"The Fed's Hotel California Monetary Policy"

In recent speeches Dallas Federal Reserve Bank President, Richard Fisher has been likening how the U.S. Federal Reserve Bank’s bond purchase programs (the Q.E.’s) seem to be “boxing” the Fed into a long duration portfolio of expensive wasting assets. Mr. Fisher calls the strategy, “The Fed’s Hotel California Monetary Policy”.

After doing a little research, and a few key-words-searches, on Fisher's theme I found an interesting website which adds a little explanation - and some musical entertainment - ‘fleshing-out’ Mr. Fisher's notion.  The web-site is called, Mish’s Global Economic Trend Analysis. I thought you might like to see Mish’s explanation of Fisher's “The Fed’s Hotel California Monetary Policy”.

Every hyperlink (except the ads) on the linked article is worth visiting, in my opinion.


https://vimeo.com/13617190

"Relax" said the night man, “we are programmed to receive. . . you can check-out any time you like, but you can never leave!" 

Michael Bloomberg, "Congress Caused the Mortgage Crisis, Not the Big Banks"

November 1, 2011 Michael Bloomberg - The Good Democrat

Speaking at a business breakfast in midtown featuring Bloomberg and two former New York City mayors, Bloomberg was asked what he thought of the Occupy Wall Street protesters."I hear your complaints," Bloomberg said. "Some of them are totally unfounded. It was not the banks that created the mortgage crisis. It was, plain and simple, Congress who forced everybody to go and give mortgages to people who were on the cusp. Now, I'm not saying I'm sure that was terrible policy, because a lot of those people who got homes still have them and they wouldn't have gotten them without that.
  
"But they were the ones who pushed Fannie and Freddie to make a bunch of loans that were imprudent, if you will. They were the ones that pushed the banks to loan to everybody. And now we want to go vilify the banks because it's one target, it's easy to blame them and congress certainly isn't going to blame themselves. At the same time, Congress is trying to pressure banks to loosen their lending standards to make more loans. This is exactly the same speech they criticized them for."Bloomberg went on to say it's "cathartic" and "entertaining" to blame people, but the important thing now is to fix the problem.  
--------------------------------------------------
A Few Questions: Was it only 'Congress' that created and allowed pressures motivating banks to abandon due diligence banking? Or, did pressure from, and policies supported by, the executive branch play an even greater role, than Congress’s role, in the creation of the housing and mortgage bubble - which led to the financial crisis? Who in Congress supported the policies that created the problem? Which players in the executive branch and its bureaucracy enforced and expanded the Community Reinvestment Act and the Affordable Housing Act?
 

Citigroup Downsizing

Juxtapose this:

Several months ago I copied and posted a video-clip to YouTube.  The original video from which I copied my video-clip was published on C-SPAN. My copied video-clip is a brief slice of the opening comments from the March 4, 2010 meeting of the Congressional Troubled Asset Relief Oversight Panel. The panel's Chairperson, Elizabeth Warren [d. MA] opens the meeting with a monologue reciting Citigroup’s history as an entity which has apparently settled into the too-big-to-fail syndrome, and which has a substantial history at the federal rescue trough.

With my tongue-in-cheek, I titled my YouTube posted video-clip: Too Big To Fail: Citigroup under the TARP

In Ms. Warren’s statements (March 4, 2010) she describes how Citigroup grew to be such a ‘systemically important’ financial institution, and she mentions that as Citigroup grew in importance, and in order to accommodate the kinds of growth Citigroup wanted, the federal government eviscerated The Glass-Steagall Act.

Considering that Elizabeth Warren is an extremely liberal Democrat, and considering that former President Bill Clinton and Clinton's Treasury Secretary, Robert Rubin were significant campaigners for Citigroup’s federal favors, it’s kind of interesting that Ms. Warren would bring attention to how the democrat brand of 'crony capitalism' has benefitted Citigroup and contributed to its too-big-to-fail stature.
Media worth consulting for additional ‘context':
1) PBS Frontline The Warning, at: http://www.pbs.org/wgbh/pages/frontline/warning/

2) PBS The Wall Street Fix: Mr. Weill Goes to Washington, at: http://www.pbs.org/wgbh/pages/frontline/shows/wallstreet/weill/

3) Bill Clinton: Building the Foundation for The House Of Cards

4) The Big Sup-Prime Gamble Godfrey Bloom

The Seeds of The Financial Crisis

If you are interested in knowing more about what policies might have contributed to the great financial crises, which began in mid-2006, you will be interested in watching the accompanying two videos.

