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To: tejek who wrote (591285)10/25/2010 7:56:08 AM
From: bentway  Respond to of 1578938
 
Foreclose on the Foreclosure Fraudsters, Part 2: Spurious Arguments Against Holding the Fraudsters Accountable

William K. Black and L. Randall Wray
Posted: October 24, 2010 11:53 PM
huffingtonpost.com

Our call for closing down control frauds and stopping the foreclosure frauds typically meets with three objections. First, it is claimed that while there were some bad apple lenders, much of the fraud was committed by borrowers. Our proposal would let fraudulent borrowers remain in homes to which they are not entitled, punishing the banks that were duped. Second, the biggest banks are too important to foreclose. And third, it is not possible to resolve a "too big to fail" institution.

Who is Guilty?

Let us deal with the "borrower fraud" argument first because it is the area containing the most erroneous assumptions. There was fraud at every step in the home finance food chain: the appraisers were paid to overvalue real estate; mortgage brokers were paid to induce borrowers to accept loan terms they could not possibly afford; loan applications overstated the borrowers' incomes; speculators lied when they claimed that six different homes were their principal dwelling; mortgage securitizers made false reps and warranties about the quality of the packaged loans; credit ratings agencies were overpaid to overrate the securities sold on to investors; and investment banks stuffed collateralized debt obligations with toxic securities that were handpicked by hedge fund managers to ensure they would self destruct.

That homeowners would default on the nonprime mortgages was a foregone conclusion throughout the industry -- indeed, it was the desired outcome. This was something the lending side knew, but which few on the borrowing side could have realized.

The homeowners were typically fraudulently induced by the lenders and the lenders' agents (the loan brokers) to enter into nonprime mortgages. The lenders knew the "loan to value" (LTV) ratios and income to debt ratios that they wanted the borrower to (appear to) meet in order to make it possible for the lender to sell the nonprime loan at a premium. LTV can be gimmicked by inflating the appraisal. The debt to income ratios can be gimmicked by inflating income. "Liar's" loan lenders used that loan format because it allowed the lender to simultaneously loan to a vast number of borrowers that could not repay their home loans, at a premium yield, while making it look to the purchaser of the loan that it was relatively low risk. Liar's loans maximized the lender's reported income, which maximized the CEO's compensation.

The problem is that only the most sophisticated nonprime borrowers (the speculators who bought six homes) (1) knew the key ratios they had to appear to meet, (2) had the ability to induce an appraiser to inflate substantially the reported market value of the home, and (3) knew how to create false financial information that was internally consistent and credible. The solution was for the lender and the lender's agents to (1) instruct the borrower to report a certain income or even to fill out the application with false information, (2) suborn an appraiser to provide the necessary inflated market value, and (3) create fraudulent financial information that had at least minimal coherence.

When the overburdened homeowner began missing payments, late fees and higher interest rates kicked-in, boosting the stated income of mortgage servicers and the value of the securities. Not coincidentally, the biggest banks own the servicers and could maximize claims against the mortgages by running up the late fees. It was quite convenient to "misplace" mortgage payments, so even homeowners who were never delinquent could get hit with fees and higher rates. And when payments were received, the servicers would (illegally) apply them first to the late fees, meaning the homeowners were unknowingly still missing mortgage payments. The foreclosure process itself generates big fees for the SDI banks.

And, miracle of miracles, the banks would end up with the homes and get to restart the whole process again -- from resale of the home through the financing, securitizing, and fee-for-servicing juggernaut.

Unfortunately, it did not go quite as smoothly as planned. The SDIs were supposed to act like neutron bombs -- killing the homeowners but leaving the homes standing, to be resold. The problem is that wiping out borrowers lowered the value of real estate, crushing not only the real estate market but also construction and through to all associated sectors from furniture and home restoration supplies to big ticket purchases that rely on home equity loans. It also led to questions about the value of the securitized toxic waste manufactured and held directly or indirectly by financial institutions.

Next, a few judges began to question the foreclosures, as they saw case after case in which the banks claimed to have lost the paperwork or submitted amateurishly forged documents. Or, several banks would go after the same homeowner, each claiming to hold the same mortgage (Bear sold the same mortgage over and over). Insiders began to offer depositions exposing fraud and perjury. It became apparent that in many and perhaps most cases, the trusts responsible for the securities (often these are "special purpose" subsidiaries of the banks) never received the "notes" signed by the borrowers -- as required by both IRS tax code and by 45 of the US states. Without the notes, billions of dollars of back taxes could be due, and the foreclosures violate state law. Finally, the Attorneys General of all fifty states called for a foreclosure moratorium.

