Another Subprime Myth Debunked...

Calculated Risk has some nifty graphs in a post about how homeownership rates have plummeted back to their 2001 levels (i.e. pre-subprime explosion). The homeowner vacancy rate is the highest that it has been since 1956, and he estimates that there are about 1.65 million "excess" housing units in the United States. That's bad news for people who are expecting the housing market to rebound this year. (click here for the full post and visual aids)

These numbers confirm a study that was done by the Center for Responsible Lending a few years ago, which directly debunked the myth that subprime mortgages and exotic Alt-A mortgages created homeownership opportunities for people with bad credit or allowed middle-class families the chance for the big house in the suburbs. The industry argument has been that regulation would prevent these great financial products from entering the market and deny all these fine consumers a piece of the American dream. They argued that regulation would limit the availability of credit or make it too expensive, thus President Bush's vision of an ownership society could not be realized.

Now, we see that there is a difference between homeownership and "sustainable homeownership." In fact, the Center for Responsible Lending found that these predatory lending products actually stripped people of their home equity and resulted in a net loss of homeowners rather than creating and sustaining homeownership. (click here for the CRL study). This is also in addition to the costs that these loans have had on individuals, communities, and municipalities.

A Little Consumer Round-Up

The New York Times has an interesting story about the convergence of money, science, and medical treatment. Click here for the story about the development of Prodisc, a spinal injury treatment, and the money paid to doctors who studied its effectiveness.

There is a proposal to amend our bankruptcy laws to allow for the "cram-down" of mortgages in Chapter 13 Bankruptcy. It sounds hyper-technical, but it is really a huge deal for consumers. As I've said before, negative equity is the buzz-word of the 2008. A record number of people are going to owe more on their homes than their homes are actually worth. This proposal will allow financially troubled consumers to declare bankruptcy, save their homes, and no longer owe more than the house is worth. This is a right that consumers have with other personal property in Chapter 13, but the mortgage industry has blocked its application to home loans...until now.There are two good posts on Credit Slips about the bill. Click here for the report on the recent hearing and Click here to learn more about the distortions of the mortgage industry related to the "unintended consequences" of the bill.

In case you thought the stimulus package and fed rate cut did the trick, the latest figures for Asset Backed Securities recently hit new lows and the Commercial Backed Securities are taking an even more dramatic fall. Click here for the details at the Calculated Risk blog.

The USPIRG blog says that Mattel broke its promise related to lead paint and its toys. They've got a link to the full story and details about hopping mad U.S. Senators...all we need now is a Consumer Product Safety Commission that does its job. Click here for the post.

Is the Department of Justice hindering the investigation of former Minnesota U.S. Attorney Rachel Paulose?

The Wall Street Journal blog highlights a claim by Scott Bloch, head of the Office of Special Counsel, that the U.S. Department of Justice is hindering its efforts to investigate claims of abuse, special treatment, partisanship, etc. (click here for the post and link to the actual story). Here's an excerpt related to Rachel Paulose:

Bloch also complains about the investigation into the performance of Rachel Paulose, who recently stepped down as U.S. attorney for Minnesota amid complaints about her management style. Bloch’s agency had referred allegations about Paulose to the inspector general’s office, but the office told him by telephone in October that it had “asked around” and wasn’t planning to do anything. In the letter, Bloch asks Mukasey: “Are you requesting that I report to the president that you refuse to investigate disclosures of wrongdoing made by a career federal prosecutor, an employee of your agency?”

In an e-mail, Justice Department spokesman Peter Carr said, “We are reviewing the letter and will respond to Mr. Bloch as appropriate.”

2008 Legislative Session: Minnesota State Senator Linda Scheid

Like Representative Mullery, if there is a consumer protection bill that is going to pass this year, it is likely going to go through Senator Linda Scheid's committee. She is the chair of the Senate's Commerce and Consumer Protection Committee, which handles a diverse and broad array of bills.

Senator Scheid was first elected a state representating in 1976, and then she was elected to the senate in 1996. This is her fourth term. Senator Scheid lives in Brooklyn Park. She has a law degree from William Mitchell, and Senator Scheid has made education and infrastructure a focus of her career. The interest in education is not surprising, since she also works as a substitute teacher.

