosures are the same parts of town where subprime lending is most common, according to a Journal-Constitution analysis of foreclosure trends and federal mortgage lending statistics.

Neighborhoods in southwest Atlanta, south DeKalb and Clayton County have the highest rates of foreclosure in metro Atlanta. But virtually every part of the metro area has been significantly touched, including parts of south Cobb County and many neighborhoods throughout Gwinnett County. Thousands of properties facing foreclosure involve mortgages of $300,000 or more, according to the data compiled by Equity Depot. Even in upscale Alpharetta, hundreds of properties have been scheduled for sale on the courthouse steps.

Kwan Straughn's former home was among them.

Straughn borrowed $871,000 to buy and make improvements to an eight-bedroom, eight-bath home not far from Country Club of the South. Straughn said he used a broker he found online to arrange loans for his house and three investment properties. The process to buy the properties was quick and easy, he said, even though he had a bankruptcy on his credit history.

Straughn said he thought he was getting a 30-year mortgage. Lewis N. Jones, an attorney representing the lender, Utah-based Land Home Services, said the term of the loan was actually no more than a few months, a type of loan sometimes made to investors but rarely for families buying a residence.

Straughn said he tried to refinance, but was unable to because the balance on the mortgage ballooned to more than the home was worth. Straughn said his family was evicted from the house after the lender foreclosed and sold the house on the courthouse steps.

"It has completely ruined us," said Straughn, who is living with friends while he pursues a lawsuit against the lender.

High-interest subprime mortgages have become common even among those with fat paychecks. About one in eight borrowers with incomes of at least $100,000 used a subprime loan to buy a metro Atlanta house in 2005, according to the federal mortgage loan statistics.

Nothing down

Thirty years ago, getting the keys to a house required an exhaustive process that included a 20 percent down payment and a thorough review of a borrower's income and debts. The down payment ensured the borrower had a major stake in the property and a verifiable income ensured that the loan could be repaid.

All that changed when Wall Street discovered how to bundle mortgages together in packages that could be sold to investors. The packages of subprime mortgages became popular because they offered investors hefty returns and, at the time, were promoted as relatively safe investments. "Wall Street had a strong appetite for these loans," said Rob Braswell, Georgia's banking commissioner.

With the demand so intense, lenders kept lowering their standards to bring in new business. Borrowers once deemed too risky were more than happy to snap up the deals.

No money for a down payment? No problem. The lenders set up "piggy-back" loans to cover the 20 percent borrowers used to put down.

Bad credit? No problem. The lenders simply charged you more.

Low income? No problem. Lenders set up adjustable-rate mortgages with low teaser rates and low monthly payments for the first year or two.

Don't want to hand over your W-2s or your tax returns? No problem. Many lenders routinely allowed "stated income" loans under which borrowers wrote down their annual income, but had to provide no documentation.

"There were some loan options out there that didn't make a lot of sense long-term," said J.D. Crowe, president of the Georgia Association of Mortgage Brokers.

Rising real estate values in most of the country allowed many homeowners with subprime mortgages to refinance to better loans after a couple of years. But that stagnant values have eliminated that option, leaving many borrowers stuck with their loan when their teaser rates end and mortgage payments dramatically increase.

Half of metro Atlanta foreclosure starts this year involved adjustable-rate mortgages, according to the data compiled by Equity Depot. Half also involved home purchases made recently — either in 2005 or 2006.

In response to the mortgage meltdown, lenders tightened mortgage standards almost overnight, making it impossible to get some loans that were readily available this spring. Some upper-income borrowers with good credit are being hit, too, especially those seeking a "jumbo loan" above $417,000, the upper limit for Fannie Mae or Freddic Mac, the companies created by the government to guarantee mortgages.

David Fisher and his wife planned to start construction on a new house in Marietta this fall. But the cost of the jumbo mortgage they needed increased 1 percentage point in just 30 days. The project is on hold.

"Our decision was to wait a little while and see if the market turned to a more normal situation in the next 30 to 60 days," Fisher said.

Little protection in Georgia

The prospect of a foreclosure is financially and emotionally devastating for most families. And in few states is the process as brutal for the borrowers as it is in Georgia.