This video is an excerpt from a longer YouTube video in which Godfrey Bloom discusses some of the problems which led to the financial crisis. This excerpt deals primarily with the Community Reinvestment Act and its role in weakening bank lending standards and credit 'due diligence'. If you are interested in watching the complete discussion key words search for "Godfrey Bloom The Big Sub-Prime Gamble" on YouTube.

Also, in the context of the Community Reinvestment Act's role in the financial crisis, you might want to watch, "Bill Clinton: Laying the Foundation for The House of Cards" - which is a video-clip from PBS NewsHour interview conducted shortly after Clinton was elected to his second presidential term (So, at the time of this interview Clinton had four more years to push The Community Reinvestment Act).

Other Resources:
(1) A Bibliography The Role of the Government Sponsored Enterprises and Federal Housing Policy in The Financial Crisis, at:
(2) Peter Wallison, Why I dissented from the Majority Report of The Financial Crisis Inquiry Commission, at:

They Tried It, and It Didn't Work?

On November 5th 2012 (the day before the election) President Obama spoke to a group in Columbus, Ohio.

After hearing an excerpt from the speech I began to wonder if he actually believes what he said, or if he's just rearranging history to suit his goals. I hope you will watch the video at the following hyperlink to its end. I think I ask some relevant questions in the last minute, or so.

Economics professors will tell you that one of the best ways to create jobs, and to stimulate an economy, is support home building. (Think of all the trades, products and services that are required to build and furnish a home.)

But, I've never heard of any economics professor who advocated a long-term policy of providing loans to people who couldn't afford to repay the loans (However, I think some of what are called "Keynesian Economists" seem to favor such policies over as a short term prescription for economic stimulus.)

I’ve come to believe that many of the policies embraced by President Bill Clinton produced great economic results during (and, for awhile after) his administration. But, as those policies and political pressures went to excess, they eventually led to the housing bubble and the financial crisis.

It seems, the financial bubble that burst during the last year of George W. Bush's administration was a long time in the making.

Just a thought . . . .

Bulk Sales of Foreclosed Single Family Homes

November 5, 2012  

Congressman Brad Sherman

5000 Van Nuys Blvd. - Suite 420

Sherman Oaks, CA 91403

Dear Congressman Sherman:

I live in the 27th Congressional District. I know you sit on the House Financial Services Committee and its Subcommittee on Capital Markets and Government Sponsored Enterprises, and I know that you also sit on the Subcommittee on Insurance, Housing and Community Opportunity.

Therefore, it seems appropriate that I bring a concern of mine to your attention.

My concern: While reading an article published in the Wall Street Journal on October 2, 2012 titled, New York Firm to Buy Fannie Foreclosures By Alan Zibel, I noticed the author mentioned the terms were the same for both of Fannie Mae’s first two ‘bulk sales’ (of foreclosed single family homes).  An outline of the terms of the deals was provided in the article (the last four paragraphs of the article).

It seems the terms of these first two bulk sales may lead to an uncertain, and very long payback period to for the GSE’s - and an even riskier and even longer payback period for any investor(s) that might be the source of funds for the managers of these deals. As long as the deal terms are fully-disclosed to the fund's (voluntary) investors their investments are their business.  

However, because of the history of Federal Housing Policy, and because of the history of the GSE’s, I believe deals such as these should be designed in a way which can actually be expected to produce rapid and less risky payment of the purchase price, than it appears the terms of the first two deals will produce.

I hope the committees you sit on will very closely review and monitor these two existing deals, and that you will have independent evaluators advise on, and audit, the structure and payment of future bulk sales of foreclosed single family homes. 

The bulk sale of foreclosed single family homes is a serious concern for homeowners, neighborhoods, and for local legislators. I believe the future financial success of these bulk sales is a critical element of the bulk sales strategy.

In the context of the GSA’s, it appears the terms of these first two deals were designed to move foreclosed homes off the GSE’s balance sheet, and to claim the 'sales agreement' as an asset.

Thank you very much for this opportunity to express my concern.

Sincerely,

Bill George

Cc. Congressman Gary Miller

2349 Rayburn House Office Building

Washington, DC  20515

 

Background Information:  

(1) Private Equity’s Foreclosure Binge (& Purge) By Michael L Boyer pub. at Seeking Alpha, October 23, 2012 - at: http://seekingalpha.com/article/941291-private-equity-s-foreclosure-binge-purge#comments_header 

(2) The Institutional Home Buying Bubble By Bill George - Posterous - at:
http://billsplace.posterous.com/the-institutional-home-buying-bubble

  

They Are . . . Movin' Out

There’s a very good article about Rex Sinquefield in today’s Wall Street Journal Editorial / Opinion section at: http://online.wsj.com/article_email/SB100014240529702038974045780785519369681...

