Category Archives: Credit markets

On the Clouded Title Mess and the Difficulties of Cleaning It Up

Abigail Field’s latest piece at Daily Finance is a great one-stop summary of the most thorny problem underlying the securitization mess: how can we clean up title given how badly it has been screwed up? As we and many others have noted, integrity of property ownership is an essential foundation of development; this is straight Hernando de Soto gospel. And as our Richard Smith has pointed out, the various fixes to get around this mess run roughshod over well established court procedures that date back to the 1677 Statute of Frauds. Why was it necessary to implement those rules? Because without them, wealthy people could use the court system to steal property. Sound familiar?

One thing that it is important to stress: that the abuses to established real estate transfer and recording processes were not inherent to the securitization model. I’m not a fan of securitization but the sad reality is that no one is prepared to go back to the more costly in terms of equity required, model of on-balance sheet banking (it would result in a shrinkage of credit that every respectable economist would recommend against and hence will never happen). But no one (except the FDIC, which keeps being ignored) is thinking seriously enough about what it would take to make securitization safer.

Class, Social and Traditional Media, and the Mortgage Mess

I’m going to tell one on myself, and since I suspect my reflexes are atypical, I suggest you watch this video by a realtor, Leigh Brown, before reading the balance of the post:

Do We Need Big Banks?

Yves here. I normally let VoxEU articles stand on their own, but this topic, of whether the bank PR that bigger banks are essential stands up to scrutiny, is near and dear to my heart.

Note that the authors point to a 1990s study that finds that a $25 billion in assets bank was the optimal size. There were a fair number of studies done then of bank size versus efficiency. I’m a bit surprised that this is the one that is most often cited, since it also came up with the biggest size threshold at which a negative cost curve kicked in (meaning the bank became more costly to run). One study found that the slightly negative cost curve started at $100 million in assets (!); more typical was somewhere between $1 and $5 billion. And remember, these studies were done in the days when banks returned checks, and check processing was believed to have strong scale economies (ie, if check processing was a bigger proportion of total costs then than now, it could arguably have increased scale economies).

Some academics were frustrated with these results. I recall reading a paper where the author argued that there were theoretical cost savings to being bigger (duh) and basically contended that the empirical data had to be wrong.

Guest Post: Curbing the Credit Cycle

Credit booms sow the seeds of subsequent credit crunches. This column argues that these have their source in cross-bank externalities. To internalise these cross-sectional spillovers, policy should operate “across the system”. It adds that this is the essence of macro-prudential policy, which, for the first time is about to be undertaken internationally.

Obama Pressing for a “Shock and Awe” Mortgage Mod Program, 3 Million in 6 Months

Given how well “shock and awe” worked in the Iraq war, I’d see the Administration’s use of that expression in the context of the mortgage mess as a Freudian slip.

I must confess to being surprised at the report by Shahien Nasiripour of Huffington Post, namely that the Administration is pushing for an even more aggressive-looking mortgage modification program than has been rumored. The reason I’m surprised is that this effort, even though it appears misguided on several fronts and falls far short of what is needed, represents an upping of the demands being made against banks. That is contrary to both the Obama Administration’s past behavior of making great sounding promises and walk them so far back as to wind up in a different country, and of inconveniencing the banks terribly much. But Shahien is an able reporter, so I’m sure he has the facts right.

Will Ireland Threaten to Default?

We were surprised that Ireland capitulated so quickly to pressure from its Eurozone confreres and accepted a punitive bailout of its government, when it was in fact its banks that were a mess. As we noted in November:

Note that the Irish government is still holding out for a banking-system-only bailout, even if the funds are channeled through the government. Since I am not aware of any IMF bailout being done on this format, it’s likely to be a sticking point if the Irish refuse to back down (recall that the government itself is under no immediate funding pressure; they have six months before they need to go to market, which is an eternity in crisis-land).

The other major bone of contention is Ireland’s super-low corporation tax, which served as a significant incentive for multinationals to set up shop in Ireland. The Germans and French are insistent that it be increased to balance the budget. The Irish objections here are plausible, particularly since the low rates are a cornerstone of their national strategy (do you want 12.5%, the current corporate tax rate, of a decent sized number or 25% of a vastly smaller number?). The Irish have made it clear that they are non-negotiable on this point, and as keenly as the rest of the eurozone would like to beat Ireland back into line, I doubt they’d be willing to risk negotiations failing over this issue.

Fast forward, the Irish agree to a deal, the ruling party suffers substantial losses precisely for accepting the terms demanded by the eurozone and the IMF, and the new incumbents are much less willing to play nicely with counterparties who are engaging in what amounts to “every man out for himself” behavior, no matter what spin is put on their demands.

Why Adulterous Failed Banker Sir Fred Goodwin’s Covered-Up Workplace Affair is a Matter of Public Interest

We will probably see in the next few days whether the newspapers manage to get the super-injunction by Sir Fred Goodwin, the CEO of failed bank RBS, lifted. Since the facts of the matter, or “speculation” if you will, are now all over the Internet, keeping the super-injunction in place seems pretty pointless, as the Telegraph confirms in Sunday’s Links.

So what’s the real point of this circus? A demonstration of the superiority of the Web over the tabloid press as a mechanism for transmitting salacious tittle-tattle? A grandstanding MP working parliamentary privilege to get a bit of banker-bashing publicity? Naked Capitalism getting into the regulatory arbitrage game and thumbing its nose at the UK court order from the relative safety of its NYC-hosted web server? Or perhaps it is blogger Guido Fawkes sarcastically pointing out that the law is now officially an ass:

So there was this ****** bloke who worked closely with another ****** colleague, they apparently began an adulterous affair not long after the ****ing crisis of 2008. He went to Court to stop it getting out that he had been banging her. Because he is the most notorious ****** of his generation he also banned references to his profession lest he be identified. Guido would be in contempt of Court if he told you his name or profession…

Indeed, the law should not be mocked; but who’s mocking it? The UK certainly needs major overhauls of its privacy (and libel) laws, rather than the current abusive shambles, but in this particular case, one might contend that it’s Sir Fred who’s doing the mocking.

EU Puts Periphery Countries on the Rack

For those of you unfamiliar with medieval implements of torture, the rack was believed to be quite effective in extracting information, but generally by having a potential victim watch it in use, with the obvious threat that he was next unless he cooperated. The rack was not only terribly painful, but like most old school methods of torture, often crippled those who survived. (Civilized people, which now clearly excludes our President and those in influential positions in the Pentagon, now recognize that torture is good only for producing phony confessions). It was also employed in particularly gory executions, such as drawing and quartering.

The Eurozone seems to be using similar medieval methods on its debt-laden periphery countries with far less clear understanding that serious damage to the subject is a likely outcome.

“Anonymous” Whistleblower Charges BofA With Large Scale Force Placed Insurance Scheme With Cooperation of Servicers

Ooh, this is ugly.

The charge made in this Anonymous release (via BankofAmericaSuck) is that Bank of America, through its wholly-owned subsidiary Balboa Insurance and the help of cooperating servicers, engaged in a mortgage borrower abuse called “force placed insurance”. This is absolutely 100% not kosher. Famed subprime servicer miscreant Fairbanks in 2003 signed a consent decree with the FTC and HUD over abuses that included forced placed insurance. The industry is well aware that this sort of thing is not permissible. (Note Balboa is due to be sold to QBE of Australia; I see that the definitive agreement was entered into on February 3 but do not see a press release saying that the sale has closed)

While the focus of ire may be Bank of America, let me stress that this sort of insurance really amounts to a scheme to fatten servicer margins. If this leak is accurate, the servicers at a minimum cooperated with this scheme. If they got kickbacks, um, commissions, they are culpable and thus liable.

As we have stated repeatedly, servicers lose tons of money on portfolios with a high level of delinquencies and defaults. The example of Fairbanks, a standalone servicer who subprime portfolio got in trouble in 2002, is that servicers who are losing money start abusing customers and investors to restore profits. Fairbanks charged customers for force placed insurance and as part of its consent decree, paid large fines and fired its CEO (who was also fined).

Regardless, this release lends credence a notion too obvious to borrowers yet the banks and its co-conspirators, meaning the regulators, have long denied, that mortgage servicing and foreclosures are rife with abuses and criminality.

Gretchen Morgenson Confirms Lack of Attorney General Investigations into Foreclosure Fraud

This is the key snippet from Gretchen Morgenson’s New York Times column today, which inveighs against Iowa attorney general Tom Miller’s unseemly and peculiar haste to get a deal with miscreant banks inked:

Two people who have been briefed on the discussions, but who asked for anonymity because the deal was not final, told me last week that no witnesses had been interviewed and that the coalition had sent out just one request for documents — and it has not yet been answered.

And the official denial amounts to a confirmation:

Administration Acts on Mortgage Fraud Against Military, Yet Denies It Exists Anywhere Else

We have yet another example of media cravenness. You would assume that when official positions presented in the media contradict each other, it would represent an obvious opportunity for reporting, and an intrepid young journalist would take up the task. But since the job of US news outlets is increasingly to distribute propaganda, they manage not to notice.

We’ve had a stenography masquerading as reporting on the result of the recent Foreclosure Task Force “review” of servicer practices. When it looked at 2800 severely delinquent loans, it found only some operational shortcomings and no unjustified foreclosures. Given that all that this cross agency effort did was to have tea and cookies with the servicers while reviewing their documents, as opposed to doing any validation of their data, this means the “exam” was a garbage in, garbage out exercise.

Similarly, today the Fed made the similarly ludicrous statement that there were “no wrongful foreclosures” based on a review of a mere 500 loan files. Given that there are 14 major servicers, that means it looked at 36 files on average per servicer. Heck of a job, Brownie!

Aside from the fact that there have been numerous reports of colossal errors that should be impossible in a system with any integrity (homes with no mortgages or where the mortgage had been paid off, where borrowers had been given letters that they had been approved for permanent HAMP mods being foreclosed upon), there are also numerous accounts of servicer-driven foreclosures. As Karl Denninger noted:

This Is How QE Really Works

QE2 Is Equivalent to Issuing Treasury Bills. In actual fact, all QE2 does is drain the real economy of interest income by swapping an interest-bearing government liability for a non-interest bearing government liability. This decreases aggregate demand in the economy. So the real economy effects of QE are to slightly lower aggregate demand. This is offset by changing interest rate expectations, which alter private portfolio preferences and risk premia, leading to credit growth, leverage and speculation, forces which should pump up the real economy. The Fed had intended to lower interest rates via the lowered risk premia. To date, the Fed has lowered risk premia. But this has also provided the tender for speculation and leverage. Moreover, the Fed has also raised inflation expectations to boot, causing interest rates to rise and working at cross-purposes with the lowered risk premia. Thus, QE2 has only been successful insofar as it has increased business credit and raised asset prices. In my view, QE2 has been a bust as it adds volatility to the system and will have negative unintended consequences down the line.

A New “Whocoulddanode” Defense, This Time of Coddling Banksters in the Crisis

I hate shooting the messenger even when he lets us know that he is a tad invested in the information he is conveying, but sometimes it is warranted. Floyd Norris now tells us that maybe it wasn’t such a good idea to have been so generous to the banks during the crisis. He cites the usual reasons: the recovery is shallow, the officialdom missed the opportunity created by the crisis to restructure the financial system, sparing bondholders created moral hazard, and we are now stuck with banks in the driver’s seat. His lament, as the headline accurately summarizes, is “Crisis Is Over, But Where’s The Fix?”

The problem is that his account is larded with a rationalization of the decisions made at the time to treat major financial firms with soft gloves:

At the time, rescuing seemed more important than reforming. The world economy was breaking down because of a lack of financing. Trade flows collapsed, and companies and individuals stopped spending. It seemed clear that halting the slide was critical…

A surprising citadel of that second-guessing is at the International Monetary Fund, where researchers this week concluded that the rescues “only treated the symptoms of the global financial meltdown.”

“Second guessing” is simply misleading.

Spiralling into the Moussaka

From the morning links

Explosive growth of unemployment recorded in Greece, with a total number of unemployed is at 733,645, according to data from the Greek Statistical Authority (ELSTAT) that were released Wednesday.

The percentage of registered unemployed reached 14.8% in December 2010 an increase of one percentage point compared with November.

Drop in Foreclosure Filings Reveals Operational Mess at Servicers

The level of complaints about servicer screw ups in the HAMP program and more recent horror stories from borrowers not seeking loan modifications confirms something we’ve noted on this blog: that servicers fee structures aren’t set up for them to handle the workload associated with high volumes of foreclosures. Accordingly they devised processes like robosigning, […]