Unlike half the states, Georgia allows foreclosures to take place with no judicial or government oversight. And no state has a faster foreclosure process than Georgia. Most lenders wait until a borrower is several months behind before initiating a foreclosure. But once a lender starts the process, a house can be sold on the courthouse steps in as few as 37 days.

In Florida, lenders must wait four months to sell a house in foreclosure; in Ohio, seven months; in New York City, well over a year.

"It's ridiculous what they can do," said Michele Bearden, the Gwinnett County homeowner whose lender sought a foreclosure in August.

Bearden and her husband, Raymond, have two sons, ages 9 and 16. He works in construction and she works for the school system. They live in a small three-bedroom ranch house near Grayson that her husband's uncle built for the family in 1994.

"We're busting at the seams, but we love it," Bearden said. "We put in a pool and a hot tub and we've made it our own."

Bearden traces their troubles to a decision in 1999 to refinance their mortgage with a subprime lender. The mortgage was pooled with other mortgages and sold to investors.

Bearden said she has spent the last several months battling the company that manages their mortgage, Houston-based Litton Loan Servicing, over a variety of fees and charges, and consequently they've been unable to refinance. The Beardens believe that Litton has not properly applied payments made to their account. The company declined to comment, citing privacy concerns.

"It just astounds me that you can build a house and live there for 13 years and in a matter of weeks, somebody could come in and it's gone, they can sell it at the courthouse steps," she said. "It is amazing that they can come and do that without having to go see a judge."

The thousands of metro families facing foreclosure are there for a host of reasons. Some agreed to mortgages they couldn't afford. Others lost a job, got sick or got a divorce. A growing number saw their mortgages grow out of reach when the introductory rate expired on their adjustable rate mortgage.

The Beardens filed a court action themselves and the foreclosure sale did not take place in August.

Bearden said it's a lonely feeling to face foreclosure. But she said she has come to realize that eve though few families discuss it openly, it's become a common struggle.

"It's not just the poor people," she said, "It's hitting everybody now."

-- Data analyst Megan Clarke contributed to this report.

Friday, September 07, 2007

Countrywide to Cut Up to 12,000 Jobs

By ALEX VEIGA – 1 hour ago

LOS ANGELES (AP) — Struggling lender Countrywide Financial Corp. will cut as many as 12,000 jobs as it struggles to deal with challenging conditions in the mortgage industry, the company said Friday. The cuts, amounting to as much as 20 percent of its work force, are needed because the company expects new mortgages to fall about 25 percent in 2008 from this year's levels, Countrywide said.

In a letter distributed to employees, Countrywide Chief Executive Angelo Mozilo called the current market cycle "the most severe in the contemporary history of our industry."

"During the past two years the growth in home price appreciation has stopped dead in its tracks and in many areas of the country it has turned in the wrong direction," Mozilo said in the letter.

In recent weeks, Countrywide borrowed $11.5 billion and sold a $2 billion stake to Bank of America so it could keep operating its retail banking and mortgage lending businesses.

The job cuts planned during the next three months are expected to center primarily on the company's production divisions and its general and administrative support areas.

Actual reductions could be lower if interest rates and other market conditions improve, Countrywide said.

The latest cuts followed the elimination of about 900 positions earlier this week and 500 others last month.

The Calabasas-based company employed more than 61,000 people as of July 31, with about 34,000 working in loan production.

Earlier Friday, IndyMac Bancorp Inc. announced plans to eliminate as many as 1,000 jobs, citing difficulties from the mortgage lending and housing market downturns.

The Pasadena, Calif.-based mortgage lender and bank said it expects its loan production volume to decline by roughly half in the fourth quarter.

Countrywide said it intends to keep transferring its residential lending business into its Countrywide Bank unit as a way to strengthen its access to funding.

Almost all of its residential lending activity will be originated through the bank by the end of this month, the company said.

Countrywide has also shifted its loan production guidelines and now only makes loans that can be sold on the secondary market to government-backed enterprises such as Fannie Mae or Freddie Mac or that qualify under investment requirements for its banking unit.

Countrywide has been struggling as the housing slump led to a sharp rise in mortgage defaults and foreclosures, particularly among borrowers with subprime loans.

The mortgage fallout has left many lenders strapped for money to fund new loans.

Lenders that relied on selling loans on the secondary market to fund their operations have been particularly hard hit, with dozens going out of business or forced into bankruptcy this year.