If you are unfamiliar with who Rex Sinquefield is here’s the text of a document I wrote in 2009:
I understand Governor Schwarzenegger uses Dimensional Fund Advisors (DFA) as one of his personal investment options.

Rex Sinquefield and David Booth are co-founders of DFA and David Booth is Chief Executive Officer, and Chief Investment Officer of DFA.  In 2004 then Governor of California Arnold Schwarzenegger appointed David Booth to the California Commission on Jobs and Economic Growth. In August of 2006 David Booth announced that significant operations and 25 employees of DFA, would be moving to Austin, TX. Mr. Booth cited several reasons for the decision to move to Austin among them a more central location, good transportation services and connections, the quality of the workforce, the desirability of the area as a place to live and work, and the availability of economically priced workspace.

An August 2006 announcement in the Austin-American Statesman provides more insight into the motivation for DFA’s decision to move to Austin:

Sinquefield retired as co-chairman last year and moved to Missouri but remains on the board. In an April interview with the St. Louis Post-Dispatch, Sinquefield said he was helping the company with the move and that rising costs in California played a role in the decision to relocate. The region "is becoming a third-world country with increasing tax rates," Sinquefield said. "We're moving the company to Austin, Texas, where there is no personal income tax."

 

Since his retirement Rex Sinquefield has been very active in politics in Missouri. He has founded an influential public policy institute named The Show-Me Institute , and he has established a Chess Club in St. Louis.

 

In November of 2006 David Booth donated 300 million dollars to his Alma Mater, the University of Chicago - Graduate School of Business.

 

In June of 2003 another high profile and economically savvy business left California - citing high taxes and high cost of living / employment costs as reasons for the move. Long time resident of Rancho Santa Fe, CA, Arthur Laffer moved his La Jolla California based economic consulting firm, Laffer Associates, to Nashville, TN

You Should Never Argue With Jerry Brown?

The Rate of Foreclosures and The Shadow Inventory (Part II)

Today I noticed a recent MSN Real Estate section article titled, Foreclosure Filings Fall – But Not in All States.(1) After reading the article I began to wonder . . . .

I wondered:
Does fewer foreclosure notices being filed mean there are actually that many fewer mortgage borrowers who are, or are becoming, ‘in default’ of their obligation to pay their mortgage?

Does fewer foreclosure notices being filed mean that the foreclosure process is (temporarily) becoming even slower than it has been in the past? Does it mean that the homes of mortgage borrowers who are “underwater” and have decided to use the ‘strategic default’ strategy are not becoming part of the shadow inventory?(2) Does it mean that borrowers who have fallen on hard economic circumstances are not continuing to squat in the homes they financed with the easy mortgages they were able to get when economic conditions seemed better? Are such borrowers still squatting, biding their time and saving money, until the foreclosure notice comes and the marshal forces them out of the home? Does fewer foreclosures notices being filed mean that defaulted squatters will have even longer to save money (by not paying their mortgages) before the foreclosure notice is filed and marshal forces them to leave the home in which they are squatting?

Is it possible that filing foreclosure notices has slowed because of seasonal factors? Home purchases normally decline significantly over the holidays (during the Thanksgiving and Christmas Holidays and past the New Years Holiday). If you held the mortgage on a defaulted residence would you want that residence vacant for three or four months until the Spring home buying season begins. Is it possible that the large mortgage servicers and investors [like the Government’s GSA’s, large banks and public and private pension plans] are concerned about the public relations ‘fallout’ from continuing foreclosures, at a high rate, during the holiday season? Is it possible that mortgage lenders are delaying foreclosures so they can digest their past losses on foreclosures, and hopefully offset future losses on foreclosures against future investment revenue from other asset classes and from fee income? [Are defaulted, but not yet foreclosed homes, still “the pig in python”? (see note below)]

It seems that filing foreclosure notices is an activity which the holders of the mortgage investment can control, or ‘time’ - depending on a number of factors some of which can benefit them. As, the number and the speed of foreclosure filings varies, watch very closely for changes in the shadow inventory.

Footnotes:

1. Foreclosure Filings Fall – But Not in All States By Teresa (Real Estate) at MSN - Pub. October 11, 2012, at: http://realestate.msn.com/blogs/listedblogpost.aspx?post=89cc9dfd-19e4-48c2-b...

