This was originally posted on May 30th, 2010, and I plan to repost it every year in the hopes that it matters.

Okay, so there’s this online thing called Google Analytics. And it shows someone who has a blog or website from where traffic to his or her site is coming. Now, it’s not always easy to tell where someone is from because some of the domains just say “verizon.net,” or whatever.

But other times I can tell where my readers are, because their domain says “freddiemac.com,” or “wellsfargo.com,” stuff like that. So, if it was just once or twice, then I would just figure that someone bumped into my blog by accident, but just between April 28th and May 29th, for example, people at FreddieMac.com came onto my blog 172 times.

Wellsfargo.com folks showed up 170 times.  JPmchase.com 94 times. Bank of America’s 64 times. usbank.com 26 times. IndyMac Bank 26 times, fanniemae.com 20 times. wachovia 19 times. fdic.gov 17 times. ca.gov 16 times. hud.gov 14 times. va.gov 14 times. mellon.com 12 times. You get the idea.

I also know that many of you spend a whole lot of time on Mandelman Matters. Like, quite a few of you have visited hundreds of pages, give or take, on my site, so obviously you’re reading it pretty carefully.

So, banking and government people… what’s up? How are you? Are you reading me because you hate what I’m saying? Or, because you hate what you’re doing? Something in the middle?

I have heard from a few of you. How come not more? Do you feel I’m being unfair about anything? Or, am I pretty much nailing it? I’m not talking about my facts, I know my facts are right. But what about my opinions? Am I out of line? You can tell me if you think so, you know. I don’t get upset because someone has a different view than my own, but it should be a well thought out view. I don’t really do stupid.

Here’s the real question: Can I do more to help homeowners in some way that you know about, but I don’t. I mean, maybe your bank or government agency is actually trying to do good, but somehow struggling for legitimate reasons and maybe I could help in some way.

I don’t really know what I’m thinking about when I say that, but I’m certainly open to the possibilities. And I wanted you all to know that I’m very easy to reach and very easy to talk to.

If you want your identity kept secret, no problem. I won’t say a word about who you are. You can reach out to me and know that I’m only interested in helping homeowners get through this mess, and I’m only trying to do that because few others seem to be.

This crisis is complex and difficult to understand for most people and I’m kind of good at explaining complicated things in a simple way, and people say I’m funny, so I think I have to try to help. Because when the people of this country catch up with what’s gone on here, and then realize that it’s going to be going on for a long time, well… a number of them are going to be quite upset.

I know that a number of banking and government people think that the way home is through our banking system, and that the average homeowner is somehow at fault and therefore somehow undeserving of help, but it’s not true. Without addressing the needs of American citizens, something we have not done well thus far, we are all in trouble.

You guys started it when you came out blaming “irresponsible sub-prime borrowers” as being the cause of the crisis. That was pretty stupid, you must admit, and I wrote to a bunch of you back then telling you it was a mistake. Now you’re having trouble getting the political support you need to change what needs to be changed because you told everybody it was something that it wasn’t.

You guys all now know that this thing had about as much to do with sub-prime borrowers as World War II. Unless you can point out a sub-prime borrower who was selling synthetic CDOs in Iceland, I think we’re done with that conversation, don’t you?

And how comfortable are you with what Bernanke’s got going at the Fed, with the help of Treasury, of course? I mean, you do agree that we’re blatantly circumventing the legislative process in order to pump trillions into banks without that messy congressional thing, right?

Okay, so fine. I’m willing to look the other way on all of that, but we have to meet somewhere in the middle. At this point, homeowners don’t believe anyone on your side of the table cares at all. They all think you’re evil and willing to see millions thrown out of their homes without blinking an eye. And if that’s the case, then there’s no reason for us to talk.

But that can’t be right, right? I can’t believe that either political party thinks they can possibly get reelected by continuing down that path, do they? It’s a bad idea. So far, the foreclosure crisis is affecting roughly 15% of American homeowners, but that number will exceed 20% in a year, or perhaps 18 months. And then all bets are off. There’ll be no going back then.

I guess that’s it. I just wanted to let you know that I’m here and I’m open to doing whatever might be productive and helpful. You don’t have to worry about me being in this for the money because if that were the case, I’d have some.

So… feel free to get in touch of you have anything to say. My email is mandelman@mac.com and I promise to be a lot more reasonable than I probably come across in many of my articles. Truth be told, I’ve learned that subtlety does little to advance my cause.

If not, not. Feel free to continue reading me without reaching out. At least I feel better for inviting you into the discussion. And I do hope some of you will take me up on it.

Mandelman out.

Chris Whalen of Institutional Risk Analytic’s presentation at a conference in early October of 2010,  showed those in attendance a terrifying picture of where our too-big-to-fail banks are headed in 2011… they’re headed towards failing, in case you didn’t realize… as a result of nothing being done to stop the foreclosure crisis from spreading and threatening “the financial foundations of the entire U.S. political economy.”

The presentation is technical and not easy for the average person to understand, but I thought in addition to providing a link at the end of this article, I’d also provide a few key snippets that anyone can understand:

“The U.S. banking industry is entering a new period of crisis where operating costs are rising dramatically due to foreclosures and defaults.  We are less than ¼ of the way through the foreclosure process.”

You got what he meant there, right?  Yeah, I thought so.  Not good.  And we’re less than ¼ of the way through the foreclosure crisis.  I said that another way some months ago when I said we are only at the beginning of the foreclosure crisis, but for those that figured I was exaggerating, well… now someone else is saying it.

Now check this out…

“Laurie Goodman of Amherst Securities predicts that 1 in 5 mortgages could go into foreclosure without radical action.”

Now just a minute here… you’re not saying that one out of five people with mortgages are “irresponsible sub-prime borrowers who never should have bought homes to begin with,” are you?  Gee, that seems like an awful lot of irresponsibility for one country, don’t you think?  It makes me wonder whether they were always that irresponsible, and we just never noticed it before, or whether there was something put into the water supply, starting right around 2003.

What I really want to ask Laurie, and I’m going to try to reach her tomorrow, is why hers and other similar forecasts, always have such a well-defined stopping point.  Like, they reach the 20% mark and that’s it.  All done.  What causes them to stop?  And will there be an announcement on CNBC: “Ladies and gentlemen, today the last foreclosure occurred at 3:00 PM Eastern Standard Time in Frog’s Breath, New Jersey.  The unlucky couple, the Jorgensens told CNBC reporter Diana Olick, who was on the scene gloating:

“Man, this really sucks!  I can’t believe this… one more day and it would have been over.”

I mean… I don’t know how many times I can say this… obviously quite a few… but foreclosures breed foreclosures.  Every time a house is lost to foreclosure, it reduces the value of the homes around it, right?  And since America’s middle class has most of its wealth in its homes, as the value of homes drop, people spend less.  And as people spend less, corporations and small businesses make less money, which leads to higher unemployment as they layoff workers or higher fewer workers.  And as people earn less or remain unemployed longer… more foreclosures, right?  Which lowers the value of the surrounding homes, right?

Lord, that makes me feel like there’s a song comin’ on… this one’s dedicated to my very good friend Max Gardner, who’s from North Carolina, and as I’m learning every day… very likely the smartest consumer lawyer that ever lived.  Come on, Max… you know how this one goes…

Sing it with me…

(Open the link above in a new window, and the music will accompany the words.)

~~~

Will the circle, be unbroken,

By and by, Lord, by and by.

More foreclosed homes, we’re creating,

And I can’t imagine why.

~~~

We’ve spent trillions, on the bankers,

Though they were the ones that erred.

While round our necks, homes hung like anchors,

But politicians were too scared.

~~~

Will the circle, be unbroken,

By and by, Lord, by and by.

More foreclosed homes, we’re creating,

And I can’t imagine why.

~~~

You can see now, what a problem,

Leaving homes, without a dime.

It should be clear soon, that our crisis,

Was not caused, by the sub-prime.

~~~

‘Cause 20 million, homes we’re losing,

Will cause great pains, for everyone.

By the time of, this crisis’ ending,

Our whole nation, will come undone.

~~~

And the bankers, up on Wall Street,

Think they’re the smartest, in the room.

But if we follow, how they’re thinking,

The middle class, will be consumed.

~~~

So I keep warning, all my neighbors,

It’s long past time, for you to know.

It was the bankers, not the borrowers,

That destroyed, the status quo.

~~~

If we don’t all, soon come to realize,

Foreclosing homes, they harm us all.

If we don’t stop them, they’ll continue,

To make our climb back, one long haul.

~~~

And so I beg you, tell your neighbor,

That you know, it’s not his fault.

Write to Congress, tell the White House,

You don’t want him to default.

~~~

Then we can start, to come together,

Rebuild our country, day by day.

Because our children, they deserve to,

Live in the great, old U.S.A.

~~~

Oh, will the circle, be unbroken,

By and by, Lord, by and by.

More foreclosed homes, we’re creating,

And I can’t imagine why.

~~~

Okay, so back to work… why would they stop?  Why only one out of five?  They say negative equity is the number one cause of foreclosures, so as long as foreclosures keep happening, and keep lowering the homes around them, won’t negative equity keep happening as the next foreclosure ratchets down the values of home after home?

Last year, if you recall, Secretary Geithner spoke at some kind of G20 type meeting in Japan, and he said in his remarks that the world couldn’t depend on the American consumer to pull the rest of the world out of the global recession this time around.  I remember writing about it, and I found it a very telling remark.  It was like he was saying that he knew he and the Obama Administration weren’t going to do anything to stop the crisis on Main Street.  They were going to let the damn thing burn to the ground, and we couldn’t be counted on to have any money to spend this time around, so the world should look elsewhere for the cure for their economic ills.

Now, I’m sitting here looking at Chris Whalen’s slide show, and Laurie Goodman’s remarks, and I’m thinking about the FHFA preventing Fannie and Freddie from doing any principal reductions, which I just wrote about yesterday…

… and I’m remembering President Obama introducing the Making Home Affordable Program, and the cheers from the throngs of Americans who had waited for him to do something about the free fall in housing prices… and how the politicians had all talked about how we had to get the toxic assets off of bank balance sheets in order to get them lending again… which we never did… and how the banks were doing so well, paying out record bonuses, repaying the TARP funds early so they could pay their oh-so-valuable CEOs untold millions once again…

No, they weren’t small, sir.

But, then I’m looking at the recent disclosures by the Fed… and how we’ve pumped something like $12.2 trillion into our banking system… given the bankers unlimited loans at zero percent… even paid off at 100 pennies on the dollar, foreign bankers and Goldman Sachs with the proceeds of the AIG bailout… all the while spending less than 1/1000^th of that amount to stop the foreclosure crisis… because we didn’t want to bail out the irresponsible borrowers who had bought homes they couldn’t afford, implying that it was they who were at the center of our economy’s woes…

But a report published by Core Logic less than two weeks ago, showed that 10.8 million or 22.5% of American homeowners with a mortgage were now underwater, and that another 2.5% drop in home prices, which is an absolute certainty in my view, would put another 2.4 million homeowners underwater… and that doesn’t sound like that would stop there.

And Sen. Ted Kaufman (D-DE) recently lambasted the Treasury Department for failing miserably with its implementation of the HAMP program, saying that his prediction is that only $4 billion of the $30 billion authorized by TARP will be spent.  But then the CBO estimates that Treasury will spend just $12 billion, which they claim is 1/4^th of the promised funding on HAMP, but the blog, Firedog Lake shows that…

… the report makes clear that $8 billion of the $12 billion that will ultimately be spent comes from unrelated mortgage-relief programs outside of HAMP itself.  In reality, HAMP will get a $4 billion dollar commitment when all is said and done, just 8% of the total allocated.

Treasury, it should go without saying, continues to say that all of that is nonsense and that the department will spend the entire $30 billion on HAMP… which I thought was $75 billion… and that started at something like $380 billion, after Bush’s Hope-4-Homeowners was slated at $320 billion and modified one loan, as I recall fondly. (Click that last one if you have a minute… it’s an oldie, but it was funny then and it’s funny now.)

But then, apparently, just a few weeks ago, John Taylor, of the National Community Reinvestment Coalition called foreclosures, “the mortal enemy to economic recovery,” and telling CNBC…

“Foreclosures are the mortal enemy to economic recovery. We can keep on pumping money into the system to create liquidity for banks and in the market, but it’s simply not going to succeed until they plug the hole at the bottom of the well!

So what has the Administration done to stem foreclosures? They have put in place a voluntary program, which has done roughly half a million permanent modifications since the program began, but there’s been three and a half million foreclosures during the same time period and seven million foreclosure filings.

That kind of performance merits a failing grade by anyone’s standards.”

(Gee, he said, “hole in the bottom of the well,” and for the last three years I’ve been saying, “we’ve got a hole in the bottom of the boat.”  Maybe I should have used the “well” metaphor, and then I’d be talking to CNBC… oh well.)  (That was funny… to me.)

And I also wonder about things that seemed to change without anyone saying anything about it, like the $30 billion the Administration said would be available for “Small Business Lending Support,” which then just sort of went away, if you read the OMB Report Under the Emergency Economic Stabilization Act, Section 202, dated October 15, 2010.

Actually, the $30 billion, they seem to say, was somehow going to be replaced by something in the Dodd-Frank bill, although I’m not saying it’s not, but I can’t seem to find reference to that anywhere.  And, the Treasury’s commitment of $1 billion for Small Business lending was cut to $0.4 billion… they say “as a result of lower than expected demand,” which if you’re plugged into the small business community at all is another way of saying that no one could qualify because their credit’s shot after living through a 25%+ drop in income as they try desperately to hold onto their homes.

So, back to Chris Whalen’s presentation…

Chris also pointed out that the banks remain insolvent, something else I’ve been harping on for so long that I’ve started to bore myself of late.  I’m actually thinking that perhaps I should just republish my articles from 2009 in 2011… think of the time that would save, and they’d sound so current.

I mean… of course the banks are insolvent, we haven’t done anything to fix them, damn it.  Doesn’t everyone remember Treasury Secretary Hank Paulson and the $700 billion in TARP funds that were supposed to buy toxic assets?

… but then he got to the banks and they wouldn’t take anything less than face value, but Paulson said he couldn’t do that, politically speaking, because everyone knew they were closer to worthless than they were to face value…

… and then the bankers said, “Oh well, sorry Hank, can we offer to validate your parking?”

… and then Paulson said, “But if I don’t buy your toxic assets you’re going to go under!”

… and the bankers smiled and said, “Well, that’s true, Hank.  I guess these things happen.”

… and then Paulson said, “ Damn it.”  And started buying preferred shares of stock with the money, because he couldn’t come up with a way to value the toxic assets in time to save the banks from imploding and thus taking our world out in one fell swoop.