That has resulted in tens of thousands of jobs being lost industrywide.

Like other lenders, Countrywide has tightened its credit guidelines and stopped selling some types of adjustable rate loans.

In the letter to employees, Mozilo outlined additional steps the company is taking to shore up its operations.

Among the changes, the company is consolidating its sales force and plans to keep targeting borrowers who now have adjustable rate subprime loans with offers to refinance with prime loans that carry more stable payments.

Mozilo noted some 75 percent of the company's Full Spectrum Lending Division's loans this year have been prime loans, many sold to borrowers who refinanced from subprime loans.

Despite the layoffs, Mozilo said in the letter that Countrywide's consumer markets division would keep expanding its sales force.

Last month, the division hired nearly 1,000 sales people, a record for the unit, he said.

"As we carry out our plan, the company's overarching focus is exactly where it has always been: to remain an industry leader in the U.S. residential lending business," Mozilo said in a prepared statement issued to the media.

The company declined further comment.

Countrywide shares fell 27 cents to $18.21 on Friday. In after-market trading, shares rose to $18.48. Shares of IndyMac fell 25 cents, or 1.1 percent, to $21.41.

Thursday, September 06, 2007

Judge Strikes Down Parts of Patriot Act

September 7, 2007

A federal judge today struck down parts of the new U.S.A. Patriot Act that authorized the Federal Bureau of Investigation to acquire corporate records using informal secret demands called national security letters.

The law allowed the F.B.I. to force communications companies, including telephone and Internet providers, to turn over their customers’ records without court authorization and permanently to forbid the companies from discussing what they had done. Under the law, enacted last year, the ability of the courts to review challenges to the ban on disclosures was quite limited.

The judge, Victor Marrero of the Federal District Court in Manhattan, ruled that the law violated the First Amendment and the separation of powers guaranteed by the Constitution.

Judge Marrero wrote that he feared the law could be the first step in a series of intrusions into the role of the judiciary that would be “the legislative equivalent of breaking and entering, with an ominous free pass to the hijacking of constitutional values.”

According to a report from the Justice Department’s inspector general in March, the F.B.I. issued about 143,000 requests through national security letters from 2003 to 2005. The report found that the bureau had often used the letters improperly and sometimes illegally.

Yesterday’s decision was a sequel to ones from Judge Marrero in 2004 and a federal judge in Connecticut in 2005, both of which enjoined an earlier version of the law. Congress responded last year by amending the law when it reauthorized the U.S.A. Patriot Act.

The earlier version of the law prohibited all recipients of the letters from disclosing them. The amended law changed the ban slightly, now requiring the F.B.I. to certify in each case that disclosures might harm national security, criminal investigations, diplomacy or people’s safety.

The law authorized courts to review those assertions under an extremely deferential standard. In some cases, for instance, judges were required to treat F.B.I. statements “as conclusive unless the court finds that the certification was made in bad faith.”

In yesterday’s decision, Judge Marrero said the amendment did not go far enough in addressing the flaws identified in the earlier decisions and created additional constitutional problems.

Recipients of the letters, he wrote, remain “effectively barred from engaging in any discussion regarding their experiences and opinions related to the government’s use” of the letters. Indeed, the very identity of the Internet service provider that brought the case decided yesterday remains secret.

Judge Marrero said that the F.B.I. may be entitled to prohibit disclosures for a limited time but afterward “must bear the burden of going to court to suppress the speech.” Putting that burden on recipients of the letters, he said, violates the First Amendment.

Judge Marrero used harsher language and evocative historical analogies in criticizing the aspect of the new law that imposed restrictions on the courts’ ability to review the F.B.I.’s determinations.

“When the judiciary lowers its guard on the Constitution, it opens the door to far-reaching invasions of privacy,” Judge Marrero wrote, pointing to discredited Supreme Court cases endorsing the internment of Japanese-Americans during the Second World War and racially segregated railroad cars in the 19th century.

“The only thing left of the judiciary’s function for those Americans in that experience,” he wrote, “was a symbolic act: to sing a requiem and lower the flag on the Bill of Rights.”

Lawyers for the American Civil Liberties Union, which represented the Internet company, said Judge Marrero had confirmed a bedrock principle.

“A statute that allows the F.B.I. to silence people without meaningful judicial oversight is unconstitutional,” said Jameel Jaffer, an A.C.L.U. lawyer.

Judge Marrero delayed enforcing the decision pending an appeal by the government. Rebekah Carmichael, a spokeswoman for the United States attorney’s office in Manhattan, said the government has not decided whether it will file one.

McMansions Turn 'McApartments,' Stirring Ire

By Ovetta Wiggins

Washington Post Staff Writer
Tuesday, September 4, 2007; B02

The new house on Allison Street in North Brentwood is two stories higher than the older homes that surround it. It doesn't have a porch, shutters or any of the other distinguishing features found on the century-old bungalows on the block.

"It's out of character for the town," said Mayor Petrella A. Robinson, who lives across the street, with a dog on her front porch.

"It's humongous," another neighbor said of the house, as yet unoccupied. "It just doesn't fit in."

The complaints sound the same as those in Chevy Chase and Arlington County: Builders are constructing large houses on small lots, knocking down trees, obstructing sunlight and destroying the character of the town.

But in North Brentwood and other small municipalities in northern Prince George's County, mansionization comes with a twist: Some of the new homes, neighbors and town leaders say, are being used as boardinghouses for several families or unrelated people. Some are college students from the University of Maryland. Others appear to be immigrants.

"Our concern with these McMansions is they are not single-family homes," LaVerne Williams of Lewisdale told a group of county planners and elected officials in Riverdale. "You are turning our communities into rooming communities."

Williams, 81, is leading a campaign to protect her neighborhood and beyond. She walked into the recent meeting with a cane in one hand and a fistful of pictures of oversize houses in the other.

"I'm a law-abiding citizen," she said. "You have to do something about this."

Prince George's planners have launched a study of mansionization, spurred not just by neighborhood complaints but also by pressure from state lawmakers.

Last year, state delegates proposed legislation that would have given 11 Prince George's towns and small cities control over zoning, a power now reserved for the county -- except in the city of Laurel.

The bill died in committee, but not for lack of local support. Del. Barbara A. Frush, a Beltsville Democrat, said she understands the plight of neighbors, feeling helpless while their community is altered.

"They make these things into not a McMansion but a McApartment building," Frush said.

Del. Tawanna P. Gaines, a Democrat from Berwyn Heights, said the House delegation has given the county an ultimatum: Come up with a county approach, or the state will deal with the matter.

The Prince George's Planning Board expects to have draft legislation to the County Council for review by next month. The county could consider further height restrictions: Houses currently can be 40 feet high. It also plans to study overlay districts, which are used to limit development in certain areas. Annapolis has used overlay zones to restrict development.

"We've had a number of communities that have expressed concern," said Samuel Parker Jr., chairman of the Planning Board. "And we know the issue in Prince George's is a little different" from those of neighboring counties.

County law declares that no more than five people unrelated by blood or marriage can live in a single-family house. But enforcement has been lax, said Bob Schnabel of College Park.

"There is no penalty," he said. "Properties in my neighborhood are rented to more than five people, and it's far time that the county deal with this."

Council member Thomas E. Dernoga (D-Laurel) said code enforcement staffing has been a problem for the county. He also said the county is considering an ordinance, like one recently adopted by Laurel, that addresses crowded houses.

In 2005, Manassas caused an uproar when it restricted single-family homes to immediate relatives, even if the number of occupants was below the legal limit. The law was meant to address problems associated with crowded housing and illegal immigration. But officials repealed the law after civil rights leaders complained.

Kristie M. Mills, city administrator for Laurel, said her city's new code was not based on ethnicity but fire safety. Under the ordinance, each house is limited to a certain number of occupants, based on the number and square footage of bedrooms.

"We had inspectors who were finding houses were being redeveloped, they were adding rooms without permits," Mills said. "One instance, the inspector found sprinklers covered up. It's boiled down to a life-saving issue."

For Williams, it is about what is happening outside the houses in her community.

In a walk through Langley Park, she pointed to several houses that tower over the bungalows. One had several cars parked around it. Another, under construction, had several entrances, suggesting that more than one family could eventually live there.

At another, Mirna Segovia answered the door and explained that she and her husband expanded their Keokee Street home two years ago simply to make room for their five children.

"It was too small," she said.