You can contact Senator Scheid related to the consumer protection bills at issue this session, as follows:

Senator Linda Scheid
75 Rev. Dr. Martin Luther King Jr. Blvd.
Capitol Building, Room G-9
St. Paul, MN 55155-1606
651.296.8869

Clinton and Schwarzenegger Team Up To Terminate Payday Loans

Politics, it is often said, make strange bedfellows, and I can think of no stranger couple than President Clinton and Governor Schwarzenegger...but here they are in the Wall Street Journal (not known for its liberal politics) advocating for the end of payday loans. Click here for the full article, here is an excerpt:

Here is one initiative that can unite progressives and conservatives as well as business leaders and community activists: helping the "unbanked" enter the financial mainstream by opening checking and savings accounts, and working collaboratively with financial institutions and community groups to develop and market products that work for this untapped market. This will put money in the pockets of individuals and grow the economy. And it won't cost taxpayers a dime.

Imagine the economic and social benefits of putting more than $8 billion in the hands of low- and middle-income Americans. That is the amount millions of people now spend each year at check-cashing outlets, payday lenders and pawnshops on basic financial services that most Americans receive for free -- or very little cost -- at their local bank or credit union. Over a lifetime, the average full-time, unbanked worker will spend more than $40,000 just to turn his or her salary into cash.

Many nonbank customers are either leery of banks or believe they do not have the products they need. The result is that the market for basic financial services is booming. Today, the number of check cashers, payday lenders and pawnshops is more than double the number of McDonald's franchises in the United States. More than 20 million Americans cash more than $60 billion in checks each year at check-cashing businesses. Full-time workers without a checking account typically pay $40 on average to cash their paychecks. And payday lenders sell an additional $40 billion in expensive small-dollar loans each year that carry fees 30 times the average credit-card rate.

They've launched a statewide initiative to get folks to open up starter accounts, reaching out to the unbanked. It's a darn good idea.

Fake Countrywide Documents and Mortgage Servicing Kick-Backs at Fidelity

Credit Slips has two great posts about the shenanigans in the mortgage servicing industry. The first post is about Countrywide Mortgage's apparent practice of "reproducing" documents that may or may not have actually been sent to consumers when required by the court. Here's an excerpt of the post by Katie Porter (click here for full post):

The latest uproar about mortgage servicing in bankruptcy is an admission by Countrywide that it "recreated" documents related to the servicing of a consumer's home loan. The short story is that Countrywide says a debtor's monthly mortgage payment changed during the Chapter 13 plan and that the debtor didn't make the increased payments. The problem is that the debtor, her attorney, and the trustee say that they were never told about the increase in payments, which is purportedly due to changing escrow requirements. Countrywide gave the debtor letters showing that the amounts changed; those letters were dated 2003, 2004, and 2007. The problem is that those letters were not copies of actual letters from 2003, 2004, and 2007. As Countrywide admitted, it "recreated" these letters as "evidence" of the change in the monthly payment.

....

The judge's question goes right to the heart of the matter. What is going on in this system? Why can't one of the nation's largest banks look in its records and produce evidence that it did what it says it did? And why can't Countrywide's lawyer explain its servicing practices? Countrywide's servicing technology reputedly retains images of every document that it produces for five years; these letters should be there. (And I note, it's possible that they are, but somebody decided it would be easier/faster/better to "recreate" the evidence.) As the judge's comments suggest, how was a consumer supposed to know these were recreations? The "recreation" only came to light in this case because one of the receipients of the letters did not move to the given address until months after the letter was sent. A letter really written at that date couldn't have been sent there--the recipient didn't even know they were going to relocate at that point in time. But for this quirk, the debtor could have been forced to pay more than $4,000 to Countrywide, even though that money may not be owed.

The second post is about kick-backs that foreclosure attorneys (the folks foreclosing, not the folks helping consumers) receive from a major mortgage servicer (click here for the full post):

Last week, a class action lawsuit (Harris v. Fidelity National) was filed against Fidelity National Information Services, a huge player in the billion dollar world of mortgage servicing.... But despite its invisibility, Fidelity is almost always part of the action in foreclosures or bankruptcy cases.

The lawsuit alleges that Fidelity receives illegal kickbacks from attorneys who work under contract with them. The exhibits to the class action are clear. Fidelity bills its clients--the servicers--for certain fees-- for example, $100 to review a bankruptcy plan. The servicer includes those fees as due and owing on bankruptcy proofs of claims, many of which appear only as "attorneys fees" or "postpetition charges." However, Fidelity requires attorneys to let it "retain" $50 of that $100. Fidelty characterizes these as "admin fees" paid by the attorney to Fidelity. The big problem with this practice is that bankruptcy law requires full disclosure of where the debtor's money is going. If the service is getting the debtor to pay these fees, the bankruptcy court should be approving those charges and who is going to receive the debtor's money. At least, that's how the class action has framed the legal issues in the case.