… and then Geithner came in and he was going to have some sort of toxic asset auction, but that was too weird, so he was going to try something called a PIP, but that didn’t work, and then a “PPIP” or Public Private Investment Program… (and maybe there was gonna’ be a “Pip, pip, cherie-o…”)

… but then one Monday morning he showed up with the Sovereign Wealth Fund of Singapore at his side and said we were going to put God only knows how many tens of billions into Citibank, but somehow own only 36%?  And I thought to myself… how the heck did he find the Sovereign Wealth Fund of Singapore over the weekend… were they just hanging out in the bar at the Hay Adams?  (That’s a fancy hotel across the street from the White House, in case you weren’t aware.)

Doesn’t anyone remember all of that going on?  Come on, people… I didn’t dream it.

Evil, that’s your name.

And then after that, Geithner had secret stress tests for banks, and many failed but we weren’t allowed to know which ones, and then next thing you knew it annual bonus time again on Wall Street and somehow they were all magically profitable again?

I remember watching the news all the time back then, before I knew that Geithner was so full of shite that there was no reason to try to follow his math, and I kept thinking that the $700 billion in TARP funds seemed like it got spent ten times over.  And I wrote the article titled: “Obama’s Speech Avoids Using the ‘N’ Word,” about the banks being insolvent and which may have been in bad taste, but it was about “Nationalization”?  No?  No one remembers?

Well… we haven’t done anything about the toxic assets that were and are clogging up bank balance sheets, all we did was suspend the FASB regs, FAS 157 & 159, the mark-to-market rules, as they were being called, and that meant banks didn’t have to write down their assets.  And I wrote the article titled: “Geithner is Allowing Banks to Recapitalize on Backs of Homeowners, or… Games Bankers Play.”

And then the commercial real estate market had dropped like 44% and the answer was “extend and pretend” and I wrote an article that I can’t remember the headline of at the moment,  but it was about that too, because Geithner and Bair said that the banks just didn’t have to recognize the losses or acknowledge that the date for refinancing had arrived even though it had?

Well, of course the banks are still insolvent.  We never fixed them, we just papered over the problem and hoped the real estate market would come back, I suppose, and thus make the toxic assets less toxic.  I don’t what else the plan could have been.  Why else would you extend and pretend, unless you thought it would be better in the future?

But there was never any chance of that because we left the hole in the bottom of the boat… I mean “well”… whatever… we let the foreclosures continue unabated… housing prices in a free fall… a condition sure to lead to higher unemployment… and therefore even more foreclosures… and all because, why?

Come on… my regular readers know why, right?  Say it with me… Because we had to punish those irresponsible sub-prime borrowers who had bought homes they couldn’t afford.  Yeehaw!  Damn this is fun, isn’t it?

Let’s sing it again… come on… one more time… just the chorus…

Will the circle, be unbroken,

By and by, Lord, by and by.

More foreclosed homes, we’re creating,

And I can’t imagine why.

Well, alrighty then… I’m going to bed.  Here’s a link to Chris Whalen’s presentation that’s scaring the pants off a bunch of folks these days that obviously have no ability to see around corners.

Check Out Chris Whalen’s Terrifying Presentation On The 2011 Foreclosure Crisis

(And as seems to be the convention these days: “hat tip” to Yves Smith over at Naked Capitalism for bringing Chris’ presentation to my attention.  I just love her… In fact, I’d tip my hat to her anytime.  She’s so hot.)

Ergo bibamus!

