Tag Archives: subprime mortgages

Jerry Brown Did More To Help Homeowners Than The Entire US Government

Yesterday, Bank of America announced that they would settle their lawsuit with a parade of states Attorneys General that began before BofA bought out the defendant, Countrywide Financial.  The initial suit alleged that Countrywide engaged “in deceptive advertising and unfair competition by pushing homeowners into mass-produced, risky loans for the sole purpose of reselling the mortgages on the secondary market.”  At the time I thought it would be difficult to hold Countrywide responsible for what the mortgage market is intended to do, but I suppose they didn’t want to face a jury at a time when the financial industry is melting down.

This settlement, which could provide up to $8.68 billion dollars for as many as 400,000 homeowners nationwide (and up to $3.5 billion in California), has some very laudable parts to it:

Under the terms of the settlement, eligible subprime and pay-option mortgage borrowers with loans from Countrywide will be able to avoid foreclosure by obtaining modified and affordable loans. Here is the information released by Brown’s office:

The loans covered by the settlement are among the riskiest and highest defaulting loans at the center of America’s foreclosure crisis. Assuming every eligible borrower and investor participates, this loan modification program will provide up to $3.5 billion to California borrowers as follows:

• Suspension of foreclosures for eligible borrowers with subprime and pay-option adjustable rate loans pending determination of borrower ability to afford loan modifications;

• Loan modifications valued at up to $3.4 billion worth of reduced interest payments and, for certain borrowers, reduction of their principal balances;

• Waiver of late fees of up to $33.6 million;

• Waiver of prepayment penalties of up to $25.6 million for borrowers who receive modifications, pay off, or refinance their loans;

• $27.9 million in payments to borrowers who are 120 or more days delinquent or whose homes have already been foreclosed; and

• Approximately $25.2 million in additional payments to borrowers who, in the future, cannot afford monthly payments under the loan modification program and lose their homes to foreclosure.

This is exactly what should have been in the bailout bill – a large-scale workout for homeowners on the brink of foreclosure to modify their loans and stay in their homes.  It’s arguably costlier to the bank at this point for the mortgages to go completely bust and to deal with the foreclosure.  In addition, BofA is SUSPENDING subprime loans and negative amortization loans as well as loans with little or no documentation from the borrower, which is in a way more significant because that’s at the root of the financial crisis.

These are also the kind of steps that Ted Lieu sought in his AB 1830 which was vetoed by the Governor – banning predatory lending and unsustainable mortgage loans.  Ultimately, Attorney General Brown was forced to seek remedy in the courts because the regulatory structure had broken down and the Congress was unable or, more likely, unwilling to give struggling homeowners a hand.  

This shouldn’t be Jerry Brown’s job, but the systemic failure fell to him, and he performed brilliantly.  And he’s not done:

And this is not the end of this chapter. The settlement does not include Angelo Mozilo, the former Chairman and Chief Executive of Countrywide Financial Corporation or David Sambol, formerly the President of Countrywide Home Loans and the President and Chief Operating Officer of Countrywide Financial Corporation. Brown will continue to prosecute separately his case against Mozilo and Sambol.

Lawmakers like Dianne Feinstein and others should be a little ashamed that they were able to do so little in the wake of this crisis while Jerry Brown did so much more.

Friday Open Thread

• Sacramento Mayoral Candidate Kevin Johnson opposes Prop 8. Johnson takes the Obama-squishy approach of saying he opposes writing it into the state constitution, but personally prefers marriage as a man-woman thing.  Incumbent Mayor Heather Fargo, for her part, is a supporter of same-sex marriage, saying of Johnson, that he “made “a good move to oppose Prop. 8. Now we just need to convince him that marriage between gay people is in fact a good thing.”

Zing. This race appears to be quite tight, but a large Obama-friendly turnout in Sacramento would seem to make the former NBA All-Star Point Guard Johnson something of a favorite right now.