The Five Stages of Grief and/or Recession

Time magazine's Justin Fox has a good post about one of my favorite economists, Nouriel Roubini (yes, I have "favorite" economists):

This morning, as I sat on a comfy chair writing my post on Al Gore and Bono, I noticed that Roubini had settled in with his laptop a few comfy chairs away. So I sidled over and asked him if he thought maybe economic gloom had gotten too much in fashion.

He cited the five stages of grief (denial, anger, bargaining, depression, acceptance). "I think we’re getting into the depression stage, we’re going to go soon enough into acceptance," he said. "The mood here is pretty depressed. That sets the stage for acceptance and fixing the problems and moving on."

So, I thought back to Governor Pawlenty's reaction to the state economist's statement that Minnesota is in a recession, and then put that within Roubini's framework. As long as Pawlenty and top government officials remain fixated on the denial and spin phase of grief/recession, the longer it is going to take until we get to the "fixing the problems and moving on" phase. I am not encouraging leaders to shout fire in a crowded theater, but we have to be realistic about the major economic problems that our community is facing---these are Roubini's "three bears"...real estate, debt, and oil.

Just take a look at this graph from Paul Krugman, related to employment and consumer confidence numbers (click here for post):

























Or how about this one from the Calculated Risk blog, which shows the downfall of the Residential Mortgage Backed Securities in less than a year (click here)

We can't stick our heads in the sand and hope things will work themselves out, and creating a tax rebate plan favors the most wealthy is not going to do it. Here's information posted by Paul Krugman about the distribution of the Bush rebate plan/economic stimulus among income levels (click here).

Payday Lending Needs To End: Minnesota Needs A Real Cap

Payday lending is a business that simply keeps people in debt, rather than provide them with an emergency safety net. The Center for Responsible Lending has found that high interest, payday lending costs American families $4.2 billion annually. 90 percent of payday lending business is generated by trapped borrowers with five or more loans, even in states that have attempted to prevent the constant churning of payday lending customers.

Only enforcement of a comprehensive interest rate cap at or around 36 percent for small loans will solve the debt trap problem, and that is what we need to pass this legislative session in Minnesota. The dozen states that have this cap, plus the District of Columbia, will realize a savings of $1.5 billion per year...that's money that can do some good rather than line the pockets of the payday lending industry.

Click here for the full Center for Responsible Lending Report, and then contact your legislator to get the 36% cap or, better yet, how about 6%.

Friday Funnies: Buy America

Buy America for $9.95, plus falling financial markets are thrown in for free...

Just click here for the latest movie/cartoon/thingy from Mark Fiore the greatest cartoonist since Walt Disney's brother.

2008 Legislative Session: Rep. Joe Mullery

This is the first in a series of posts about influential legislators for the upcoming session. The first legislator to be profiled is Representative Joe Mullery. If it has to do with consumers, chances are it is going to pass through Representative Joe Mullery's Public Safety and Civil Justice committee.

He is an attorney, representing District 58A in Minneapolis. DFL Representative Mullery has been a long-time advocate for affordable housing, criminal justice, and consumer rights. Nearly all of the households in his district make under $75,000.


You can contact Rep. Mullery as follows:

Joe Mullery (DFL) 58A
* 367 State Office Building
100 Rev. Dr. Martin Luther King Jr. Blvd.
Saint Paul, Minnesota 55155
(651) 296-4262

E-mail: rep.joe.mullery@house.mn

Economics and the Youth Vote

BusinessWeek has an interesting cover story related to the "youth" vote. Specifically, the thinking and issues important to the sons and daughters of baby boomers. This generation is referred to by many names, millennials or Gen Y, but there can be little doubt of their importance---they are 43 million strong and comprise 20% of the voting electorate. And as older generations pass away, their influence will be even more.

Here is an excerpt about the economics of this generation and how it is going to change the political discourse related to student loans, health care, and credit card regulations:

As the government and employers shift more responsibility for benefits like health care and retirement onto the shoulders of individuals, many Millennials see themselves as unwitting victims. Although that trend has been building for decades, this may be the first generation to fully feel the great shift of risk in their bones. "This is a group of people who understand what it means to have no safety net," says Elizabeth Warren, a Harvard University School of Law professor and co-author of The Two-Income Trap. "Millennials walk the economic high wire. If nothing goes wrong, they will make it safely to the other side. The slightest disruption—a layoff, an illness—and they are off the wire and falling hard."