Mandelman out.

~~~

Hey… why not take a minute and SUBSCRIBE to Mandelman Matters so you’ll get it delivered to your email daily? Don’t worry, you don’t have to read it, if you don’t want to.  But you’ll feel better when you do!

I talk to a lot of homeowners from all over the country every single day, and it’s been like that for almost two years now.  Each day, I’ve try to do whatever I can to help those struggling to hold on both financially and emotionally.  They reach out to me looking for answers, and I don’t know what else I could do but help in whatever way I can.

I hear a lot of anger, a lot of fear, and a lot of resignation at America lost.  I write about injustice, rant about intolerance, and fight to stop ignorance.  I try to speak out for people that can’t find their voice at the moment.  A friend called me the other day.  When I answered he said, “Still trying to save the world one homeowner at a time?”  We both laughed.

Yes, I suppose I am, I thought to myself.  It’s what I can do… write and try to help where I can.  I started by writing a few articles in the fall of 2007, and I took my act online in December of 2008 when I started blogging on MSNBC’s Newsvine.  In April of 2009, Mandelman Matters was born and since then I’ve worked seven days a week, and so many hours a day that I’d rather not say.  I’ve written 350 in-depth articles on the political, social, economic and legal aspects of the financial and foreclosure crisis since then.

I figure I’ve probably written at least as many articles as anyone in the country on the foreclosure crisis, HAMP, and loan modifications… and it’s quite possible that I’ve written more than anyone else on those subjects.  I don’t sell advertising or make money on my blog, for the last couple of years its been enough that several thousand homeowners have written to me, saying that I’ve made a significant positive difference.

But, it’s not enough anymore.  And I want those that read my column to know why.

It all started this past August 16^th and 18^th, when the Treasury Department invited some bloggers to come hear what Tim Geithner and other nameless Treasury officials had to say on a range of topics, including the foreclosure crisis and the Home Affordable Modification Program, HAMP.  The first article I wrote about HAMP was on the night of President Obama’s speech introducing his Making Home Affordable plan to save the housing market, which at the time was already in a free fall.  My headline read: “I’m sorry Mr. President.  That’s just not enough.”

I knew right away that HAMP wasn’t going to work as advertised.  There were a lot of reasons why, but the simple truth is I only needed to hear one phrase to know the program would fail: responsible homeowners.

You see, there’s no such thing as irresponsible homeowners and responsible homeowners.  It wasn’t irresponsible sub-prime borrowers that caused this crisis; it was irresponsible Wall Street bankers that did it.  That’s not to say that there weren’t some number of people who bought a home they couldn’t afford, it’s just to say that those people, a tiny fraction of the whole, didn’t have anything to do with the crisis we seem unable to address, let alone solve.

Yet, just about every single week, I end up having to listen to someone tell me about some 24 year-old with a paper route, who bought a $12 million home on the water with a stated income loan.  I’m sure there are a few of those, but they don’t have anything to do with the crisis.

No, borrowers didn’t cause the crisis that the entire world is struggling through today, bankers did that… Wall Street’s bankers to be specific, but lots of other flavors of banker had a hand in it as well.

Millions of people have lost their homes already, and we’ve only just begun to feel the pain that’s sure to come if we stay on our current course.  Why some people don’t see that is beyond me.  But one thing I know for sure, is that the crisis is being allowed to continue because homeowners have no voice in Washington D.C.

Bankers, on the other hand have thousands of lobbyists and hundreds of millions of dollars in campaign cash to hand out.  So, last year, according to Special Inspector General of TARP, Neil Barofsky’s report, we gave the banks $3.7 TRILLION, while spending something way, way under one percent of that amount on stopping the foreclosure crisis.

The people have no voice because they are ashamed.  They think it’s their fault that they are in a difficult financial position today, and when someone is at risk of losing their home to foreclosure, they tell no one.  Should they hire an attorney and somehow save their home from foreclosure, neither they, nor their lawyer tells anyone.  The banks certainly don’t tell anyone anything. And the crisis goes on, worsening every day.  And the media just keeps writing stories about how economists were surprised at how bad things have become.  But, I can’t help but wonder… are they really surprised?  Or did they know all along how bad things would get?

I also can’t help but wonder why everyone’s so quiet about a crisis that’s far worse than any in my lifetime.  In California, for example, when gay marriage didn’t receive enough votes in the last election, there were people marching in the streets.  But millions lose homes to foreclosure, and not a peep.  Banks pay out hundreds of billions in bonuses after being rescued from insolvency by the U.S. taxpayer, and the most you hear is, something akin to “I don’t think I like that” coming from a distant source.

I was able to get through all of this until last week when I learned of what was said at the meetings between various bloggers and Treasury Department officials.  My friend, Richard Zombeck of Huffington Post and shamethebanks.org told me about the meetings and sent me a link so I could see for myself what went on.  Then others sent me links to what others had written about what was said during the meetings.  And that was it for me… I stopped writing… for about a week, and maybe a little longer.  What was the point, was all I could say to myself.

It made me sad to know what Treasury Department officials had said about the foreclosure crisis and HAMP… very, very sad.  In fact, I can’t think of another time in history when my government acted as these guys have acted, or are continuing to act today.  They truly do not care about people at all.  They are so shockingly devoid of compassion or empathy that they offend me so deeply that I don’t like thinking of this government as representing my country or I can’t help but feel that my country is lost.

Treasury Department officials said, in no uncertain terms that they knew HAMP wouldn’t save homeowners from foreclosure.  Here’s what was written in Huffington Post’s Shahien Nasiripour’s detailed article on the meeting

The administration knew they’d only reach a fraction of those needing help, the official claimed, and that millions of homeowners would ultimately lose their homes to foreclosures that the administration chose not to prevent. Taxpayer money was on the line, and the administration couldn’t justify spending the amount of money it thought would be necessary to save those homes, the official said.

Nevertheless, HAMP remains the best option — even though it’s reaching fewer borrowers than forecast. Other programs, the official noted, would have been either too expensive or unfair. Homeowners who consciously bought more homes than they could afford shouldn’t be bailed out.

Here’s what Steve Waldman of Interfluidity.com had to say about the meetings:

Officials pointed out that what may have been an agonizing process for individuals was a useful palliative for the system as a whole. Even if most HAMP applicants ultimately default, the program prevented an outbreak of foreclosures exactly when the system could have handled it least.

There were murmurs among the bloggers of “extend and pretend”, but I don’t think that’s quite right. This was extend-and-don’t-even-bother-to-pretend. The program was successful in the sense that it kept the patient alive until it had begun to heal.  And the patient of this metaphor was not a struggling homeowner, but the financial system, a.k.a. the banks.

Policymakers openly judged HAMP to be a qualified success because it helped banks muddle through what might have been a fatal shock. I believe these policymakers conflate, in full sincerity, incumbent financial institutions with “the system”, “the economy”, and “ordinary Americans”.

Treasury officials are not cruel people. I’m sure they would have preferred if the program had worked out better for homeowners as well.  But they have larger concerns, and from their perspective, HAMP has helped to address those.

This led to blogger Atrios of Eschatonblog.com to write the following:

Conning homeowners by announcing a government program designed to help them when in fact it was designed to help the banksters is, in my world, “cruel.”

Felix Salmon, blogging on Reuters, said the following:

HAMP is now coming into focus as a serious failure and cruel one at that.  The problem is that it’s not helping people stay in homes, but merely delays foreclosures. This helped banks weather a foreclosure crush, but raised false hopes among a substantial number of applicants, hundreds of thousands of whom were disqualified, as Felix points out, even though they made their payments on time.

HAMP might well have been a success in the ways that Treasury enumerates — helping out banks on the solvency front, reducing the rate of foreclosures, that sort of thing. It was almost certainly a good idea politically, as well: you don’t hear much about the plight of homeowners being foreclosed upon, these days, certainly compared to the huge amount of noise on the subject around the time that Obama was elected president. The government is perceived to have Done Something, and the circus has moved on.

But it’s still a tragedy that hundreds of thousands of people who signed up for loan modifications — and who made all of their modified loan payments in full and on time — have had their modifications cancelled. Many of those people blame the servicers; Treasury, meanwhile, is more prone to blaming the borrowers themselves, claiming they’re incapable of verifying their income.

My feeling is that even if income hasn’t been verified, servicers shouldn’t simply cancel the loan mods if they’re performing well. And that if that’s what the servicers are doing, the incentives within HAMP have been designed very badly. That’s a Treasury failure, and it’s impossible to credibly spin it as any kind of success.

And, incredibly, they are sticking by HAMP.  Only now Treasury is saying that the benefit is found in spacing out foreclosures, as opposed to stopping unnecessary foreclosures.  Tens of billions to spread out foreclosures in order to help banks take losses… on the backs of ordinary people… American citizens… taxpayers.  Because I suppose the $3.7 TRILLION we gave the banks in 2009 alone wasn’t enough.

Here’s Huffington Post Nasipour once again:

The official touted the ever-growing pipeline of homes likely to enter foreclosure as a success in the administration’s fight to stem the rising tide of home foreclosures. It’s taking longer for homes to enter foreclosure, and it’s taking longer to evict homeowners once they enter foreclosure.

The so-called “shadow inventory” of homes — those with severely delinquent mortgages, in foreclosure or already repossessed that have not yet been put on the market — has significantly grown since the administration took office and is estimated to range from 5 to 7 million homes.  Through June, borrowers in foreclosure have been delinquent for an average of 461 days before being evicted from their homes, according to Jacksonville, Fla.-based data provider Lender Processing Services.

That’s a good thing, the official said, because it gives the market time to absorb these homes gradually — without leading to a dramatic drop in home prices.

Richard Zombeck, writing for Huffington Post and shamethebanks.org, among many other things said the following:  (And I strongly suggest you read Richard’s entire article, click his name and it will take you to it.)

When President Obama delivered his speech in Arizona in February, 2009, nowhere in the speech did he come close to implying that this plan was intended to help the banks and servicers get more money out of homeowners before taking their homes. What he said was, “This will enable as many as three to four million homeowners to modify the terms of their mortgages to avoid foreclosure.” It wasn’t followed by, “…for a couple of months.”

Richard also included this paragraph, also from Nasipour’s article, describing it as “one of the more egregious statements to come out of this discussion”.

One of the reasons why HAMP has been effective ties back to the foreclosure pipeline. The official said that because some 1.2 million homeowners entered the program and immediately benefited from a trial period of lower monthly payments, not only were their foreclosures delayed but they also received what was essentially a tax cut of more than $500 a month — all without cost to the taxpayer, the official boasted. Even though nearly half of those borrowers have been booted from the program, they still benefited from lower monthly payments courtesy of the Treasury Department with the cost borne by lenders and investors of those mortgages. Plus, at the very least, those homeowners got a chance at a permanent modification, the official said.

And finally, Dean Starkman wrote:

“So, a debate over a complicated matter is sharpened, for me, anyway.  Not to overstate anything: the world didn’t change because of the meetings.  There’s no evidence the bloggers—via the meeting or their blogs—had any influence whatever, for instance, on HAMP policy.”

Oh, well good then.

So, before I say anything about all of that, there are a few facts I pulled from various sources that I want to lay before you.

1. President Obama appointed Timothy Geithner to be Treasury Secretary. As president of the Federal Reserve Bank of New York, Geithner served under a board of directors headed by JP Morgan Chase CEO Jamie Dimon.  Geithner had been partly responsible for the decision to let Lehman Brothers go under, for the tarp program, and for American International Group (AIG) paying its creditors with taxpayer money.  As his chief of staff, Geithner chose a former lobbyist for Goldman Sachs.

2. President Obama: “The recession was caused by a perfect storm of irresponsibility and poor decision-making that stretched from Wall Street to Washington to Main Street.”

3. On February 10, 2010 Obama said that he didn’t “begrudge” the $17 million bonus awarded to Dimon and the $9 million to Goldman Sachs CEO Lloyd Blankfein. “I know both guys. They are very savvy businessmen.”

4. A group within the White House that began calling themselves the “pitchfork gang,” said their attempts to persuade Obama take a tougher stance on Wall Street were undermined by Geithner and by National Economic Council head Larry Summers.  Geithner and Summers were apparently worried about upsetting business confidence.

5. In the stimulus’s first year, the administration spent only $17 billion of the $139 billion allocated for infrastructure spending.

6. Geithner and Summers repeatedly blocked attempts to get tough on Wall Street on the grounds that doing so would threaten the recovery itself by upsetting the bankers.

7. Organizing for America, the administration’s campaign organization, which is supposed to be focusing on the 2010 elections, recently devoted its resources to organizing parties across the country to celebrate Obama’s forty-ninth birthday.

Sorry, but I’m about done with the Oblabla Administration.  Waiter, check please.

Look, I’m not making a political statement.  I don’t see the Republicans doing anything to help the situation either.  I fact, to the contrary, the Republicans have offered nothing constructive since Obama took office in 2009.  They vote as a block as if they were elected to represent a party as opposed to individual constituents, and personally, I think if they’re going to vote like that, I think they should have to wear matching sweaters and sing their chorus of “Nooooooo” in harmony.

Just on one day I’d like to see Obama come out in favor of cream in coffee, just so I could watch some knucklehead Republican oppose it on Face the Nation.  “No, I say there should not be cream in coffee.”  Oh, sit back down you intellectual midget.

None of that excuses what the Obama Administration has allowed to happen as related to the foreclosure crisis.  Treasury officials now say they knew and it was okay with them.  In fact, it was a good thing.

Officials pointed out that what may have been an agonizing process for individuals was a useful palliative for the system as a whole.

No, I’m sorry but no, damn it.  I don’t even know what a palliative is, but it doesn’t matter.  Geithner, you elitist piece of garbage, you do not get to torture American citizens because you find benefit for the banks in doing so.  Who the hell do you think you are?  Did my president know about this?  Because you imply that he did, and if that’s the case then he should be impeached.  No American president would ever condone what you are describing and if this one did, he is not fit to lead our country.

Mr. Geithner… people have taken their own lives over what you’ve allowed to happen.  Children have gone to bed night after night scared to death, not knowing why their parents are so afraid… or so angry.  Marriages have ended.  Fathers have sat up at night wondering if their life insurance policies will pay off after suicide.  And all of this and more continues to this day and yet there is no plan to change a thing.  Because you’re happy that Wells Fargo is suffering too terribly much.

And why?  Because Citibank or Bank of America would have gone under if the foreclosures would have come at a faster pace?  Bullshit.  You think that it’s because of HAMP that it’s taking banks a long time to foreclose?  You’re a moron, Tim.

If banks were going to go under by foreclosing too quickly they would have slowed the pace themselves.  We didn’t need you to invent a fake loan modification program and lie to the American people about it in order to slow down the pace of foreclosures.  Besides they could have MODIFIED THE LOANS, Timmy.  There was always that alternative, lest you forget.

Before you showed up with HAMP banks were modifying loans much more frequently.  Is that what you wanted to do, STOP MODIFICATIONS?  So you invented a program that would do just that by promising to modify 3-4 million loans?  Did Obama know of your plan?  Did the President of the United States know that this outcome would be considered a success?  Is that what your cohorts at Treasury are saying… off the record, of course.  Cowards.

Mr. Geithner, you should be incarcerated for the rape of the American people.  You know what caused this crisis and you know damn well that it wasn’t some guy in Stockton, California not making a mortgage payment.  How do you sleep?  Do you even know what you’ve done to thousands of people’s lives so the banks wouldn’t have to foreclose too quickly?  If that made sense to you, you need help.

To my readers…

That’s it.  I can’t do it the same way I have been for the last two years.  The rules of the game have changed.  I suppose I could give up and walk away, but I won’t do that now no matter what.  This is a whole new ball game and we need to be much more aggressive, much louder, much more intolerant of the abuse by financial institutions.  We need the consumer attorneys to file more lawsuits, and we homeowners have to save our money to pay for them to do so.  We can’t sit back and watch 14 million more homeowners lose their homes to foreclosure, because if that’s the way it goes, then our country truly will be lost for decades… perhaps forever.

Do you feel what it’s like out there?  Not where Tim Geithner lives, but where you and I live.  Imagine what it will feel like a year from now, when it’s that much worse.  And then two years from now when it’s worse still.  And then worse still.  What will we all say then?  What will we tell our children about the country we have left for them?

Gee, it really was our fault.  We all took an irresponsibility pill in 2005 and went out and bought homes we couldn’t afford and that’s why your world looks like this?  Sorry about that?.

We gave the banks $3.7 TRILLION last year alone.  That’s $3.7 TRILLION.  And Goldman Sachs alone handed out $120 BILLION in bonuses last year?  We bailed out GMAC three times to the tune of almost $20 billion?  GMAC?  Why, were they too big to fail, too?  GM itself went bankrupt, that was okay… but GMAC was too big to fail?  Really?  Really?

Is someone going to make an argument as to why it made sense to hand $3.7 TRILLION to bankers who ran their banks into the ground while doing essentially NOTHING for millions of homeowners whose foreclosures only caused their neighbors to sink further underwater.

We need to do things differently.

I know that some people need to get their loans modified, so for those that do, use the REST Report and push like hell.  I see loans get modified every single day.  And there are a lot of dedicated people out there helping homeowners every day.  Oh, I know…  guess who wants you to believe they’re all scammers… that you don’t need a lawyer… that you should just call your bank directly.  Others may want to strategically default, and for those folks, let’s see just how long we can keep people in homes without paying for them.  And if you can afford to file a legitimate lawsuit, for God’s sake file it.  And I’ll help anyone who asks me to in any way I can.  I’ll organize more attorneys so they’re better prepared to represent homeowners.  I’ll help educate more people so they know that it’s not their fault, so that they can find their voice once again.

But this is going to take more than passion.  It’s going to take money…

From the very beginning of my journey into this crisis, I’ve wanted to produce documentary style programming… broadcast quality video… footage of homeowners telling their stories, sharing the horror of their experiences dealing with banks that don’t care about anything this country has given them.  Interviews with real people that didn’t do anything wrong or irresponsible in order to find themselves at risk of losing their homes.  And I’ve collected such interview footage over the last two years… and it’s powerful… like, kick you in the gut type powerful.

I wanted to produce such a documentary and have it delivered to every member of congress and every member of the senate… every state governor’s desk and every major media outlet… I wanted to see it on television and on YouTube… I wanted it delivered to the White House… and all on the same day.  I called the initiative, A Hundred Thousand Homeowners, and the idea was to get 100,000 people to each kick in a dollar.  After PayPal, it would produce a budget of $67,000, and with that money we’d get our message heard.

But it’s taking far too long.  The problem is that it doesn’t spread.  Someone sends in their dollar, but that’s where it stops.  They don’t tell anyone else, because they don’t want anyone else to know of their situation.

Two weeks ago, I was interviewing a homeowner who had struggled for 14 months to get his loan modified.  He finally did in a few short weeks after sending in a REST Report, so I wanted to hear his story.  I interviewed him on camera for 20 minutes and it was emotional.  He had a tear in his eye through most of the interview.  It was hell for him, and everyone there could feel his pain.  At the end I asked him if he had anyone to talk to through the experience and he explained that he didn’t.  Not the sort of thing you talk about, he explained.

Then I asked him if his wife had anyone to talk to through the nightmarish process of getting his loan modified, and he looked down at the floor and then back at me.  He said: “I never told her.”

Through 14 months of being put through hell by his bank, through 13 SCHEDULED SALE DATES THAT WERE EACH POSTPONED AT THE LAST MINUTE… and he never told his wife until it was over and his got his modification.  And that said everything to me.

So, here’s the deal.  We need to do more.  And I will do more.  It’s all a question of how fast we can move.  Last week I was invited to Washington D.C. to speak at a rally, and I said I probably couldn’t make it because I wouldn’t be able to afford it.  I’m sure it will go just fine without me, there are lots of others who can deliver the message, but the thing is… I really don’t believe that.  I think I’m uniquely positioned and prepared to deliver the message for homeowners.  I think I  would make a difference if I could be there.

I also know that I could produce documentary programming that would change minds… shatter paradigms… and force politicians to take action.  I’ve been successful in print.  I’ve written 350 articles on this topic… and readers say they’ve made a difference.  This is still our country.  It’s still a democracy.  Let’s not fail our children because we failed to act.

I’ll be putting a new tab on Mandelman Matters in the next few days.  It will be labeled “MY MISSION” and it will describe in greater detail what I want to do… what I will do… and it will ask for your support.  And if it comes, then we’ll move quickly, and if it doesn’t, it will take longer.  But I’m going to do it one way or the other.  Because I know now that I have no choice.  Treasury’s officials have made that much all too clear.

I’ve spoken with others around the country and they will come along… but we have to start somewhere.  We have to show that we can make our voices heard.

If you’re a business owner, consider supporting the effort by sending in a substantial donation and I’ll make sure your company is recognized and promoted online to thousands of people.  If you’re an individual homeowner, do what you can.  If you can’t send money, perhaps you can help in other ways.  Organizing meetings of homeowners, sending out emails, posting links to your Facebook page, calling your representatives and encouraging others to do the same.  There’s a role for everyone in this fight, and we’ll need all the help we can get.

And if you don’t want to be a part of this drive for American homeowners… write in and tell me I should quit… that it’s a waste of time… that we cannot win… that we won’t even be heard.

I won’t listen, of course, but I want to know how you feel one way or the other.  For God’s sake do something… even if it’s writing me an email telling me I’m nuts.  At least I’ll know you’re alive.

350 articles.  A lot to read… let alone to write.  I’ve gotten to know hundreds of lawyers around the country that are fighting for the rights of homeowners.  I’ve spoken with and helped thousands of homeowners and heard their stories first hand.  I’ve built alliances with others on-line.  ML-Implode will help.  Shamethebanks.org will help.  Danny Schechter, the producer/director of the documentary, Plunder, will help.  Steve Dibert of MFI-Miami will help.  Short Sale Power Hour will help.  ThinkBigWorkSmall will help.  And I know lots of others that will help too.

Let’s start somewhere.  Help me and I’ll fire the first shot.  After all, how do you eat an elephant?  Simple.  One bite at a time.

Mandelman out.

