The Mortgage Insider

It’s Good To Be King

 “I too have been a close observer of the doings of the Bank of the United States. I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the Bank. You tell me that if I take the deposits from the Bank and annul its charter I shall ruin 10,000 families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin 50,000 families, and that would be my sin! You are a den of vipers and thieves.” ~Andrew Jackson (February 1834).

 Boy, talk about history repeating itself!

 Before we begin, I want to offer a minor correction to an earlier column in which I insinuated that the Federal Reserve was in charge of printing our money. I was corrected by one of my readers, who rightfully pointed out that the Treasury Department performs that physical task. That said, if you look at any dollar in your wallet, it clearly states at the top that it is a “Federal Reserve Note.” In addition, the Federal Reserve’s own site indicates: “The Federal Reserve orders new currency from the Bureau of Engraving and Printing (a bureau within the U.S. Treasury), which produces the appropriate denominations and ships them directly to the Reserve Banks.”[1] So at the end of the day, I am not sure this distinction is meaningful to our debate. However, I always strive to be accurate and I do appreciate any and all feedback …

 Now, let’s talk about Dodd-Frank and financial reform. I don’t know about you, but I am getting pretty tired of picking up the tab for the too-big-to-fail banks and their bad bets. We have previously discussed the Federal Reserve’s debasement of our currency and the future inflation that portends. The very idea of printing our way out of a debt crisis means all of us have been robbed in the night while we were sleeping. As an example, one of my friends called and was very excited that the stock market broke 12,000 again recently. Unfortunately, I had to point out that, on a gold-adjusted basis from the date of the crash in March of 2009, we are actually at 7900. Therefore, unless you believe gold will drop like a stone in the near future, $0.33 of every dollar you had in savings is already gone. Thanks, Mr. Bernanke!

 Enter Dodd-Frank and a truckload of new regulations, all administered by the Federal Reserve, which is in turn owned by the same too-big-to-fail-banks. Is anyone else seeing the conflict of interest here? According to a Bloomberg study, “Financial regulators are in the midst of proposing more than 300 new regulations, with more than 100 final rules coming this summer (2011).”[2] On the Federal Reserve Bank of Philadelphia’s site, they likewise confirm the demise of the Office of Thrift Supervision (OTS), but the creation of four new agencies in its place.[3] I guess since five separate bank regulatory agencies couldn’t prevent this banking crisis, surely eight will in the future!? And how is this a bad thing given the recent financial crisis, you ask? Well, none of these new regulations effectively prevents the risk-taking aspect of these banks’ operations — which is what got us into this mess. In fact, many analysts have estimated the big banks are leveraged as much or more than they were at the peak of the crisis. Instead, the presumption appears to be that consumers have an IQ equivalent to their shoe size and must have been duped into making all those sub-prime loans. Consequently, all the new rules appear related to further protecting consumers from themselves. That has so far resulted in an enormous increase in paperwork and a proliferation of government wonks to review it all. In practical terms, closing costs on an average mortgage are up approximately 39 percent in the last couple of years. And after April 1^st, your interest rate will carry an estimated 0.125 percent premium to cover the costs associated with the new “compensation rule.”

 On April 1^st, loan officers will be subject to a new compensation law that tacitly seeks to control the amount of income persons in my profession can make. This might easily have been accomplished by setting an upward limit on the total revenue stream allowed as a percentage of the loan amount. In other words, if you were to limit a mortgage company to no more than a 3 percent revenue stream, you would in fact eliminate the possibility of the 5 percent to 12 percent gouging that sub-prime borrowers were routinely subjected to in the past. However, that would have taken only a paragraph to write and actually benefitted the consumer greatly. Instead, the government decided that loan officers must now charge the same percentage of revenue for every client they serve. There are no upward limits, and loan officers can change that percentage from time to time without any further guidance. Therefore, if sub-prime lending ever returns, they are free to gouge the 5 percent to 12 percent in points they used to, so long as they gouge everyone equally! Yep — makes perfect sense to me. In the meantime, all mortgage companies must fix in their rates of return, thus guarantying a built-in pad above that floor price so as to avoid any potential for error and subsequent penalty. Hence the additional 0.125 percent in rate we will all now have to pay.

 So, what have we learned here then? The big banks colluded in an enormous swindle, wherein securities that should have been rated as junk were given AAA rating by the shill rating agencies. When this house of cards collapsed and their collective fraud was discovered, we got stuck with the bill to prevent “the sky from falling.” Four million fellow Americans became unemployed, and we likewise have paid their unemployment insurance for nearly two years now. Meanwhile, not one of the crooks went to jail or was even prosecuted. Instead, they remained in charge of all the same banks they had just finished looting, or were otherwise left to retire with their ill-gotten gains in tact. The cure we were then sold by these geniuses was to allow them to print more of our money to pay their bad debts with, and thus dramatically reduce the value of our currency. And now apparently to add insult to injury, we will be treated to increased fees and premiums on all financial services across the board for our own good, while bank profit margins are enhanced as a direct result! All this, we are told, will keep us from creating the next financial crisis — which we didn’t create in the first place. So you tell me, why is it the ONLY thing that seems to have been reformed in all of this nonsense is my 401(k)?!

[2] http://about.bgov.com/2011/02/28/behind-the-study-dodd-frank-with-bgov-analyst-cady-north/

[3] http://www.philadelphiafed.org/bank-resources/publications/src-insights/2011/first-quarter/navigating-dodd-frank.cfm

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A society that puts equality before freedom will get neither. A society that puts freedom before equality will get a high degree of both. ~ Milton Friedman

This month, it seemed like a good time to answer a few readers’ questions about loan modifications. I have had several clients and friends come to me for refinances in the last couple years that I was unable to help in the traditional way. Either they had lost their job, had their incomes reduced, or the appraisal was too low to allow for the entire balance to be refinanced. In a few cases, they were simply denied because of one of the myriad new and vacuous regulations sweeping my industry. The hardest ones for me, however, have been those who, sensing their un-approvable status, have attempted a mortgage “modification” on their own before coming to see me. So, let’s talk about modifications!

 I believe the long history of failed government programs will one day show the Home Affordable Modification Program (HAMP) was one of the worst. Sure, there are hordes of other programs that have wasted larger absolute amounts of money. However, I cannot recall a program that has wasted a larger percentage of the money allotted, created as much moral hazard, and exacerbated the problem it was designed to solve to this degree.

 To start the process, you need to call your current mortgage company and ask to speak to someone about a modification. You will then be promptly transferred to a recent high school graduate who will inform you that, in order to qualify, you must forgo your next two mortgage payments. Assuming your circumstances are dire enough to take this advice, you call back 60 days later. The next GED genius you speak to will faithfully take your information and likely inform you that you don’t qualify for one of the following reasons: you make too much money, you make too little money, you have too much in savings, you have too little in savings, you failed to list that part-time job you had three years ago on your application, and so on and so forth.

 Assuming you make it through the tortuous application process to a trial modification, you should congratulate yourself. According to the Treasury Department, you are one of approximately 39 percent of all applicants to get this far.[1] But don’t pop the cork just yet. Just 30 percent of all trial modifications are made permanent. For those of you who are a bit mathematically challenged, that works out to less than 12 percent of all people applying that get any kind of permanent relief. And the biggest surprise may come when they cancel your trial modification. That’s when you find out that all your payments during the trial period were used to pay lender fees. Hey, this sort of stellar service doesn’t come for free! The next statement you get in the mail will be for all back payments and late fees that have accrued to date — and they are due immediately. So, I guess you could say I am not a big fan of modifications. Oh, and did I mention that over 54 percent of all modifications re-default within the first year? So, I guess we are all lucky that the Treasury only set aside $75 billion for this little gem of social engineering!?

 If you can’t get approved for a normal refinance, you should instead contact your current mortgage company and ask for something called a “streamline refinance.” This terminology makes all the difference. That’s because a “streamline” implies you are current on your payments, but don’t want to go through the whole qualification process again. Generally speaking, there is no new appraisal required, and you likely won’t have to provide a pay stub either. The only downside here is that you won’t get as low an interest rate as you see quoted locally and you will still be charged fees of $1500 to $5000. On the other hand, of the people who have called me and tried this approach, better than 90 percent have had success. The real heartbreak for me is when someone who has already tried modification asks for help. Since ruining your credit is a prerequisite of HAMP, you are now ineligible for any such streamline process.

 Lastly, I want to provide a few words of empowerment to those of you working your way through a regular refinance transaction. Many of you, out of a false sense of loyalty or confidence, insist on using a big bank rather than a local mortgage banker. What you need to understand is that ALL of the large banks (Wells Fargo, Citi, Chase, Bank of America, etc.) use “national appraisal companies.” This means you may get someone from Pueblo appraising your home here in Evergreen (true story!). While you could have avoided this issue by using someone like me, there is a way to prevent this from happening to you. When the appraiser calls for the appointment, ask them questions. Find out how many appraisals they have done in this area in the last year. Ask where they live and how long they’ve been in the business. If you have any apprehension about their geographic competency, then politely refuse to schedule the appraisal. It is absolutely critical that you do not allow them access to your home. Instead, tell them to inform their company of your decision, and ask them to assign someone else from your same zip code. Under the new rules, this is perfectly acceptable and can save you thousands of dollars and needless stress. And in addition, if you are listing your home for sale, tell your realtor to perform the same screening of any would-be appraiser before they come out. The deal you save might just be your own!

 For expert advice on all aspects of home finance, call the professional. Dan can be reached at (303-674-0201)

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Well, it is that time of year again when I do my best to provide an economic outlook for the next year. As always, I think it is informative to review last year’s predictions and see how I did.

First, let’s cover what I got wrong. I thought in 2010 we would begin to see some state and municipal governments ask for bailouts of their own. For the most part, I appear to have been a bit early in my timing. The only municipal bailout of record was Harrisburg, Pennsylvania.  The capital city took $3.3 million from the state to avoid a payment default in September. However, noted Wall Street analyst Meredith Whitney appeared on 60 Minutes December 19^th, 2010 and issued a rather dire warning.[1] She predicted somewhere between 50 to 100 municipal defaults, totaling “hundreds of billions of dollars” in losses in the next 12 months. Look for our representatives to tout the repayment of TARP as a good reason to provide these new bailouts.

Last year’s article was entitled “The Forecast Calls for Debt,” and I predicted our national debt would reach $14.5 trillion by the end of 2010. In fact, our national debt went from $11.9 trillion to $13.6 trillion last year.[2] However, as I write this less than one month into 2011, that figure has crested $14 trillion.[3] So at this pace, I was only off by a couple of months. Despite the current political rhetoric, look for the national debt to hit $16 trillion by the end of 2011.

Next, I see the economy (GDP) continuing to grow at a rate of 2.6 percent in 2011, down from 2.9 percent in 2010. Obviously, this is still too anemic to produce a substantial decline in unemployment. I am forecasting a small improvement in unemployment, but for the “official” rate to remain stubbornly above 8.3 percent. Meanwhile, the “real rate” of unemployment will stay pegged in the mid teens. Simply put, the aforementioned growth of national debt will create a substantial drag on the economy, and regulations arriving by the truckload will only dampen things further. The bigger culprit here will likely be the Dodd-Frank financial reform bill, while Obamacare isn’t fully implemented until 2014. Look for banking costs and fees to jump and for a slower pace in both commercial and consumer lending overall.

“What about inflation?” you ask. Well, that depends on whether you like the official “consumer price index” (CPI) figure or the “real rate” of inflation. Is there anyone who has shopped for his/her family through 2010 who actually believes inflation (including both food and energy) was only up 1.5 percent last year?! The reason for this obvious disconnect is that the folks at the Bureau of Labor use “hedonics” and “geometric weighting” when they report the CPI. That’s a fancy way to say they manipulate the actual basket of goods used, rather than just report the increase in raw prices. If we were to use the raw formula employed back in 1980, the inflation rate for 2010 would have been reported at something like 5.5 percent.[4] I expect the reported inflation rate to hit 3 percent by the end of 2011, and the real rate of inflation to be something like 7.5 percent. On the other hand, the good news is at least this reported increase should finally be sufficient for seniors to see a cost of living increase to their benefits. That will be welcome news after being frozen out for the last two years.

Lastly, the small bright spot in all this may be the Denver area housing market. Despite a 2 percent increase in foreclosures nationwide in 2010, Colorado saw foreclosure filings drop 31 percent.[5] Since the bottom of the stock market crash in March 2009, Denver home prices are actually up a seasonally adjusted 0.8 percent.[6] That said, the median house price in Denver fell in 2010 by 16 percent to $239,967. So, sellers with entry-level homes for sale are having much more luck than their high-end counterparts. Unfortunately, I expect foreclosures nationwide to peak in 2011, with approximately 2.8 million new filings. This would be the result of the estimated 7 million units still held in “shadow inventory,” stemming from the failed and ill-conceived Home Affordable Modification Program (HAMP).[7] Fortunately, I think Colorado and Denver will be spared from most of this, and I expect only a modest increase in our foreclosure rates. I also believe we could be the benefactor of a population influx, as other states dramatically increase their tax rates. Overall, I think home prices will hold up unchanged on the year.

Thanks to all of you who read my column and call or write me with feedback. I very much appreciate the interactive quality this work seems to have imbibed.  

[2] http://en.wikipedia.org/wiki/United_States_public_debt

[3] http://www.usdebtclock.org/

[4] http://www.shadowstats.com/alternate_data/inflation-charts

[5] http://www.realtytrac.com/trendcenter/co-trend.html

[6] http://www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/en/us/?indexId=spusa-cashpidff–p-us—-

[7] http://www.housingwire.com/2010/05/25/shadow-inventory-could-take-four-years-to-clear-morgan-stanley

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There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

~Ludwig Von Mises (1881-1973)

So here we have this quote from one of the greatest economists in history. Hmm … which path would you say we’re on? Some may argue the worst of the financial crisis is already behind us. However, no one would argue that it resulted from a massive expansion of credit given to a segment of society least willing and able to repay it. On the other hand, the question that should be on anyone’s mind after reading this is whether or not we have abandoned further credit expansion. If not, then Mr. Von Mises seems to be telling us that the worst may be yet to come.

Jump now to December 1^st of last year. After a two-year period of legal wrangling, an act of Congress, and a lawsuit from Bloomberg, the Federal Reserve was finally forced to give us a partial audit of its lending activity during the financial crisis (December 2007 to July 2010). Buried in the Dodd-Frank financial reform bill was a clause that required the Fed to disclose the names of the borrowers, the size and interest rates of loans, and “information identifying the types and amounts of collateral pledged or assets transferred.” What was released by Bernanke and pals was nothing short of shocking, both in its breadth and lack of detail. The spreadsheets posted on their site reveal only vague details of some 21,000 previously undisclosed overnight loans totaling some $9 trillion. [1] However, the implication of what was disclosed paints a picture of crony capitalism beyond anything I had previously imagined. And here, I will confess that determining how best to highlight the myriad of outrageous facts presented was at once overwhelming.

My first thought was to point out some of the obvious statistics. The big number here is 98 percent. That was the percentage of these funds used during this period by the six largest banks, namely Bank of America, Citigroup, Morgan Stanley, Barclays, Goldman Sachs, and JPMorgan.[2] I don’t know about you, but my first thought upon learning this was what an even bigger farce this means the bank stress tests were back in May of 2009.

My other idea was to point out the huge sums lent to non-U.S. banks. Since the data released only goes back to December 1^st, 2007, we will likely never know how early the Fed really recognized and began responding to the crisis.  However, its first loan of $10 billion to the European Central Bank was quickly followed by another $20 billion to a “who’s who” of European megabanks. But it certainly does call Bernanke’s remarks in May 2007 into question when he stated, “… we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.” [3] Either he was grossly incompetent, and/or he felt the need to mislead the Senate committee he was addressing at that time.

This data also, of course, leads to further speculation about the fate of Lehman Brothers. As Frank Partnoy of the Financial Times wrote, “Ben Bernanke, Fed chair, also testified that ‘the only way we could have saved Lehman would have been by breaking the law.’ Yet, the Fed’s new spreadsheets belie these claims. The data show the Fed was lending prolifically abroad in 2007 and then domestically to investment banks — including Lehman — in early 2008.” [4] Since Lehman failed in September of 2008, I guess we can answer our earlier question. Apparently, misleading the Senate is a bit of a hobby for Mr. Bernanke.

I also considered writing about the “low” and “no-interest” loans made to vulture investor friends of the Federal Reserve. Apparently, it wasn’t bad enough that the Fed lent trillions out to “too-big-to-fail” banks on flimsy collateral. No, I guess it wouldn’t be any fun unless you could shovel multi-million dollar profits into the back pockets of your cronies using our money. For more on this, see the New York Times article referenced below.[5]

However, in the end, the most egregious pattern that I saw emerge from this data-dump was how profusely the expansion of credit has continued. With Mr. Von Mises’s quote ringing in my ear, I checked in to see Bernanke’s interview on 60 Minutes when I heard him say, “One myth that’s out there is that what we’re doing is printing money. We’re not printing money.” [6] Now who is Mr. Bernanke misleading?

Need help with a refinance or purchase? Call Dan Smith at (303-674-0201).

[2] http://www.cnbc.com/id/40496451/Six_Banks_Got_Over_98_of_the_Fed_s_PDFC_Money

[3] http://www.federalreserve.gov/newsevents/speech/bernanke20070517a.htm

[4] http://www.ft.com/cms/s/0/6ea84d76-fe54-11df-abac-00144feab49a.html#axzz18bBqAtRS

[5] http://www.nytimes.com/2010/12/03/business/economy/03fed.html 

[6] http://www.cbsnews.com/video/watch/?id=7120553n

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“… We conclude that the [Federal] Reserve Banks are not federal …
but are independent, privately owned and locally controlled corporations …
without day to day direction from the Federal Government.” – Ninth Circuit Court, Lewis v. United States, June 24^th, 1982[1]

If you read my column on a regular basis, this quote is no surprise to you. On the other hand, I think it is important to keep reminding everyone that the entity responsible for printing our money operates independently from any kind of direct government supervision. Sure, the President of the United States gets to appoint the Chairman of the Federal Reserve Board (with the consent of the Senate). However, the Federal Reserve is absolutely autonomous when it comes to deciding how much of our money to print and, more importantly, what to spend it on. In addition, under the Carter administration, the Fed was given additional responsibilities to promote the goals of “maximum employment, stable prices, and moderate long-term interest rates.” So you tell me, how do you think they’re doing so far?

The verdict rendered above, though, is quite interesting in that it directly contradicts the information on the Federal Reserve’s own Web site, which states emphatically that “The Federal Reserve System is not ‘owned’ by anyone and is not a private, profit-making institution. Instead, it is an independent entity within the government, having both public purposes and private aspects.” [2]  That must come as a surprise to the Fed’s shareholders. According to Factcheck.org, “The stockholders in the 12 regional Federal Reserve Banks are the privately owned banks that fall under the Federal Reserve System.” [3] Okay, well that explains a whole lot right there. And it may explain the crazy way the Fed has been behaving all these many years.

Fast-forward to November 3^rd and the Fed’s announcement that they plan to embark on another round of “quantitative easing” (QE2). This is a fancy way of saying they plan on printing another $600 billion in new dollars, and then using them to buy a portion of our nation’s growing debt. Never mind that the Fed already added over $2 trillion to its balance sheet in the QE1 portion of the program.  And never mind that it has done nothing but fuel the mother-of-all economic bubbles waiting to burst in the Treasury and interest rate markets. And never mind that this policy has also caused nearly every commodity to jump to the multi-generational highs you and I see reflected every time we go grocery shopping. No, never mind any of that. Apparently, you and I are just too dim-witted to understand this form of genius and all the pain they are sparing us from. So why not just announce that they plan on printing massive amounts of money until they can buy all their “too-big-to-fail” bank shareholders out of the mess they got themselves into, you ask? Well, that would probably be because runaway printing of new money is generally considered the last refuge of failed states and banana republics. I’m just guessing …

That said, there is a minor detail that apparently has escaped the watchful eye of the mainstream media on both sides of the aisle. And you’re just going to love the punch line here. You see — the Federal Reserve could purchase Treasuries, like any other investor, directly from the U.S. Treasury. But then no one would earn a commission and that would be a shame. So instead, all Fed purchases of Treasuries will be run through the New York Federal Reserve branch, which is run by one William Dudley. And yes, that is the same William Dudley who is a former partner and managing director at Goldman Sachs up through 2007. So instead of just printing the money and buying Treasuries directly, the New York Fed has published a list of “dealers” who will facilitate all purchases on behalf of the Fed — and earn a few billion in commissions for doing so.[4] And Goldman Sachs will no doubt take the lead here.

So, what’s this mean for mortgage rates in the future? Well, no one knows for sure, but the last administration that attempted to print and spend us all into prosperity was the Carter administration. Money supply went up a record-setting 17.7 percent in the first two years of his presidency. A little over two years later, 30-year fixed rates peaked at 18 percent. A quick check on money supply increases from 2008 to 2010 shows the Fed has already increased money supply over 10 percent and counting. So, I’m willing to go out on a limb here and guess that rates by mid-2013 will be in excess of 10 percent.  The message is simple. If you are shopping for a home or planning to refinance, don’t wait for rates to fall any further. Now would be much better than later.

[2] http://www.federalreserve.gov/generalinfo/faq/faqfrs.htm

[3] http://www.factcheck.org/askfactcheck/who_owns_the_federal_reserve_bank.html

[4] http://www.newyorkfed.org/markets/pridealers_current.html

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As the Worm Turns

 I don’t know about you, but I have a few pet peeves. For some reason, long tangle phone cords and people who drive precisely the speed limit in the left lane have always bugged me. And I hate when there is an interesting news story for which there is never any follow up. So, I promised myself when I started this column that I would always try to follow through and let you know how a story ends.

 In July of 2008, I wrote an article about a story that had just been broken and was being dubbed “Mozilo-gate” at the time. That euphemism later gave way to the phrase “Friends of Angelo,” and he has since became a sort of poster child for the financial collapse we are still firmly in the grip of. As you may recall, Angelo Mozilo was the former CEO of Countrywide Financial. And this was also the same month regulators seized IndyMac Bank, in what was then the nation’s second largest bank failure in history. Did I mention Angelo also founded IndyMac Bank? The “Friends of Mozilo” the press were referring to were actually a very extensive list of politicians in key committee seats and positions throughout Washington. And all of Angelo’s “friends” had received new home mortgages at substantially discounted rates compared to the market — so substantial, in fact, that the terms have never fully been disclosed. However, the focus of the press’s attention at that time was Senator Chris Dodd (D), Chair of the Senate Banking Committee, and Senator Kent Conrad (D), Chair of the Senate Budget Committee. Cries of corruption and bribery were being leveled at Senators Dodd and Conrad, who had just finished passing the very first $300 billion bank bailout the nation had seen. And the primary benefactor of this governmental largess was none other than Angelo Mozilo.

 Immediately preceding the passage of this bill, the shotgun marriage of Countrywide to Bank of America had been coming apart at the seams. Bank of America had done a bit of due diligence and discovered what we all know now for sure … namely, that Countrywide’s portfolio of loans was a virtual trash heap filled with the worst performing subprime loans in the industry. Bank of America was rightfully balking at the prearranged price being paid, after determining this book of business was likely only worth a third of what they were paying for it. Enter Dodd and Conrad to the rescue, with a bill that allowed the deal to move forward and close. This freshly approved $300 billion dollar bamboozle allowed Bank of America to refinance the aforementioned trash heap into shinny new FHA loans, complete with a government guaranty to repay them even if the borrowers did not. Bank of America was satisfied and the deal closed. “So what did Angelo get out of all this?” you ask. Well, that would be a $162 million severance package, of course!

 Now, I know what you’re probably thinking here. This guy has a real skill set, right? He drives the largest home lender in the nation straight into the ground during the same month he crashes the second largest bank in the country. And let’s not forget that he pioneered the sale of subprime mortgages to Fannie Mae, which some experts estimate totaled as much as $1.5 trillion. So, no one could argue he wasn’t the single biggest player behind the failure of both Fannie Mae and Freddie Mac. All told, Angelo Mozilo could easily be credited with at least $500 billion of government bailouts to date. And if you’re thinking the $162 million is all he got away with, well then you must be forgetting about the $400+ million he liquidated in the three previous years leading up to Countrywide’s collapse. And here is where the SEC stepped in and sued Mr. Mozilo for fraud in 2009. It seems there is some pesky law that says its wrong to make rosy forecasts to investors each quarter, while you pull every dime you can out of what you know is a sinking ship. In fact, if there weren’t so many “Friends of Angelo” still serving all over Washington, you might imagine criminal charges would have followed. But, alas, the SEC only filed civil fraud charges, and Mr. Mozilo never faced any jail time in spite of the obvious evidence against him.

 Fast-forward to October 15, 2010 and here’s how the story ends. Angelo Mozilo settled all charges against him with the SEC for $67.5 million. In essence he didn’t even give back his severance package. According to the Reuters report[1], “The flamboyant poster boy of the subprime mortgage market’s boom and bust struck a last-minute deal with the U.S. Securities and Exchange Commission before his trial on civil fraud charges was to start next week. … Mozilo settled without admitting or denying any wrongdoing. Bank of America, which bought Countrywide in 2008, said it will advance $45 million to Mozilo for the settlement, as required by indemnification provisions.”

Yep, you read that last bit right! Angelo managed to steal over $500 million dollars in a three-year period, when he knew Countrywide was dying from the inside out. And he paid what amounts to a parking ticket of $22.5 million. Meanwhile, Bank of America is still reeling and is as dysfunctional as any “too-big-to-fail” bank can be. Fannie Mae and Freddie Mac are in shambles and are both wards of the state. We have so far bailed them out almost $200 billion and that number grows daily. FHA has recently had to increase the cost of mortgage insurance to all consumers to cover the staggering amount of losses it has had to absorb. Senator Dodd is retiring at the end of the year from the Senate. And Senator Conrad has a net worth north of $3 million, according to his public filings. That’s a neat trick for someone who was orphaned and went straight out of college into civil service, before coming to the Senate. Ok, I guess you can add another pet peeve to my list…

For expert and honest advice on any aspect of home finance, contact Dan Smith. He can be reached at 303-674-0201. 

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I’m not sure where I am living any more…you? Many of you have called or written me over the years, to tell me you enjoy these articles because someone is actually saying something about all of this. While I very much appreciate that feedback, I think we can all agree that the content of this blog over the last few years has been down right scary at times. And what is even scarier is the fact that you just don’t hear about these sorts of things on the news. It really doesn’t matter which set of propaganda channels you watch either. Each night I find myself watching both Fox and CNN, in the hopes of guessing what is really going on. But then along comes a story that is all over the financial internet, that none of the televised networks covers. And the stories I find seem so nuts to me, I can’t understand they don’t make the cut in comparison to Lindsey Lohan’s most recent binge.

Case in point: Has anyone heard of Senate Bill SB1619, or its counter part in the House, HR 4690? SB1619 is titled the “Livable Communities Act of 2009” and was sponsored by (D-CT) Chris Dodd and co-sponsored by our own Sen. Michael Bennet. You can pull a half page summary of the bill from the Library of Congress on line,[1] and read it for yourself if you think I’m kidding. The bill proposes that the Department of Housing and Urban Development (HUD) add a new “Office of Sustainable Housing and Communities” (OSHC). So what will they do, you ask? Well first of all they will use our Federal tax dollars to provide grants, to any and all, local and state, planning and development organizations. So this is the proverbial “carrot” that will be offered. In exchange for those funds, it will require said municipalities to conform to a comprehensive plan for any future development, as laid out by the Federal government. And here both proponents and opponents alike seem to at least agree on the intended outcome. It seems the Federal government would like all of us to live much closer to large metropolitan areas. Modeled after a United Nation’s Agenda 21[2] of 1992, the idea is that if we all lived in high rises closer to metropolitan areas, we would collectively be more energy efficient and environmentally friendly. The “stick,” of course, is tax penalties for those of us who prefer to live as far away from metropolitan places as possible. Yep…I know I’d be willing to live in a glorified apartment again, if only the Abert’s squirrel population could be restored to pre Civil War levels.

 The date for a vote on this bill in the Senate hasn’t been set yet, but Senator Dodd already has the report out of committee as of August 3^rd. So by the time you read this a date will have likely been set. If you love where you live as much as I do, I hope you will let our representatives know how you feel. Till then, those of us who live in such a crazy town outside of Denver Metro’s jurisdiction need to get our financial houses in order. Rates are 4.0% for 30 year fixed rate, as I write. If you are going to buy or refinance a piece of real estate – NOW is the time!

[2] http://www.un.org/esa/dsd/agenda21/

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In a previous article, I had written about a “moral hazard” that was being created by some of the recent policy initiatives coming out of Washington. And while I was enjoying a frosty beverage at my favorite local pub, I was asked by one of the patrons there what exactly I had meant by that term. So it dawned on me that not everyone is familiar with the concept and I thought it appropriate to explain.

 A good definition of moral hazard can be found at Wikipedia: Moral hazard arises because an individual or institution does not take the full consequences and responsibilities of its actions, and therefore has a tendency to act less carefully than it otherwise would, leaving another party to hold some responsibility for the consequences of those actions. In layman’s terms, this is what happens when banks are given the magic designation of “too big to fail.” So far, only Lehman Brothers has had to bear the consequences of its bad behavior and gross mismanagement. In fact, many of you may not want to know this, but the remaining big banks are leveraged more now than they were when the collapse first hit in 2008. This is a direct result of not only the bailouts they received, but also the new financial regulatory reforms. “Too big to fail” has not been prevented in the future by this new law, but rather has been codified into law as I described last month. But what did you expect, since it was these very banks that helped write the legislation anyway… another moral hazard in and of itself!

 However, there is a bigger moral hazard here than that, which I thought was worth mentioning. Can you imagine, for instance, how many more bank robberies we would have, if we allowed a robber to keep a good portion of what was stolen when he was caught,? I bring this up because I was disturbed by a conversation I had with my son. Nothing new there, eh? He was in disagreement with this contention I made, and said something like, “Why on earth would the president of a company purposefully run that institution into the ground? It doesn’t make any sense. Most of these financial companies were over 100 years old and were trusted all over the world.”

 The answer, of course, is because it paid better than running those businesses correctly! Think about it. The SEC alone has accepted tens of billions of dollars in settlements for civil fraud cases in the last couple of years. But can you name even one of those key executives who has been indicted? Frank Raines drove Fannie Mae into the ground and took $50 million in a single year as compensation. The fine he paid for his fraud was only $30 million. However, thanks to the time bomb he helped place, bloomberg.com reports that you and I have already put close to $100 billion into bailing out Fannie Mae. Maurice Greenberg ran AIG into the ground and left the company with $4.3 billion for himself. His fine to the SEC was a paltry $15 million, and we still have $170 billion of our money tied up in that bailout. And take Dick Fuld, the head of Lehman Brothers mentioned above. He received $484 million in compensation between 2000 and 2008 for driving that company into bankruptcy. The bankruptcy attorney handling the investigation reported earlier this year that Mr. Fuld himself oversaw and participated in accounting fraud, which directly led to that company’s ultimate demise. Yet, he hasn’t even been charged with a single count of fraud so far.

 Moral hazard doesn’t end there either. Imagine if the government created a program that handed out benefits which included reducing the interest rate on your mortgage to as low as 2 to 3 percent, or even paid down a portion of your principal balance. But what if, to qualify for those kinds of amazing benefits, you had to let your mortgage payment go for at least 60 days without paying it? Can you imagine the line of people who would be all too happy to do that, as long as you were handing out that kind of free money? Well, as you may have guessed, there are already many economists who have concluded these very policies have actually increased the number of foreclosures nationwide to over what they would have been absent such policies. I know, right? Who could have seen that coming?

 Finally, enter the mother-of-all of moral hazards. Take our current Federal Reserve and a tactic my people like to call “quantitative easing.” This is when the government runs up huge amounts of debt, and the Federal Reserve turns around and prints money to pay for all of it. Mmm, the last time I remember any modern country trying a stunt like this was Argentina in the 1980s. As I recall, that didn’t end well for them.

 So what should you do then, you ask? There is a window of opportunity here that has been held open, only owing to the financial disarray in so many other countries. Our current rates are the lowest they have ever been in recorded history. So if you are as worried as I am about the threat of inflation that will eventually follow, get your financial house in order. There will never be a better time to buy a home than right now, or to refinance and lock in the lowest payment you will likely see in your lifetime. Don’t wait any longer!

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“Since my last report, this employee has reached rock bottom and has started to dig.” – Unknown employee review

This month, I wanted to respond to several readers’ requests that I do some follow up on earlier stories that I’ve run. I’m guessing the phrase, “Read’em and weep!” may be a bit melodramatic here. But I’ll let you decide …

As I write, the Dodd-Frank Bill, otherwise known as the Financial Regulation Reform Bill, has been signed into law. I wrote about it two months ago when this bill came out of the Senate and was about 1,100 pages. The final product turned out to be over 2,300 pages long, and likewise still hasn’t been read by any lawmaker in Washington. The headlines say this law will end “too big too fail,” and prevent future government bailouts from ever happening again, but I doubt it. What it does do is grant unprecedented power to the Federal Reserve. It allows the Fed to seize control of any company it deems as representing a “systemic” risk to the economy. As a consequence of issuing that decree, the Fed may then regulate the size and range of activities that company may engage in. And the answer to your next question is “Yes, those powers can be exercised over any kind of company—bank or otherwise.”

Naturally, there are no specific guidelines in this law related to when this kind of seizure might be appropriate. And the process of seizure will look eerily like the “nationalization” of private companies by Venezuela as of late. However, given the fact that the Federal Reserve is actually a privately owned bank, the term “nationalization” would be inaccurate to say. We’ll just have to coin a new term for when the largest bank in the country decides to take over another company and run it as its own. Maybe we could call it “Doddamization”! Nevermind the Fed’s gross incompetence as a bank regulator, and the unique role it played in precipitating this financial collapse. This endowment of economic omnipotence is for our own good, and will protect future generations. Yeah, right! Regardless of which side of the aisle your politics fall on, the real question here should be this: How can a regulator that so thoroughly demonstrated their inadequacy as such, be logically expected to perform any differently in the future?

Next, the Dodd Frank Bill also has something new for the FDIC to do. In a likewise baffling perversion of reason, the FDIC will take the place of a Federal Bankruptcy court when a large financial firm’s failure “would imperil financial stability.” This will no doubt follow the Fed seizure and subsequent mismanagement period, I’m guessing? And outside the peruse of any bankruptcy court, the FDIC can then take over the failing firm, sell off its assets, and impose losses on shareholders and creditors as it sees fit. I know I may sound like a broken record here, but given the similar failure of the FDIC to perform as a regulator of banks, what makes anyone believe they would be superior to a bankruptcy court in these instances? Federal Bankruptcy courts do, unfortunately, have hordes of experience liquidating large complex companies over the last few decades. In fact, owing to the anticipated ineptitude of the FDIC in this role, the new law requires large financial firms to draft “living wills” to map out how they can be safely wound down. Yep, there was real genius at work here, folks!

Three months ago, I also reported on the SEC filing a civil fraud case against Goldman Sachs. I told you I was certain it would end up in settlement, with no admission of guilt on Goldman’s part, and I guessed that a fine would be levied between $50 million and $100 million. Well, Goldman must have stolen a lot more than we all thought, because the fine just announced was $550 million. That tells you their take must have been north of $5 billion, on the collective subprime con game they’ve been running. So this is nothing more than a very expensive parking ticket to Goldman.

Many more months ago than that, I told you about AIG and how they sold a kind of insurance called “credit defaults swaps,” that ended up bankrupting them. I explained that the difference with this kind of insurance is that the policy holder doesn’t have to have a financial interest in the asset being insured. So this would be like an insurance company selling insurance on your car, to everyone living in Denver. It’s great to be the insurance agent when all the premium checks come in each month—but a nightmare when you get a ding on your car. Now they have to pay claims to everyone in Denver worth far more that the car ever was. And in AIG’s case, this collective “car” was totaled. Yes, I know this violates all kinds of insurance rules and points to obvious fraud on many levels. And apparently AIG decided so, too! This week they agreed to pay out another $725 million to three Ohio State pension funds, to settle pending fraud charges there. You may recall they settled with the SEC and the state of New York a couple years back for $1.6 billion.

Now check my math here, but I think that just added up to $2.8 billion in fraud settlements paid out between AIG and Goldman, in just the last two paragraphs. So tell me how it is that there is that much fraud that needs to be settled, but no one going to jail for the crime of fraud at either firm? In fact, both the SEC and Federal prosecutors just announced this last week that they were dropping all charges against Joe Cassano, the former head of AIG’s special products division. I guess they all just figured we wouldn’t notice or care. And is it just me, but how is a new law that requires the Federal Reserve, The Treasury Department, or the FDIC to take over a huge failing company any different than a government bailout in its effect? I mean, whose money do you think they are going to do that with? If I didn’t trust all our representatives in Washington so much, I’d say we just passed a law that mandates bailouts rather than prevents them. And, gee whiz, I can’t imagine what the unintended consequence of something stupid like that might be …

Thirty-year fixed rates are at 4.25 percent as I am typing. Fifteen-year fixed rates are under 4 percent. So take advantage now and refinance or purchase whatever you need to, and get these rates locked in. Once they’re gone, it may be the last time we will see rates this low in our lifetimes!

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