...

A more apt name for people like her may be Generation Debt. No group has ever started life so deeply in the hole, due mainly to mounting college costs, dwindling financial aid, and credit-card debt. The average college student now graduates with $20,000 in loans.

Click here for the full article, and the intersection of economic angst and Generation Y's political coming of age.

Pawlenty Nixes White Collar Crime Lab Money

Although Minnesota is ranked 8th in the nation in mortgage fraud by the Mortgage Bankers Association, Governor Pawlenty's bonding proposal nixes a plan by Dakota County to create a much-needed forensics lab to tackle white collar crime.

Given the magnitude of the foreclosure crisis, it is odd that a simple and moderate funding proposal like this one has been cut. It says a lot about the governor's priorities: fund skylights at the Minnesota Zoo ($7.5 million), but don't fund a crime lab that could prevent millions of dollars in fraud and hold bad actors accountable ($6.7 million).

Although the newspapers didn't really talk much about it, I am sure that folks at the Financial Crimes Task Force would have something to say about it.

Click here for the Pioneer Press story.
Click here for the Star Tribune story.

Minnesota Pollution Control Agency Caves To Agribusiness

The Star Tribune has the story (click here), below is an excerpt:

After three years of research, the state was ready to impose the nation's first water-quality limit for acetochlor, a potent farm chemical that was washing into rivers and lakes.

But after hearing from scientists from agribusiness giants Monsanto and Dow AgroSciences, the Minnesota Pollution Control Agency (MPCA) decided to allow more than twice the concentration of the chemical in rivers than it had originally proposed.

...

Rep. Ken Tschumper, DFL-La Crescent, said that if there's a dispute between 1.7 and 3.6 parts per billion, the state should "err on the side of safety" and use the more protective standard. Tschumper, a dairy farmer, has authored legislation to determine whether some of the pesticides used in Minnesota are safe enough for the environment and human health.

This event follows two high profile incidents involving the Minnesota Pollution Control Agency and the herbicide Atrazine. First, the MPCA allegedly fired an agency researcher for wanting to testify about his findings that Atrazine was harming the environment. Second, they un-invited researcher and University of California biologist Dr. Tyrone Hayes, preventing him from presenting his research linking widespread amphibian decline with the herbicide Atrazine.

By the way, Atrazine has been banned in the European Union due to its links to prostate and breast cancer.

Minnesota: Foreclosure Help for People Losing Their Homes

There are a lot of stories about foreclosures, including a lot of posts about foreclosure statistics, issues, and other economic data on this website. But, where do you actually turn for help?

There were thousands of people in Minnesota last year who lost their homes, and there will be even more in 2008. Facing foreclosure is a daunting and emotional experience. Nobody likes to admit that they are in financial trouble. But here is some advice: the sooner you get help the more somebody can help you. Waiting reduces the number of options available to you.

So turn to somebody who has training and can help you. If you're falling behind on your monthly housing payments or you're interest rate is about to spike---go to the Minnesota Homeownership Center (click here). On the Homeownership Center's website, there is a map. Click where you live, and you will receive a list of free, reputable housing counselors in your area. They are in the best position to evaluate your options.

Anybody who is claiming that they can "save" your home or buy your home and lease it back to you is almost certainly a scam artist. I have never heard of anybody successfully selling their home to somebody, signing a contract-for-deed, and then getting their home back in a few years...NEVER. These people are after the equity in your house, or simply want your house, itself.

Go to the Homeownership Center, find a counselor, and get real help. The counselor may not be able to solve all of your problems, but they may be able to help you find a long-term, sustainable plan to get you on the right path.

Martin Luther King Day

Last speech by Martin Luther King:



On War:



I have a dream:

Attorney General Lori Swanson Sues EPA

As part of a broader assault on an individual state's ability to regulate big business, the federal EPA recently struck down a California law to reduce automobile emissions. Minnesota Attorney General Lori Swanson has now joined a coalition of 16 other states in suing the Environmental Protection Agency to preserve our state's ability to regulate vehicle emissions (in addition to a broader philosophical issue related to a state's right to protect the health and safety of its citizens).

Specifically, the lawsuit was initiated in response to the EPA’s December 19, 2007 denial of California’s request to set higher standards than the federal government. The California standards would reduce automobile greenhouse gas emissions by 30% by 2016.

Here is a link to the actual motion filed to "intervene" in the case currently pending before the United States Court of Appeals, Ninth Circuit.