My people perish for lack of knowledge.

Book of Hosea, Chapter 4, Verse 6

The idea of turning worthless metal into gold has fascinated man for thousands of years.  The word itself, alchemy, is derived from the Greek meaning, “The Egyptian Art”. And Lapis philosophorum, referred to as the philosophers’ stone, is the legendary alchemical substance, that was said to be capable of turning base metals, especially lead, into gold. Sir Isaac Newton, the guy who I was taught, needed an apple to fall on his head to figure out the whole gravity thing, was also a famous alchemist.

Legend has it that a 13th-century scientist and philosopher named Albertus Magnus discovered the philosopher’s stone, passing it on to his student, who is considered to be the Catholic Church’s greatest theologian and philosopher, Thomas Aquinas, just before he died circa 1280.  In his writings, Magnus reported that he witnessed the creation of gold by “transmutation”.

I didn’t know any of that, but now I understand J.K. Rowling’s “Harry Potter and the Philosopher’s Stone” a little better… well, sort of, anyway.  And thank the good Lord for Wikipedia, that’s what I always say.

I imagine that the whole idea of lead being turned into gold was probably involved in the world’s first securities fraud case brought by an investor, like maybe Sir Issac Newton was really just an 18^th century version of Bernie Madoff, and all that gravity stuff was just the work of a public relations firm putting the right spin his image.  “Let’s go with the gravity pitch, and I’m gaga over the whole Apple thing… package it up, I want to see some sketches on my desk by Old Hallowed Eve… it’s positively brilliant.”

Anyway, it’s easy to see how the idea of turning something of little value into gold would capture man’s attention. It’s the winning Powerball ticket.  It’s like Jack getting the goose that lays golden eggs after his magic beans turned into a giant beanstalk.

It’s impossible, of course.  You can’t turn lead or anything else for that matter into gold.  Or can you?

Securitization… We’re Forever in Your Debt

I think you have to be at least in your forties to remember life before securitization took hold of out society.  Prior to that, people used to say that the only way a bank would give you a loan was if you could prove you didn’t need one.  Once securitization was driving our national pride, banks made as many loans as fast as they could, in the form of credit cards, auto loans, and every other flavor of debt imaginable.

Before securitization children were raised receiving fewer presents for their birthdays and holidays and I don’t need a source for that statistic.  Water is wet, the sky is blue, and that’s a fact.  Hotel rooms never cost $600 a night, even if you adjust the amount for inflation, in fact, there were simply far fewer so called “luxury goods” before we were all being constantly sold on the idea that taking on debt was the hip hop happening thing to do.

Just look at cars.  Before securitization I wanted a used Bronco.  After securitization, I wanted a Range Rover.  The Bronco was way better, by the way, but it cost me $792.40 a month for three years to find that out.  I’m not sure when it happened, but sometime in the last decade, the price of cars went completely around the corner and up the hill.  One day, a really expensive car cost $40,000.  I went away for the weekend, came home and a really expensive car cost $65,000.  Three months later, top of the line was $80,000.  And at the peak, there were ultra-luxo-window stickers reading $115,000 and more.  I don’t know how you feel about this issue, but for $115,000, I need bedrooms.  Thank you securitization!

A few years ago, my daughter, then maybe 12 years old, just had to have True Religion jeans.  All the kids were wearing them, and I’m a father who understands and accommodates the forces of peer pressure, so to the mall we went.  Nordstrom’s, an entire department store that stands as a testament to securitization, carried the ultra-desirable jeans.  How much could they be, I wondered as I reached for the price tag.

Do you know the answer to this one?  If you don’t, then you better sit down… $300 and up!  When I first saw the price tag I thought they must sell them as a three pak, but no.  Three hundred bucks for one pair of True Religion jeans.  Jeans!  They’re jeans.  Like Levis with heavy, pronounced stitching so they look like someone made them in a high school sewing class.  And God forbid they have an over sized piece of glass on the pockets, and you’re closing in on four bills with tax and tip.

The girl at the check out counter asked me how I’d like to pay for them.  I replied, “How about a little bit each month for a couple of years,” and I handed over my plastic debtor card.  In one fell swoop, I made my daughter happy beyond words, and at the same time, I did my part for Wall Street’s bond builders.  Little did I know that those bond builders would soon cause the credit markets to freeze solid, and lead to an ice age in the financial markets that would turn the United States government into the lender of first, last and middle resort.

Sidebar: By the way, in this story the stock market is largely irrelevant.  Here’s what David Einhorn of Greenlight Capital, one of the insiders to today’s crisis, said about what has happened:

“What most people don’t realize is that the fixed-income (read: bond) world dwarfs the equity (read: stock) world.  The equity world is like a f#@king zit compared with the bond market.”

But then, we don’t make movies about the bond market, now do we?

What is Securitization?

Securitization is a process that takes certain assets (think: loans) and “pools” them so they can be packaged into interest-backed securities, which are a type of bond.  The interest and principal payments that come from the borrower making payments on a loan are paid to those that invest in the securities/bonds.  Basically, when you take a mortgage or other type of loan, and you turn it into a “security,” which is called a bond… you’ve “securitized” it.

Let’s start here: Lending money to anyone is risky.  You just never know if the person will repay the loan.  He or she may mean to repay it, but can’t due to a life event that could not have been foreseen. Maybe he or she became unemployed unexpectedly.  Or, I don’t know… like, maybe he or she got hit by a bus.  I absolutely detest it when that happens.

It’s probably a little safer to lend money to someone with a good credit score than a bad one, but no matter what FICO says, lending money to any human being is still a risk of substantial heft.  Securitization changed all that… it made lending money to anyone a lot safer.

Lending money to people, however, can also be quite profitable, so when the risk of doing so was reduced significantly, a whole lot more investors wanted to do it.  After all, stocks can go up and down with the tide, but bonds are IOUs from corporations or the government.  If they’re rated triple A by the bond market’s credit rating agencies, Moody’s, Fitch and Standard & Poors, they’re almost like money in the bank, the kind of investment that’s appropriate for a pension fund.

Securitization got its start in the 1970s, when home mortgages were pooled by U.S. government-backed agencies, Fannie Mae, Freddie Mac, Ginnie Mae, and Sallie Mae.

Once again… when you securitize the mortgages you spread the risk of lending money to any one individual by creating a pool of loans and then selling debt securities, called bonds, that entitle the holder to a percentage of the payment streams, (made up of the principal and interest payments made by the borrowers as they make payments on their mortgages).  Because the mortgages are all pooled, if one person doesn’t make their mortgage payment, the impact to any one of the investors in the bonds is minimal.

The securitization process involves two steps:

Step One: A company that originated loans identifies which loans it wants to remove from its balance sheet.  It creates a pool of these loans, referred to as the “reference portfolio”.  It then sells this reference portfolio to an entity referred to as an “issuer,” which is set up by a financial institution to purchase the assets in the pool.  Issuers are “special purpose vehicles,” commonly called “Structured Investment Vehicles” or SIVs and they are off a company’s balance sheet for accounting and legal purposes.

Step Two: The issuer finances the purchases of the assets in the pool by issuing and selling mortgage-backed securities… bonds… tradable, interest-bearing securities to investors. The reference portfolio, or pool of assets, generates cash flows that fund a trustee account that pays investors fixed or floating rate payments.  The originator of the loans services the loans in the reference portfolio, in most cases anyway, and collects payments from the borrowers who took out the loans.  The servicer deducts its fee from the payments collected and then passes the balance on to the SPV or trustee.

Okay, how are we doing?  Hanging in there?  If you’re feeling overwhelmed, you can always go back and read those last two paragraphs again slowly.  It’s not complicated.  It just takes a little getting used to.  Here’s an even simpler explanation of the two steps above:

Step One, Take Two: We originate some loans that we don’t want on our books anymore.  We want to sell them to someone else, but the someone else probably doesn’t want them either… for the same reasons that we don’t.  So, we make a list of these loans and we call it our “reference portfolio”. Then we set up a separate company with a “special purpose,” that’s not found on our financial statements, called an SIV, whose purpose is to buy the loans that we want off our books.

Step Two, Take Two: Now, the SIV we set up needs to buy the loans we want off our books, but it needs money to buy them.  So, the SIV finances the purchase of the loans by selling mortgage-backed securities to investors.  As the borrowers make their payments, they are placed into a trustee account, which pays the investors either a fixed or variable rate of interest, which is the investor’s return on their investment in the mortgage-backed securities.  Since we originated the loans, we want to keep servicing them… we just didn’t want them on our books anymore… we don’t mind earning a fee for sending out the monthly statements and collecting the payments.  We take our fee off the top of what we collect , and send the rest to the trustee account.

Better?  I hope so.   Can you see how it would be less risky for an investor to buy a mortgage-backed security… which is a share of a pool of loans that have been securitized… then it would be to loan someone $500,000 for a single mortgage?   Way less risk, right?  Okay, let’s move on…

More recently, like in the last ten years, Wall Street started dividing the reference portfolio into sections called “tranches”.  Each tranche has a different amount of risk to the investor.  The least risky tranche is the senior tranche, or super senior tranche, and it receives its share of the cash flows generated by the loans before any of the more junior tranches.  Once the most senior tranche has received all that it’s supposed to, then the middle tranche starts filling up.  And once the middle tranche is full with the amounts it was supposed to receive, then the bottom tranche starts to fill with cash flows from the payments borrowers are making.

(In a previous article on Mandelman Matters, I described these tranches as drawers in a dresser, in case you don’t recall.  You can find that article here: Mandelman U.)

In our latest financial meltdown, the most senior tranche was rated triple A, so the mortgage-backed securities that came from the most senior tranche were triple A rated bonds.  The middle tranche was rated triple B, so the bonds sold from that tranche were rated triple B, which is the lowest rating that’s considered “investment grade”.  And the bottom tranche was rated below triple B, so we can think of the bottom tranche as being akin to junk bonds.

Securitization provided a way for banks and financial institutions to find new sources of funds either by moving assets (loans) off of their balance sheets, or by borrowing against them, which replenishes the cash needed to originate more loans.  You see… it’s the circle of life, Simba.

Securitization made a bank’s cost of borrowing go way down because assets being securitized are removed from the bank’s balance sheet, which means that issuers can raise funds to finance the purchase of assets more cheaply than would be possible on the strength of the originator’s balance sheet alone.   And unlike conventional debt, securitization does not inflate a company’s liabilities. It produces funds for future investment without balance sheet growth.

The system of originating loans, securitizing them, and selling the securities cut from the pool or the tranche seemed to work just fine and dandy for a long time, bringing huge economic benefits to this country.  Let’s face it, it’s an attractive proposition… all the advantages of lending without the risk of not being repaid.  The marketing of debt was on the move, and soon we became a country jammed packed with consumers anxious to borrow and spend, borrow and spend.  Money from overseas became jealous, and figuratively speaking, booked passage to the USA’s spectacular spending grounds, where the streets were said to be paved with gold and platinum plastic.

The 1980s… If you can borrow it, they can securitize it.

Beginning in the 1980s, Wall Street started securitizing other forms of debt, considered an “income producing asset” because the payments made by the borrower provide an income stream to the investor.  Car loans, credit cards, student loans, computer loans, aircraft loans… if we could borrow it, Wall Street found a way to securitize it.  When mortgages are used as the backing for the bonds, we call them mortgage-backed securities (MBSs), and when other types of income producing assets are behind the cash flows, we call the bonds “asset-backed securities (ABSs).

In theory, securitization reduces the risks of lending and increases liquidity…  and this may be true… for loan originators.  For society as a whole, however, securitization is a double-edged sword.

Securitization transforms an illiquid asset… a loan… into a publicly issued tradable debt security.  It also can take loans on your balance sheet made to people with relatively low credit scores and turns them into triple A rated bonds… very much like alchemy… the “science” of turning lead into gold.  And since you can turn lead (sub-prime loans) into gold (triple A rated bonds) there’s a strong incentive to make more sub-prime loans.

You see, there’s virtually unlimited global demand for triple A rated bonds because they’re by definition as safe as bonds issued by the U.S. Treasury.  But there’s NOT an unlimited supply of sub-prime loans.  To use our alchemy analogy, a few years into the housing bubble, Wall Street found there was a shortage of lead, so they started doing everything possible to get more lead… they started predatory lead gathering, if you get my meaning.

Over the past three decades, the number of securitized residential mortgages in this country has increased steadily and dramatically… roughly 45% at the end of 2004, roughly 51% at the end 2007.  Some private securitizations, as opposed to the U.S. government-backed variety, grew by 102% between the years 2004 and 2007, accounting for almost 40% of total mortgage securitizations by the end 2007.  The vast majority of the loans placed into private securitization pools during this period were sub-prime or Alt-A.

Securitization is what drives all of those credit card and mortgage advertisements… it’s what has fueled the campaigns to convince us to embrace debt as being a good thing, a status symbol, something to be desired.  Our country’s economy grew, as we all went further in debt.  And credit was made available to more people than ever before, even those with relatively low credit scores.  That’s why a gardener with a low income was given a $700,000 mortgage during the bubble.

But, is that what caused the economic crisis we’re now in?  Was it the sub-prime borrowers not making their mortgage payments that drove our economy off of the proverbial cliff?

No, it was not.

Securitization is why we all started living with debt without thinking about it as a burden.  It’s why, when going to the mall armed with our credit cards, we say we’re “going shopping,” instead of describing what we’re really doing, which is “going borrowing”.

Try this the next time you pull out your Visa or MasterCard to “buy” something.  Say to yourself… “I’m now borrowing money at a high interest rate.”  Chances are that product, or whatever it is, won’t look nearly as good as it did a few minutes ago.  Whatever you see in the window… ask yourself if you want to borrow money at 20% interest to get it.

Securitization did many good things too.  It made mortgages available to more people, so more people could own their own home.  Home ownership is a good thing for a nation’s economy for obvious and well-known reasons.  People invest in homes.  They raise families in homes.  As home prices rise, wealth is accumulated in the form of home equity.

Historically, sub-prime loans performed quite well.  People, in general, tend to pay their mortgages, a fact that should come as little surprise to anyone.  People with less than stellar credit scores pay their mortgages before they pay other bills because they value having a home a whole lot.  Understandably, they don’t want to move back to that apartment in which the kitchen smelled like old socks.  In fact, one of the reasons the bond credit rating agencies rated the bonds backed by sub-prime mortgages as triple A, besides the impact of securitization into tranches, was the historical performance of sub-prime loans.

And, just for the record, sub-prime borrowers don’t intentionally go out and buy homes that they know they won’t be able to afford next year.  You want to know why?  Because no one likes moving their refrigerator that much.  Because they have to find a friend who has a truck, like me, who will come over on a Saturday and help carry the fridge to their new apartment, which is invariably on the second floor and the elevator’s broken or not big enough.

No, what happened to cause the economic crisis that’s dragging us closer to an outright depression every day, had little to do with sub-prime borrowers, it had a lot to do with securitization… and it had everything to do with derivatives, incentives, and the bond market, or rather the shattering of the bond and credit markets.

When Goldman Sachs CEO, Lord Blankcheck… I mean Lloyd Blankfein, testified a few months ago about his firm’s role in a scandal du jour, in which Goldman was accused of betting against the bonds they sold to investors by buying credit default swaps that paid off when the bonds failed, he referred to the investors as being “sophisticated”.  But, bond investors are not, generally speaking, sophisticated.  They buy using a credit rating system that uses letters of the alphabet to signify the amount of risk involved.  I mean, you might as well color code the damn things… I’m buying yellow bonds today!  I like purple bonds!
A recent S&P document states:

“Our ratings represent a uniform measure of credit quality globally and across all types of debt instruments. In other words, an ‘AAA’ rated corporate bond should exhibit the same degree of credit quality as an ‘AAA’ rated securitized issue.”

What happened to create this mess wasn’t the result of borrowers borrowing too much, although some certainly did.

It wasn’t the housing bubble, although we did have one and it popped.

It wasn’t predatory lending, stated income or Option ARM loans, although some of these caused problems for some people.

It wasn’t homeowners believing that real estate prices would go up forever, or using their homes like ATMs, although I’m sure there were some that were guilty of both to whatever degree.

It was Wall Street’s bankers abusing the system in every conceivable way… because they could do so for profit… and an enormous profit, at that.  It was Wall Street’s investment banks that irresponsibly borrowed too much, Lehman was leveraged at 30:1.  It was Wall Street’s banks that seemed to think that home prices would go up forever.  And it was absolutely Wall Street’s bankers that used their banks like giant ATMs, pumping cash out of them until there was no more as reward for short term gains that turned out to be illusory.

Wall Street’s bankers abused the securitization process, creating mortgage-backed securities and collateralized debt obligations (“CDOs”), which are really towers of BBB rated mortgage-backed securities, that were unquestionably destined to default.  They did this because, starting in 2003, someone at Goldman Sachs convinced someone at AIG to issue credit default swaps on triple A rated mortgage-backed securities.  Make no mistake about it… they knew what they were doing.

From In Understanding the Securitization of Sub-prime Mortgage Credit, referenced below:

The rating agencies differ about what exactly is assessed. Whereas Fitch and S&P evaluate an obligor’s overall capacity to meet its financial obligation, and hence is best through of as an estimate of probability of default, Moody’s assessment incorporates some judgment of recovery in the event of loss. In the argot of credit risk management, S&P measures PD (probability of default) while Moody’s measure is somewhat closer to EL (expected loss).

In 1998, there weren’t enough credit default swaps in existence to make any difference to anyone.  By 2007 there were… it’s hard to say, but estimates seem to hover around $60 trillion.  Today, those same estimates say the number has been reduced to $30-$40 trillion.  That’s trillion, with a capital “TRILLION”.

Perverse Incentives…

Credit default swaps are like bond insurance… they pay off when a bond defaults.  Because triple A rated bonds hardly ever default, buying insurance that pays off when they do default was cheap.  For example, for $200,000 a year for 10 years… you could buy a credit default swap insurance policy on $100 million in bonds backed by sub-prime mortgages.  If the $100 million bond defaulted, the credit default swap would pay you the $100 million.

In Understanding the Securitization of Sub-prime Mortgage Credit, a white paper written Adam B. Ashcraft and Til Schuermann of the New York Federal Reserve Bank in March of 2008, they described the infrequency of highly rated bonds defaulting as follows:

Highly rated firms default quite rarely. For example, Moody’s reports that the one-year investment grade default rate over the period 1983-2006 was 0.073% or 7.3 basis points. This is an average over four letter grade ratings: Aaa through Baa.

So, buying a credit default swap on a mortgage-backed security that was backed by sub-prime loans became a way for institutional investors… they weren’t available to you or me… to short the sub-prime market.  And you didn’t even have to own the mortgage-backed security to insure, or rather, bet… against its default.

Nothing was right about what was happening on Wall Street, but it wasn’t easy to see, in large part because it only went on for a few years, but also because Wall Street obfuscates what it doesn’t want others to see… in fact, Wall Street guys are legendary in that regard.

What could be seen were the houses.  Bigger, newer, nicer and nicer, and lots of them… everywhere you looked.  I felt like I had spent much of 2006 feeling like I was either a wimp in the risk taking department, or that I’d fallen behind in the race to the top of the hill.  Where were all these houses coming from?

So, when things changed the country experienced the changes through the real estate market.  The bubble had popped and everything that would happen after that would be blamed on those houses, those inside them, and those who sold them and the loans that financed them.  The bankers of Wall Street were insolvent and their insolvency threatened the global financial system, their behaviors had squandered untold trillions, but it was blamed on “irresponsible sub-prime borrowers”.

I ran the following paragraph by several people and they all thought that it was about right… so… conventional wisdom goes something like this:

Sub-prime, and other borrowers, irresponsibly got in over their heads and bought houses they couldn’t afford, or took out home equity loans in amounts they couldn’t afford to repay, and then at some point couldn’t make their payments.  When they didn’t pay for the houses and loans, it caused the bonds to default and Wall Street banks and other investors around the world lost so much money that some went under and the government had to bail them out to save the banking system.  Then, AIG had to pay out $170 billion because of credit default swaps that were triggered when the bonds defaulted, which the U.S. government had to bail out so investors wouldn’t lose all that money.

What a crock of crap that is.  The only part of that paragraph that resembles truth is that the U.S. government did in fact bail out AIG.  The rest is unadulterated hooey that was started by the banking industry’s PR machine, and something like half the country still believes to be true.  And because they do, the people trapped by our deteriorating economy in one way or another, are alone, ashamed and afraid.  It’s dividing our country along imaginary lines.  And while we blame each other for what securitization started, the bankers get richer and more powerful.

That’s not at all what happened here.  What we’re experiencing today in our economy isn’t the result of a real estate bubble popping.  Wall Street’s investment banks didn’t come crashing down because some previously hidden class of irresponsible Americans with sub-par credit bought houses they couldn’t afford.

What caused our economy to collapse happened on July 10, 2007, because that was the day that something happened that had never happened before, and what it destroyed remains destroyed to this day.  Because of what happened on that day in July of 2007, the U.S. government is the only investor in mortgages in this country, the only lender in the mortgage market, through Fannie and Freddie, now both essentially government agencies.

More than three years later and private securitizations of mortgages are little more than an historical footnote… they’re no more.  Pension plans don’t invest.  And even Goldman Sachs’ bonds… they’re debt… is still guaranteed by the U;.S. government.  The banks aren’t healthy, no matter what Tim “Transparency” Geithner wants us to believe.  And the toxic assets we were all told were clogging up the balance sheets of our nation’s largest financial institutions are right where they were in the fall of 2008.  All because of what happened on July 10, 2007…

The day that Standard & Poors and Moody’s downgraded the ratings on 1,011 bond issues… some were downgraded by several letters of the alphabet.  It was LESS THAN ONE PERCENT of the bonds secured by sub-prime mortgages.

Less than one percent of the bonds secured by sub-prime mortgages were downgraded that day.  You probably didn’t even notice it, but it started a series of dominoes falling that had been set up to spell out disaster.

Pension fund managers were furious.  Their funds had bylaws that prohibited them from investing in anything but triple A rated bonds.  If Standard & Poors and Moody’s hand screwed up the ratings on these bonds, what about the trillions of other mortgage-backed securities that institutional investors were holding?  What about the bond insurers?  Who was vulnerable?  Fund managers dumped their bond holdings in the morning, and at fire sale prices.  Investors ran for the exit on financial stocks.

Money for sub-prime and Alt-A mortgages evaporated literally overnight.  Within weeks, money for all types of mortgages was scarce and fading fast.   Then money for all sorts of credit had left the building, even for debts that had nothing to do with mortgages.  Banks began hoarding cash.  Within two or three weeks, banks didn’t trust each other enough to lend to each other.

The SIVs that the banks had set up off of their balance sheets had to be refinanced every three to six months, but suddenly no one wanted to invest in them.  Banks like Citibank were forced to buy them back, or force their investors to take unthinkable losses.

On August 7^th, the Federal Reserve had refused to lower rates.  But on August 17^th, the Fed hit the panic button and announced a huge expansion of its emergency lending program for banks.  Here’s what the Federal Reserve had to say on that August 17^th…

Press Release

Release Date: August 17, 2007

For immediate release

Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward. In these circumstances, although recent data suggest that the economy has continued to expand at a moderate pace, the Federal Open Market Committee judges that the downside risks to growth have increased appreciably. The Committee is monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets.

Did you see anything in there about irresponsible sub-prime borrowers buying houses that were too expensive, or even anything about the housing market at all?  No, I guess you didn’t, now did you?  And why not read that last line one more time…

(The Federal Reserve) is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets.)

The world’s biggest bailouts were about to begin.

With no way to get a mortgage, housing prices started to fall, but they didn’t just come down gradually as they would in a normal market correction… they fell of a damn cliff, like in the last scene of the movie Thelma & Louise.  With no way to refinance, those that had been sold loans that needed refinancing were doomed.  The credit markets were frozen solid.  Consumer spending would soon slow, transforming a torrent into a trickle, and unemployment had nowhere to go but up.

The U.S. government might have stepped in to stabilize the financial markets that fall, but by the end of the year, the country had only one question on its mind… which candidate would be the country’s next president.  Everything else, including the beginnings of an economic meltdown that would come to resemble that of the 1930s, would have to wait.

What had started growing as a result of securitization, now was a growing feeling of insecuritization.  But it wasn’t the borrowers that flipped the switch and turned on the financial chaos channel, it was Wall Street’s bankers.  No one told them to create loans than needed to be refinanced every two or three years, no one forced them to securitize loans into pools with more risk of default than was present in the individual loans themselves.  No one got out of bed one morning and said… hey, why not break the bond market so only the government will make loans from now on.  And no one said leverage your assets 30 or 40:1.  Bankers did all that, baby…  not borrowers.

Let my people go… it’s long past time to come together…

Don’t you get it?  We’re not going to have any sort of recovery until we stop the foreclosure crisis.  And we can’t stop the foreclosure crisis without helping people avoid foreclosure.  And we won’t help people avoid foreclosure until politicians know that they won’t get clobbered by their constituents for having done so.  And meanwhile, the water just keeps rising higher… and higher.

Life events happen.  Illness.  Job loss.  Divorce.  Any of those things happens today and chances are better than excellent that it’s a foreclosure to boot.  And those things don’t just happen to other people, they happen to everyone.

The foreclosure crisis is entirely unnecessary at this point.  It can be stopped.  It’s being allowed to continue and the people are too ashamed to speak out and demand that it be stopped.  There are millions of homes sitting vacant… and for what?

The scars are already deep.  The water is higher every single day.  Do you feel it… yet?  You will.  We all will.  Soon enough.

And then we’ll all wish we’d done something sooner.  And it will be too late.

Mandelman out.

Whew… I was so relieved today when I read the results of a study just published by the Center for Responsible Lending on the foreclosure crisis.  You see, up until now, and having written almost 300 articles on the topic, I’ve been struggling to understand why we as a nation have allowed the foreclosure crisis to go on unchecked.

I mean, come on… not only has not one government program worked in the least, but at this point we don’t even have anything in place that MIGHT work to stem the tide of foreclosures that quite literally threatens our country’s economic stability, and therefore that of the entire world.

Think about it… according to the Obama Administration and a whole gaggle of media pundits, we managed to figure out how to save a multi-trillion dollar banking system that was only days away from imploding.  We turned around the worst economic and financial meltdown in 70 years… in less than one year!  Even General Motors, which was bankrupt a few months ago and about to cause starvation in a large part of the Midwest, as I recall, is not only back on its feet, but its about to have a banner year.  Banks like Citibank, Bank of America and others, went from being practically penny stocks a year ago, to handing out record bonuses only months later!

The stock market bounced like a Superball, coming up from the depths of panic to break through the 10,000 mark like it was tissue paper.  Interest rates are at record lows… there’s no threat of inflation… the housing market has bottomed out… in fact, Realtors and mortgage brokers are telling me that things are going gangbusters.  Around the world, entire countries are defaulting as they drown in debt, but not only did we get our economy back into recovery mode, but we even had time last year to fix our health care system!  We’re absolutely incredible!  USA…. USA… USA!  Come on, chant with me!

Even while fighting a seemingly un-winnable, protracted war in Afghanistan, we happen upon the largest underground treasure chest on the planet.  I mean, it’s like then one day we were shootin’ at some food, and up through the ground came a bubblin’ crude… oil, that is… black gold… Texas Tea.  Next thing we knew, why Jed’s a trillionaire!  And we’re not God’s chosen nation?  Please!

So, you can imagine how surprised I’ve been that when it comes to the biggest problem we have, the foreclosure crisis, its been pretty much left alone to eat away and the financial and societal fabric of our country.  It would be like finding out that we’ve decided to just leave the oil in the Gulf of Mexico where it floats.

Well, as of today, the Center for Responsible Lending (“CRL”) has straightened it all out for me, and I’m so relieved that I’m taking the weekend off to finally relax a bit.  We’re not fixing it because it’s mostly affecting brown people!  Oh, thank God… and here, I’ve been worried about almost nothing… aren’t I embarrassed.  It’s like the fence that we keep talking about building to stop illegal immigration into this country that’s NOT along the Canadian boarder.

The Center’s study showed that a home owned by a black family is 76% more likely to go through foreclosure than a home owned by a white family.  Gotcha’!  It’s like the Rodney King riots in LA so many years ago.  The riots went on like a National Geographic Special until late in the day when someone threw a beer bottle across Wilshire Blvd. landing in Beverly Hills… and they called out the National Guard.

The study also showed “worrying evidence” that the crisis will “wipe out a generation of wealth in communities of color and exacerbate the existing income gap between white and non-white families.”

So, I guess white families don’t have that much to worry about.  No matter what, they’ll still be doing a whole lot better than the non-white families.  That’s good news, right?  Relax, white people!

The study then says the following:

“Once the foreclosure crisis is complete, as many as 10 million homes will go through the foreclosure process, which has cut across all demographic and income groups, from trailers to McMansions, from homes with sub-prime loans to homes with vanilla mortgages.”

Okay, before I comment on the message here… who wrote that paragraph?  Is it someone afflicted with Down Syndrome, or perhaps autism, because if so, then “good job!”  If not, then whoever wrote that paragraph… you’re an asshat.

For one thing, the foreclosure crisis doesn’t become “complete”.  What do you think happens… someone rings a bell and that’s it… it’s over now?  Foreclosures breed foreclosures breed foreclosures.

Reduced equity is what drives foreclosures, because when life events occur, and they most definitely do occur, people can’t sell their underwater homes so they end up in foreclosure, which furthers the reduction in home values in the surrounding area.

Reduced equity also reduces the level of consumer spending, which reduces corporate profits, which tends to increase and worsen unemployment… which in turn leads to more foreclosures.  And all of this is to say nothing of the bonds that default as the payment streams inside the mortgage backed securities dry up, thus triggering the credit default swap liabilities that we’re going to be paying for the rest of my life on behalf of AIG.

And should we even bother talking about the toxicity of the assets that are STILL clogging up the balance sheets of our too-big-to-fail, too-big-to-save banks?  I know, Geithner at Treasury and Bair at FDIC have suspended the accounting requirements for banks, so they don’t have to recognize the losses by writing down assets to their actual value, but that’s not a permanent change, right?  So, as values fall will the banks get better or worse, from a financial perspective?  Class?  Right… worse!

What would cause the foreclosure crisis to be “complete”?  Immigration to this country?  Can’t be that, ‘cause obviously those people would be largely be brown and we’ve already established how well that color does when trying to hold onto a home.  So, you see, brown couldn’t really do that much for us.  (Sorry about that one, couldn’t resist.)

And might I mention… “from homes with sub-prime loans to homes with vanilla mortgages.” From sub-prime to vanilla?  Why not just go with “from chocolate to vanilla,” and be done with it.  I’d like to suggest that you are obsessed with color and need at least a vacation, and probably years of therapy.

The CRL shows that, “all in all, 17 percent of Latino homeowners, 11 percent of black homeowners, and 7 percent of white homeowners have lost their homes to foreclosure since 2007, or are at imminent risk.”

Okay, let’s do the math…

According to the U.S. Census Department, here’s how the color chart in this country breaks down as of 2000, which we can assume hasn’t changed all that much compared with today in percentage terms.  And please know that I did not write the words below, it’s how the Census describes things.

White alone, non-Hispanic:            199,491,000

Black, or African American:             41,127,000

Hispanic or Latino                        46,944,000

So…

7 percent of white families is: 13,964,370.

11 percent of black or African American families is: 4,523,970

And 17 percent of Hispanic or Latino families is: 7,980,480

Want to know what those numbers show more than anything else?  They show that more than 25 million American families are about to be wiped out, and endure a life changing event because Wall Street’s bankers abused the mortgage securitization process, knowingly creating bonds that appeared to ratings agencies to be “triple A” but weren’t, which was necessary in order to sell them to pension plan investors, because at the same time they distorted and abused the usage of credit default swaps that allowed them to place bets against the defective bonds at 50:1 odds.

These same banks leveraged themselves 30 and 40 to one, based on the absurd belief that housing prices would never reverse themselves.  These same banks and their commercial lenders and retail mortgage companies, created toxic mortgage products designed for nothing more than refinancing in a year or two, and then used predatory lending strategies and tactics to take advantage of people of ALL COLORS, of all ethnicities.

Did the predatory lending, however, target the inner city, lower income African American communities?  You bet it did.  In fact, I wrote an article about that abomination last year, titled: “Wells Fargo’s Ghetto Loans and the Mud People.”  And if you haven’t read it, you should.  Everyone should.

But, our foreclosure crisis is not a race issue.  And, at the same time, it very clearly is.

First of all, the foreclosure crisis is an American tragedy that, as we stand here today, is sure to be monumentally catastrophic on an historic scale… for tens of millions of American families in every conceivable shade of brown, at every economic level, and for our nation and its economy as a whole.

To think that it is somehow possible for tens of millions of American families to endure such a tragedy… while watching a handful of elite Wall Street bankers, directly responsible for the crisis, not only walk away unscathed, but encouraged to remain in their positions and allowed enormous profits as a result… to think that such a thing can happen without impact to our society as a whole is utter foolishness.

This is not a tragedy that discriminates.  The race diminished as a result of what is being allowed to transpire will be “human”.  To suggest otherwise is not only insensitive at a level that makes one cringe, but additionally, will only serve to divide people further, at a time when the nation is already struggling under the unfounded and erroneous belief that it is only “irresponsible borrowers” who find themselves in foreclosure, and they are therefore deserving of their fate.

As the CRL study correctly states:

“The costs of foreclosure are extensive, multifaceted, and long-term, extending far beyond individual families to their neighbors, communities, cities and states.”

However, while the CRL study correctly points out that, African Americans, Latinos and other ethnic minorities will pay a higher price as a result of the crisis widening.  But it will be the legacy of disparity in incomes and education that will be the cause.  This effect will not be the result of the crisis discriminating but from the realities of life in America, a nation still trying to recover from slavery and segregation.

At the same time, I do believe that there have been racial undertones preventing our society from taking faster action to prevent this crisis.  This crisis was initially mischaracterized as being a “sub-prime” crisis, and because there are racial undertones and racial realities associated with the term “sub-prime,” it is also, I believe, unquestionably true that that our nation has done less to address the crisis to-date than we would have had the affected segment of society been seen as predominantly “white”.  And to the extent that’s the case, all involved should be deeply ashamed.

Lastly, the CRL study estimates that between 2009 – 2012, there will be indirect losses in wealth resulting from depreciation of nearby properties of close to $400 billion in African American and Latino communities, but based on the report’s other conclusions, I think it’s far more meaningful to realize that the number will be far in excess of $1 trillion, all communities combined.  These losses will not accrue to those losing homes, but by those near by.  And yet many in this group still maintain that those in financial distress now, should not be helped.

When you add in the direct losses of those losing homes, and the directly related deterioration of the bonds and credit derivatives, the numbers climb into the tens of trillions of dollars, and very quickly the scope of the problem becomes both apparent and overwhelming.

Then look at our country’s core problem: unsupportable levels of debt… government, personal and corporate. Consider the aging and massive baby boomer generation that is declining in its propensity to earn and spend, has not saved enough for retirement, and will need to access the unfunded promises of pensions and Medicare. We cannot spend, borrow, or grow ourselves out of this debt.  As Chairman Bernanke said just a week ago while testifying to Congress, we are on an “unsustainable path”.

Those that believe we can grow our way back to prosperity as we have before are misinterpreting history.

The result of the Great Depression and war years was a debt-free population that had saved through the war.  The post-WWII baby boom, coupled with the fact that our country’s manufacturing capacity was not destroyed during the war, is what drove our country to the economic prosperity we’ve known for the last 50 years.  Conversely, today’s college students are looking at graduating to no jobs, six-figure debt loads, and as a result, are in no rush to start the families that provide the foundation for economic expansion.

Those that believe we can spend our way back are just as mistaken.  Any amount of fiscal stimulus, eventually runs out, and when it does all we have to show for it is more debt.  Japan, for example, tried massive amounts of stimulus spending, and the result is a country with debt to GDP of 200%, but no economic growth.

We passed a $700 billion stimulus bill just a little over a year ago and while we succeeded at fixing our roads and bridges, we failed to create jobs or any lasting impact.  We stimulated housing with tax credits, government spending, and the purchase of mortgage backed securities, and the moment those programs stopped the real estate market literally fell off a cliff and is again poised to continue its inevitable decline.

And, certainly most memorably, we sacrificed transparency in order to go dramatically further into debt.  We pumped trillions of dollars into failed financial institutions, embraced childish policies, like “extend and pretend” and the suspension of mark-to-market accounting, and circumventing our legislative process, we allowed banks to borrow from the Fed and loan to Treasury in order to make the spread, which we allowed the banks to call “profits”.

These programs and policies have led to three notable outcomes:

1. Our banking system didn’t fail, but the toxic assets that were threatening the solvency of our institutions are right where they were in the fall of 2008.

2. We are much deeper in debt as a result of the massive borrowing and spending associated with “saving” institutions that remain insolvent absent government support.

3. The money that made the banks appear profitable, combined with no lending and essentially risk-free trading, resulted in a citizenry forced to watch literally hundreds of billions in bonuses handed out to the very individuals that caused the crisis in the first place.

After almost 20 years, Japan should have shown us by now that you can in fact deficit spend for decades without result.  Greece, Spain and others to be named later should show us what happens when the ability to do so runs out.

The problem we face is unsustainable levels of debt throughout every aspect of our society.  If we are to ever break the deflationary spiral we have allowed to take hold, we have no choice but to fix the structural problems that can only continue to make any sort of real recovery impossible.

The cuts will be painful and perhaps politically unpalatable, but they are at the same time, anything but optional.  Reducing the amounts promised by public pensions, cutting government wages, the restructuring of public programs like Social Security and Medicare, a reduction and perhaps elimination of corporate taxes, and changes to the tax code that eliminate the incentives to send jobs overseas, and the unwavering commitment to eliminate debt in government and throughout our society… all are areas worthy of our immediate attention.

Just think where we as a nation might already be today, had we followed a different path coming out of the financial meltdown.  We could have dedicated a portion of the stimulus, government spending and tax credit programs to stabilize the housing market. A stabilized housing market would have buoyed consumer spending, which would have in turn reduced unemployment thereby preventing additional and unnecessary foreclosures.

Of course, on the other side of the coin, absent the trillions of dollars we pumped into failed financial institutions, our banks would be somewhat smaller, but I think most of us could have gotten by with that reality for a while.  And we could have enacted real financial reforms that would eliminate the problem of “too big too fail” for future generations… like our son’s and daughter’s, for example.

Lastly, to those who believe that there is an upside to our foreclosure crisis… that they will one day be among those able to scoop up near limitless opportunity born from the losses of their fellow citizens, I can only offer that they are sadly quite mistaken.

While few in this group may realize it today, that sort of thinking can only lead to their inclusion in our country’s race to the bottom.

Other Mandelman Matters articles you might like… in fact you probably will… Oh, come on… why not try clicking at least one?

Click here to understand Securitization, the Bond Market & Mortgage Backed Securities.

Get Smarter Here: Books I’ve Loved Reading – The Great Depression Diary, by Benjamin Roth.

Mandelman’s How and Why to Use the REST Report When Applying for a Loan Modification

Mandelman’s Senate Investigation Says Banks Caused Crisis, Not Borrowers

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Reuters reported yesterday that 91 banks missed their May 17th TARP payments.  Under the TARP program, the U.S. Treasury invested money into insolvent banks through the purchase of preferred shares of stock, and those shares require the banks to make regular dividend payments to the Treasury, with the right to repurchase the shares at some point in the future.

So, it’s just like an interest only loan.  The banks pay the interest only payments, called dividends, until they repay the principal by repurchasing the preferred shares the government bought under TARP.

So, obviously, an increasing number of banks are struggling to meet their obligations, but I suppose that’s what happens when you’re an irresponsible bank owner.

SNL Financial compiled the statistics from U.S. Treasury data, which showed that it was the first missed payment for 23 of the banks, but for the others, it was at least their second missed payment.  Not only that, but the data also showed that the number of banks unable to make their TARP payments rose for the third quarter in a row.  In February of this year, 74 banks didn’t make their payments and 55 banks missed payments last November.

Perhaps most disturbing was that the analysis found that 20 banks have missed at least four payments since the program began in 2008, and eight banks have missed five payments.  The data did not make clear how many of these defaulting loans are due to actual hardships, and how many are strategic defaults, but some taxpayers say they’re suspicious.

With 600 banks still owing the government payments under the TARP program, there’s the definite potential that the crisis could spread, littering communities with empty banks everywhere that some fear would be irresistible targets for vandalism, and therefore would be costly to clean up after they were burned to the ground by local residents out having a good time.

In some cases, banks are attempting to renegotiate or modify their loans.  For example, Midwest Banc Holdings offered to swap $84.8 million in preferred shares issued under the TARP program for $15.5 million in common shares, but that would have meant an 80 percent loss for U.S. taxpayers who are the investors in the loans.

The U.S. Treasury, who is servicing the loans, says they denied Midwest Banc’s application for a loan modification because Midwest failed the NPV, and because the taxpayer investors have made it clear that they’re not interested in giving out principal reductions to irresponsible sub-prime bankers who were flipping loans during the bubble, borrowed beyond their means, and took risks based on the idea that real estate would go up forever.  Now they want to be bailed out again and taxpayers are saying no.

Unable to raise private capital, regulators seized Midland back in May, but the bank says it could have kept itself going if Treasury had just given it a little more time.  The bank says that it received a letter saying that it had been approved for a trial loan modification.  Then, a week later and without notice, the bank found itself being seized by the FDIC.

A Midland spokeswhiner said that it’s not fair to be seized while under consideration for a modification, but FDIC Chair Sheila Bair responded by saying: “Huh?  I’m sorry, did you say something?”

Sheila Bair thinks to herself… “I hate it when he prays for the recovery.”

Midland executives say the process of applying for a loan modification was a nightmare.  The bank claims that Treasury lost the paperwork it submitted four times, and was impossible to reach on the phone.  One bank executive who did not want to be named said that he waited on hold around the clock for three straight days.  When someone finally answered he asked to see the results of the NPV test that Treasury claims the bank failed, but Treasury responded by saying that they don’t have to provide that information, and then the line went dead.

Perhaps predictably, some politicians around the country are going into the business of offering to help distressed bankers get their loans modified.  These politicians often claim to have special relationships, and 99% success rates, claiming to be able to get a bank’s loan modified for an upfront fee of  $350,000 to $500,000.

U.S. taxpayers, however, have issued strong warnings to bankers, saying that these politicians are nothing more than unscrupulous scammers looking to take advantage of desperate bankers.

A spokesperson for U.S. taxpayers stated that politicians promising to modify a bank’s loan are making promises they can’t keep, because once taxpayers find out about such promises, there’s no chance of those politicians still being in office after the upcoming midterm elections.

According to U.S. taxpayers, if you’re a banker at risk of losing your bank to seizure, you don’t need a politician to get your loan modified… you can call the Treasury, or better yet, call a taxpayer directly.

Just dial 1-800- B-W-A-H-A-H-A-H-A-H-A

The preceding story was TRUE.

Click here for Reuters reporting of the story.

~~~~~~~~~

Other Mandelman Matters articles you might like… you’ll probably like… I mean, I think you’ll like them… no, many of you definitely will.. some, perhaps a great deal.

A Mandelman View: Now I Get It.  We’re not stopping the foreclosure crisis because it affects mostly brown people.

Get smarter here the easy way with: Mandelman U. Presents: Securitization & Mortgage Backed Securities

These guys are really too much: The Banksters: Lloyd Blankfein, John Mack, Vikram Pandit, Jamie Dimon and Brian Moynihan.  Have we forgotten what lying is?

A Mandelman Book Review: Books That Matter: 13 Bankers, By Simon Johnson and James Kwak

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Click here and SUBSCRIBE to Mandelman Matters.  That way you’ll always be up on stuff that matters.

I just finished reading: Crisis Economics – A Crash Course in the Future of Finance, by Nouriel Roubini & Stephen Mihm.  It was really good… great even.

In January of 2009, in the final days of the Bush Administration, Vice President Dick Cheney was asked why the administration had failed to see the biggest financial crisis since the Great Depression.  He answered: “Nobody anywhere was smart enough to figure it out.  I don’t think anybody saw it coming.”

Who could have possibly known?

Well, Nouriel Roubini, a Professor of Economics at New York University knew.  In fact, he was very specific in his warnings about the crisis to come, as early as September of 2006, while he was speaking to an audience from the International Monetary Fund.  Of course, back then, many in the audience found his warnings absurd.

He told his audience that the United States “would soon suffer a once-in-a-lifetime housing bust, a brutal oil shock, sharply declining consumer confidence, and inevitably a deep recession.”  And he went on to explain, “as homeowners defaulted on their mortgages, the entire global financial system would shutter to a halt as trillions of dollars worth of mortgage backed securities started to unravel.”

Roubini was unquestionably the most prescient of all of the economists that were talking about what was to come, back in the fall of 2006.  He described the crisis as one that would take down hedge funds, Wall Street’s investment banks, and the government sponsored behemoths, Fannie Mae and Freddie Mac.  And he was, at best listened to with skepticism, and at worst almost laughed at, as a “doom and gloomer.”

By early 2008, when most economists were talking about the crisis as is “liquidity trap,” and a problem caused by “sub-prime borrowers,” Roubini was forecasting a credit crisis that would affect everyone from Main Street to Wall Street and back again.  He even went so far as to predict that two major broker-dealers, as in Bear Stearns and Lehman Bros., would go bust, and that the other major firms would cease to function as independent entities.  Bank of America, obviously, bought Merrill Lynch, and Morgan Stanley and Goldman Sachs were forced to submit to the increased regulatory environments when they both become bank holding companies.  All told, Roubini wasn’t just right, he was dead on right.

He also predicted that the crisis that would begin here, would also consume the rest of the world, hammering the economies of Europe and Asia, and that it would ultimately cause the world to “teeter on the edge of a deflationary spiral,” the likes of which had not been seen since the Great Depression of the 1930s.

There were others, too, that predicted economic trouble ahead and tried to sound an alarm, but no other economist in the world saw what was coming with the same degree of clarity or specificity.  Yale University’s Robert Schiller saw the stock market bubble in advance of the dot-com bubble’s demise, and more recently, he was one of the first to see impact of the housing bubble coming to an end.  Others talked about how Wall Street’s compensation structures would encourage people to take on too much risk.  Wall Street legend, James Grant, warned that the Federal Reserve had created an enormous credit bubble.  And the list goes on and on.

Those economists were also ignored.  The thinking was that the financial markets were self-regulating.  No one thought that countries like ours, in this day and age, were subject to systemic meltdowns, and if anything along those lines did ever happen, we would rebound quickly… because we always had.  Well, maybe not “always,” but at least “always” in the last 50 years.

Now, Roubini has finally written his book on what caused the economic calamity we are currently experiencing… I just finished it, and it is excellent, although I will admit that it is not for someone with no base knowledge of economics.  You don’t need a PhD to enjoy it, or learn from it, by any means, but you probably do have to be someone who wants an in-depth discussion of the causes of, and responses to, the crisis.  If that describes you… well, then I pretty darn sure you’ll LOVE this book.

Roubini’s thinking on all aspects of the crisis are nailed down and tight as a drum.  He gives it to the reader straight, and makes each point understandable and indisputable.  He makes clear that today’s crisis was not caused by sub-prime borrowers buying homes they could not afford.  He explains that booms and busts are reoccurring events in a capitalistic society, but he then he goes on to paint a picture that we all need to see more clearly, and he does it in such a way that I found compelling to say the least.

You might remember that I also reviewed Joseph Stiglitz’s book, Freefall, which also documents the events that brought us to today, but I want to make clear that this is NOT a carbon copy of anything written to-date.  Roubini explains things I didn’t previously understand, such as the details of Federal Reserve Chairman Ben Bernanke’s and Treasury Secretary Geithner’s response to the meltdown.

Oh, I knew some of what those two had done, but not enough in terms of the details, and I was thrilled when I read the chapters that provided clear insight, not only into what they did, and continue to do, but also why it isn’t, and won’t work to fix what is so clearly broken.  In fact, having finished Crisis Economics, I now understand why some of what they did is causing more problems today, and will most definitely cause further problems tomorrow, both here and around the globe.  And that’s just one of the unique aspects of this book that makes it a great read.

Look… here’s the deal… today’s crisis is going to be around for a long time, and you’re going to want to know more about what’s happening around you soon enough, if you don’t feel that way already.  Without that knowledge, I’m afraid things are going to be awfully scary going forward.  And we’re talking about a global pandemic, a very complex series of problems that we’ve allowed to develop over at least 30 years.  So, it’s not the kind of thing you can expect to pick up in a book or two.

So far, I’ve read nine.  And I’m only reviewing the ones I think are really great reads.  I don’t like reading text books either, I like to be entertained while I’m learning.  Well, I just finished Roubini’s Crisis Economics about an hour ago, and rushed to get my review done in order to share it with you…. Which is not something I’ve done before.  So, take it for whatever it’s worth… it’s a good one… you should read it.

And if you do… I hope you’ll consider clicking the link below, because that way I make 6% of the sale as an Amazon Affiliate.  I know… it’s not really much money, but I don’t sell advertising on my site, so every little bit does help.  I mean… if you’re going to buy it anyway, why not buy it here?

Those are the words that were printed on a large banner that hung above the cubicles at Ameriquest Mortgage in Sacramento, California, according to an ex-employee of the now defunct sub-prime mortgage banking lender that was shut down by Citigroup in 2007.  Long Beach Mortgage, ACC’s wholesale lender, would later be bought by Washington Mutual.

Ameriquest, an originator of sub-prime mortgages owned by ACC Capital Holdings, was responsible for $50 billion in sub-prime loans in 2004 alone, roughly ten percent of the sub-prime loans made that year.

Back then, sub-prime loans could be sold at a premium, meaning that if you sold a $500,000 loan to Wall Street, you could expect to get $520,000, the extra $20,000 referred to as “service release premium”.  And that’s on top of the points and fees that Ameriquest charged the borrower to get the loan, in this example let’s say three points or $15,000.  That’s $35,000 to put together the paperwork needed to process a loan and then dump it on… let’s say, Lehman Bros. or Citibank… or JPMorgan… or whomever.

Can you do that math?  They made $35,000 on a $500,000 loan… so on $50 billion in loans, they would have made $3.5 BILLION.  And that, as they say, is darn good money.

It’s no wonder that Ameriquest boasted that they were the sort that didn’t let a tiny, little, insignificant thing like a borrower’s INCOME get in the way of originating a loan.

Next let’s take a look at Washington Mutual, the bank whose television and radio ads used to talk about how they loved puppies and kittens.  The Senate Permanent Subcommittee on Investigations under Chairman Carl Levin, D-MI, and Ranking Member Tom Coburn, R-OK, launched a series of four hearings in April to examine some of the causes and consequences of the financial crisis, and on Friday they’ll issue their first report and from reading the early releases, it’s going to be like my birthday a million times over.

The first bank under the Committee’s microscope, Washington Mutual, was at one time the nation’s largest thrift with more than $300 billion in assets, $188 billion in deposits, and 43,000 employees.  Washington Mutual (WaMu to its friends and co-conspirators) was the largest bank failure in U.S. history, when it was handed off in the middle of the night… I mean, when it was sold to JPMorgan/Chase in 2008.

Not so coincidentally, I received a call today from an ex-employee of WaMu, a woman who worked in various capacities including loan underwriter in the Downey, California office.  (That will be important later.)

I spoke with her for maybe fifteen minutes earlier this morning, and that was all I needed to arrange to interview her at length at a more convenient time.  During our fifteen-minute call, some of the things she said actually brought tears to my eyes.  And then I found myself getting angry… really angry.

I’ll be publishing my interview with her tomorrow evening, so look for it on Friday, but to give you some idea of what to expect, just think Enron meets Bernie Madoff meets Adelphia meets Drexel Burnham Lambert meets Charles Keating meets everything-else-that’s-wrong-with-corrupt-capitalism meets a serial child rapist… and you’ll be halfway there.  What WaMu did was beyond unforgivable, and most assuredly only the tip of Wall Street’s iceberg.  There simply is no punishment that could fit this crime.

During my interview with this courageous banker, who’s name I will not mention, I heard stories of a bank where they routinely manufactured borrower tax returns, paycheck stubs from jobs that borrowers never had, and in general lied or overlooked anything that might hinder a loan’s approval.  And they did this as a matter of day-to-day business, more often than not, without the borrower’s knowledge.  Their primary target: poor, relatively uneducated minorities whose dreams they could appear to fulfill.

Just like at Ameriquest Mortgage above, be assured that at WaMu they were the sort that most certainly didn’t lose deals to income either.

The Senate’s Subcommittee began its investigation into the financial crisis in November 2008.  Senate investigators gathered millions of pages of documents, conducted 100 interviews, held depositions, and brought in dozens of experts.  And this is far from being the ending, it’s just the beginning.

The Committee says that its hearings in the near future will look at the role of the regulators (Dopey and Sleepy?), the AAA-happy credit rating agencies, the inconceivably greedy and much too big to fail investment banks, and the use of complex financial instruments referred to as derivatives that ensured that no one would be able to understand what they were doing.

This is the story of the smartest guys in the room.  People so brilliant that they could never be replaced.  In fact, some on Wall Street had jobs so secret and complex that they couldn’t even do them.

According to Senator Levin, my new personal hero, WaMu employed “a toxic mix of high risk lending, lax controls, and destructive compensation policies.”  In the Senate Committee’s press release of April 12, 2010, he went on to make the following statements:

“As the debate on financial reform begins, it is critical to acknowledge that the financial crisis was not a natural disaster, it was a man-made economic assault.”

“Washington Mutual built a conveyor belt that dumped toxic mortgage assets into the financial system like a polluter dumping poison into a river.”

“Examining how Washington Mutual operated, and what its insiders were saying to each other, begins to open a window into the troubling mortgage lending and securitization practices that took our economy over a cliff.”

“The Washington Mutual case study examines how the bank’s search for profits led to the origination and securitization of shoddy mortgages that infected the entire financial system.  The documents show that, in the mid-2000s, the bank made a conscious decision to focus on high-risk mortgages, because higher risk loans offered greater profits.  Washington Mutual increased its securitization of sub-prime loans six-fold, primarily through its sub-prime lender, Long Beach Mortgage Corporation.”

Long Beach Mortgage?  Now where have I heard that name before?  Oh yeah, Long Beach Mortgage used to be a part of Ameriquest Mortgage.  The plot thickens.

Again from the Senate Committee’s release of April 12:

“From 2003 to 2008, documents were unearthed showing that these high-risk loans were problem-plagued.  Internal reports show that Long Beach and Washington Mutual loans did not comply with the bank’s own credit requirements, contained fraudulent or erroneous borrower information, and suffered from large numbers of early payment defaults on the part of borrowers.”

“One FDIC review of 4,000 Long Beach loans in 2003, found that less than a quarter could be properly sold to investors.  A 2005 review of loans from two of Washington Mutual’s top producing retail loan officers found fraud in 58% of the loans coming from one loan officer’ s operations and 83% from the other.”

“Yet those two loan officers continued working for the bank for three years, receiving prizes for their loan production.  A 2008 review found that staff in another top loan producer’s office had been literally manufacturing borrower information to speed up production. “

Levin and the Committee also found a systematic approach at work inside Washington Mutual.  They determined that the bank’s pay policies and financial incentives contributed significantly to the problems.  The Committee’s release stated:

“Loan officers and processors were paid based on volume, not the quality of their loans, and were paid more for issuing higher risk loans.  Loan officers and mortgage brokers were also paid more when they got borrowers to pay higher interest rates, even if the borrower qualified for a lower rate – a practice that enriched WaMu in the short-term, but made defaults more likely down the road.  These skewed compensation practices went right to the top.  In 2008, when he was asked to leave the failing bank, CEO Kerry Killinger was paid $25 million.”

Now, if you remember reading any number of my articles on the bankers and how they broke the bond market by packaging and selling mortgage backed securities, then this next paragraph should inspire a few goose bumps.  It sure did for me…

“The Subcommittee investigation found that the bank contributed to the financial crisis by making hundreds of billions of dollars in shoddy, high risk mortgage loans, packaging them, and selling them to investors as mortgage backed securities.”

“Documents obtained by the Subcommittee also show that, at a critical time, Washington Mutual selected loans for its securities because they were likely to default, and failed to disclose that fact to investors.  It also included loans that had been identified as containing fraudulent borrower information, again without alerting investors when the fraud was discovered.  An internal 2008 report found that lax controls had allowed loans that had been identified as fraudulent to be sold to investors.”

So, there you have it.  What they did was no accident.  They did it on purpose.  They wanted to get rid of the garbage they had created so they stuffed it into bonds, stood by while they watched those bonds get rated AAA, and then they sliced them up and sold them to investors all over the world.  And that’s fraud.

When those investors, many who were pension funds that manage money belonging to teachers, truck drivers and fire fighters, realized that the bonds were not properly rated… that they were not in fact AAA rated bonds… they dumped them faster than you could say “securitization trust”.  On that day, in the summer of 2006, July, if memory serves… the music died.

On that day, it became impossible to get a new mortgage or refinance an existing one whether one had equity or not, because with investors no longer willing to trust the ratings agencies, the banks saw that they would no longer be able to sell their loans to investors… and they started hoarding what cash they had almost overnight.  Without mortgages available, housing prices went into the freefall that continues today.   But many just couldn’t see it yet.  The foreclosure crisis had begun in earnest.

The first to go under and lose their homes were the families closest to the edge… but hundreds of thousands more would soon find their families circling the proverbial drain, about to lose their home.  As these highest risk loans went into default and the banks started foreclosing, and as prices continued to drop due to the tightening credit markets, all factors combined to fuel further foreclosures… and then more still.

The government, most notably then Treasury Secretary Henry Paulson, and Federal Reserve Chairman Ben Bernanke looked at the problem and immediately consulted with the titans of Wall Street like Dick Fuld at Lehman Bros., Jamie Dimon at JPMorgan, that guy at Citi with the evil Bond villain sounding name, Vikram Pandit, and Lord Blankcheck at Goldman Sachs, to leave out quite a few.

Paulson and Bernanke were assured that all was containable, that each had plenty of liquidity, that it was just sub-prime loans that had gone into default… and a terrible misconception was born.

They labeled it a “sub-prime borrower crisis,” not something that could ever spread beyond a small number of mortgages relative to the whole of the mortgage market.  But they were wrong. It was never a sub-prime borrower crisis.  The system of securitization was failing because of greedy bankers who had intentionally and fraudulently packaged mortgage backed securities and allowed them to be improperly rated AAA.

And the problem was systemic, because all of the banks had been buying and selling each others bonds, believing that by purchasing a type of insurance policy that protected the holder of such a bond from its default, known as a credit default swap, they had removed the risk.  And believing risk to have been removed they had started taken chances that no prudent person or company would ever take.  In fact, the entire financial system was soon at the brink of complete collapse because, like African slaves aboard the slave ship Amistad, if one firm went down, the others were chained to it.

Paulson may not have seen it immediately, but when Bear Stearns went under, and he saw clearly the real nature of the problem, well… that’s when politics entered the picture, and the timing couldn’t have been worse.

President Bush was finishing his second term, and the Democrats, who now controlled Congress, hated him with the white hot intensity of a thousand suns, or something very close.  Paulson was told not to come to Congress for any reason, unless he could guarantee that a crisis was at the door.  The Democratic controlled Congress would do nothing that might make Bush look good.  The next President would deal with the problems, and the next president would be a Democrat.

And that’s why we all watched in shock as Paulson and Bernanke, two very smart and experienced individuals who had been watching the crisis unfold every day for months and months before, jumped in their car and drove to Capitol Hill to tell our elected representatives that the sky was literally about to fall.  They needed a check for $700 billion… and just make it out to Hank.

I couldn’t understand why at the time, the two had waited until the last minute like that… I commented to a friend of mine how irresponsible it was for them to have not come to Congress sooner under such circumstances.

Months later, I read a 60-70 page white paper written by Phillip Swagel, the Chief Economist at Treasury from December 2006 until the day President Obama was sworn in as our 44^th President, if my memory serves.  He wrote a paper for the Brooking’s Institute, and as I turned the pages, chills went up and down my arms and legs as I came to understand why it was that when economics and politics collide, no good can come.

(By the way, at the end of last year, I wrote a white paper using those words I remembered thinking on that day: The Foreclosure Crisis – Where Economic Policy and Politics Collide, No Good Can Come.  I published a version of that paper on Mandelman Matters using an illustration of Santa having come down the chimney into an empty and obviously foreclosed home, under the title: Ho, Ho, Homeless, if you have trouble finding it and want to, just send me an email and I’ll send you a link.)

Is it starting to come together?  Starting to crystallize.  If so, great.  If not, don’t worry.  As I said this is the beginning, not the end.  And I’ll be writing a lot more on this subject and a lot sooner that you think.  I’ve waited for this day for a long time… two years… but it’s finally here.

To the homeowners, the thousands of homeowners that I have communicated with over the last couple of years… the homeowners that I have assured are not the cause of our country’s economic collapse… to the homeowners who have lost homes believing that it was somehow their own fault that everything turned out so terribly, terribly wrong… to all of you I want to scream from the highest mountain top:

Free at last, free at last… it is time for you to break the bonds of shame that have kept you quiet all these many months, afraid to talk to others, afraid that it is you that failed.  It’s time to come out into the light and say that you now understand that it was not your fault.  It was the banks that broke our world and caused our pain.  It was the banks that committed the crimes here.  You?  You just bought a house under the assumption that the world tomorrow would look at least something like it did yesterday and for the last 70-odd years.

To CNBC’s Diana Olick and Rick Santelli… and all the others like you who have blamed the homeowners and exacerbated their feelings of shame with your ignorant and mean-spirited rantings and ravings about how you’d rather die than see your neighbor helped financially by the government… it will soon be clear that it has always been you that should be deeply ashamed… you who should beg forgiveness from the American people, because it is you who have caused harm to so many for no reason but your own ratings.

As I told so many of you, on the phone, by email, and through my articles, your day would soon come, and it is almost here.  Let the healing begin.  Then it’s time to make our voices heard… loud and clear.  The mid-terms are still far enough away… there is still time.

Who’s the moron in the Obama Administration? Someone needs to find out and let me know so I can name names, because the monumentally tragic absurdity known as the Making Home Affordable program, or the Home Affordable Modification Program, or any of the other wonky acronyms this administration has come up with, just went from ill-conceived to stupid. It jumped the shark, in a manner of speaking.

This past week, the administration announced, again with much fanfare, that they would be announcing some fabulous improvements to the absolute failure that is HAMP, the government’s answer to the ongoing foreclosure crisis that continues to fuel the freefall in housing prices that assures our recession’s future.

So, once again I waited to see what the smartest guys in the room would come up with, again feeling like Charlie Brown eyeing that football, and thinking to myself: If you pull that thing away at the last moment again… Lucy, you got some ‘splainin’ to do. (When I think things to myself, I often sound like Desi Arnaz in my head.)

So, they made the announcement and I wrote an article about it and I tried hard not to be a unqualified naysayer. I don’t like bashing the Obama Administration all the time. I’m even willing to wait longer to see my doctor or pay a tax on my health insurance if they’ll just stop the bloodletting in the housing market before it turns Somalia into a better place to own a home than Southern California. That’s not unreasonable, is it?

But they did it again, damn it. The Harvard contingent that’s packed in like sardines in this administration once again demonstrated that they have no idea what they’re doing when it comes to the foreclosure crisis. Their best idea to-date, no actually their only idea to-date, is to continually release questionable-at-best, manipulated economic data to tell us that the recession is over, as we struggle to stay afloat hoping to not be laid off, and wondering how much we could save each month by growing our own tomatoes after our bankruptcy has been discharged.

Well, there’s that and the giving of trillions to the banksters in one form or another.

The “new and improved” HAMP advertised “principal reductions” and “more help for the unemployed,” as it relates to loan modifications, which made for a fabulous sound bite, and predictably led the tribe of sycophant journalists to write about how the new plan would help stop more people from falling into the abyss.

So, here it is Saturday morning. I got up, poured my coffee and sat down to read the language of the new HAMP more carefully, and now all I want to do is beat someone or something with a baseball bat… or go take a nap. Because, I have to tell you… I’m getting real tired of stupid, and this is really stupid.

The new and improved HAMP caused Moody’s Economy.com to release revised forecasts for the new plan, saying that it could prevent nearly 1.5 million foreclosures from now through 2012, compared with an estimated 650,000 forecasted under the old plan.

Am I the only one that finds that hysterical, in addition to being interminably sad, of course? I mean, none of the forecasts for the old HAMP have come anywhere near close to accurate, so now Moody’s releases forecasts based on those hippy-dippy numbers? And that’s not funny? In addition to being stupid, of course? I‘m sorry, but I’m laughing my ass off over here.

So, here’s what the new and improved HAMP will… and more importantly will not do for homeowners:

1. Help for the Unemployed – For distressed homeowners receiving unemployment benefits at the time they apply for a loan modification under HAMP, lenders are now supposed to lower their payments to no more than 31% of their gross income for three months… as long as the homeowner is not more than 90 days in arrears at that time.

Then, as if it mattered one iota, the unpaid amounts are to be added to the loan’s principal so they can be defaulted on… I mean repaid… at a later date.

It appears that the administration is hoping that three months later the unemployed homeowner will have found gainful employment and therefore will qualify for a normal HAMP loan modification in which payments will stay at some reduced amount. Of course, if the borrower doesn’t manage to find a new job in 90 days… and not just a new job mind you, but one that adequately replaces his or her lost income… we’re not talking “would you like fries with that”… well, then it’s foreclosure time at the family ranch once again.

Okay, everybody stop. Whose idea was this? Find him… test him to make sure he’s not mentally challenged due to a metal plate in his head or by some sort of birth defect… and assuming that’s not the case, punish him severely and publicly in order to dissuade others from engaging in this level of thinking in the future. Clearly, we need to raise the bar here, and allowing this sort of thing to slip by as being in any way acceptable for adults will only perpetuate a race to the bottom in the idea generation department. Next thing you know you’ll be taxing health insurance benefits… oh wait… never mind, bad example.

Let’s look at this component of the new plan…

First of all… and the administration knows this all too well… we have a record number of people in this country that are unemployed for more than 26 weeks, a near record number of part-time workers for economic reasons, and a decline in average hourly wages across the board. And that’s according to the government’s own most recent report.

So, let’s see… how many weeks in three months? Hmmm… carry the 7… divide by 9… I don’t know… shall we call it 12? I wonder how many of the unemployed homeowners applying for a loan modification will replace their income to the level required in 12 weeks or less? And since lenders and mortgage servicers won’t even talk to anyone about a loan modification until they’re 60 days delinquent, and the new plan only applies to homeowners that are less than 90 days delinquent… so that leaves what… a thirty-day window?

The administration’s new plan will only apply to unemployed homeowners in that 30-day window?  Seriously?  And then they’ll get a lower payment for 90 days and unless they find a new job that replaces their old one in that time, they’re back to foreclosure? Wonderful, that just sounds positively wonderful.  Crackerjack work, wouldn’t you say?

Oh, and even in the best case scenario, the amounts that go unpaid get tacked onto the loan anyway? And just when do those get repaid? Come on… this is characterized as providing extra help for unemployed homeowners?  Really?

This is extra help, like a Dr. Scholl’s footpad helps 40 years of wandering in the desert.

2. Consider Principal Reductions for Underwater Homeowners – For homeowners behind in their payments and considered “deeply underwater,” the new and improved HAMP will “require lenders and servicers that decide to participate to consider” providing a reduction in the principal balances of mortgages. They will also be “encouraged” to reduce principal balances for underwater homeowners who are current on their payments.

First of all, the word “consider” comes from the Latin word “considerare,” which means: “to look at closely, observe”. And the word “considerate” means: “marked by deliberation, of persons deliberate and prudent, and circa 1700, meaning “showing consideration for others”.

So, before I say anything else, I’d like to propose that we pass a new law immediately that prohibits the use of either word in conjunction with anything having to do with banks. All those in favor? Yep, I thought so.

Getting back to the specific issues at hand… weren’t the banks already required to “consider” principal reductions in conjunction with granting loan modifications under the HAMP guidelines. Oh yes they were… or rather are. Look up the HAMP guidelines, you’ll see.

So what’s the deal now? Are the banks now being double-dared to consider writing down the loans?  Are they being told to think on it extra hard.

Why in the world, and especially at this stage of this tragedy, would our government even CONSIDER writing language like this into an already failed plan that’s continuing to publicly pull our nation’s economy towards an extended state of financial ruin?

And don’t even talk to me about banks being “encouraged” to write down mortgages for homeowners who are not delinquent on their mortgage payments, because not only do I not believe this will ever happen to any meaningful degree if at all, but I find the entire idea utterly preposterous. If you want to help those who are not (yet) delinquent on their mortgage payments, how about doing something to stop their neighbor’s home from being auctioned off at 60% of it’s market price. That might help, what do you think?

We certainly don’t need Bank of America devoting any of its obviously scarce resources to calling homeowners who aren’t delinquent and saying: “Hi, yes I’m calling from Bank of America. I realize you’re not delinquent on your mortgage payments, so we thought we’d give you a call and see if we can’t write down the principal balance for you.”

And all of this assumes that lenders and servicers will decide to participate in the first place, because like every other government program to-date, it’s all voluntary. The banks don’t have to do diddlysquat. And, as The New York Times pointed out in its editorial discussing the changes to HAMP:

“… lenders might wait to see if bigger incentives are offered later. They may also prefer foreclosure to modifications because the long foreclosure process lets them postpone taking losses.”

Both points are of course true, assuming that any lender’s internal discussions on the subject would even rise to the level at which either point might become relevant.

The administration must do more. They owe these homeowners… and the American people more.

There are quite a few people out there that feel that homeowners unable to make their mortgage payment deserve nothing more than foreclosure. Their thinking, in most instances, is that these homeowners have brought this on themselves and now it’s time to pay the proverbial piper. Their bad decisions have consequences and the government has no business “bailing them out”. Yada, yada, yada.

I could not disagree more with this perspective and it’s important for me to state precisely why I think the way I do.

A. This is not 2006, 2007, 2008 or even 2009. This is 2010. The government has had several years and two administrations to do something about our downward spiral in the housing market and it has unquestionably failed at every single turn. Meanwhile, our government has bailed out the Wall Street banksters whose actions were the proximate cause of the crisis. It wasn’t today’s homeowners who thought housing prices would go up forever, and as a result leveraged themselves 40:1, it was the bankers who thought that way and did just that as a result.

B. Sub-prime loans are not the issue, and haven’t been for well over a year, maybe two. Today, more than half of the foreclosures are prime loans, so it’s not about people who shouldn’t have qualified for buying their home. People losing their home today have simply been caught up in the deflationary collapse that’s been allowed to go on almost unchecked for far too long.

C. Had the government stepped in sooner and more effectively, and there were plenty of opportunities for it to do so, we wouldn’t have (U3) unemployment hovering around 10% with no relief in sight, so many of these homeowners wouldn’t be unemployed and losing their home as a result. (U6 unemployment, the real unemployment number, is still north of 17%)

D. Had the government stepped in sooner and more effectively… and had the banks not shattered the credit markets by pushing AAA rated mortgage backed securities whose value was questionable at best… housing prices wouldn’t have fallen as far as they have and therefore many more people would be able to refinance as their loans adjust higher instead of the situation in which we find ourselves today.

E. The government’s failure to more effectively address the housing crisis has caused values to fall to the point where every homeowner in America has sustained enormous losses, to the point where even the most prudent of plans have gone awry. Retirements are being postponed, and all Americans are paying the price. Taking effective measures at this point to stop the carnage in the housing markets doesn’t represent a special interest bailout of irresponsible homeowners, it represents the only responsible path the government can possibly take to assure the future prosperity of its citizens and nation as a whole.

Hopefully, that made my position sufficiently clear.

This new and improved HAMP for the unemployed is not going to help 1.5 million homeowners instead of 650,000, as forecasted by Moody’s. In fact, with HAMP itself still languishing somewhere between total failure and abysmal failure,  in terms of its ability to help homeowners who are not unemployed, I’d be surprised if it helps anyone at all.

And the idea that anyone could possibly peg their hopes on banks “considering” anything, or acting in anyone’s best interests but their own, based on any level of encouragement, first makes me laugh… and then pity those willing to do so.

The entire idea is absurd, and whoever is responsible for authoring such enhancements to the HAMP program, deserves to be publicly ridiculed. They are obviously people whose intelligence is lacking to such a degree that they should not be allowed to drive a car, or even cross busy streets without assistance.

Here’s a thought… Perhaps the whole thing is just part of Obama’s plan to stop immigrants from coming into this country illegally by allowing the United States to become a nation whose economy provides less opportunity for prosperity than Mexico. ‘Cause you know… that just might work.

If that’s the case, however, then I’d like to reverse my position on the whole “build a fence” idea. Capisce?

Mandelman out.

Ergo bibamus.

Massachusetts Attorney General Martha Coakley is hunting for bank. She just bagged Goldman Sachs, among others, and they’re writing down mortgages faster than you can say “fraudulent securitization”. She’s my God damn hero. I think I’m voting for her for president in 2012 whether she runs for the office or not.

Apparently, Martha My Dear decided she’d better do something about the foreclosure crisis in Massachusetts, seeing as no one else was. And so being a woman with a fully developed adult brain, she thought she might take a look at the people who made all the money… the investment banks and their role in the origination and securitization of mortgages.

(I know just how you’re feeling. Exciting isn’t it? Hang on… it gets even better.)

As part of the settlement, Goldman has agreed to principal write-downs so that homeowners in Massachusetts can refinance or sell their homes! (I swear… I am not making this up.)

For homeowners with loans held by Goldman entities, the investment bank… ooops, I’m mean the commercial bank… will reduce the principal of first mortgages by 25-35% and second mortgages by 50% or more!

And borrowers who have a first mortgage that’s seriously delinquent will be required to make a “reasonable monthly loan payment” while trying to refinance… or until they sell their home, which is certainly more than reasonable. And, if after six months, the borrower is still unable to find financing or sell his or her home, Goldman will reduce the principal owed on the existing loan to assist the borrower!

Martha’s office announced that the settlement with Goldman Sachs & Company is worth $50 million and includes substantial principal write-downs and refinancing options for loans owned by Goldman and/or serviced by Litton.

Martha has been investigating the role of investment banks in the origination and securitization of sub-prime loans in Massachusetts. And, in order to resolve any potential claims stemming from the Attorney General’s investigation, Goldman has agreed to provide loan restructuring to Massachusetts sub-prime borrowers. The program is designed to enable borrowers to replace the “problem loans” with affordable ones based on the current value of their properties.

(Holy Mary Mother of God… just when I’d thought I’d seen everything.)

Additionally, Goldman has also agreed to make a $10 million payment to the Commonwealth of Massachusetts, which I thought was darned considerate of them, and has pledged to continue cooperating with Martha in her ongoing investigation of industry practices. This woman muct be scary as can be. You go girl. You’ve got Goldman Sachs sounding like actual human beings!

(Do you hear that President Obama? Secretary Geithner? Is any one in D.C. paying any attention to what this woman has going on in Massachusetts? Yoohoo! Lookie here…)

That’s not even all of it… even if a homeowner’s loan isn’t held by Goldman, but is serviced by Goldman’s affiliated servicing company, Litton Loan Servicing LP, Goldman says they’ll help qualified borrowers find refinancing and other alternatives to foreclosure.

The Massachusetts Attorney General’s Office began investigating the securitization of sub-prime loans in December 2007, and since then has focused on industry practices related to the issuance and securitization of sub-prime loans to Massachusetts consumers. Martha’s looking into whether securitizers may have:

• Facilitated the origination of “unfair” loans under Massachusetts law.
• Failed to ascertain whether loans purchased from originators complied with the originators’ stated underwriting guidelines.
• Failed to take sufficient steps to avoid placing problem loans in securitization pools.
• Been aware of allegedly unfair or problem loans.
• Failed to correct inaccurate information in securitization trustee reports concerning repurchases of loans.
• Failed to make available to potential investors certain information concerning allegedly unfair or problem loans, including information obtained during loan diligence and the pre-securitization process, as well as information concerning their practices in making repurchase claims relating to loans both in and out of securitizations.

Martha’s investigation into securitizers is part of her comprehensive enforcement approach to combating sub-prime lending and the foreclosure crisis. This latest inquiry concerns the role of “Securitizers” (read: Goldman Sachs), who bundled mortgage loans and sold them as mortgage-backed securities or other investment vehicles.

(I can’t wait for Part 2… I hope her next installment covers “The role of Bold Face Liars & Greedy Bastards in the Financial Meltdown.”)

So far, Martha has sued Fremont Investment & Loan, as well as Option One and its parent H&R Block, alleging unfair, deceptive and predatory lending practices. And she’s obtained preliminary injunctions against those companies too!

And the latest polls in Massachusetts show Martha and the Republican, Scott Brown are neck in neck.  People… I don’t care about Republicans or Democrats… but are we seriously considering not electing one of the only people in the country not bought off by the banks?  One of the only people with a track record that might lead to solving the foreclosure crisis?

If you’re in Mass or know anyone there… for God’s sake, pick up the phone.  Tell them not to let this happen.  The country needs Martha NOW.  Put Scott in in a couple years… when he can’t keep the country in a recession by voting with the banks.

He’s running to stop the health care bill.  Who cares about this stupid bill?  Do you really care about health care when you’re living under a bridge?  Stop the depression from taking hold by putting Martha in the Senate.  The health care bill won’t make a damn bit of difference for years… but if we don’t do something fast, 14 million will lose their homes in the next 3 years.

COME ON EVERYBODY LET’S SING!

MARTHA FOR PRESIDENT!

Martha my dear though I spend my days in conversation

Please

Remember me Martha my love

Don’t forget me Martha my dear

The Beatles