What to do? We suggest an immediate moratorium on foreclosures and a requirement that all notes be produced by purported holders of mortgages within a reasonable length of time. If they cannot be found, the mortgages -- as well as the securities that pool them -- are no longer valid. That means that the homeowners are not indebted, and that the homes are owned free and clear. And that, dear bankers, is a big, big problem. It is also the law -- without evidence of debt, there is no debtor and no creditor.

Commentators are horrified that a foreclosure moratorium would let "deadbeat" borrowers remain in their homes while delinquent in their payments. The speculators that purchased "MacMansions" and stated on six separate loan applications that each house was their principal dwelling are frauds. The moratorium would (briefly) reward fraudulent borrowers while (briefly) punishing the fraudulent banks. This is true.

It is not possible to separate "worthy" borrowers who were duped by banks from all "unworthy" borrowers who knew the loan applications were false. Indeed, given the millions of borrowers that received liar's loans, even if the borrowers were all frauds we could not possibly prosecute all of them due to lack of resources. We currently prosecute roughly 1,000 mortgage fraud cases annually at the federal level. If we used all of our resources to investigate and prosecute fraudulent mortgage borrowers exclusively we would be able to prosecute less than one-tenth of one percent of those frauds.

The losses that the fraudulent nonprime lenders caused are vastly greater than the losses caused by fraudulent borrowers, so no rational prosecutor would use his scarce resources to prosecute individual nonprime borrowers. Moreover, prosecutions of individual borrowers for alleged fraud in the applications would be difficult to win against competent defense counsel because it will not be possible to infer the borrower's intent and knowledge and whether the loan agent instructed him to enter specified information on the application. We are not arguing that the speculator who committed fraud while buying six homes should be allowed to walk free. We are simply arguing that it makes no sense to use limited judicial resources to go after owner-occupier households where it will be almost impossible to prove intent to defraud.

On the other hand, we can infer a lender's fraudulent intent because it is financially sophisticated and has expertise in lending. An honest mortgage lender would not make "liar's loans" because absence of proper underwriting inherently produces loans that are expected to default. Yet, in 2006 just about half of all mortgages originated were liar's loans. Banks happily advertised specialization in "no doc" and NINJA loans. There can be no question about intent -- the intent was fraud, plain and simple. Fraud on the part of credit raters is equally easy to infer -- we have the internal emails that document intent to defraud securities purchasers by "pay to play" schemes. And the fraud committed by the investment banks that pooled the mortgages is also well documented. These entities committed tens of thousands and even millions of frauds each. For obvious efficiency reasons, that is where our judicial resources ought to be directed.

Macro Effects and Culpability

There is one other consideration that biases the case in favor of borrowers. Many homeowners were sold on the idea that "real estate values only go up" -- and quite a few planned to refinance on better terms, or even to flip the house at a price that would allow them to pay-off a mortgage they could not otherwise afford. We realize that it is not easy to shed tears for speculators foiled by the market, and that is not our point.

What is important to understand, however, is that the financial sector is largely culpable for the generation of speculative frenzy, the creation of the "financial weapons of mass destruction", and the transformation toward financial fragility that finally collapsed in 2007. In the aftermath we lost 10 million jobs and millions of homeowners lost their homes. The "collateral damage" inflicted by the SDIs is now endangering tens of millions of American families -- most of whom played no role in the speculative euphoria. Almost half of American homeowners are already underwater or on the verge of going under. In short, it was Wall Street that turned our homes over to a financial casino -- and so far virtually all the losses have been suffered on Main Street.

This culpability is at the aggregate scale and of course no individual bank can be held liable in court for the collapse of the financial system. Rather, each bank's guilt must be assessed according to its own fraud. However, a national moratorium on foreclosures must be evaluated at the macro level, and justified on the basis of the aggregate costs, benefits, and moral implications. And certainly at the aggregate level that must be considered by President Obama, the benefits to the majority of Americans clearly outweigh the costs imposed on the relatively few. And the morality is also on the side of homeowners and clearly against the banks.

Closing the control frauds would actually benefit honest bankers by eliminating the "Gresham dynamics" created by fraudulent institutions -- a race to the bottom in underwriting. Since fraudulent banks use accounting fraud to manufacture high profits, they do not actually have to use a viable business model. By eliminating control fraud from the financial sector, it will be much easier for honest banks to succeed.

Further, the financial system has massive excess capacity -- as evidenced by the need to create bubble after bubble to find outlets for capacity. Almost all of the innovations in practice and instruments of the past two decades were spurred not by demand but rather by excess capacity. Downsizing the financial sector is critical to restoring it to a size that is commensurate with the needs of the economy.