Mortgage Bankers Association Pats Itself On The Back

The Mortgage Banker's Association issued a press release related to a loan modification study it did in the third-quarter. Click here for the press release and click here for the study. The press release appears to be a self-congratulatory pat-on-the-back for all of loan-modifications and work-outs that industry provided to homeowners in the third-quarter. Specifically, the headline of the press release reads, "MBA Study: Industry Initiated More Than 235,000 Loan Modifications and Repayment Plans in 3rd Quarter."

The headline, however, is misleading, because it lumps together the number of "loan modifications" and the number of "repayment plans." When you look at the actual study, the industry only provided 54,000 loan modifications out of 384,000 foreclosure actions that it took in the third-quarter. While it did provide 183,000 repayment plans, that is hardly a victory for consumers.

In the past, repayment plans would be great. A consumer needs a grace period or a plan to get caught-up on a loan due to family illness or loss of a job.

The mortgages that are currently going bad, however, have toxic terms---high interest rates, balloon payments, negative amortization. These consumers need the underlying loan to be modified for there to be any real relief. Past industry studies have shown that repayment plans with these toxic mortgages are simply not sustainable and are not a long-term solution. In this light, the 14% of bad loans being modified is rather pathetic and not proportional to the financial crisis we are currently experiencing.

The New Subprime: Home Equity Debt

In late December 2007, I declared that "negative equity" will be the buzz word of 2008. In addition to subprime loans, people were regularly drawing equity out of their homes to pay for a whole variety of expenses, primarily credit cards and health care expenses. In addition to toxic subprime and Alt-A mortgage products, these home equity loans lowered the home-to-value ratio on thousands of houses. Rather than having 30% or 40% equity, people now had 5% 0r 10% equity based on dubious appraisals.

That means that when housing prices fall or something unexpected in life happens, people no longer have a financial cushion. And, when people no longer have a financial cushion their loans go into default and/or their homes go into foreclosure.

Along those lines, BusinessWeek has an interesting story about the growing number of home equity loans that are going bad. Specifically, the amount of home equity loans that have gone bad has more than doubled since 2003 and doesn't show signs of stopping. It's now nearly $40 billion. You combine that with bad credit card debt, bad mortgage debt, and bad auto loans, and we've got serious trouble. It's a $850 billion market, so there's a lot further to go. Click here for the full BusinessWeek story, and here's an excerpt:

The boom brought about some especially toxic home-equity loans. Homeowners gamed the system, steadily cashing out every bit of equity from their houses—a situation that arose in part because banks didn't track whether borrowers took out subsequent loans from competitors. Another bad practice: a home-equity loan on top of a payment-option adjustable-rate mortgage. Those ARMs allow borrowers to make monthly payments that amount to less than the interest. The principal keeps growing, eroding the equity, which makes it a risky home-equity loan on top of an already risky mortgage.

In a rapidly rising housing market, such practices didn't seem particularly reckless. After all, homeowners could quickly refinance, using newly accumulated equity to pay off a second loan, or even a third. So lenders were confident they would get their money back. "The proposition was that borrowers would refinance and pay this sucker off in six months or a year," says Guy Cecala, publisher of Inside Mortgage Finance. "But the market died."

Friday Funnies: Senator Blo & Go

I think the most amazing part about today's Friday Funnies is that it's actually true. Click here for the full story from the Washington Post, but here's an excerpt about Senator Norm Coleman's new family business of providing "blo & go's" to the world. Perhaps there is a chance for world peace after all:

Laurie Coleman, wife of Republican Sen. Norm Coleman, has invented a tool for hands-free hair drying called the "Blo & Go."

Anyone who has ever tried to style his or her hair by wielding a blow-dryer in one hand and a brush in the other knows that it can be an exasperating juggling act. The challenge of an at-home blowout is what inspired Coleman to invent the Blo & Go, a hair-dryer holster.

....

Press secretary LeRoy Coleman (no relation) confirms that the senator is "indeed proud of his wife and proud of the product."

But after a little thought, he changed his mind about rounding up a quote from his boss -- thus depriving us of a public record of Sen. Norman Coleman (R-Minn.), up for reelection this year, commenting on a Blo & Go.

More economic troubles...

When it rains, it pours. Here is a round-up of the latest economic news:

• Dow plunges more than 300 points. (click here for story)

• Merrill Lynch posts $9.8 Billion Loss. (click here for story)

• New housing construction lowest in 16 years, dropping 40% in 2007 (click here for story)

And, that's just a sampling from one day's headlines.

Women Are Harder Hit By Foreclosure Crisis

I had earlier posted research related to the correlation between race and receiving a high-cost, subprime mortgage. Now there is new information that there is also a high correlation between being a woman and receiving a high-cost, subprime mortgage, which becomes extremely likely if you are also a woman of color. The New York Times has the story, click here, the following is an excerpt:

Though women and men have roughly the same credit scores, the Consumer Federation of America found that women were 32 percent more likely to receive subprime loans than men. The disparity existed within every income and ethnic group. Blacks and Latinos are also more likely to get subprime loans than comparable white borrowers.

In another study, the National Community Reinvestment Coalition found that women received 37 percent of high-cost home loans in 2005, compared with just 28 percent of prime loans. Preliminary research by the organization suggests that this gap may have tightened as subprime loans crested in 2006.

....

“The striking thing is that the disparity between men and women actually goes up as income rises,” said Allen J. Fishbein, director of credit and housing policy for the Consumer Federation of America. Among high earners — defined as people earning twice the median income — black women are as much as five times more likely to receive subprime mortgages than white men.

Click here for the full study by the Consumer Federation of America.

State Economist: "Minnesota is in a recession."

A little over two weeks after the Star Tribune's business page proclaimed that a recession is "unlikely," Minnesota's state economist has declared that we are in a recession. Click here for the full story, here is an excerpt:

The state unemployment rate jumped to 4.9 percent in December, up from 4.4 percent the month before. The U.S. unemployment rate stood at 5 percent in December.

Minnesota lost 2,300 jobs last month, capping a string of declines, 23,000 jobs in all, over the last six months of 2007. That's the worst run of Minnesota job declines since the last U.S. recession in 2001. It also wiped away all of the job growth in the first half of 2007.

That has not, however, stopped some people in the Pawlenty administration from downplaying the current economic problems in the state. I mean, that would require the governor to take some leadership and stop campaigning with Senator John McCain.

Why the Supreme Court matters...

As if there was ever any doubt why the United States Supreme Court matters, this is just more confirmation. Whether you are talking about human rights or consumer rights, the five votes on the Supreme Court can fundamentally alter the playing field. The Supreme Court has put a near-impossible hurdle in front of investors looking to sue a company for securities fraud. Here is the summary from the New York Times (click here for the full story):

The decision in the case, Stoneridge Investment Partners v. Scientific-Atlanta Inc., was a major and ardently sought victory for investment banks, accountants and vendors — the deep pockets that have become nearly automatic targets of class-action lawsuits that accuse them of having engaged in a fraudulent scheme with the company that actually issued the stock.

The notion of “scheme liability,” as the theory behind such lawsuits is known, now appears to be dead.

The 5-to-3 decision held that in order to proceed with such a lawsuit, plaintiffs must be able to show that they relied, in making their decision to acquire or hold stock, on the deceptive behind-the-scenes behavior of these financial institutions, often called secondary actors. But behavior that was never communicated to the marketplace cannot be said to have induced reliance, Justice Anthony M. Kennedy wrote for the majority.

"Reliance" is a concept and element of common-law fraud, and in the 1960s and 1970s the common-law was altered by state and federal consumer protection statutes that eliminated the "reliance" element, because it was too difficult to prove and allowed bad actors to go unpunished. Now, the Supreme Court has effectively put that element back in play.

Click here for the opinion itself.

CitiGroup's $24 billion writedown; 24,000 layoffs---Sign of Broader Economic Trouble

Although this may come as a shock to the Star Tribune's board of economists (who predicted no recession this year), Citigroup announced today that they would "write-down" $24 billion in losses due to subprime and credit-related losses, and then lay-off 24,000 people. That's pretty big, and comes on the tail of Citigroup's announcement of a bail-out by a Singapore bank and the Saudi Arabian Prince Alwaleed bin Talal (they pumped $15 billion into the company). Click here for a full story from CNBC.

The trouble at Citigroup is reflective of broader problems in the economy. For example, Sears/K-Mart announced a 60% drop in profit (click for the story). And, there was an abrupt pull-back on consumer spending. The New York Times has the story (click here):

The abrupt pullback raises the possibility that the country may be experiencing a rare decline in personal consumption, not just a slower rate of growth. Such a decline would be the first since 1991, and it would almost certainly push the entire economy into a recession in the middle of an election year.

There are mounting anecdotal signs that beginning in December Americans cut back significantly on personal consumption, which accounts for 70 percent of the economy.

This illustrates the problem and danger of an economy that has exported all of our manufacturing jobs to other countries and killed its middle-class. If all we do is sell stuff to one another and provide services, our economy is no longer diversified enough to withstand natural, financial cycles. Instead, we risk a major, spiraling economic downturn.

Details Related to Bush Loan Modification Program

Although the Bush plan can best be described as too little and very late, I thought I should provide some information related to what the plan does or does not do. I've gotten some inquiries since the plan was released in mid-December, and so here it is...

The loan modification proposal only applies to Adjustable Rate Mortgages that were originated between January 1, 2005 and July 31, 2007. The initial reset must occur between January 1, 2008 and July 31, 2010. If you qualify, the problem is that much of the relief is based on your credit score not being severely damaged. Common sense, however, tells us that if you are headed into foreclosure...your credit score is going to be severely damaged. It also leaves the thousands of folks in Minnesota, Florida, California, Ohio, Pennsylvania, etc. who were already headed into foreclosure due to toxic Adjustable Rate Mortgage resets in 2007 with no relief.

For people with resets in 2008, but with damaged credit, it goes back to the way it was---a completely discretionary relief as determined by the servicer's analysis of the homeowners' situation. This fails to incorporate the advantages and economies of a truly uniform, streamlined process.

Here is a link to the American Securitization Forum's framework and fact sheet on the loan modification program and its additional information.

Here is a link to the American Securitization Forum's Question and Answer sheet.

I'm not endorsing the American Securitization Forum, by any means, but it's the most complete summary out there.

More LHS Mortgage Fraud Sentencing

The Star Tribune has the story on the sentencing of "How To Ruin Your Life" author, Jill Lehn, and Isadore Stewart. Lehn got three years and Stewart got 18 months. According to the article:

Lehn had worked as a loan closing agent or buyer in 60 deals with 10 lenders. She helped conceal fraudulent payments in excess of $3.2 million, personally receiving more than $444,000.

Lehn got a lighter sentence for speaking-out and encouraging others not to follow her path, which I think is great and surprising. The Department of Justice did a psychological profile of white collar criminals a few years ago, and one of the most common characteristics is denial ("I am not a real criminal or real thief.") and the other common characteristic is narcissism. Lehn is admirably proving to be the exception to the profile.

For the full article click here.

Mortgage Fraud Victims Pack Meeting and Vent

According to a Pioneer Press story, 200 homeowners and renters from the Prague Estates packed a meeting on Thursday. They met with Assistant U.S. Attorney Joe Dixon, because he wanted to find out what type of sentences Michael and Ardith Parish should receive. To nobody's surprise, the people expressed anger and frustration...and, my guess, a call for "no mercy."

Should this surprise anybody? Of course the victims of this fraud are upset. They lost a lot of money, are emotionally hurt, and will likely have damaged credit for years to come. Just because Michael and Ardith Parish robbed with mortgage documents and contracts rather than a gun and a ski mask doesn't mean they aren't plain vanilla thieves. They should be treated as any other person who stole millions of dollars would be treated.

Negative Equity Revisited

A few weeks ago I stated that "negative equity" would be the buzz word of 2008. High loan to value ratio mortgages, 80/20 mortgages (two mortgages one for 80% of the value and another for 20% of the value), inflated appraisals or all of the above would force a high number of homeowners into a very difficult situation: owing more on their house than their house is worth.

There is an interesting article in the Star Tribune that picks up on this trend, but the article looks at it from the angle of appraisers and appraisals. Specifically, if you got an optimistic appraisal or, more likely, inflated appraisal during the boom years, now you are more likely to have negative equity or complications when selling your home.

Here is a description of the appraiser's world during the boom years:

According to a survey last year by the October Research Corp., almost 90 percent of the appraisers polled said that they were pressured by mortgage brokers, lenders, realty agents, consumers and others to raise property valuations. That percentage was nearly double the findings of a study done three years earlier.

The study also found that 75 percent of appraisers reported "negative ramifications" -- including being blacklisted -- if they didn't cooperate.

So where was our honorable Minnesota state regulators while all of this was going on? The answer is a few paragraphs down:

In Minnesota, the situation has been brewing for years. In late 2004 the Department of Commerce, which licenses appraisers, was cited by federal regulators for not having a good system for keeping track of continuing education and not putting enough resources to policing the industry. The agency has since beefed up its investigations department by hiring former appraisers as investigators.

What can be done?: Access to Courts IX

What can be done about binding mandatory arbitration?

On the federal level, there is a bill called the Arbitration Fairness Act of 2007. Introduced as S. 1782 by Sen. Russell Feingold (D-Wis.) in the Senate and H.R. 3010 by Rep. Hank Johnson (D-Ga.) This bill will ban the types of binding mandatory arbitration clauses discuss in this series of posts called "Access to Courts."

Click here to go to Public Citizen's website and send a message to congress, right now.

On the state level, we are a little more limited due to federal pre-emption. We can, however, pass a disclosure law modeled after the disclosure law in California. It obviously can't be that onerous, if it is being complied with in California. This disclosure law is what enabled Public Citizen to establish that the National Arbitration Forum in Minnesota rules for corporation over 97% of the time. Sunlight is a powerful disinfectant, and maybe we should shine the light on something rotten in our own backyard.

Access to Courts Part IX: What Can be done?
Access to Courts Part VIII: Other Arbitration Horror Stories
Access to Courts Part VII: Internal Documents, False Statements to the Court, Oh My!
Access to Courts Part VI: National Arbitration Forum Stacks Deck Against Consumers
Access to Courts Part V: Godless Bloodsuckers
Access to Courts Part IV: Harvard Law Professor and Former Judge Black-Balled After Ruling For Consumers
Access to Courts Part III: The Origins of the National Arbitration Forum
Access to Courts Part II: What is Binding Mandatory Arbitration
Access to Courts Part I: Halliburton v. Rape Victim

Friday Funnies: The Night Before Caucus

Although this was really created for the Iowa Caucus, I thought it was still applicable for the upcoming Nevada caucus and darn funny, too...

Click here for the Night Before Caucus video/cartoon/thingy

Other Arbitration Horror Stories: Access to Courts VIII

From a recent Mother Jones article entitled, "Suckers Wanted: How Car Dealers and Other Businesses are Taking Away Your Right To Sue":

Consumer arbitration horror stories abound. Last month, a Maryland woman named Deborah Williams testified at a hearing in the House about her dispute over a Coffee Beanery franchise. Despite the fact that Maryland's attorney general determined that the Coffee Beanery had defrauded her, she was forced into arbitration in Michigan, where the company is headquartered. The Coffee Beanery's attorney actually worked as an arbitrator for AAA, the same firm handling her case, and her arbitrator shared an accounting firm with the company, a clear conflict of interest. Despite the decision from Maryland's attorney general, the arbitrator ruled against Williams, assessed her $100,000 for the cost of the arbitration, a $150,000 judgment to be paid to Coffee Beanery, and ordered her to pay the company's legal fees as well. Williams is now bankrupt and nearly homeless as a result and can't appeal the decision. She will be paying off the award for the rest of her life.

Click here for the full Mother Jones article.

Access to Courts Part IX: What Can be done?
Access to Courts Part VIII: Other Arbitration Horror Stories
Access to Courts Part VII: Internal Documents, False Statements to the Court, Oh My!
Access to Courts Part VI: National Arbitration Forum Stacks Deck Against Consumers
Access to Courts Part V: Godless Bloodsuckers
Access to Courts Part IV: Harvard Law Professor and Former Judge Black-Balled After Ruling For Consumers
Access to Courts Part III: The Origins of the National Arbitration Forum
Access to Courts Part II: What is Binding Mandatory Arbitration
Access to Courts Part I: Halliburton v. Rape Victim

Internal Documents, False Statements to the Court, Oh my!: Access to Courts Part VII

The following are some excerpts from a brief authored by Paul Bland and Carlene McNulty in a North Carolina case. It is probably one of the best briefs I've read on this issue, as well as an in-depth look at Minnesota's National Arbitration Forum. I've posted links to the briefs and hundreds of pages of supporting documentation, including internal memoranda, affidavits and e-mails below.

Here are a few highlights:

NAF and its principles have shown a disturbing propensity to say things that are simply untrue, where they think that doing so will induce a court to enforce an arbitration clause. Perhaps the best known example came from the case Toppings v Meritech Mortgage Services, Inc., 569 S.E.2d 149 (W. Va. 2002), where the West Virginia Supreme Court of Appeals struck down a lender's arbitration clause as unconscionable....When the plaintiffs first challenged the NAF as being biased in the Toppings case, NAF rushed to provide the defendant lenders with the names of well-regarded members of the State Bar, including a respected former Justice of the Supreme Court of Appeals of West Virginia, a Professor from West Virginia College of Law, and well respected local attorneys it claimed would be arbitrators for arbitration proceedings in West Virginia. The problem is, NAF's representations were completely fals