2. For a definition of the shadow inventory see the third paragraph of the October 9, 2012 article, CoreLogic Reports Shadow Inventory Continues to Decline in July at: http://www.corelogic.com/about-us/news/corelogic-reports-shadow-inventory-continues-to-decline-in-july-2012.aspx 

CoreLogic estimates the current stock of properties in the shadow inventory, also known as pending supply, by calculating the number of properties that are seriously delinquent, in foreclosure and held as real estate owned (REO) by mortgage servicers but not currently listed on multiple listing services (MLSs). Roll rates are the transition rates of loans from one state of performance to the next. Beginning with this report, cure rates are factored in as well to capture the rise in foreclosure timelines and further enhance the accuracy of the shadow inventory analysis. Transition rates of “delinquency to foreclosure” and “foreclosure to REO” are used to identify the currently distressed non-listed properties most likely to become REO properties. Properties that are not yet delinquent but may become delinquent in the future are not included in the estimate of the current shadow inventory. Shadow inventory is typically not included in the official metrics of unsold inventory.

NOTE: The pig in the python, see:

The Rate of Foreclosures and The Shadow Inventory (Part I)

In October of 2010 I commented on a Reuters article titled, Shadow Housing Inventory Seen Topping 2 Million.(1)

My Comment:
I believe those who attempt to minimize the size, or the significance of the shadow inventory are either in the real estate, banking, or institutional investment industries.

If you want to understand why the shadow inventory is growing do a key word search on the Wall Street Journal article, “Congress Helped Banks Defang Key Rule” by Susan Pulliam & Tom McGinty (2)

Under current accounting rules, banks and other mortgage investors are reluctant to complete a foreclosure or a loan modification because the completion of a foreclosure or modification transaction forces the revaluation of the mortgage asset on the financial books of bank’s, mortgage investor’s or Government Sponsored Enterprises (think bank loan loss reserves). And, banks and other investors would rather have a strategic defaulter, or a squatter in default, than have a vacant  foreclosed home because the squatter provides some security from vandalism and 'stripping', and because the squatter continues to be liable for property taxes, HOA fees and municipal assessments.

Unemployment is high and loan qualification standards are very restrictive, so the banks have a significantly reduced opportunity to sell foreclosed homes, so why rush to foreclose.

Stay tuned for the outcome of the investigations of the Mortgage Electronic Registration Systems (MERS). What institutions came-up with the concept of MERS and provided the funding for the start-up of MERS? Fannie Mae and Freddie Mac each provided 2 million $ in seed money to create MERS, then they invited the largest mortgage investment banks to join in the MERS process.(3)

I watched the U.S. Senate and U.S. House of Representatives hearings on problems in the mortgage industry last week. It was truly ironic to see Senators and Congressional Representatives scolding and badgering witnesses about the problems in the mortgage crises. It would seem those in Congress don’t understand how they helped to create and fuel the mortgage and real estate bubble by years of policies they endorsed and encouraged.(4)

Committees in The U.S. Senate and House of Representatives held hearings on problems in the mortgage industry and problems in the mortgage modification effort last week. Most of the testifiers commented that a general problem in foreclosures and loan modifications was a mis-alignment of incentives. They also mentioned three other more specific issues:

(1) Most Mortgage servicers are ill-suited to the task of underwriting a modification. They were set up as operations designed to process and allocate payments, not to underwrite or modify loans.
(2) Mortgage servicers have monetary motivation to keep the original loan on the books as long as possible (even while appearing to work on a foreclosure). This is because fees and penalties, which represent income to the servicing entity, accrue while the loan is being modified.
(3) Investors in mortgage notes have little incentive to approve a HAMP modification (or any other modification for that matter) if it creates a loss in the net present value of their note, and most servicers and other witnesses testifying mentioned that mortgage investors have not yet really embraced the loan modification process.

Footnotes:

1. See, Shadow Housing Inventory Seen Topping 2 Million By Al Yoon pub. Reuters 11/22/2010, at: http://www.reuters.com/article/2010/11/22/us-usa-housing-shadow-idUSTRE6AL40Z20101122

2. Congress Helped Banks Defang Key Rule by Susan Pulliam & Tom McGinty, at: http://online.wsj.com/article/SB124396078596677535.html

3. Key words search: Two Faces: Demystifying the Electronic Mortgage Registration System’s Land Title Theory by Christopher L. Peterson. Did the difficulty in tracking title and note ownership in MERS influence the robo-signing phenomenon?