• SF League of Women Voters releases YouTube video channel for SF Supevisor candidates. You can get your fill of local politics. There’s literally hours of this stuff. Knock yourself out (and yeah, I’m talking to you Sweet Melissa).

This is fantastic.  Yolo County residents are fighting the construction of a new prison.  It’s as damaging to build as a new coal-fired power plant for a local community.  No city should be turned into another Prison Town, USA.  There’s a little NIMBYism here, but the truth is that we cannot build our way out of the prison crisis – it begins with saner sentencing and a return to the traditional role of rehabilitation.

• Sheila Kuehl writes an open letter to Gov. Schwarzenegger asking him to sign SB840.  It’s very comprehensive.

• Meanwhile, in a rare bit of good news from the insurance industry, HealthNet will reinstate the nearly 1,000 dropped policyholders whose coverage was nixed after they got sick and tried to use it.  They’re also paying millions in fines and reimbursements.

• Sen. Mark Ridley-Thomas on the subprime crisis and its effect on the state.

Still No Sign Of Land

There are budget votes scheduled for Sunday, but given that the Republican effort to impose an unworkable spending cap died in committee yesterday, it’d be hard to see how this all gets resolved in a matter of days.  Clearly the GOP’s ACA 19 overreached to the extreme, throwing in practically every goodie on their wish list and expecting the majority Democrats to roll over.  This time, they didn’t.

They are holding out for a strict formula written into the state Constitution that would limit how much spending can grow in a year. They unveiled their plan, ACA 19, written by Assembly Republican Leader Mike Villines of Clovis, at a legislative hearing Friday. Democrats spent much of the 3 1/2 -hour meeting tearing it down, saying it would strangle government.

“It seems to me the objective of this proposal is clearly to promote less government,” said Assemblyman Sandre Swanson (D-Alameda). “I don’t think your proposal allows any practical flexibility to deal with real-life crises.” […]

An analysis by the California Budget Project, which advocates for low-income Californians in the budget process, concluded that the GOP plan would make it impossible for the state to keep funding schools at the current levels approved by voters through Proposition 98.

The nonprofit further said the GOP plan would “ratchet down the state’s ability to support public services” as government spending failed to keep pace with the state economy.

Republican lawmakers argued that the naysayers were basing their criticism of the spending cap on unrealistic revenue scenarios. Democrats responded that the entire GOP plan is unrealistic. And so it went. The plan was ultimately rejected by the Democrats who control the committee.

This just doesn’t sound like two sides reaching an endgame, but of course stranger things have happened in Sacramento.  Plus there are deadlines for the state ballot that hit in a matter of days.

The worry here is that, as Frank Russo notes (and he’s a must-read in these times), the lobbyists who hold much control over what happens in the state will use the chaos to carve out some treats for their industries.

A prime example (pun intended) is California’s response to the subprime mortgage mess, where our state is experiencing one of the highest rate of mortgage foreclosures-something that has kicked our economy in the gut-and has exacerbated the fiscal problems we have with our budget.

Even Halper of the Los Angeles Times exposed in an article yesterday that the Schwarzenegger Administration at the bidding of the powerful banking industry in California is trying in closed door meetings, with the connivance of legislative Republicans, to hold the budget up and extract hundreds of millions for their friends. The article starts off:

“One reason California still has no state budget is a closed-door dispute over a tax proposal that could be a multimillion-dollar boon to banks that engage in subprime lending.

“The proposal, according to legislative sources and industry lobbyists involved in the private budget talks, was brought to the table by the Schwarzenegger administration at the urging of lenders and other corporate interests. The proponents argued that it would help offset costs to businesses that could result from other tax changes under consideration. “

Essentially this would happen by refunding tax hikes to those companies who did poorly in 2008, i.e. subprime lenders.  It’s complicated but the beneficiaries are clear.  High-tech industries are trying to repeal some worker rights as part of a deal.  In the waning hours there’s going to be a lot of opportunity for mischief.  And then there’s Schwarzenegger’s blue pencil to deal with.

It almost makes you think it’s a GOOD thing there’s no budget yet.

Friday Things I Didn’t Get To Post About This Week Open Thread

Let me clear out my Inbox and set you on your weekend way:

• The Megan’s Law website apparently is being used as a hit list and may have led to at least one death.  This is the downside of a “what about the children?” über alles mentality.

• I’m not entirely certain about this claim that state lawmakers could have solved the mortgage crisis back in 2001 by cracking down on predatory lending practices.  It’s a boilerplate story, a typical “they bought off the politicians” frame.  But the problem, as Paul Krugman notes today, is that home prices lowered, leading to negative equity for homeowners.  Not sure what the lawmakers could have done about that.  This is a national crisis that required federal action.  And what action could be taken on the state level is in the purview of the Attorney General.  Jerry Brown is investigating home loans from Countrywide Financial for improprieties, particularly forcing buyers with good credit into subprime mortgages.

• For all the talk about Steve Poizner, he is doing his job in suing Blue Shield for their loathsome practice of dropping patients retroactively after they seek coverage.  Blue Shield’s response?

The state’s interpretation of laws governing policy cancellations “is simply wrong.”

Stupid state, not knowing their own laws as well as a private entity!

• Nancy Pelosi is under fire for saying that Republicans like this war.  Juan Cole is right to slam her for assuming that Republicans would act in good faith and help to end the war after the 2006 elections.  What Republican Party was she talking about?

• Anthony Wright has the new amendments released to the public on the new health care reform.  I should have a lot more on this over the weekend.

• I know that I didn’t execute a House roundup in November, but honestly there wasn’t a whole lot going on in the races.  So I postponed it and will have a December roundup in the next few days.

• And finally, I would be remiss if I didn’t mention the California Democratic Party buying three grand in French wine from Fabian Nuñez, who’s now a wine salesman, I guess.  I have to acknowledge Kevin Spillane (two Republicans in one day, I know) from the No on 93 campaign for the funny move of sending a bottle of Two Buck Chuck to Nuñez’ office.  It is an award winner.

It’s an open thread.

More OC Follies

Looks like the same county poohbahs who under-invested in their own fire safety over-invested in soon-to-be-worthless structured investment vehicles, basically a bundling of subprime mortgage debt that is about to go bust.

Twenty percent, or $460 million, of the county’s $2.3 billion Extended Fund is invested in so-called SIVs that may face credit-rating cuts, said Treasurer Chriss Street. In all of its funds, the county holds a total of $837 million of SIV debt, including $152 million in its $3.5 billion of money-market funds that isn’t under ratings review, said his spokesman, Keith Rodenhuis.

It’s what Atrios has taken to calling “Big Shitpile,” sold to municipal governments as low-risk but soon to be a de facto bailout for mortgage brokers – and crushing to these same municipal governments, who won’t be able to provide services out of them.

Plus, we have a top Republican activist about to turn himself in on pedophilia charges:

Jeffrey Ray Nielsen-the well-connected Orange County conservative activist who claimed the so-called liberal media, specifically the Weekly, was out to get him by publishing a series of exposés on his pedophile activities-is expected to finally admit tomorrow that he used two boys for sex since 1994, according to law-enforcement sources.

A legal representative for Nielsen, who has extensive personal ties to Congressman Dana Rohrabacher and Orange County Republican Party boss Scott Baugh, told prosecutors early last week that Nielsen would plead guilty to two felony counts: committing lewd acts on a child under 15 years old and committing lewd acts on a child under 14 years old.

He’s getting off easy, he’ll probably serve 3 years instead of the 30 years he faced if convicted of all the counts in current trials.

PLUS, Hank Asher, a top business associate to Rudy Giuliani, was named in the bribery investigation of Sheriff Michael Carona.  He’s got the double-whammy, shady ties to America’s Mayor AND America’s Sheriff!

Asher, identified by the initials H.A. in Overt Act 59 of a federal grand jury indictment against Orange County sheriff Michael Carona, had handed the diamond-encrusted Cartier baubles to the wives of the sheriff and his deputy, and with that, assured himself a place in a federal indictment that was looming.

Asher is not charged with any crime in the indictment. But his expensive gifts are clearly part of the corruption investigation.

Someday somebody’s going to write a book about the dysfunctional conservative backwater that is the OC, and it’s not going to look anything like the TV show.

Special Session-O-Rama

Looks like that Dec. 5 deadline for voting on a health care proposal has been extended, after the power play of scheduling it on the day of the Republican Assembly retreat was justified by the Speaker’s office by saying “Deadlines are deadlines.”  Until they aren’t.

And now, there’s talk of a third special session, this one on the subprime mortgage crisis.  I guess the inaction on the first two was not sufficient; we need a third.  And I appreciate efforts to stop predatory lending, though I’m not sure how this would make a dent in what is a national credit lending problem.

I’m still not sure we have a housing “crisis” or just a housing market downturn, but I am pretty sure that nothing the Assembly is going to do in a special session this year is going to affect it one way or the other. Well, they are probably capable of making it worse. But I don’t think they can or will do anything to increase the value of my home, and while I’d love the help, I don’t particularly think they should try.

I’m not as dismissive as Dan Weintraub; this is most definitely a crisis.  But I’m not really sure what the Assembly can do.  The bills they have proposed would only apply to new loans.  That’s important, but they would not do a whole lot for those facing foreclosure.  And anyway, those entering into new loans would have to be deaf, dumb and blind to agree to some no-money-down ARM at this point.  And this bit from the press conference is flat-out embarrassing:

In an illustration of the complexity of the crisis, though, one of the homeowners presented at the press conference as a victim said the house he lost was actually one of two that he owned.

While many owners have lost homes they occupied, others were investors who saw the real estate run-up of the past decade as an investment opportunity.

Sacramento resident Carlos Villegas said he was forced into foreclosure when monthly payments on the house he bought in 2005 shot up from $2,200 to $3,550.

“They gave me three days to move,” he said. “I feel frustrated with the system.

In response to questions from reporters, Villegas said after the foreclosure, he moved back to a smaller house he had purchased 10 years earlier, which he had been renting out.

Of all the people with foreclosure problems, you found a guy with another house?!?

The credit mess is a national problem, and state solutions are nice, but they’re not going to work.  Perhaps driving down the costs of healthcare through a new reform would be the BEST way to help those struggling with home payments.

UPDATE: CPR has a summary of Democratic legislative proposals, and I have to say that the steps to address the current crisis are fairly weak tea.  Some of these, like foreclosure consultant reform, are already illegal; others, like facilitating reporting on workout agreements and increasing talk between homeowners and creditors, should have been initiated months ago.  The only substantive policy I see here is shoveling $10 million dollars to credit counselors.  The federal plan being worked out by the Treasury Department, to freeze teaser rates for some mortgages, would do a hell of a lot more good.

Big Shitpile Update

With home prices sinking, and expected to drop another 20% after already falling 12% in just a few months, I think this deal between Arnold Schwarzenegger and mortgage lenders smacks of desperation more than anything.

Four major subprime lenders promised to give a break to California homeowners who cannot afford escalating mortgage payments, under a plan announced Tuesday by the lenders and Gov. Arnold Schwarzenegger.

Countrywide, GMAC, Litton and HomeEq – which collectively service more than one quarter of subprime loans to people with poor credit – agreed to maintain the initial, lower interest rate for some subprime borrowers whose rates are scheduled to jump significantly higher. To qualify, borrowers must occupy their homes, have made their payments on time and prove they cannot afford payments with the higher interest rate.

These lenders obviously think that they would rather get less money than no money at all.  Of course, we’ve substituted “subprime mortgages” for “mortgages that people can’t afford.”  Actually the problem is as widespread in million-dollar-plus mortgages, which aren’t subprime at all.  The lending companies basically offered lots and lots of money to anyone who was able to sign their name, and are now feeling the sting of consequences.  Will they offer the same relief to homeowners with million-dollar homes?  That seems unlikely.

So while I applaud any effort to keep people in their homes, somehow this deal makes me more worried about the long-term consequences of this runaway mortgage crisis than ever.

UPDATING THE UPDATE: We’re apparently all indirectly paying to bail out Countrywide:

Countrywide Financial Corp. fell more than 10 percent in New York Stock Exchange trading after U.S. Senator Charles Schumer urged the regulator of the Federal Home Loan Bank system to probe cash advances to the largest U.S. mortgage lender.

Schumer said he was alarmed by the volume of advances the system’s Atlanta bank has made to Countrywide considering “the rapid deterioration” in the credit quality of some of the Calabasas, California-based company’s mortgages. Schumer expressed his concerns in a letter sent today to Federal Housing Finance Board Chairman Ronald Rosenfeld.

The Atlanta bank has made $51.1 billion in advances to Countrywide as of Sept. 30, representing 37 percent of the bank’s total outstanding advances, Schumer wrote, citing U.S. Securities and Exchange Commission filings.

No respectable company would assume 37% of Countrywide’s debt.  The Federal Loan Home Bank system, however, isn’t a company at all.  It’s as close as you can get to a federal bailout.

The Federal Home Loan Bank is what the British call a quango – a quasi-non-governmental organization. Although it isn’t legally backed by taxpayer money, it’s widely perceived as having an implicit federal guarantee. And at first glance, it appears that taxpayers’ trust is being used to bail out one of the biggest bad actors in the subprime story.

More here.

Looming Recession Update: Just Shedding Jobs

The nation actually had a good employment month in October.  The economy added 166,000 jobs, mainly in the professional and business services, health care, and leisure and hospitality sectors, and even construction was largely unchanged.

On the other hand, California lost 15,800 jobs, and year-over-year unemployment is up a full point to 5.6% (and that of course doesn’t include those who have stopped looking for work).  That’s also a full point over the national average.  The apologists that call themselves economists in this article are trying to spin the numbers but it won’t wash.

October’s decline in employment, the biggest since the loss of 14,000 jobs in July, confirms that the state’s economy is slowing, said Stephen Levy, who directs the Center for the Continuing Study of the California Economy in Palo Alto.

But “this is a slowdown that the nation is participating in,” Levy said. (Then why did the US add 166,000 jobs in the same month? -ed.) […]

Levy cautioned against making “a big deal” of the overall job loss figures.

“None of this is like when we lost our aerospace industry — that was permanent — or when the Internet bubble burst,” he said.

The current job losses do not signify any loss of strength in the state’s key economic sectors, he said. “It’s not like our economy is threatened from this.”

Really?  You mean the construction sector isn’t losing strength due to the housing meltdown?  And that isn’t driving economic trouble in all other sectors, as the end of refinancing and redecorating new homes depresses consumer spending?

Ever hear of trash-outs?

“An old wooden house along Genevieve Street in San Bernardino was the scene recently of a trash pickup for tenants who lost their home to a bank foreclosure.”

“On Thursday morning, the driveway was piled up with appliances, furniture and clothes that were littered everywhere – a telltale sign of a family that recently lived there. An old gas stove with a skillet full of dust was found. In the back yard, there were mattresses, a microwave, two mangled couches and a bulky refrigerator.”

“Foreclosed homes all over the Inland Empire are turning into what Lisa Carvalho calls ‘trash-outs’ – wooden and stucco carcasses with piles of junk left behind by former tenants.”

“The High Desert offers even more interesting tales. The area is full of tract homes in subdivisions that have stacks of furniture piled inside every room, she said.”

“‘These typically look like they’re occupied, but they’re not trashed,’ she said about these homes. ‘(The owners) just walk away and wash their hands of it.'”

Distressed properties (which are usually foreclosures or short sales) made up one out of every five homes listed for sale in Orange County last week.  And it’s hard to even say who’s in worse shape, homeowners, realtors, or financial institutions stuck with mortgages that will be defaulted without delay.

This is a crisis, and economists who keep their heads in the sand aren’t serving whoever it is they’re supposed to serve.  The legislation that would have at least helped to address this was blocked by Senate Republicans last week.  Where California is able to go in the next decade relies on stabilizing this housing situation.

Looming Recession Update: Home Edition

Statewide foreclosures in California hit the 24,000 mark in the third quarter of 2007 for the first time ever.  In fact, it beat the previous record by 39%.  Nationally, there are almost 18 million vacant homes, and the homeownership rate, often touted by the Bush Administration as proof of economic success, fell for the fourth straight quarter.  What’s really concerning are the foreclosures in upper-income areas:

In four Newport Beach-area ZIP Codes, for example, there were 11 foreclosures in the third quarter, up from just three in the same period last year. There were seven foreclosures in Bel-Air, and none a year ago.

“It’s definitely increasing,” said Joyce Essex, a Coldwell Banker real estate agent based in Beverly Hills who specializes in selling foreclosed homes.

Essex said most of her properties were in the San Fernando Valley and South Los Angeles, but about 10% of her listings are now in a more affluent part of town.

“It’s working its way to the Westside. The Westside is always last to get hit,” Essex said of the foreclosure wave, based on her experience in the 1990s downturn.

The mortgage crisis is finally catching up to those who live hand-to-mouth on a higher level.  The millions who used home equity loans to finance their lifestyle, pulling money out of their properties over and over again, now have no ability to continue the scheme.  And this is just the beginning.  Millions of variable-rate mortgages will reset to a higher rate, in some cases doubling the payment, in the next 2 years.  That will mean more foreclosures, a sapping of housing wealth, and a real impact on state finances:

More than $23.6 billion in California housing wealth will evaporate if real estate prices continue to decline and foreclosures on subprime home loans soar, according to a new congressional report that indicates the fallout from the national mortgage crisis is worsening.

In addition, over the next two years, the state will lose nearly $111 million in tax revenue from the forecast repossession of 191,000 homes and the spillover effect on neighboring property values, said the study, released Thursday by the Senate Joint Economic Committee.

“State by state, the economic costs from the subprime debacle are shockingly high,” committee Chairman Chuck Schumer, D-N.Y., said in a statement. “From New York to California, we are headed for billions in lost wealth, property values and tax revenues.”

And that’s actually a very optimistic scenario, plus it focuses only on tax revenues and not residual effects.  In a country where two-thirds of all economic activity is consumer spending, housing jitters will redound through the entire economy, with families cutting spending because they can no longer rely on their houses for retirement security.  And this isn’t temporary.

“It took Southern California 10 years to recover (from the last housing downturn), and it took the Bay Area six or seven years,” said Cynthia Kroll, senior regional economist at the Fisher Center for Real Estate and Urban Economics at UC Berkeley. “That’s a very realistic expectation.”

This was all very predictable.  Everyone knew that subprime mortgages were a risky asset on which to rest the entire economy.  But it was easy money, particularly for those financial institutions making cash in mortgage-backed securities, so they allowed it.

There is pending legislation in the House Financial Services Committee that would help protect consumers against predatory lending, and other bills would allow Fannie Mae to buy a bunch of mortgages and give homeowners a chance to stay in their homes.  Hopefully, the market has gotten so bad that legislation like this will have a chance to pass.  Otherwise, California and the nation will have a very tough road ahead, impacting the ability to improve people’s lives in education, health care, and practically everything government does.