The cost of not closing control frauds, by contrast, can be staggering. The business practices that maximize the fictional reported income (e.g., making "liar's loans to people who cannot repay their loans) maximize real losses and hyper-inflate financial bubbles. Control frauds destroy wealth at a prodigious rate. The one thing we certainly cannot afford is leaving the control frauds under the control of fraudulent CEOs.

Can the Frauds be Foreclosed?

The assertion that the SDIs cannot be resolved because of their size is unsupported. Very large institutions have already been resolved both in this country and abroad. The "too big to fail" (TBTF) doctrine has always been unproven, dangerous, and counter to the law. An institution that is not permitted to fail faces obvious adverse incentive problems. It also destroys healthy competition with institutions that are not considered TBTF. It encourages risk-taking and fraud. And it subverts the law, which requires that insolvent institutions must be resolved.

As we write this piece, the markets are taking it upon themselves to begin to close down the control frauds -- with homeowners fighting the foreclosures and investors demanding that the banks take back the toxic waste. Unfortunately, following the market solution will be a long-drawn-out and costly process -- both in terms of tying up the judicial system but also in terms of the uncertainty and despair that will persist. At the end of that process, the banks will have to be resolved. No matter how much the politicians dislike it, they will end up with the banks in their hands -- either now or later. Taking them now is the right thing to do.



To: tejek who wrote (591285)10/25/2010 8:09:18 AM
From: bentway  Read Replies (2) | Respond to of 1578938
 
Gauging the scope of the tea party movement in America

By Amy Gardner
Washington Post Staff Writer
washingtonpost.com
Sunday, October 24, 2010; 12:01 AM

In an unruly, unpredictable and chaotic election year, no group has asserted its presence and demanded to be heard more forcefully than the tea party. The grass-roots movement that was spawned with a rant has gone on to upend the existing political order, reshaping the debate in Washington, defeating a number of prominent lawmakers and elevating a fresh cast of conservative stars.

But a new Washington Post canvass of hundreds of local tea party groups reveals a different sort of organization, one that is not so much a movement as a disparate band of vaguely connected gatherings that do surprisingly little to engage in the political process.

The results come from a months-long effort by The Post to contact every tea party group in the nation, an unprecedented attempt to understand the network of individuals and organizations at the heart of the nascent movement.

Seventy percent of the grass-roots groups said they have not participated in any political campaigning this year. As a whole, they have no official candidate slates, have not rallied behind any particular national leader, have little money on hand, and remain ambivalent about their goals and the political process in general.

"We're not wanting to be a third party," said Matt Ney, 55, the owner of a Pilates studio and a founder of the Pearland Tea Party Patriots in Pearland, Tex. "We're not wanting to endorse individual candidates ever. What we're trying to do is be activists by pushing a conservative idea."

The group, with 25 active members, meets to discuss policies and listen to speakers, Ney said. "We provide opportunities for like-minded people to get together," he said.

The local groups stand in contrast to - and, in their minds, apart from - a handful of large national groups that claim the tea party label. Most of those outfits, including FreedomWorks and Tea Party Express, are headed by longtime political players who have used their resources and know-how to help elect a number of candidates.

The findings suggest that the breadth of the tea party may be inflated. The Atlanta-based Tea Party Patriots, for example, says it has a listing of more than 2,300 local groups, but The Post was unable to identify anywhere near that many, despite help from the organization and independent research.

In all, The Post identified more than 1,400 possible groups and was able to verify and reach 647 of them. Each answered a lengthy questionnaire about their beliefs, members and goals. The Post tried calling the others as many as six times. It is unclear whether they are just hard to reach or don't exist.

Mark Meckler, a founding member of the Tea Party Patriots, said: "When a group lists themselves on our Web site, that's a group. That group could be one person, it could be 10 people, it could come in and out of existence - we don't know. We have groups that I know are 15,000 people, and I have groups that I know are five people."

'We can't always agree'
There is little agreement among the leaders of various groups about what issue the tea party should be most concerned about. In fact, few saw themselves as part of a coordinated effort.

The most common responses were concerns about spending and limiting the size of government, but together those were named by less than half the groups. Social issues, such as same-sex marriage and abortion rights, did not register as concerns.

If anything tied the groups together, it was what motivated their members to participate. Virtually all said that economic concerns were a factor, and nearly as many cited a general mistrust of government. Opposition to President Obama and Democratic policies was a big factor, but only slightly more so than dissatisfaction with mainstream Republican leaders.

Eleven percent said that Obama's race, religion or ethnic background was either a "very important" or "somewhat important" factor in the support their group has received.

While the tea party groups may lack a unifying direction or vision at the moment, the results show that they are ripe for action. A remarkable 86 percent of local leaders said most of their members are new to political activity, suggesting that they could be turned into a potent grass-roots force heading into the 2012 elections.

Of course, their general lack of interest in politics also suggests that they could just as easily recede, particularly if the economy improves.

The tea party's biggest successes this year have come only after one of a handful of well-funded national groups swooped in to mobilize local support. In upset victories in Alaska and Delaware, for instance, the Sacramento-based Tea Party Express spent hundreds of thousands of dollars on advertising for Republican Senate candidates Joe Miller and Christine O'Donnell, respectively.

Other national groups, such as FreedomWorks and Americans for Prosperity, have also built organizations and spent millions of dollars on advertising, high-profile bus tours or other direct campaign tactics.

Some of the local group leaders may find such tactics distasteful. Fifty-seven percent said they want to operate as a network of independent entities. And many organizers said the lack of coordination and the independence of the groups are what drew them to the movement, even if it is a liability when it comes to turning their beliefs into action.

"It's both an advantage and a disadvantage," said Joe Lisante, 43, a family doctor and a founder of Miami County Liberty, a group near Dayton, Ohio.

"If you're an opponent of the tea party, we're not an easy target," he said. "Some of the groups want to take on prayer in school. Some of them want to take on voter education. Some want to be endorsing candidates. But there is no particular person, at least in the state of Ohio, who is the president of the tea party; it just doesn't exist. That's a disadvantage for us because we can't move quickly on things. We can't always agree."

From one member to thousands
Many of the groups that were interviewed claim hundreds of members and some boast thousands, but most said they have fewer than 50. A number of them appear to be limited to family or friends - the Northern Connecticut Patriots, for instance, counts seven members; the Southeast Wyoming Tea Party Patriots has one.

Jeff Lafferty, 48, a landscaper in Cheyenne, Wyo., said he formed the Southeast Wyoming Tea Party Patriots in April after growing increasingly concerned about such federal actions as the bank bailouts and the stimulus bill. But Lafferty attracted just one person to his only meeting, in part because a 9/12 Project tea party group in Cheyenne was already active, he said. Moreover, he said he has since grown disillusioned with the movement and the signs that some of its members are motivated by racism against Obama. Not only is his group no longer functioning, he said, but it "never was."

Donna Riner, 52, a medical practice manager, founded the five-member San Carlos Tea Party, in San Diego, which has met just once. "I just invited friends and family members," Riner said. "I wanted them to know what the tea party represents. It's about smaller government and less taxes. I wanted them to go on the national lists and join and give money to some of the big groups that support the people I believe in."

The tea party has been accused of racism by its political opponents after comments from some prominent members and signs at several major rallies this year that attacked Obama for either his race or the false belief that he is a Muslim. At rallies, for instances, organizers have kicked out questionable members and have sought to project a more tolerant image.

But the interviews found that Obama's race is, in fact, important in more than one in 10 tea party groups.

Andy Stevens, 68, a video producer and a founder of the Tea Party Patriots in Anacortes, Wash., said he described Obama's race and and religion as "somewhat important" to members of his group because they remain troubled by what they see as the president's un-American and un-Christian behaviors.

In Stevens's view, those include Obama's "socialist" policies and intentional failure to mention "the creator" when talking about inalienable rights.

"There are questions that don't get answered, like citizenship and his birth certificate," Stevens said. "I don't know why questions keep popping up all the time. If something is irrefutable, the questions wouldn't keep popping up."

The groups clearly do not identify with any particular national leaders, an indication that there is no tea party front-runner to take on Obama in 2012. When asked to name a national leader who best represents their views, more than a third of the groups said "no one."

Former Alaska governor Sarah Palin (R) received the most mentions, with 14 percent, followed by talk-show host Glenn Beck with 7 percent and South Carolina Sen. Jim DeMint (R) with 6 percent.

One question remains: If most tea party groups don't engage in political campaigning, what exactly do they do?

Lisante, from Miami County, Ohio, said his meetings generally start with the Pledge of Allegiance, followed by a prayer, and then a speaker and a skit - the most recent was about the bank bailout. (Lisante said it was very funny.) The point, he said, is not to organize political action but to educate members and encourage them to become active on their own.

"Basically, we say: 'Listen, guys: You can no longer be the one who doesn't vote,' " Lisante said. " 'If you want to have an impact, you've got to show up.' "

Database editor Dan Keating contributed to this report.



To: tejek who wrote (591285)10/25/2010 12:28:51 PM
From: Tenchusatsu  Read Replies (2) | Respond to of 1578938
 
Ted, you could show people two unlabeled pie charts, one depicting America's wealth distribution and one depicting that of the former Soviet Union.

Then you can jump to the conclusion that people would "prefer communism."

Old news, let's MoveOn ...

Tenchusatsu