4.  Watch YouTube video titled Bill Clinton: Laying The Foundation For The House of Cards at> and watch Bill Moyers and Gretchen Morgenson in the video-clip titled, Fannie Mae: The Quintessential Model For Crony Capitalism at: and Watch the video clip of Congressman Christopher Shays in the video-clip Corruption at the GSE’s at:

The Shadow Knows

[First draft, January 10, 2010] Recently I've been reading articles documenting the increasing size of "the shadow inventory" of housing. Many articles mention that in addition to foreclosed properties, and REO's, a rapidly growing portion of the shadow inventory is represented by homes for which the home loan is in default, but on which banks are not foreclosing. Many of the articles I've read explain some reasons why banks and other Collateralized Mortgage Obligation (CMO) investors would choose not to foreclose on borrowers-in-default, but none of the articles list all of the reasons I can think of for banks and investors not foreclosing. 

The change to mark-to-market accounting for certain classes of financial assets (GAAP) has been delayed by Financial Accounting Standards Board (FASB) - with pressure from the U.S. Congress and bank lobbyists (see: http://online.wsj.com/article/SB124396078596677535.html). So, the necessity to actually account for these bank assets' true market value is currently suspended. 

If a mortgage owner is a bank and the bank forecloses, the process for re-pricing the asset begins. And, the amount of the loss on the asset would then reduce the calculated bank reserves and force the regulators to require the bank to add more reserves. Under present market conditions this would not be a good thing for the bank, or for the U.S. Government. (Under present conditions banks which could not raise more reserve assets would be forced into FDIC receivership). And, if banks actually began to foreclose rapidly on all borrowers-in-default the calls for Government Sponsored Agency (GSA) loan insurance payoffs would further complicate the bail-out of the GSA's. Also, the demand for private mortgage insurance payoffs would put further stress on private mortgage insurers and impose additional stress on the financial system in general (and probably require private insurers to increase their required reserves). 

Another reason banks might avoid foreclosing on a borrower-in-default is that judges are becoming a bit cantankerous. Judges have begun to force loan modifications, mandate cram-downs, and in the absence of good physical documentation proving a bank or investor actually owns the loan, some judges have even awarded property to the (supposed) borrower when the loan documentation is missing, flawed or incomplete. 

It seems that the rush to originate loans, slice-and-dice loan tranches, construct CMO derivatives, track ownership, and re-register frequently traded CMO's (in the electronic registration system) led some necessary loan details, and even some complete documentation, to "go missing". So banks and investors are beginning to see foreclosure as a risky and potentially expensive option. (see: 10/24/09 NYT article by Gretchen Morgensen titled, "If Lenders Say 'The Dog Ate Your Mortgage' " at> http://www.nytimes.com/2009/10/25/business/economy/25gret.html )  

Another subtlety, as long as the bank allows the borrower-in-default to stay in the home the mortgage investor (bank or CMO investor) is not as greatly exposed to losses from theft, vandalism and gross depreciation of real estate value due to non-maintenance of the property. 

Also, by not foreclosing on borrowers-in-default the lender avoids becoming the owner of the property and thus avoids direct liability for property taxes, HOA Fees, and some of the more recently imposed municipality assessments levied against investors who now own foreclosed property (see: http://www.dlapiper.com/miami-dade_foreclosure_ordinances/ for another example see mosquito abatement fees in some areas of California - Indio, Palm Springs, Stockton, Mountain House, etc.)

If the "shadow inventory" came to the market all at once demand would be even further overwhelmed by supply causing even more significant price erosion.

It’s logical . . . perhaps corrupt, but logical.

Other Resources:

1. See CoreLogic.com at: http://www.corelogic.com/search.aspx?q=shadow+inventory

2. The Case-Shiller S&P Home Price Index is published on the last Tuesday of the month with a two month time lag in reporting for data gathering and data analysis, at: http://www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/en...

3. Also see, YouTube video The Impact of The Delay in Implementing FAS#157 at:  

4. And, watch the YouTube video The Short Sale Conundrum - Mortgage Servicers’ Misaligned Incentives at:

5. Re: Was the strategy for delaying the pain learned during Japan's 'Lost Decade'? “Geithner worked for Kissinger Associates in Washington for three years and then joined the International Affairs division of the U.S. Treasury Department in 1988. He went on to serve as an attaché at the Embassy of the United States in Tokyo.” From Wikipedia, Timothy Geithner at: http://en.wikipedia.org/wiki/Timothy_Geithner

6. Watch a brief segment of Georgetown Law Professor Adam Levitin's Congressional testimony titled, "Regulators Don't Want to Know" at: