Opening the Bag of Mortgage Tricks

Opening the Bag of Mortgage Tricks – ALL the revelations this year about dubious practices in the mortgage servicing arena — think robo-signers and forged signatures — have rightly raised borrowers’ fears that companies handling their loans may not be operating on the up and up.  But borrowers aren’t the only ones concerned about potential mischief. Investors who hold mortgage securities are increasingly worried that servicers may be putting their interests ahead of those who own the loans.  A servicer might, for example, deny a loan modification to a borrower because it also owns a second mortgage on the same property and doesn’t want to write down that asset, as required in a modification. Levying outsize default fees is another tactic — the fees typically go to the servicer, not the lender, but they can still propel a property into foreclosure more quickly. And foreclosures aren’t a good outcome for investors.  Last week, a jury in federal district court in Reno, Nev., awarded a group of 50 mortgage investors $5.1 million in punitive damages against defendants in a loan servicing case. Although the numbers in the case aren’t large, its facts are fascinating.

Financial Interests Dictate Sovereign Policy – Interview with Michael Hudson – 1. A recent article of yours, “Schemes of the Rich and Greedy,” cites the bailouts in Europe among such schemes. What are the main faults with bailouts, and for whom are they designed? 3. How do you explain the IMF’s role in Europe’s debt crisis? Is it that the EU lacks the technical expertise to deal with sovereign debt issues, as some have suggested, or because it is a junior partner of multinational finance capital?

Will shale gas turn out to be an energy sink? – If you externalize the costs of a business activity, it means other people pay the costs–environmental, social and otherwise–and you get the profits. It goes on all the time in extractive industries such as oil and natural gas and mining. And, it is also a natural strategy for manufacturers who dump their pollution into the air and the water. It’s even practiced in finance where the executives of Wall Street banks have managed to collect the bonuses made off a phony boom in the last decade and saddle taxpayers with the losses of the inevitable bust caused by bad and often fraudulent loans, misleading derivative contracts, and leveraged speculation in stocks and commodities. If the loopholes are there, you can be assured that people in business will take advantages of them. That’s exactly what is happening in the business of shale gas drilling. Drillers are exempt from federal clean air and water regulations under a bill shepherded through Congress in 2005 by none other former Halliburton CEO Dick Cheney in his capacity as the then vice president of the United States. (Halliburton is one of the world’s largest providers of drilling fluids for shale gas drilling and other oil and gas drilling operations.) That means the drillers can externalize the environmental costs of these hazardous fluids and other materials needed to fracture the shale and thereby free the natural gas. They can foist those costs on nearby residents in the form of ruined water supplies, toxic air pollution, poisoned land, and health problems for humans and animals.

Ingredient Costs Expected To Push Food Prices Up
- As previously reported here, more large packaged-food makers have announced and/or implemented price hikes to their product lines.

In the meantime, the US largest, Kraft Foods is in the process of rolling out price hikes on about 40 percent of it’s line-up.  Analysts are suggesting the rate of inflation on food could more than double in the next year. General Mills hasn’t raised food prices in 3 1/2 years.  The maker of Bisquick, Betty Crocker, Pillsbury and Gold Medal flour has stated it will raise prices on 25% of it’s cereal line on Monday. Last month, McDonald’s said it is planning on raising prices in order to offest rising costs. Kellogg is expected to raise cereal prices along with Unilever and Nestle who have signaled increases are likely in the near future. “The USDA doesn’t like to break bad news” says one agricultural economist that expects at a least a doubling in food inflation next year.Coffee, sugar, wheat and corn are at all highs not seen in 2 to 20 years on the commodity markets.  

IMF Chief Worried About Europe Domino Effect (Reuters) – The head of the International Monetary Fund said on Thursday he was worried that EU leaders’ piecemeal approach to Europe’s debt crisis was encouraging markets to pick off weak countries one by one.

Dominique Strauss-Kahn appeared to endorse the idea of common euro bonds, saying they could be a useful tool, but added the political will to give power to the center of Europe was the main hurdle to their creation. "I am worried, and that’s why I am urging the Europeans … to provide a comprehensive solution because this piecemeal approach … obviously doesn’t work," Strauss-Kahn told Reuters. "The markets are just waiting for what’s next." Due to its cumbersome decision-making structure, the euro zone has tended to offer countries such as Greece and Ireland rescues only once they were "at the edge of the cliff," he said. That approach has created a domino effect.

German Obstructionism Heightens Euro Fears
- Speaking in front of the German parliament in Berlin, Merkel sang the praises of the "extraordinary ideas of peace and freedom which provide the foundation of European unity." It is a legacy, she went on, "to which I feel personally beholden." Fine words, to be sure. But there are some in Germany who have found cause to doubt the sincerity of Merkel’s commitment to the European Union. The German chancellor, after all, has become a stick in the deep mud of the ongoing euro crisis, one which has seen country after country fall victim to skyrocketing interest rates on government bonds, making borrowing on the international financial markets virtually impossible.

PIMCO Investment Outlook – Allentown – Bill Gross –

  • The global economy is suffering from a lack of aggregate demand. With insufficient demand, nations compete furiously for their share of the diminishing growth pie.
  • In the U.S. and Euroland, many policies only temporarily bolster consumption while failing to address the fundamental problem of developed economies: Job growth is moving inexorably to developing economies because they are more competitive.
  • Unless developed economies learn to compete the old-fashioned way – by making more goods and making them better – the smart money will continue to move offshore to Asia, Brazil and their developing economy counterparts, both in asset and in currency space.

 Mauldin: Kicking the Can Down the Road – “Kicking the can down the road” is a universally understood metaphor that has come to mean not dealing with the problem but putting a band-aid on it, knowing we will have to deal with something maybe even worse in the future. While the US Congress is certainly an adept player at that game, I think the world champions at the present time have to be the political and economic leaders of Europe. Today we look at the extent of the problem and how it could affect every corner of the world, if not played to perfection. Everything must go mostly right or the recent credit crisis will look like a walk in the Jardin des Tuileries in Paris in April compared to what could ensue.

Sunshine: at the IMF, of all places – So, here we are, after a 2010 of economic horrors. There is extensive debate as to whether the standard tools of economics are even valid. But is anyone at least trying to do something original with the standard toolkit? The DSGE model may be one of John Quiggin’s zombies…, but zombies are notoriously resilient.  The answer on this occasion is yes, at least as far as Michael Kumhof and Romain Ranciére, go. In a new paper, they present a DSGE model… Then, they run a simulation of the macro-economy assuming that there is a negative shock to the bargaining power of labor resulting in a shift in the income distribution. The simulation results were that the financial sector balloons in size, that total private debt in the economy expands hugely, and that credit acts as a substitute for rising average wages in the short run. Eventually, the model produced a massive financial crisis and a brutal recession, followed by a blow-out of the government budget. Your keen and agile minds will not have missed that flat real wages, an increased share of national income going to the top 5%, enormous growth in the financial sector, and a credit-financed consumer boom are exactly what happened to the macroeconomy in the last 30 years.

More on the lunacy of the Basle Accords – I was looking at the preferred asset classes under the Basle Accords in my previous post, and realised that every single asset class that is given less than a 100 percent credit risk weighting is now tainted by widespread default or impairment. The credit risk weightings mean that instead of reserving the standard 8 percent of capital in respect of a debt, the bank can cut that by the weighting applied to the asset class. Effectively, the reduction in credit risk weighting operates as a powerful subsidy to the borrowers and equally powerful incentive to over-leveraging the lenders. As a baseline, all financial, consumer and corporate debt must be reserved at a credit rating of 100 percent of 8 percent, unless explicitly discounted. A weighting of 50 percent, for example, means that instead of holding $8 reserves on a loan of $100, the bank only needs to hold $4 of reserves. A zero weighting means they lend $100, but hold no reserves at all.

The British Mess (III): Bank of England Tiptoes Around Sovereign Risk Worries The latest Bank of England Financial Stability Report is worth decoding. My last post on the UK sketched a scenario in which the very large 2011 funding programme for UK banks, discussed in the June BoE FSR (back issues all available here), could be quite problematic, in adverse markets. I hinted that if there was sufficient disorder, we might find the limits of the Implicit Sovereign Guarantee Moral Hazard Trade. It looks as if the Bank of England agrees, and it has sharpened its commentary, though you still have to read between the lines a bit, perhaps with the assistance of Robert Peston: According to the Bank of England, up to £500bn of wholesale debt is due to mature by the end of 2012. That includes something over £200bn effectively owed to taxpayers through the Treasury’s Credit Guarantee Scheme and the Bank of England’s Special Liquidity Scheme. Of that £500bn or so, between £350bn and £400bn falls due for payment this year.

Inside the Mortgage Monster – Back in the days of the home-loan boom, loan officers at Ameriquest Mortgage worked hard and played hard. They put in ten- and twelve-hour days punctuated by “Power Hours”—frenzied telemarketing sessions aimed at sniffing out borrowers and separating the real salesmen from the washouts. A frat-house mentality ruled, with liquor and cocaine flowing freely. “It was like college, but with lots of money and power,” one former Ameriquester, Travis Paules, recalls. In this excerpt from his new book, The Monster: How a Gang of Predatory Lenders and Wall Street Bankers Fleeced America-and Spawned a Global Crisis, investigative reporter Michael W. Hudson tells the story of Travis Paules’ first year and a half inside America’s biggest—and most predatory—subprime mortgage empire.


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